SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended August 31, 1998 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
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
At September 30, 1998, there were 94,147,192 shares of A.G. Edwards, Inc. common
stock, par value $1, issued and outstanding.
<PAGE>
A.G. EDWARDS, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Consolidated balance sheets 1
Consolidated statements of earnings 2
Consolidated statements of cash flows 3
Notes to consolidated financial statements 4-5
Management's financial discussion 6-8
PART II. OTHER INFORMATION 9
SIGNATURES 10
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<CAPTION>
A.G. EDWARDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
August 31, February 28,
1998 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 106,647 $ 84,764
Cash and government securities, segregated under
federal and other regulations 61,777 57,294
Securities purchased under agreements to resell 180,000 204,363
Securities borrowed 145,788 786,119
Receivables:
Customers, less allowance for doubtful accounts
of $3,870 and $3,800 2,353,844 2,229,128
Brokers, dealers and clearing organizations 9,821 12,521
Securities inventory, at fair value:
State and municipal 106,582 142,692
Government and agencies 48,682 209,247
Corporate 59,064 51,714
Property and equipment, at cost, net of accumulated depreciation
and amortization of $252,093 and $229,938 232,437 230,158
Deferred income taxes 68,834 70,432
Other assets 132,345 114,896
$ 3,505,821 $ 4,193,328
LIABILITIES AND STOCKHOLDERS' EQUITY
Checks payable $ 136,224 $ 203,017
Securities loaned 186,593 820,918
Payables:
Customers 512,571 920,791
Brokers, dealers and clearing organizations 590,574 185,756
Securities sold but not yet purchased, at fair value 24,039 19,141
Employee compensation and related taxes 457,236 505,731
Income taxes 18,747 17,137
Other liabilities 63,331 57,716
Total Liabilities 1,989,315 2,730,207
Stockholders' Equity:
Preferred stock, $25 par value:
Authorized, 4,000,000 shares, none issued
Common stock, $1 par value:
Authorized, 550,000,000 and 250,000,000 shares
Issued, 96,463,114 shares 96,463 96,463
Additional paid-in capital 184,797 181,826
Retained earnings 1,318,270 1,196,568
1,599,530 1,474,857
Less - Treasury stock, at cost (1,983,109 and 284,173 shares) 83,024 11,736
Total Stockholders' Equity 1,516,506 1,463,121
$ 3,505,821 $ 4,193,328
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
A.G. EDWARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES:
Commissions $ 294,916 $ 293,005 $ 607,219 $ 530,638
Principal transactions 48,242 52,836 100,245 107,438
Investment banking 55,986 42,252 115,306 78,880
Asset management and service fees 97,545 75,477 190,904 143,126
Interest 51,640 43,514 102,427 84,357
Other 2,867 2,748 5,284 4,741
551,196 509,832 1,121,385 949,180
EXPENSES:
Compensation and benefits 352,546 326,412 718,392 609,868
Communications 25,670 24,529 51,573 47,992
Occupancy and equipment 29,811 23,487 56,517 46,116
Floor brokerage and clearance 4,928 5,309 10,022 9,845
Interest 1,688 3,112 546
Other 19,766 17,350 41,086 33,197
434,409 397,087 880,702 747,564
EARNINGS BEFORE INCOME TAXES 116,787 112,745 240,683 201,616
INCOME TAXES 44,530 43,500 92,420 77,830
NET EARNINGS $ 72,257 $ 69,245 $ 148,263 $ 123,786
Earnings per share:
Basic $ 0.76 $ 0.72 $ 1.55 $ 1.29
Diluted $ 0.74 $ 0.71 $ 1.52 $ 1.27
Dividends per share $ 0.14 $ 0.13 $ 0.28 $ 0.25
Average common shares outstanding (basic) 95,004 95,504 95,444 95,858
(000's omitted)
Average common and common
equivalent shares outstanding (diluted) 97,232 97,628 97,654 97,751
(000's omitted)
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
A.G. EDWARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended August 31,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 148,263 $ 123,786
Noncash items included in earnings 37,866 30,049
Change in:
Segregated cash and government securities (4,483) 243,238
Net securities borrowed and loaned 6,006 (31,596)
Net payable to brokers, dealers
and clearing organizations 407,518 (12,550)
Net receivable from customers (532,936) (216,180)
Net securities inventory 194,223 12,984
Other assets and liabilities (133,721) (55,530)
Net cash provided by operating activities 122,736 94,201
Cash Flows from Investing Activities:
Securities purchased under agreements to resell 24,363 (15,000)
Capital expenditures and other investments (32,098) (32,953)
Net cash used in investing activities (7,735) (47,953)
Cash Flows from Financing Activities:
Employee stock transactions 24,003 14,817
Cash dividends paid (25,785) (23,816)
Purchase of treasury stock (91,336) (41,471)
Net cash used in financing activities (93,118) (50,470)
Net increase/(decrease) in Cash and Cash Equivalents 21,883 (4,222)
Cash and Cash Equivalents at March 1 84,764 62,799
Cash and Cash Equivalents at August 31 $ 106,647 $ 58,577
<FN>
Income tax payments totaled $71,616 and $60,336 during the six month periods
ended August 31, 1998, and 1997, respectively.
Interest payments totaled $2,748 and $1,353 during the six month periods ended
August 31, 1998, and 1997, respectively.
See Notes to Consolidated Financial Statements.
</TABLE>
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<PAGE>
A.G. EDWARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED AUGUST 31, 1998
(Dollars in thousands, except per share amounts)
(Unaudited)
FINANCIAL STATEMENTS:
The consolidated financial statements include the accounts of A.G. Edwards,
Inc., and its wholly owned subsidiaries (collectively referred to as the
"Company"), including its principal subsidiary, A.G. Edwards & Sons, Inc.
("Edwards"), and have been prepared in conformity with generally accepted
accounting principles. These financial statements should be read in conjunction
with the Company's annual report for the year ended February 28, 1998. All
adjustments that, in the opinion of management, are necessary for a fair
presentation of the results of operations for the interim periods have been
reflected. All such adjustments consist of normal recurring accruals unless
otherwise disclosed in these interim financial statements. The results of
operations for the six months ended August 31, 1998, are not necessarily
indicative of the results for the year ending February 28, 1999. Where
appropriate, prior year's financial information has been reclassified to
conform with the current year presentation.
The Company has no components of other comprehensive income.
STOCKHOLDERS' EQUITY:
Under the stock repurchase program, the Company purchased 2,164,000 shares at an
aggregate cost of $91,000 during the six month period ended August 31, 1998.
For the six month period ended August 31, 1997, the Company purchased 1,638,000
shares at a cost of $41,000.
NET CAPITAL REQUIREMENTS:
Edwards is subject to the net capital rule administered by the Securities and
Exchange Commission ("SEC"). This rule requires Edwards to maintain a minimum
net capital, as defined, and to notify and sometimes obtain the approval of the
SEC and other regulatory organizations for substantial withdrawals of capital
and loans to affiliates. As of August 31, 1998, Edwards' net capital of
$1,060,188 was $1,014,422 in excess of the minimum required.
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<TABLE>
<CAPTION>
A.G. EDWARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED AUGUST 31, 1998
(Dollars in thousands, except per share amounts)
(Unaudited)
EARNINGS PER SHARE:
The following table presents the computations of basic and diluted earnings per
share. (shares in thousands)
Three Months Ended Six Months Ended
August 31, August 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net earnings available to common stockholders $ 72,257 $ 69,245 $ 148,263 $ 123,786
Weighted average basic shares outstanding 95,004 95,504 95,444 95,858
Dilutive effect of employee stock plans 2,228 2,124 2,210 1,893
Total weighted average diluted shares 97,232 97,628 97,654 97,751
Basic earnings per share $ 0.76 $ 0.72 $ 1.55 $ 1.29
Diluted earnings per share $ 0.74 $ 0.71 $ 1.52 $ 1.27
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective for fiscal periods beginning after
June 15, 1999. The adoption of this statement is not expected to have a
material effect on the Company's financial statements.
* * * * *
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<PAGE>
A.G. EDWARDS, INC. AND SUBSIDIARIES
MANAGEMENT'S FINANCIAL DISCUSSION
RESULTS OF OPERATIONS
Six Months Ended August 31, 1998 Compared to
Six Months Ended August 31, 1997
The six months ended August 31, 1998 saw a continuation of the high level of
retail investor activity that existed during the last three fiscal years in
spite of the dramatic downturn in the equity markets in late August of this
year. The New York Stock Exchange and Nasdaq overall trading volumes increased
25% and 24%, respectively, over the prior year, which contributed to a 16%
increase in total customer trades for the Company. The number and size of
customer trades and the product mix generally affect the level of revenues. The
number of branches and brokers increased to 616 and 6,388, which represent
increases of 6% and 4%, respectively, compared with the same period last year.
Total revenues increased $172 million (18%) to $1.1 billion from $949 million
last year. Expenses were $881 million, an increase of $133 million (18%),
resulting in a rise in net profit margin to 13.2% this year from 13.0% last
year.
Total commission revenue increased $77 million (14%), reflecting increased
trading volume and, to a lesser extent, expansion of the Company's distribution
system. Listed commissions rose $24 million (11%) while mutual fund and
insurance sales increased $39 million (32%) and $14 million (22%), respectively.
Client demand for equities, mutual funds and variable annuities remained strong
due to the continuation of the relatively strong equity market conditions and
increased volatility during the first six months of this fiscal year.
Principal transaction revenue decreased $7 million (7%). Sales revenue from
government bonds declined $5 million (19%) primarily as a result of lower yields
this year. Corporate equity revenue decreased $2 million (8%) primarily due to
the recent downturn in the equity market.
Investment banking revenue increased $36 million (46%). Underwriting fees and
concessions rose $23 million (37%) due to the continued strength in initial
public offerings during the period coupled with an increased customer demand for
equity-based unit trusts. Management fees increased $13 million (85%) due to
participation as manager or co-manager in a larger number of corporate offerings
coupled with increased activity in mergers and acquisitions this year.
Asset management and service fees increased $48 million (33%). Fees from third-
party mutual funds rose $24 million (28%) reflecting the strong industry-wide
cash inflows to funds. Fees from the administration of client assets under
third-party management and from the Company's management services improved
$23 million (76%) due to a higher level of assets under management.
Interest revenue increased $18 million (21%). Interest revenue from margin
accounts rose $19 million (28%) due to a 28% increase in average margin debits.
Interest revenues from securities owned increased $5 million (77%) as a result
of higher average inventory. As a partial offset, interest earned on short-term
investments declined $6 million (58%).
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The rise in expenses is primarily due to the increase in compensation and
benefits of $109 million (18%). Commission expense increased $55 million (17%)
due to the rise in commissionable revenue. General and administrative salaries
and related benefits increased primarily as a result of general increases and
higher employment. Incentive-related compensation rose primarily as a result of
higher earnings.
Occupancy and equipment expenses increased $10 million (23%) as a result of
branch and home office expansion.
Three Months Ended August 31, 1998 Compared to
Three Months Ended August 31, 1997
Net earnings for the quarter ended August 31, 1998 were $72 million on revenues
of $551 million compared to net earnings of $69 million on revenues of
$510 million for the same period a year ago. The explanation of revenue and
expense fluctuations presented for the six month period are generally applicable
to the three months of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets fluctuate in the normal course of business, primarily
because of the timing of certain transactions, which may result in corresponding
changes in related liabilities. Securities-lending transactions and related
securities-borrowed transactions have decreased significantly reflecting
management's re-evaluation of the profitability associated with this activity.
The Company plans to purchase additional land adjacent to its St. Louis
headquarters with the intent to construct an additional office building and a
training/conference center. As this project is in the early planning stage of
development, the costs associated with it are not yet known. These projects are
expected to be financed from operations.
YEAR 2000
The "Year 2000" issue arises because many computer hardware and software
systems, including the Company's, use only two digits to represent the year. As
a result, these systems and programs may not accurately calculate dates beyond
1999, causing system failures or miscalculations. The Company, along with the
entire financial services industry, is heavily reliant on computer technology.
Therefore, any unresolved Year 2000 issues of the Company, other industry
members or entities that support the industry, may result in a material and
negative impact on the Company's operations or financial condition. While the
Company has contacted a significant number of third parties with which it does
business concerning their Year 2000 progress, there can be no assurance that
these parties have provided accurate and complete information concerning their
Year 2000 efforts or that their remediation efforts will succeed, nor can there
be assurance that third parties not contacted will not have problems and
adversely affect the Company's operations.
-7-
<PAGE>
With respect to its internal systems, the Company's efforts to remediate the
Year 2000 issues are proceeding according to plan. At September 30, 1998, all
mission critical systems have been assessed, modified and tested. Non-critical
systems and non-information technology systems are expected to be modified by
December 31, 1998, with testing to continue throughout 1999. In July 1998, the
Company participated in the Securities Industry Association's ("SIA") Year 2000
Beta Tests. No material problems were identified by the Company or, according
to the SIA, other test participants. Beginning March 1999, the Company plans to
participate in an industry-wide testing program. In addition, the Company will
point-to-point test with significant counterparties throughout the remainder of
calendar 1998 and 1999, as management considers appropriate.
Management estimates the total cost of the Company's Year 2000 efforts will be
less than $15 million. Most of these costs have already been incurred and
expensed. However, as to future estimates and assumptions, there can be no
assurance that these cost estimates will be correct. Actual costs may differ
materially from these estimates.
The Company is in the process of incorporating various Year 2000 issues into its
corporate contingency plans and expects a written plan to be completed by mid-
year in calendar 1999. The plan will include steps to handle internal system
processing problems that may occur after December 31, 1999. Consideration will
be given to alternatives for mission critical third parties. However,
management believes that the Company's mission critical third parties are
securities and commodities exchanges, clearing associations and utilities and
that the industry currently has no available alternatives for most or all of
these parties.
FORWARD-LOOKING STATEMENTS
The Management's Financial Discussion, including the discussion under
"Year 2000," contains forward-looking statements within the meaning of federal
securities laws. Actual results are subject to risks and uncertainties,
including both those specific to the Company and those specific to the industry
which could cause results to differ materially from those contemplated. The
risks and uncertainties include, but are not limited to, third-party or Company
failures to achieve timely, effective remediation of the Year 2000 issues,
general economic conditions, actions of competitors, regulatory actions, changes
in legislation and technology changes. Undue reliance should not be placed on
the forward-looking statements, which speak only as of the date of this
Quarterly Report on Form 10-Q. The Company does not undertake any obligation to
publicly update any forward-looking statements.
STOCKHOLDER PROPOSALS:
Any stockholder proposals to be presented at the 1999 annual meeting of
stockholders to be held June 24, 1999, must be received by the Company no later
than January 10, 1999, at its principal executive office at One North Jefferson
Avenue, St. Louis, Missouri 63103 in order to be considered for inclusion in the
Company's proxy statement and proxy relating to that meeting. Stockholders
wishing to nominate one or more candidates for election to the Board of
Directors, or propose any other business to be considered at the stockholder
meeting, must comply with a Bylaw provision dealing with such matters. Pursuant
to the Bylaw provision, any stockholder of the Company eligible to vote in an
election of directors may nominate one or more candidates for election to the
Board of Directors or propose business to be brought before the stockholder
meeting, by giving written notice to the Company not less than 60 days,
April 25, 1999, nor more than 90 days, March 26, 1999, prior to the date of the
meeting.
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<PAGE>
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
There have been no material changes in the legal proceedings previously
reported in the Company's Annual Report on Form 10-K for the year ended
February 28, 1998.
Item 6: Exhibits and Reports on 8-K
Exhibit 27 Financial Data Schedule. (This financial data schedule is
only required to be submitted with the registrant's
Quarterly Report on Form 10-Q as filed electronically to
the SEC's EDGAR database.)
Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
August 31, 1998.
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<PAGE>
SIGNATURES
Pursuant to the requirements 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: October 14, 1998 /s/ Benjamin F. Edwards III
BENJAMIN F. EDWARDS, III
Principal Executive Officer
Date: October 14, 1998 /s/ Robert L. Proost
ROBERT L. PROOST
Principal Financial Officer
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<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> AUG-31-1998
<CASH> 106,647
<RECEIVABLES> 2,363,665
<SECURITIES-RESALE> 180,000
<SECURITIES-BORROWED> 145,788
<INSTRUMENTS-OWNED> 214,328
<PP&E> 232,437
<TOTAL-ASSETS> 3,505,821
<SHORT-TERM> 0
<PAYABLES> 1,696,605
<REPOS-SOLD> 0
<SECURITIES-LOANED> 186,593
<INSTRUMENTS-SOLD> 24,039
<LONG-TERM> 0
0
0
<COMMON> 96,463
<OTHER-SE> 1,420,043
<TOTAL-LIABILITY-AND-EQUITY> 3,505,821
<TRADING-REVENUE> 100,245
<INTEREST-DIVIDENDS> 102,427
<COMMISSIONS> 607,219
<INVESTMENT-BANKING-REVENUES> 115,306
<FEE-REVENUE> 164,510
<INTEREST-EXPENSE> 3,112
<COMPENSATION> 718,392
<INCOME-PRETAX> 240,683
<INCOME-PRE-EXTRAORDINARY> 240,683
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 148,263
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 1.52
</TABLE>
