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, 1999 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 $3.3 billion at April 30, 1999.
At April 30, 1999, there were 94,461,086 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, 1999 (the "1999 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 24, 1999 (the "Company's 1999 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.
1
<PAGE>
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 and
financial consultants) in the United States. At February 28, 1999, Edwards had
639 offices (up from 594 at the end of the prior fiscal year) in 49 states and
the District of Columbia, and 13,953 full-time employees (up from 12,967),
including 6,528 financial consultants (up from 6,289) providing services for
approximately 2,340,000 clients (up from 2,060,000). 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 (FCM).
AGE Commodity Clearing Corp. (Clearing), a commodity clearing subsidiary, is
registered with the CFTC as a 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 five A.G.
Edwards trust companies (collectively referred to as the Trust Companies),
including a federally chartered savings bank, provide investment advisory,
portfolio management and trust services. Gull-AGE Capital Group, Inc. serves as
general partner of 59 real estate partnerships in connection with 24 limited
partnerships sold by Edwards from 1982 through 1985.
(b) Financial Information About Industry Segments
Information regarding industry segments is set forth in Note 1 (Summary of
Significant Accounting Policies) of the Notes to Consolidated Financial
Statements under the caption "Basis of Financial Information" appearing on page
28 of the 1999 Annual Report to Stockholders. Such information is hereby
incorporated by reference.
(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 consolidated revenues, are set forth on pages 22
and 23 of the 1999 Annual Report to Stockholders under the caption "Ten-Year
Financial Summary." Such information is hereby incorporated by reference.
2
<PAGE>
COMMISSIONS
Commission revenue represents the most significant source of revenue for the
Company, accounting for more than 50% of total revenue in four 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
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.
3
<PAGE>
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. Edwards' municipal underwriting activities include areas of
specialization in kindergarten through 12th grade schools, sports and
entertainment, municipal finance, housing, higher education, health care, and
public utilities. Corporate finance activities are focused on five major areas:
industrial growth, real estate/financial services, emerging growth, consumer
products and energy. 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 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.
4
<PAGE>
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, and revenues from assets under management by
Edwards. 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 Trust Companies, provides its clients with personal, ERISA
and custodial trust services.
Clients desiring professional money management are offered three types of
account portfolio services. Edwards, acting as investment manager, offers
portfolio management strategies based on the client's investment objectives.
Edwards' investment consulting service offers the Private Advisor Service
(formerly known as Asset Performance Monitor(R)), which provides clients with
third-party investment management, performance measurement, management search
and related consulting services, and the Strategic Asset Account, a fee-based
pricing alternative. The PathwaysSM, Spectrum, Fund Navigator, Fund Advisor and
Strategic Asset Account investment advisory programs are personalized, fee-based
asset allocation programs that utilize load and no-load 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 to its clients for the various types of
self-directed individual retirement accounts as provided under the Internal
Revenue Code.
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 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.
5
<PAGE>
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 9 (Financial Instruments) 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 1999 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 up to an additional 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.
PRIVATE CLIENT SERVICES
Edwards' Private Client Services group helps individuals and businesses meet a
wide range of financial and investment needs. Individual investors can receive
tailored asset allocation, tax- and risk-reduction strategies, portfolio reviews
of stocks, bonds and mutual funds (including concentrated equity strategies) and
comprehensive estate planning recommendations. Closely-held and publicly-traded
business clients can access services for risk management, employee benefit
programs (retirement plans and key employee compensation), capital formation and
management and ownership succession.
RESEARCH
Edwards provides both technical market analysis and fundamental analysis of
numerous industries and individual securities for use by its financial
consultants 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, including on-line services, some of whom possess
greater financial resources than the Company. Edwards competes for clients on
the basis of price, quality of service, financial resources and reputation.
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.
6
<PAGE>
Recent regulatory actions, which reduced certain restrictions on
bank affiliates engaging in securities activities, increased competition from
commercial banks and their affiliates for securities underwriting activities and
other brokerage services. In addition, legislative proposals, calling for
further reductions on restrictions for brokerage service and underwriting
activities, may 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 1999 Annual Report to Stockholders. Such
information is hereby incorporated by reference.
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 Trust Company FSB, a federal savings bank, is regulated
by the Office of Thrift Supervision (OTS), the Federal Deposit Insurance
Corporation (FDIC) and by the SEC as an investment advisor. 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
three commodity pools sponsored by Edwards, is regulated by the CFTC and the
NFA.
OTHER MATTERS
Information concerning the Company's year 2000 compliance efforts is contained
under Item 7 of this Form 10-K. Such information is hereby incorporated by
reference.
7
<PAGE>
ITEM 2. PROPERTIES.
The Company's headquarters are located at One North Jefferson Avenue, St. Louis,
Missouri. It consists of several buildings owned by the Company which contain
approximately 1,500,000 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 660,000 square feet of land owned by the Company.
The Company also owns approximately 520,000 square feet of land adjacent to its
headquarters and is using this property principally for additional employee
parking areas. Also, the Company owns one 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, 1999,
was $48,176,000.
ITEM 3. LEGAL PROCEEDINGS.
(a) Litigation
The Company is a defendant in 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, 1999.
8
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the executive officers of the Company as of
May 1, 1999. Executive officers are appointed by the Board of Directors to hold
office until their successors are appointed and qualified.
Year First
Appointed
Executive
Name Age Office & Title Officer of the
Company
Benjamin F. Edwards III 67 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 42 years.
Director of Edwards since
1967.
Mary V. Atkin 44 Corporate Vice President 1999
of Edwards. Director of
Information Technology of
Edwards since March 1999.
Manager of Corporate
Communications of Edwards
prior to March 1999.
Employee of Edwards for 21
years. Director of
Edwards since 1993.
Robert G. Avis 67 Executive Vice President 1984
of Edwards. Vice Chairman
of the Board of the
Company until March 1999.
Vice Chairman of the Board
and Director of the
Investment Banking
Division of Edwards from
1989 to March 1999.
Director of the Sales and
Marketing Division of
Edwards from 1984 to 1997.
Employee of Edwards for 33
years. Director of
Edwards since 1970.
9
<PAGE>
Robert L. Bagby 55 Vice Chairman of the Board 1991
of the Company. Vice
Chairman of the Board,
Executive Vice President
and since 1995, Director
of the Branch Division of
Edwards. Assistant
Director of the Branch
Division of Edwards prior
to 1995. Employee of
Edwards for 24 years.
Director of Edwards since
1979.
Donnis L. Casey 51 Corporate Vice President 1996
of Edwards. Director of
the Staff Division of
Edwards since 1996.
Assistant Director of the
Staff Division of Edwards
prior to 1996. Employee
of Edwards for 32 years.
Director of Edwards since
1993.
Benjamin F. Edwards IV 43 Vice Chairman of the Board 1996
of the Company since March
1999. Vice Chairman of
the Board and Director of
the Investment Banking
Division of Edwards since
March 1999. Executive
Vice President and
Director of the Sales and
Marketing Division of
Edwards since 1997.
Regional Officer of
Edwards from 1995 to 1997.
Assistant Branch Manager
of Edwards from 1991 to
1995. Employee of Edwards
for 21 years. Director of
Edwards since 1994.
Alfred E. Goldman 65 Corporate Vice President, 1991
Director of Market
Analysis of Edwards.
Employee of Edwards for 39
years. Director of
Edwards since 1967.
10
<PAGE>
Douglas L. Kelly 50 Vice President and 1994
Secretary of the Company.
Corporate Vice President,
Secretary, and Director of
Law and Compliance of
Edwards. Employee of
Edwards for 5 years.
Director of Edwards since
1994.
Ronald J. Kessler 51 Corporate Vice President 1996
of Edwards. Director of
Operations since January
1998. Assistant Director
of Operations prior to
January 1998. Employee of
Edwards for 31 years.
Director of Edwards since
1989.
Thomas H. Martin Jr. 39 Assistant Treasurer of the 1999
Company since March 1999.
Vice President of Edwards.
Controller of the Company
and Edwards since March
1999. Accounting Manager
prior to March 1999.
Employee of Edwards for 18
years.
Joseph G. Porter 38 Assistant Treasurer of the 1999
Company since March 1999.
Vice President of Edwards.
Principal Accounting
Officer of the Company and
Edwards since March 1999.
Accounting Manager prior
to March 1999. Employee
of Edwards for 16 years.
Robert L. Proost 61 Vice President and 1990
Treasurer of the Company.
Corporate Vice President,
Treasurer, Assistant
Secretary and Director of
Administration of Edwards.
Employee of Edwards for 11
years. Director of
Edwards since 1989.
Benjamin F. Edwards III and Benjamin F. Edwards IV are father and son.
Benjamin F. Edwards III and Robert G. Avis are stepbrothers.
11
<PAGE>
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 1999 Annual Report to
Stockholders on page 43 under the caption "Quarterly Financial Information" and
on page 44 under the caption "Shareholder 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
1999 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 17 through 21 of the
1999 Annual Report to Stockholders under the caption "Management's Financial
Discussion." Such information is hereby incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
The information required by this item is contained in Management's Financial
Discussion under the caption "Risk Management" on page 21 of the 1999 Annual
Report to Stockholders. 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 dated April 22, 1999, and under the caption
"Quarterly Financial Information" on pages 24 through 33 and page 43 of the 1999
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.
12
<PAGE>
The securities held by Edwards for client accounts are protected up to $500,000,
including up to $100,000 for cash claims, by SIPC. In addition to the SIPC
coverage, securities held in client accounts are provided additional protection
up to the full value of the accounts (as determined by SIPC) by a commercial
insurance company. Neither SIPC protection nor the additional protection
applies to fluctuations in the market value of securities.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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 3 through 6 of the Company's 1999
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," "Executive Compensation" and "Performance Graph" on pages 7
through 16 of the Company's 1999 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 1999 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
1999 Proxy Statement under the caption "Certain Transactions." Such information
is hereby incorporated by reference.
13
<PAGE>
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, included on pages 24
through 33 of the Company's 1999 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.
14
<PAGE>
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.
4(vi) Amendment No. 3 to the Rights Agreement dated December 30,
1998, between A.G. Edwards, Inc. and Boatmen's Trust Company as
Rights Agent, dated July 11, 1997, filed as Exhibit 4.6 to
Registrant's Form 10-K for the fiscal year ended February 28,
1998.
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, 1999 and
incorporated herein by reference.
13 Annual Report to Stockholders for the fiscal year ended
February 28, 1999. Except for those portions of pages expressly
incorporated by reference, the 1999 Annual Report to Stockholders
is not deemed filed as part of this Annual Report on Form 10-K.
21 Registrant's Subsidiaries.
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, 1999.
15
<PAGE>
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 20, 1999 By /s/ Benjamin F. Edwards III
Benjamin F. Edwards III,
Chairman of the Board
16
<PAGE>
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 20, 1999
Benjamin F. Edwards III President and Director
(Chief Executive Officer)
/s/ Robert L. Proost Treasurer and Director May 20, 1999
Robert L. Proost (Principal Financial Officer)
/s/ Robert L. Bagby Vice Chairman of the Board May 20, 1999
Robert L. Bagby and Director
/s/ Benjamin F. Edwards IV Vice Chairman of the Board
Benjamin F. Edwards IV and Director May 20, 1999
/s/ Dr. E. Eugene Carter Director May 20, 1999
Dr. E. Eugene Carter
/s/ Charmaine S. Chapman Director May 20, 1999
Charmaine S. Chapman
Director May 20, 1999
Dr. Louis Fernandez
/s/ Samuel C. Hutchinson Jr. Director May 20, 1999
Samuel C. Hutchinson Jr.
/s/ Ronald J. Kessler Director May 20, 1999
Ronald J. Kessler
/s/ Thomas H. Martin Controller May 20, 1999
Thomas H. Martin Jr.
/s/ Joseph G. Porter Principal Accounting Officer May 20, 1999
Joseph G. Porter
17
<PAGE>
EXHIBIT INDEX
Exhibit Description
13 1999 Annual Report to Stockholders.
21 Registrant's Subsidiaries.
23 Independent Auditors' Consent.
24 Power of Attorney. Included on Signature Page 17.
18
EXHIBIT 13
Management's Financial Discussion
(Year references are to fiscal years ended February 28
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 639 locations and
approximately 14,800 total employees in 49 states and the District of Columbia.
The Company's primary business is providing a full range of financial products
and services, including investment banking, to its individual, institutional,
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.
The Company's fiscal 1999 was the fourth consecutive year of record
profitability. A strong economy, low inflation and low interest rates provided
conditions for another year of increased investor activity, record trading
volumes and rising stock prices in the domestic equity markets. The mid-year
volatility of the equity markets slowed activity slightly, only to rebound to
record levels by calendar year end as the Federal Reserve lowered interest rates
three times in less than three months. Despite some volatility in interest rates
early in fiscal 1999, inflation remained low, resulting in a continuation of
lower returns to fixed-income investors. As a result, retail investors continued
to shift their holdings to the equity markets.
The year began with a continuation of the high level of retail investor
activity that existed in the prior three years. The Dow Jones Industrial Average
(the Dow) began the year at 8,546 and continued its climb to a peak of 9,374 in
mid-July. But the fear of inflation, lower corporate earnings and turmoil in the
foreign markets sent the Dow tumbling in late July to a low of 7,539 on August
31. After the Federal Reserve began to lower interest rates in September, the
Dow rebounded to a record of 9,643 in early January, only to finish the year at
9,307. In spite of this volatility, the Dow ended the year up 9 percent,
following a 24 percent gain in 1998. The NASDAQ average jumped 29 percent for
the year, following a 35 percent gain in the prior year. Investor demand and
volatility in high-tech stocks, particularly Internet companies, fueled the rise
in the NASDAQ market and resulted in record NASDAQ volume.
Results of Operations
Revenues, net earnings and earnings per share for the Company reached record
levels for the fourth year in a row in 1999. Revenues for the Company rose 12
percent to just more than $2.2 billion from $2.0 billion in 1998. Revenues in
1998 were up 18 percent from $1.7 billion in 1997. Net earnings of $292 million
in 1999 increased 9 percent from $269 million in the previous year. Net earnings
in 1998 were up 23 percent from $219 million in 1997. Diluted earnings per share
for the Company were $3.00 in 1999, versus $2.75 and $2.24 in 1998 and 1997,
respectively. The Company's net profit margin was 13.0 percent in 1999, compared
to 13.4 percent in 1998 and 12.9 percent in 1997.
The number of A.G. Edwards financial consultants reached 6,528 at fiscal
year end, an increase of 4 percent from the prior year end. The number of
locations at the end of 1999 was 639, up from 594 at year-end 1998. The Company
intends 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):
Increase (Decrease) 1999 vs. 1998 1998 vs. 1997
Revenues:
Commissions $ 101,718 9% $179,125 19%
Principal transactions (5,930) (3) (5,055) (2)
Investment banking 28,083 15 34,759 22
Asset management and
service fees 90,087 29 65,832 26
Interest 20,642 11 33,035 22
Other 2,066 22 (46) (1)
$ 236,666 12% $307,650 18%
Expenses:
Compensation and benefits $ 154,766 12% $196,000 18%
Communications 5,689 6 12,692 15
Occupancy and equipment 22,187 23 10,613 12
Floor brokerage and clearance 1,108 6 1,676 9
Interest 4,192 292 (629) (30)
Other 15,734 22 4,458 7
$ 203,676 13% $224,810 17%
17
<PAGE>
Commissions
Commissions are the most significant source of revenue for the Company,
accounting for more than 50 percent of total revenue in each year. Commission
revenue rose 9 percent, from $1.1 billion in 1998 to $1.2 billion in 1999, and
accounted for more than 43 percent of the Company's overall revenue increase in
1999. As commissions are transaction-based revenues, they are influenced by the
number and size of client transactions and product mix and may vary considerably
from period to period.
Listed equity securities commissions increased 9 percent ($43 million) and
over-the-counter equity commission revenue rose 5 percent ($9 million) in 1999,
once again 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 1999 was up 28 percent on the New York Stock Exchange and 24 percent
on the NASDAQ. The Company's increases trailed the industry, primarily due to
its lesser share of higher institutional volume on the exchanges and its client
base not investing as heavily in the high-tech and Internet sectors, which have
caused the overall volumes to rise significantly.
Company revenues from mutual fund sales rose 11 percent ($27 million) in
1999. Investor demand continued to be high for mutual funds in spite of a
volatile year in the equity markets. Industry-wide, cash flows into funds
remained strong with only the month of August resulting in a net cash outflow.
Following this trend, sales of variable annuities increased 13 percent ($16
million) for 1999.
Fiscal 1998's 19 percent ($179 million) increase in total commissions over
fiscal 1997 reflected increased retail investor activity due to higher stock
prices and trading volumes as well as strong cash flows into mutual funds and
variable annuities in 1998 compared with 1997.
Principal Transactions
The Company maintains 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 decreased 3 percent ($6 million) in 1999, due
to reduced client demand for debt securities as a result of lower yields and the
strength of the equity markets. Revenue from sales of government debt securities
declined 22 percent ($10 million) but was partially offset by a combined 5
percent ($5 million) rise from sales of municipal and corporate debt securities.
The decline in government securities sales and the increase in sales of
municipal and corporate debt securities was primarily due to client demand
shifting from government to municipal and corporate debt securities as a result
of a widening of the interest rate yield spreads.
Revenues from principal transactions decreased 2 percent ($5 million) in
1998 as compared to 1997. Revenue from sales of municipal debt securities in
1998 decreased 8 percent ($6 million) due to lower yields and the strength of
the equity markets.
Investment Banking
The Company derives investment banking revenue from underwriting public
offerings of securities for corporate and governmental entities for sale to its
clients. The Company also provides advisory services to these same corporate and
governmental entities.
In 1999, investment banking revenue increased 15 percent ($28 million) due
to the Company's participation in the industry-wide record levels of
underwriting as domestic and foreign corporations raised record capital in U.S.
markets during calendar 1998. Underwriting fees and selling concessions
increased 7 percent ($11 million) in 1999, principally because of a 9 percent
($10 million) increase in revenue from corporate equity issues in 1999. The
initial public offering market continued to be strong, as did client demand for
equity-based unit trusts. Management fees increased 43 percent ($17 million) 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.
In 1998, favorable market conditions for investment banking activities
resulted in revenue growth of 22 percent ($35 million) over 1997. Underwriting
fees and selling concessions advanced 33 percent ($38 million) in 1998,
principally because of a 46 percent ($42 million) increase in revenue from
corporate equity and debt issues in 1998, which was partially offset by a 7
percent ($3 million) decline in management fees.
18
<PAGE>
Asset Management and Service Fees
Asset management and service fees consist primarily of revenues earned from
providing support and services in connection with client assets under third-
party management, including mutual funds, and the Company's trust services.
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.
Asset management and service fees rose $90 million in 1999, an increase of
29 percent. Fees from third-party mutual funds were 24 percent ($47 million)
higher than 1998's fees, reflecting the strong industry-wide cash flows into
funds and higher market valuations of existing assets. Fees resulting from the
administration of client assets under third-party management and from the
Company's management services improved 57 percent ($40 million) in 1999. The
average number of these accounts increased 61 percent, while the total assets in
these programs grew from $9.5 billion at the end of 1998 to $11.8 billion by the
close of 1999, an increase of 24 percent.
The 1998 increase in asset management and service fees of 26 percent ($66
million) over 1997 was primarily due to a 24 percent ($37 million) jump in
service fees from third-party mutual funds. Fees from the Company's management
services in 1998 rose 57 percent ($26 million) as a result of the growth in the
number of client accounts and higher market valuations of existing assets.
Interest
The Company earns interest revenue principally from financing its clients'
margin accounts, debt securities carried in inventory for resale and short-term
investments. Interest revenue rose 11 percent ($21 million) in 1999, primarily
because of a 14 percent ($21 million) increase in interest earned on margin
accounts. The increase resulted from an 18 percent rise in average margin debits
partially offset by slightly lower interest rates charged on margin accounts in
the later part of the year. Interest revenues from securities owned increased
$4 million, while interest earned on short-term investments decreased $5 million
as inventory levels were higher and average short-term investments declined.
The 1998 versus 1997 increase in interest revenue was principally due to a
27 percent ($31 million) increase in interest earned on margin accounts as a
result of a 24 percent rise in average margin balances and from increased
revenue from securities owned.
Expenses
Compensation and benefits, the major component of the Company's overall
expenses, rose 12 percent ($155 million) in 1999 and 18 percent ($196 million)
in 1998. A significant portion of this expense is variable in nature and
directly relates to commissionable sales and to the Company's profitability. The
year-to-year comparisons generally reflect the increases in revenue and
profitability in both 1999 and 1998. General and administrative salary expense
increased 17 percent ($37 million) in 1999 and 17 percent ($31 million) in 1998
because of general salary increases and an 11 percent growth in the number of
support employees in 1999 and 12 percent in 1998.
Communication expense rose 6 percent ($6 million) in 1999, primarily
because of increased business volume coupled with branch expansion. Occupancy
and equipment increased 23 percent ($22 million) in 1999, principally because of
branch and headquarters expansion and the cost associated with the purchase of
technology-related equipment. All remaining expenses increased a combined 22
percent ($21 million) over last year due to branch and headquarters expansion
and increased security transactions.
In 1998, all non-compensation-related expenses increased a combined 11
percent ($29 million), mainly as a result of expansion.
Income Taxes
For information concerning the provision for income taxes and information
regarding the difference between effective
tax rates and statutory rates, see Note 6 (Income Taxes) of the Notes to
Consolidated Financial Statements.
Liquidity and Capital Resources
The Company's assets fluctuate in the normal course of business, primarily
because of the timing of certain transactions. Securities-loaned transactions
and related securities-borrowed transactions decreased from fiscal 1998,
reflecting management's re-evaluation of the profitability of this activity.
Customer receivables continued to increase in 1999 as a result of business
expansion and the increased participation by clients in the markets during the
past year. The decrease in government securities inventory from 1998, and the
related decrease in payables to brokers and dealers, was due to an underwriting
of government securities which was in progress at February 28, 1998.
19
<PAGE>
The principal sources for financing the Company's business are
stockholders' equity and cash generated from operations. Average bank borrowings
of $35 million in 1999, $11 million in 1998 and $2 million in 1997 were
primarily used to finance customer receivables. Capital expenditures for the
past three years have been financed primarily from operations. The Company plans
to purchase additional land adjacent to its St. Louis headquarters with the
intent to construct an additional office building, a training/conference center
and a parking garage. As these projects are in the early planning stage of
development, the costs associated with them are unknown. These projects are
expected to be financed primarily from operations.
Under the Company's stock repurchase program, which began in May 1996, the
Company is authorized to repurchase up to 33 million shares of the Company's
common stock over a 5 1/2 year period ending in 2001, in part to offset the
issuance of stock under the employee stock plans. The Company purchased 4.9
million and 3.4 million shares at aggregate costs of $180 million and $106
million in 1999 and 1998, respectively. At February 28, 1999, a total of 11.3
million shares had been purchased under this program. These treasury shares were
purchased with funds generated from operations and proceeds from employee stock
plans. Future treasury share purchases, dividend payments and the costs of
expansion are expected to be financed from the same sources.
The Company has adequate sources of credit 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 clients -- see Note 5 (Net Capital
Requirements) of the Notes to Consolidated Financial Statements. Under such
rules, the subsidiary would be restricted from expanding its business, paying
cash dividends or advancing loans to affiliates if its net capital were to go
below certain levels. The rules also require A.G. Edwards & Sons, Inc., to
notify and sometimes obtain approval from the SEC and other regulatory
organizations for substantial withdrawals of capital and loans to affiliates.
A.G. Edwards & Sons, Inc.'s net capital in excess of these levels was
approximately $909 million on February 28, 1999, up from $873 million the
previous year.
Year 2000
This section is a Year 2000 readiness disclosure pursuant to the provisions of
the Year 2000 Information Readiness and Disclosure Act.
The "Year 2000" issue arose because many computer hardware and software
systems use only two digits to represent the year. As a result, these systems
and programs may not accurately calculate dates beyond December 31, 1999,
causing system failures or miscalculations. The Company, along with the entire
financial services industry, is heavily reliant on computer technology. As such,
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 significant third parties concerning their Year 2000 progress, there
can be no assurance that these other parties have provided accurate and complete
information concerning their Year 2000 efforts.
With respect to its internal systems, the Company's efforts to remediate
the Year 2000 issues are proceeding according to plan. Mission critical systems
have been assessed, modified, tested and placed in production. Non-critical and
non-information technology systems have been assessed, with modifications and
testing scheduled to be complete in June 1999. The Company is currently
participating in an industry-wide testing program with other broker-dealers,
clearing organizations, securities exchanges and depository institutions. The
Securities Industry Association has reported that preliminary results of the
testing program have been favorable. In addition, the Company will continue both
internal and point-to-point testing with significant counterparties throughout
calendar 1999.
Management estimates the total cost of the Company's Year 2000 efforts will
not exceed $15 million. Most of these costs have already been incurred and
expensed. Actual costs may differ materially from this estimate.
The Company has incorporated various Year 2000 issues into its corporate
contingency plans. The plans include steps to address internal system processing
errors that may occur after December 31, 1999. Consideration was given to
alternatives for mission critical third parties. However, management believes
that the Company's primary 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
entities.
20
<PAGE>
Risk Management
General The business activities of the Company expose it to a variety of risks.
Management of these risks is necessary for the long-term profitability of the
Company. The Company manages these risks through the establishment of numerous
policies, procedures and controls. The most significant risks that affect the
Company are market risk and credit risk. Credit risk is discussed in Note 9
(Financial Instruments ---- Off-balance Sheet Risk and Concentration of Credit
Risk) of the Notes to Consolidated Financial Statements.
Market Risk Market risk is the risk of loss to the Company resulting from
changes in interest rates, equity prices or both. The Company is exposed to
market risk since it maintains positions in fixed-income and equity securities.
The Company primarily manages its risk through the establishment of trading
policies and guidelines and through the implementation of control and review
procedures. The Company has a hands-on management philosophy which provides for
clear communication between all responsible parties throughout the trading day.
The Company's policy is to purchase inventory to provide investment product
for its clients. As a result, the Company purchases only inventory which it
believes it can readily sell to its clients, thus reducing the Company's
exposure to liquidity but not to market fluctuations. In addition, maximum
inventory guidelines are set by the Executive Committee for fixed-income and
equity securities, subject to certain limited exceptions.
Capital management and control are accomplished through review, by product
managers and members of management outside of the trading area, of various
reports, including reports that show current inventory profit and loss,
inventory positions exceeding set limits, and aged positions. Additionally,
real-time capital management data is available for intraday assessments.
The Company does not act as a dealer, trader or end-user of complex
derivative products, 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, with related profits
and losses recorded in income. These transactions are not material to the
Company's financial condition or results of operations.
Equity Price Risk Equity price risk refers to the risk of changes in the level
or volatility of the price of equity securities. The Company is exposed to this
risk as a result of its market-making activities. At February 28, 1999, the
potential daily loss in fair value of equity securities was not material.
Interest Rate Risk Interest rate risk refers to the risk of changes in the
level or volatility of interest rates, the speed of payments on mortgage-backed
securities, the shape of the yield curve and credit spreads. The Company is
exposed to this risk as a result of maintaining inventories of interest-rate-
sensitive financial instruments. This is the Company's primary market risk.
For the purposes of the SEC's disclosure requirements, the Company has
elected to use the sensitivity approach to express the potential decrease in the
fair value of the Company's interest-rate-sensitive financial instruments. The
Company calculated the potential loss in fair value of its debt inventory by
calculating the change in offering price of each inventory item resulting from a
10 percent increase in either the Treasury Yield curve for taxable products or
the Municipal Market Data Corporation's AAA rated yield curve for tax-exempt
products. Using this method, if such a 10 percent increase in yield were to
occur, the Company calculated a potential loss in fair value of its debt
inventory, at February 28, 1999, of $8.9 million.
******************************************************************************
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 Annual
Report. The Company does not undertake any obligation to publicly update any
forward-looking statements.
21
<PAGE>
<TABLE>
<CAPTION>
Year Ended: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Revenues
Commissions:
Listed Securities $ 505,226 $ 462,276 $ 365,908 $ 338,241 $ 236,629
Options 49,830 44,188 33,850 29,432 21,576
Over-the-Counter Securities 199,472 190,092 178,752 142,696 80,525
Mutual Funds 281,782 255,005 214,029 184,616 142,653
Commodities 15,518 16,315 16,038 16,448 15,261
Insurance 149,691 131,925 112,099 90,150 77,117
Total 1,201,519 1,099,801 920,676 801,583 573,761
Principal Transactions:
Equities 60,538 61,184 58,427 55,334 37,565
Debt Securities 141,484 146,768 154,580 151,033 203,460
Total 202,022 207,952 213,007 206,367 241,025
Investment Banking:
Underwriting Fees and Selling Concessions 163,419 152,029 114,426 80,572 70,156
Management Fees 55,582 38,889 41,733 24,427 22,574
Total 219,001 190,918 156,159 104,999 92,730
Asset Management and Service Fees 405,385 315,298 249,466 199,593 157,859
Interest:
Margin Account Balances 170,982 149,738 118,373 107,192 89,971
Securities Owned and Deposits 30,530 31,132 29,462 27,150 15,548
Total 201,512 180,870 147,835 134,342 105,519
Other 11,360 9,294 9,340 7,583 7,448
Total Revenues 2,240,799 2,004,133 1,696,483 1,454,467 1,178,342
Expenses
Compensation and Benefits 1,431,697 1,276,931 1,080,931 929,755 756,736
Communications 104,638 98,949 86,257 80,364 74,708
Occupancy and Equipment 118,683 96,496 85,883 79,077 73,108
Floor Brokerage and Clearance 20,933 19,825 18,149 16,275 14,355
Interest 5,628 1,436 2,065 3,153 6,818
Other Operating Expenses 88,433 72,699 68,241 69,561 53,288
Total Expenses 1,770,012 1,566,336 1,341,526 1,178,185 979,013
Earnings Before Income Taxes 470,787 437,797 354,957 276,282 199,329
Income Taxes 178,670 168,500 135,900 105,700 75,210
Net Earnings $ 292,117 $ 269,297 $ 219,057 $ 170,582 $ 124,119
Per Share Data
Diluted Earnings $ 3.00 $ 2.75 $ 2.24 $ 1.77 $ 1.33
Basic Earnings $ 3.07 $ 2.81 $ 2.29 $ 1.80 $ 1.35
Dividends Declared $ 0.57 $ 0.51 $ 0.44 $ 0.40 $ 0.37
Book Value $ 17.16 $ 15.21 $ 13.12 $ 11.33 $ 9.84
Other Data
Total Assets $ 3,803,132 $ 4,193,328 $ 4,244,340 $ 3,102,085 $ 2,224,282
Stockholders' Equity $ 1,627,737 $ 1,463,121 $ 1,261,303 $ 1,088,684 $ 919,281
Dividends Declared $ 54,002 $ 48,740 $ 41,851 $ 37,769 $ 34,200
Return on Average Equity 18.9% 19.8% 18.6% 17.0% 14.5%
Pretax Return on Average Equity 30.5% 32.1% 30.2% 27.5% 23.3%
Net Earnings as a Percent of Revenues 13.0% 13.4% 12.9% 11.7% 10.5%
Average Common and Common
Equivalent Shares Outstanding (Diluted) 97,322 98,051 97,816 96,644 93,267
Average Common Shares
Outstanding (Basic) 95,252 95,950 95,483 94,621 91,809
<FN>
Share and per share data have been restated for stock splits and stock dividends.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Year Ended: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Revenues
Commissions:
Listed Securities $ 273,363 $ 231,312 $ 203,936 $ 140,096 $ 129,288
Options 21,135 19,167 21,745 20,002 18,141
Over-the-Counter Securities 94,075 69,199 69,415 38,842 38,236
Mutual Funds 244,357 191,643 145,494 80,158 69,998
Commodities 16,766 13,016 13,941 12,322 11,941
Insurance 74,862 46,757 47,343 39,514 40,424
Total 724,558 571,094 501,874 330,934 308,028
Principal Transactions:
Equities 40,260 31,266 23,157 10,922 11,741
Debt Securities 146,705 184,040 165,284 145,732 116,624
Total 186,965 215,306 188,441 156,654 128,365
Investment Banking:
Underwriting Fees and Selling Concessions 111,379 87,061 77,464 44,167 42,395
Management Fees 35,594 21,251 13,389 11,161 11,542
Total 146,973 108,312 90,853 55,328 53,937
Asset Management and Service Fees 138,952 109,483 88,344 61,455 47,321
Interest:
Margin Account Balances 60,491 50,098 47,026 51,209 50,489
Securities Owned and Deposits 14,074 14,631 16,915 15,025 14,817
Total 74,565 64,729 63,941 66,234 65,306
Other 6,628 5,464 5,206 4,302 4,066
Total Revenues 1,278,641 1,074,388 938,659 674,907 607,023
Expenses
Compensation and Benefits 828,409 692,127 594,404 422,524 374,119
Communications 73,048 66,899 62,468 58,323 52,527
Occupancy and Equipment 67,258 61,701 56,035 49,783 42,560
Floor Brokerage and Clearance 15,062 15,016 13,741 11,461 10,031
Interest 1,113 1,886 1,186 4,229 6,314
Other Operating Expenses 50,180 46,774 42,793 36,925 29,948
Total Expenses 1,035,070 884,403 770,627 583,245 515,499
Earnings Before Income Taxes 243,571 189,985 168,032 91,662 91,524
Income Taxes 88,700 70,560 62,500 32,500 32,700
Net Earnings $ 154,871 $ 119,425 $ 105,532 $ 59,162 $ 58,824
Per Share Data
Diluted Earnings $ 1.71 $ 1.38 $ 1.25 $ 0.73 $ 0.73
Basic Earnings $ 1.75 $ 1.40 $ 1.28 $ 0.74 $ 0.74
Dividends Declared $ 0.35 $ 0.29 $ 0.25 $ 0.19 $ 0.19
Book Value $ 8.72 $ 7.11 $ 5.89 $ 4.79 $ 4.30
Other Data
Total Assets $ 2,236,590 $ 2,111,192 $ 1,577,143 $ 1,402,627 $ 1,126,004
Stockholders' Equity $ 790,367 $ 615,240 $ 492,010 $ 385,869 $ 343,539
Dividends Declared $ 30,843 $ 24,624 $ 20,622 $ 15,480 $ 15,185
Return on Average Equity 22.0% 21.6% 24.0% 16.2% 18.3%
Pretax Return on Average Equity 34.7% 34.3% 38.3% 25.1% 28.4%
Net Earnings as a Percent of Revenues 12.1% 11.1% 11.2% 8.8% 9.7%
Average Common and Common
Equivalent Shares Outstanding (Diluted) 90,530 86,740 84,152 81,023 80,884
Average Common Shares
Outstanding (Basic) 88,643 85,421 82,331 80,205 79,976
<FN>
Share and per share data have been restated for stock splits and stock dividends.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
February 28, February 28,
(In thousands, except share amounts) 1999 1998
<S> <C> <C>
Assets
Cash and cash equivalents $ 99,499 $ 84,764
Cash and government securities, segregated
under federal and other regulations 57,959 57,294
Securities purchased under agreements to resell 14,838 204,363
Securities borrowed 243,507 786,119
Receivables:
Customers 2,626,316 2,229,128
Brokers, dealers and clearing organizations 27,855 12,521
Fees, dividends and interest 52,077 47,287
Securities inventory, at fair value:
State and municipal 144,180 142,692
Government and agencies 50,618 209,247
Corporate 72,297 51,714
Property and equipment, at cost, net of accumulated depreciation
and amortization of $276,229 and $229,938 240,367 230,158
Deferred income taxes 88,312 70,432
Other assets 85,307 67,609
$ 3,803,132 $ 4,193,328
Liabilities and Stockholders' Equity
Checks payable $226,516 $ 203,017
Securities loaned 229,542 820,918
Payables:
Customers 949,076 920,791
Brokers, dealers and clearing organizations 68,419 185,756
Securities sold but not yet purchased, at fair value 45,659 19,141
Employee compensation and related taxes 578,073 505,731
Income taxes 24,645 17,137
Other liabilities 53,465 57,716
Total Liabilities 2,175,395 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 239,998 217,862
Retained earnings 1,348,094 1,160,532
1,684,555 1,474,857
Less: Treasury stock, at cost (1,625,042 and 284,173 shares) 56,818 11,736
Total Stockholders' Equity 1,627,737 1,463,121
$ 3,803,132 $ 4,193,328
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Earnings
Year Ended February 28,
(In thousands, except per share amounts) 1999 1998 1997
<S> <C> <C> <C>
Revenues
Commissions $ 1,201,519 $ 1,099,801 $ 920,676
Principal transactions 202,022 207,952 213,007
Investment banking 219,001 190,918 156,159
Asset management and service fees 405,385 315,298 249,466
Interest 201,512 180,870 147,835
Other 11,360 9,294 9,340
2,240,799 2,004,133 1,696,483
Expenses
Compensation and benefits 1,431,697 1,276,931 1,080,931
Communications 104,638 98,949 86,257
Occupancy and equipment 118,683 96,496 85,883
Floor brokerage and clearance 20,933 19,825 18,149
Interest 5,628 1,436 2,065
Other 88,433 72,699 68,241
1,770,012 1,566,336 1,341,526
Earnings Before Income Taxes 470,787 437,797 354,957
Income Taxes 178,670 168,500 135,900
Net Earnings $ 292,117 $ 269,297 $ 219,057
Earnings per share:
Diluted $3.00 $2.75 $2.24
Basic $3.07 $2.81 $2.29
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
Three Years Ended February 28, 1999 Additional
(In thousands, except per share amounts) Common Paid-in Retained Treasury
Stock Capital Earnings Stock Total
<S> <C> <C> <C> <C> <C>
Balances, March 1, 1996 $ 64,313 $ 232,058 $ 798,805 $ (6,492) $ 1,088,684
Net earnings 219,057 219,057
Dividends declared
$0.44 per share (41,851) (41,851)
Treasury stock acquired (64,805) (64,805)
Stock issued:
Employee stock
purchase/option plans 3,403 (9,444) 42,938 36,897
Restricted stock 1,221 1,997 20,103 23,321
Balances, February 28, 1997 64,313 236,682 968,564 (8,256) 1,261,303
Net earnings 269,297 269,297
Dividends declared
$0.51 per share (48,740) (48,740)
Treasury stock acquired (106,006) (106,006)
Stock issued:
Employee stock
purchase/option plans 7,667 (29,774) 78,677 56,570
Restricted stock 5,824 1,185 23,849 30,858
Stock split 3-for-2 32,150 (32,150)
Cash paid for fractional shares (161) (161)
Balances, February 28, 1998 96,463 217,862 1,160,532 (11,736) 1,463,121
Net earnings 292,117 292,117
Dividends declared
$0.57 per share (54,002) (54,002)
Treasury stock acquired (180,175) (180,175)
Stock issued:
Employee stock
purchase/option plans 13,770 (52,177) 108,657 70,250
Restricted stock 8,366 1,624 26,436 36,426
Balances, February 28, 1999 $ 96,463 $ 239,998 $ 1,348,094 $(56,818) $ 1,627,737
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Year Ended February 28,
(In thousands) 1999 1998 1997
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net earnings $ 292,117 $ 269,297 $ 219,057
Noncash items included in earnings:
Depreciation and amortization 47,564 37,855 33,066
Expense of restricted stock awards 28,149 25,155 22,173
Deferred income taxes (17,880) (13,874) (13,944)
(Increase) decrease in operating assets:
Segregated cash and government securities (665) 343,697 1,794
Securities borrowed 542,612 606,745 (779,598)
Receivable from brokers, dealers and clearing organizations (15,334) 2,114 (714)
Receivable from customers (397,188) (551,774) (249,291)
Fees, dividends and interest receivable (4,790) (6,218) (4,458)
Securities inventory 136,558 (239,686) 31,825
Other assets 4,472 (7,000) (4,930)
Increase (decrease) in operating liabilities:
Checks payable 23,499 28,281 25,766
Securities loaned (591,376) (637,508) 797,937
Payable to brokers, dealers and clearing organizations (117,337) 137,914 (30,805)
Payable to customers 28,285 104,123 96,679
Securities sold but not yet purchased 26,518 1,471 (4,201)
Employee compensation and related taxes 72,342 91,554 83,079
Income taxes 7,508 3,601 906
Other liabilities (5,923) 16,730 (1,021)
Net cash from operating activities 59,131 212,477 223,320
Cash Flows From Investing Activities
Securities purchased under agreements to resell 189,525 (4,363) (107,987)
Purchase of property and equipment (57,773) (78,218) (44,305)
Long-term investments included in other assets (22,170) (16,301) 6,499
Net cash from investing activities 109,582 (98,882) (145,793)
Cash Flows From Financing Activities
Employee stock transactions 78,527 62,273 38,045
Purchase of treasury stock (180,175) (106,006) (64,805)
Cash dividends paid (52,330) (47,736) (40,555)
Cash paid for fractional shares (161)
Net cash from financing activities (153,978) (91,630) (67,315)
Net Increase in Cash and Cash Equivalents 14,735 21,965 10,212
Cash and Cash Equivalents, at Beginning of Year 84,764 62,799 52,587
Cash and Cash Equivalents, at End of Year $ 99,499 $ 84,764 $ 62,799
<FN>
Interest payments totaled $5,585 in 1999, $3,245 in 1998 and $2,650 in 1997.
Income taxes paid totaled $168,748 in 1999, $165,618 in 1998 and $145,216 in 1997.
Supplemental disclosures of noncash financing activities:
Restricted stock awards, net of forfeitures, totaled $28,602 in 1999, $24,818 in 1998 and $21,768 in 1997.
See Notes to Consolidated Financial Statements.
</TABLE>
27
<PAGE>
Notes to Consolidated Financial Statements
(Three years ended February 28, 1999)
(Dollars in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Financial Information 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 generally accepted
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 operates, and is managed, as a single business segment, that of
providing investment services to its clients. The Company offers a wide range of
services designed to meet clients' individual investment needs, including
securities and commodities brokerage, asset management, insurance, trust,
investment banking, and other related services. These services are provided by
more than 6,500 financial consultants in more than 630 branch locations of the
Company's principal subsidiary, A.G. Edwards & Sons, Inc. Since these services
are provided using the same sales and distribution personnel, support services
and facilities, and all are provided to meet the needs of its clients, the
Company does not identify or manage assets, revenues or expenses resulting from
any service, or class of services, as a separate business segment. With
headquarters in St. Louis, A.G. Edwards & Sons, Inc. has offices in 49 states
and the District of Columbia.
Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly
liquid investments with maturities of 90 days or less at the date of
acquisition.
Securities Transactions Securities purchased under agreements to resell (Resale
Agreements) and securities sold under agreements to repurchase are recorded at
the contractual amounts that the securities will be resold/repurchased,
including accrued interest. 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. Receivables from and payables to customers include amounts due
on cash and margin transactions. Securities owned by customers, including those
that collateralize margin or other similar transactions, are not reflected on
the Consolidated Balance Sheets.
Securities inventory, securities sold but not yet purchased, 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.
Investment Banking Investment banking revenue, which
includes underwriting fees, selling concessions and management fees, is recorded
when services for the transaction are substantially completed. Transaction-
related expenses are deferred and later expensed to match revenue recognition.
Stock-Based Compensation The Company applies the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
No. 25), and related interpretations to account for its employee stock plans.
Based on the provisions of the plans, no compensation expense has been
recognized for options issued under these plans.
Restricted stock awards are expensed in the year granted, which coincides
with the defined service period.
Property and Equipment 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 estimated useful lives of five to 10 years using both straight-
line and accelerated methods.
Income Taxes Income tax expense is provided for using the asset
and liability method, under which deferred tax assets and liabilities are
determined based upon the temporary differences between the financial statement
and income tax bases of assets and liabilities, using current tax rates. The
Company files a consolidated federal income tax return.
28
<PAGE>
Comprehensive Earnings Effective March 1, 1998, the Company adopted SFAS No.
130, "Reporting Comprehensive Income," which established standards for the
reporting and display of comprehensive earnings and its components.
Comprehensive earnings for each of the three years in the period ended February
28, 1999, was equal to the Company's net earnings.
Recent Accounting Pronouncements The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosure about Segments of an Enterprise
and Related Information," which established standards for the disclosure
requirements related to segments.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal periods beginning after June 15, 1999. The statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. The adoption of this statement is not expected to 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 $34,620 in 1999, $10,656 in 1998 and $2,191 in 1997, at
effective interest rates of 5.8 percent, 6.0 percent and 5.8 percent,
respectively. Substantially all such borrowings were secured by customer-owned
securities. There were no borrowings outstanding at February 28, 1999 and 1998.
3. Employee Stock Plans
The Company applies the provisions of APB No. 25 to account for its employee
stock plans. If compensation expense for the Company's stock option and stock
purchase plans was 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
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Pro forma net earnings $280,000 $258,000 $214,000
Pro forma earnings per share:
Diluted $2.87 $2.63 $2.19
Basic $2.94 $2.69 $2.24
</TABLE>
The Black-Scholes option pricing model was used to calculate the estimated fair
value of the options.
Employee Stock Purchase Plan Options to purchase 1,875,000 shares of common
stock granted to employees under the Company's stock purchase plan are
exercisable October 1, 1999, at 85 percent of market price based on dates
specified in the plan. Employees purchased 1,872,249 shares at $25.29 per share
in 1999, 1,871,400 shares at $20.64 per share in 1998 and 1,870,325 shares at
$14.98 per share in 1997. Treasury shares were utilized for all of the shares
purchased. The fair value of the options granted under this plan was estimated
using the following assumptions for 1999, 1998 and 1997, respectively: dividend
yield of 1.51 percent, 1.34 percent and 2.21 percent; an expected life of one
year; expected volatility of 43 percent, 34 percent and 25 percent; and risk-
free interest rates of 4.55 percent, 5.68 percent and 5.74 percent. The fair
value of the options granted in 1999, 1998 and 1997 was $7.52, $8.16 and $3.93,
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, 1999, no stock appreciation rights had 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. Eligible employees as of February 28, 1999, were
awarded 882,623 shares with a market value of $28,685. At February 28, 1998 and
1997, the awards were 597,595 and 1,040,724 shares, respectively, with
corresponding market values of $25,732 and $22,070. Treasury shares were
utilized for these awards.
Nonqualified 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 1999, 1998
and 1997, respectively: dividend yield of 1.51 percent, 1.34 percent and 2.21
percent; expected lives of six years; expected volatility of 43 percent, 34
percent and 25 percent; risk-free interest rates of 5.49 percent, 5.70 percent
and 6.41 percent; and a forfeiture rate of 6 percent, 6 percent and 8 percent.
The fair value of options granted under this plan in 1999, 1998 and 1997 was
$13.92, $16.35 and $6.29, respectively.
29
<PAGE>
A summary of the status of the Company's stock options as of February 28,
1999, 1998 and 1997, and changes during the years ended on those dates is
presented as follows:
<TABLE>
<CAPTION> 1999 1998 1997
Shares Weighted- Shares Weighted- Shares Weighted-
(000) Average (000) Average (000) Average
Exercise Exercise Exercise
Price Price Price
<C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 4,445 $18.97 4,993 $14.39 4,862 $12.61
Granted 968 $32.50 575 $43.06 792 $21.21
Exercised (793) $12.52 (1,050) $10.47 (620) $ 9.18
Forfeited (23) $11.83 (73) $17.50 (41) $13.67
Outstanding, end of year 4,597 $22.91 4,445 $18.97 4,993 $14.39
Treasury shares utilized for exercises 793 1,050 620
</TABLE>
The following table summarizes information outstanding stock options at
February 28, 1999:
<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>
$11-$15 1,507 2.7 $13.31 1,507 $13.31
$16-$20 796 5.0 $16.59 796 $16.59
$21-$25 755 6.0 $21.21 0
$30-$35 968 8.0 $32.50 0
$40-$45 571 7.0 $43.06 0
4,597 2,303
</TABLE>
4. Employee Profit Sharing Plan
The Company has a defined contribution plan (401(k)) 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 and are
based on the Company's pretax earnings. The Company expensed $85,308 in 1999,
$76,933 in 1998 and $65,754 in 1997 in connection with the 401(k).
The Company also has an unfunded, nonqualified deferred compensation plan
that provides benefits to participants whose contributions from the Company in
the 401(k) are subject to Internal Revenue Service limitations. Participants
earn interest on these benefits at the broker call rate. The Company expensed
$34,799 in 1999, $26,495 in 1998 and $20,092 in 1997 in connection with this
plan. At February 28, 1999 and 1998, employee compensation and related taxes
included $116,121 and $87,041, respectively, related to this plan.
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
2 percent of aggregate debit items, as defined, arising from customer
transactions and would be restricted from expanding its business or paying cash
dividends or advancing loans to affiliates if its net capital were less than 5
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, 1999, the subsidiary's net capital of $1,039,169 was 40 percent of
aggregate debit items and $987,189 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.
6. Income Taxes
The provisions for income taxes consist of:
1999 1998 1997
Current:
Federal $ 169,286 $ 154,428 $124,871
State and local 27,264 27,946 24,973
196,550 182,374 149,844
Deferred (17,880) (13,874) (13,944)
$ 178,670 $ 168,500 $135,900
<PAGE> 30
Deferred income taxes reflect temporary differences in the bases 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 $105,490 at February 28, 1999, and $86,607 at
February 28, 1998, 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 $17,178 at February 28, 1999, and $16,175 at February 28,
1998, and consisted primarily of accelerated depreciation deductions.
The Company's effective tax rate was 38 percent in 1999, 39 percent in 1998
and 38 percent in 1997, which differed from the federal statutory rate of 35
percent. State and local taxes, net of federal benefit, increased the effective
rate by
4 percent in 1999, 1998 and 1997. No other single item had a material impact on
the difference in the rates.
7. Stockholders' Equity
Earnings per Share The following table presents the computations of basic and
diluted earnings per share.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net earnings available to
common stockholders $292,117 $269,297 $219,057
Shares (in thousands):
Weighted average shares
outstanding 95,252 95,950 95,483
Effect of dilutive common shares:
Restricted shares 423 386 557
Stock purchase plan 457 392 305
Stock option plan 1,190 1,323 1,471
Dilutive common shares 2,070 2,101 2,333
Total weighted average
diluted shares 97,322 98,051 97,816
Earnings, per Share:
Diluted $3.00 $2.75 $2.24
Basic $3.07 $2.81 $2.29
</TABLE>
Stock Repurchase Program The Company's stock repurchase program, which began in
May 1996, authorizes the Company to repurchase up to 33 million of its
outstanding shares over a 5 1/2 year period. The Company purchased 4,871,500
shares with an aggregate cost of $180,175 in 1999, 3,438,000 shares at a cost of
$106,006 in 1998 and 3,433,500 shares at a cost of $64,805 in 1997. Repurchased
shares are added to treasury stock to be used for employee stock plans and to
partially offset the past effect of these plans.
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 $60 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 $60 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 $120. The
rights, which are redeemable by the Company at a price
of $0.00256 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. 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, 1999,
are as follows:
Year ending February 28 (29),
2000 $53,900
2001 50,600
2002 45,400
2003 39,100
2004 32,000
Later years 69,000
$290,000
Rental expense under all operating leases and equipment maintenance contracts
was $52,657 in 1999, $45,893 in 1998 and $39,598 in 1997.
In the normal course of business, the Company enters into when-issued and
underwriting commitments and delayed-delivery transactions. Settlement of these
transactions at February 28, 1999, would not have had a material effect on the
consolidated financial statements.
31
<PAGE>
At February 28, 1999 and 1998, the Company had $128,750 and $109,850,
respectively, of outstanding letters of credit, principally to satisfy margin
deposit requirements with a clearing corporation. Of these amounts, $10,000 was
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.
9. 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
that of 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 of 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.
10. Enterprise Wide Disclosure
The Company provides investment services to its clients through its financial
consultants in more than 630 branch offices. Transaction services include
commissions and sales credits earned by executing or facilitating the execution
of security and commodity trades. Asset management fees are earned by providing
portfolio advisory services through third-party managers, including mutual
funds, and the Company's in-house portfolio managers. The Company earns interest
revenue principally from financing its clients' margin accounts, debt securities
carried for resale and short-term investments.
The following table presents the Company's revenue by type of service for
the years ended February 28:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Transaction services $1,645,230 $1,521,416 $1,312,143
Asset management services 351,831 264,464 201,380
Interest 201,512 180,870 147,835
Other 42,226 37,383 35,125
$2,240,799 $2,004,133 $1,696,483
</TABLE>
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, 1999 and 1998, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended February 28, 1999. 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 at February 28, 1999 and 1998, and the results of
their operations and cash flows for each of the three years in the period ended
February 28, 1999, in conformity with generally accepted accounting principles.
/S/DELOITTE & TOUCHE LLP
April 22, 1999
St. Louis, Missouri
33
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL INFORMATION
(Unaudited)
Dividends Stock Price Revenues Earnings Net Earnings
Declared Trading Range (in millions) Before Tax Earnings per Share
per Share High -- Low (in millions) (in millions) Basic Diluted
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1999
by Quarter
First $0.14 48 13/16 -- 40 1/8 $570.2 $123.9 $76.0 $0.79 $0.78
Second $0.14 48 7/16 -- 27 1/8 $551.2 $116.8 $72.3 $0.76 $0.74
Third $0.14 40 -- 25 1/8 $524.3 $109.5 $68.0 $0.72 $0.70
Fourth $0.15 41 -- 32 1/8 $595.1 $120.6 $75.8 $0.80 $0.78
Fiscal 1998
by Quarter
First $0.12 25 13/16 -- 20 1/2 $439.3 $ 88.9 $54.5 $0.57 $0.56
Second $0.13 29 1/8 -- 23 15/16 $509.8 $112.7 $69.2 $0.72 $0.71
Third $0.13 39 -- 26 9/16 $527.3 $118.0 $72.4 $0.76 $0.73
Fourth $0.13 43 -- 34 3/8 $527.7 $118.2 $73.2 $0.76 $0.75
</TABLE>
[FN]
Per share data have been restated for stock splits and stock dividends.
43
<PAGE>
Annual Meeting
The 1999 Annual Meeting of Stockholders will be held at the company's
headquarters, One North Jefferson, St. Louis, Missouri, on Thursday, June 24,
1999, at 10 a.m. The 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, 1999,
and January 3 and April 3, 2000.
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, 1999, was 29,200.
Registrar/Transfer Agent
The Bank of New York
Shareholder Relations Department--11E
P.O. Box 11258
Church Street Station
New York, New York 10286-1258
(800) 524-4458
Account Protection Package
The securities held by A.G. Edwards & Sons, Inc., for client accounts 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 additional protection
up to the full value of the account (as determined by SIPC) by a 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
Mercantile Exchange; and other commodity exchanges.
A.G. Edwards companies are also members of 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 Subsidiary of
A.G. Edwards & Sons, Inc. (Edwards) Delaware Registrant
The Ceres Investment Company Missouri 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 Investment Management
Consulting Services, 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. Edwards Trust Company FSB Federal 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
A.G. Edwards Capital, Inc. Delaware Registrant
AGE Capital Holding, 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 22,
1999, 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, 1999.
/s/ Deloitte & Touche LLP
May 27, 1999
St. Louis, Missouri
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> FEB-28-1999
<CASH> 99,499
<RECEIVABLES> 2,654,171
<SECURITIES-RESALE> 14,838
<SECURITIES-BORROWED> 243,507
<INSTRUMENTS-OWNED> 267,095
<PP&E> 240,367
<TOTAL-ASSETS> 3,803,132
<SHORT-TERM> 0
<PAYABLES> 1,822,084
<REPOS-SOLD> 0
<SECURITIES-LOANED> 229,542
<INSTRUMENTS-SOLD> 45,659
<LONG-TERM> 0
0
0
<COMMON> 96,463
<OTHER-SE> 1,531,274
<TOTAL-LIABILITY-AND-EQUITY> 3,803,132
<TRADING-REVENUE> 202,022
<INTEREST-DIVIDENDS> 201,512
<COMMISSIONS> 1,201,519
<INVESTMENT-BANKING-REVENUES> 219,001
<FEE-REVENUE> 351,831
<INTEREST-EXPENSE> 5,628
<COMPENSATION> 1,431,697
<INCOME-PRETAX> 470,787
<INCOME-PRE-EXTRAORDINARY> 470,787
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 292,117
<EPS-BASIC> 3.07
<EPS-DILUTED> 3.00
</TABLE>
