SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended November 30, 1998 Commission file number 1-8527
A.G. EDWARDS, INC.
State of Incorporation: DELAWARE I.R.S. Employer Identification No:
43-1288229
ONE NORTH JEFFERSON AVENUE
ST. LOUIS, MISSOURI 63103
Registrant's telephone number, including area code: (314) 955-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
At December 31, 1998, there were 94,810,664 shares of A.G. Edwards, Inc. common
stock, par value $1, issued and outstanding.
A.G. EDWARDS, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Consolidated balance sheets 1
Consolidated statements of earnings 2
Consolidated statements of cash flows 3
Notes to consolidated financial statements 4-5
Management's financial discussion 6-9
PART II. OTHER INFORMATION 9
SIGNATURES 10
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<CAPTION>
A.G. EDWARDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
November 30, February 28,
1998 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 96,029 $ 84,764
Cash and government securities, segregated under
federal and other regulations 310,283 57,294
Securities purchased under agreements to resell 220,000 204,363
Securities borrowed 253,649 786,119
Receivables:
Customers, less allowance for doubtful accounts
of $3,870 and $3,800 2,225,213 2,229,128
Brokers, dealers and clearing organizations 15,135 12,521
Securities inventory, at fair value:
State and municipal 166,156 142,692
Government and agencies 32,581 209,247
Corporate 60,788 51,714
Property and equipment, at cost, net of accumulated depreciation
and amortization of $263,650 and $229,938 235,462 230,158
Deferred income taxes 70,234 70,432
Other assets 134,577 114,896
$3,820,107 $4,193,328
LIABILITIES AND STOCKHOLDERS' EQUITY
Checks payable $ 166,623 $ 203,017
Securities loaned 280,779 820,918
Payables:
Customers 580,316 920,791
Brokers, dealers and clearing organizations 624,355 185,756
Securities sold but not yet purchased, at fair value 29,937 19,141
Employee compensation and related taxes 490,565 505,731
Income taxes 9,625 17,137
Other liabilities 57,950 57,716
Total Liabilities 2,240,150 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 150,702 181,826
Retained earnings 1,372,916 1,196,568
1,620,081 1,474,857
Less - Treasury stock, at cost (1,298,335 and 284,173 shares) 40,124 11,736
Total Stockholders' Equity 1,579,957 1,463,121
$3,820,107 $4,193,328
<FN>
See Notes to Consolidated Financial Statements.
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<CAPTION>
A.G. EDWARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES:
Commissions $266,697 $294,399 $ 869,747 $ 822,113
Principal transactions 51,302 52,367 151,547 159,805
Investment banking 54,369 49,806 169,675 128,686
Asset management and service fees 99,750 82,729 294,823 228,779
Interest 49,269 45,978 151,696 130,335
Other 2,907 2,064 8,191 6,805
524,294 527,343 1,645,679 1,476,523
EXPENSES:
Compensation and benefits 329,013 334,752 1,047,405 944,620
Communications 26,788 24,563 78,361 72,555
Occupancy and equipment 29,809 24,535 86,326 70,651
Floor brokerage and clearance 5,608 5,143 15,630 14,988
Interest 1,547 4,659 442
Other 21,990 20,319 63,076 53,620
414,755 409,312 1,295,457 1,156,876
EARNINGS BEFORE INCOME TAXES 109,539 118,031 350,222 319,647
INCOME TAXES 41,570 45,640 133,990 123,470
NET EARNINGS $ 67,969 $ 72,391 $ 216,232 $ 196,177
Earnings per share:
Basic $ 0.72 $ 0.76 $ 2.27 $ 2.05
Diluted $ 0.70 $ 0.73 $ 2.22 $ 2.00
Dividends per share $ 0.14 $ 0.13 $ 0.42 $ 0.38
Average common shares outstanding (basic) 95,148 95,951 95,345 95,889
(000's omitted)
Average common and common
equivalent shares outstanding (diluted) 97,070 98,327 97,459 97,943
(000's omitted)
<FN>
See Notes to Consolidated Financial Statements.
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<CAPTION>
A.G. EDWARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended November 30,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 216,232 $ 196,177
Noncash items included in earnings 57,474 47,381
Change in:
Segregated cash and government securities (252,989) 339,273
Net securities borrowed and loaned (7,669) 3,305
Net payable to brokers, dealers
and clearing organizations 435,985 12,043
Net receivable from customers (336,560) (622,788)
Net securities inventory 154,924 (14,494)
Other assets and liabilities (83,032) 5,350
Net cash from operating activities 184,365 (33,753)
Cash Flows from Investing Activities:
Securities purchased under agreements to resell (15,637) 128,274
Capital expenditures and other investments (59,799) (48,720)
Net cash from investing activities (75,436) 79,554
Cash Flows from Financing Activities:
Employee stock transactions 73,362 56,124
Cash dividends paid (39,008) (36,456)
Purchase of treasury stock (132,018) (71,153)
Net cash from financing activities (97,664) (51,485)
Net change in Cash and Cash Equivalents 11,265 (5,684)
Cash and Cash Equivalents at March 1 84,764 62,799
Cash and Cash Equivalents at November 30 $ 96,029 $ 57,115
Income tax payments totaled $123,708 and $119,100 during the nine month periods ended November 30, 1998, and 1997,
respectively.
Interest payments totaled $4,609 and $1,751 during the nine month periods ended November 30, 1998, and 1997,
respectively.
<FN>
See Notes to Consolidated Financial Statements.
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A.G. EDWARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 1998
(Dollars in thousands, except per share amounts)
(Unaudited)
FINANCIAL STATEMENTS:
The consolidated financial statements include the accounts of A.G. Edwards,
Inc., and its wholly owned subsidiaries (collectively referred to as the
"Company"), including its principal subsidiary,
A.G. Edwards & Sons, Inc. ("Edwards"), and have been prepared in conformity with
generally accepted accounting principles. These financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended February 28, 1998 and the Company's Quarterly Reports on Form 10-Q for the
quarters ended May 31, 1998 and August 31, 1998. All adjustments that, in the
opinion of management, are necessary for a fair presentation of the results of
operations for the interim periods have been reflected. All such adjustments
consist of normal recurring accruals unless otherwise disclosed in these interim
financial statements. The results of operations for the nine months ended
November 30, 1998, are not necessarily indicative of the results for the year
ending February 28, 1999. Where appropriate, prior year's financial information
has been reclassified to conform with the current year presentation.
The Company has no components of other comprehensive income.
STOCKHOLDERS' EQUITY:
Options to purchase 1,875,000 shares of common stock granted under the Employee
Stock Purchase Plan are exercisable October 1, 1999, at 85% of market price
based on dates specified in the plan. Employees purchased 1,872,249 shares at
$25.29 per share in October 1998. Treasury shares were utilized for these
transactions.
Under the stock repurchase program, the Company purchased 3,482,000 shares at an
aggregate cost of $132,000 during the nine month period ended November 30, 1998.
For the nine month period ended November 30, 1997, the Company purchased
2,538,000 shares at a cost of $71,000.
NET CAPITAL REQUIREMENTS:
Edwards is subject to the net capital rule administered by the Securities and
Exchange Commission ("SEC"). This rule requires Edwards to maintain a minimum
net capital, as defined, and to notify and sometimes obtain the approval of the
SEC and other regulatory organizations for substantial withdrawals of capital
and loans to affiliates. As of November 30, 1998, Edwards' net capital of
$1,082,322 was $1,036,932 in excess of the minimum required.
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<CAPTION>
A.G. EDWARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 1998
(Dollars in thousands, except per share amounts)
(Unaudited)
EARNINGS PER SHARE:
The following table presents the computations of basic and diluted earnings per
share.
Three Months Ended Nine Months Ended
November 30, November 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net earnings available to common stockholders $ 67,969 $ 72,391 $ 216,232 $ 196,177
(shares in thousands)
Weighted average basic shares outstanding 95,148 95,951 95,345 95,889
Dilutive effect of employee stock plans 1,922 2,376 2,114 2,054
Total weighted average diluted shares 97,070 98,327 97,459 97,943
Basic earnings per share $ 0.72 $ 0.76 $ 2.27 $ 2.05
Diluted earnings per share $ 0.70 $ 0.73 $ 2.22 $ 2.00
* * * * *
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A.G. EDWARDS, INC. AND SUBSIDIARIES
MANAGEMENT'S FINANCIAL DISCUSSION
NINE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO
NINE MONTHS ENDED NOVEMBER 30, 1997
Results of Operations
The nine months ended November 30, 1998 saw a continuation of the high level of
retail investor activity that existed during the last three fiscal years in
spite of the dramatic downturn in the equity markets in late August 1998. The
equity markets subsequently rebounded as the Dow Jones Industrial Average rose
21% and the Nasdaq average increased 30% in the last three months of the period.
The New York Stock Exchange and Nasdaq overall trading volumes increased 29% and
22%, respectively, over the prior year while total customer trades for the
Company increased 12%. The number and size of customer trades and the product
mix generally affect the level of revenues. The number of branches and brokers
increased to 624 and 6,432, which represent increases of 6% and 4%,
respectively, compared with the same period last year.
Total revenues increased $169 million (11%) to $1.65 billion from $1.48 billion
last year. Expenses were $1.3 billion, an increase of $139 million (12%),
resulting in a slight decline in net profit margins to 13.1% this year from
13.3% last year.
Total commission revenue increased $48 million (6%), reflecting increased
trading volume and, to a lesser extent, expansion of the Company's distribution
system. Listed commissions rose $22 million (6%) while mutual fund and
insurance sales increased $25 million (13%) and $13 million (13%), respectively.
Client demand for listed equity securities, mutual funds and variable annuities
remained high due to the continuation of the relatively strong equity market
conditions and increased volatility during the first nine months of this fiscal
year. As an offset, over-the-counter commissions decreased $12 million (8%).
The downturn in the equity markets in August of this year accelerated a trend by
our clients away from smaller over-the-counter stocks in favor of less volatile,
more conservative issues.
Principal transaction revenue decreased $8 million (5%). Revenue from
government bonds declined $7 million (19%) primarily as a result of lower yields
this year.
Investment banking revenue increased $41 million (32%). Underwriting fees and
concessions rose $19 million (18%) due to the continued strength in initial
public offerings coupled with an increased customer demand for equity-based unit
trusts. Management fees increased $22 million (92%) due to participation as
manager or co-manager in a larger number of corporate offerings coupled with
increases in merger and acquisition activity this year.
Asset management and service fees increased $66 million (29%). Fees from third-
party mutual funds rose $34 million (24%) reflecting the strong industry-wide
cash inflows to funds. Fees from the administration of client assets under
third-party management and from the company's management services improved
$32 million (64%) as a result of the growth in number of client accounts and
higher market valuations of existing assets.
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Interest revenue increased $21 million (16%). Interest revenue from customer
margin accounts rose $23 million (21%) due to a 22% increase in average margin
receivable. Interest revenues from securities owned increased $6 million (63%)
as a result of higher average inventory. As a partial offset, a 51% reduction
in short-term investments resulted in a $7 million (50%) decrease in interest
earned.
Compensation and benefits increased $103 million (11%). Commission expense
increased $42 million (8%) due to the rise in commissionable revenue. General
and administrative salaries and employee benefits increased $35 million (13%)
primarily as a result of general increases and higher employment. Incentive-
related compensation rose $26 million (14%) primarily as a result of higher
earnings.
Occupancy and equipment expenses increased $16 million (22%) as a result of
branch and home office expansion.
THREE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO
THREE MONTHS ENDED NOVEMBER 30, 1997
Net earnings for the quarter ended November 30, 1998 were $68 million on
revenues of $524 million compared to net earnings of $72 million on revenues of
$527 million for the same period a year ago. The explanation of revenue and
expense fluctuations presented for the nine month period are generally
applicable to the three months of operations with the exception of the following
items:
Total commission revenue decreased $28 million (9%) due to declines in mutual
fund and over-the-counter revenues of $13 million (20%) and $12 million (22%),
respectively. In spite of the increase in the Nasdaq trading volume, many
retail investors were tentative following the downturn in the equity markets in
August of this year and redirected their attention toward investment
alternatives with less market risk.
Compensation and benefits decreased $6 million (2%). Commission expense
decreased $14 million (8%) due to the decline in commissionable revenue which
also caused a $1 million (1%) decrease in incentive-related compensation. These
were partially offset by the $9 million (10%) rise in general and administrative
salaries and employee benefits as a result of general increases and higher
employment.
LIQUIDITY AND CAPITAL RESOURCES
No material changes have taken place since August 31, 1998 regarding the
Company's liquidity, capital resources and overall financial condition.
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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 arises 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 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 and tested. Non-critical systems and non-
information technology systems have been assessed, with modifications and
testing expected to be complete in March 1999. In July 1998, the Company
participated in the Security Industry Association's (SIA) Year 2000 Beta Tests.
No material problems were identified by the Company or, according to the SIA,
other test participants. Beginning in March 1999, the Company plans to
participate in an industry-wide testing program. In addition, the Company will
point-to-point test with significant counterparties throughout 1999, as
management considers appropriate.
Management estimates the total cost of the Company's Year 2000 efforts to be
less than $15 million. Most of these costs have already been incurred and
expensed. Actual costs may differ materially from these estimates.
The Company is in the process of incorporating various Year 2000 issues into its
corporate contingency plans and expects a written plan to be completed by mid-
year in calendar 1999. The plan will include steps to handle internal system
processing problems that may occur after December 31, 1999. Consideration will
be given to alternatives for mission critical third parties. However,
management believes that the Company's mission critical third parties are
securities and commodities exchanges, clearing associations and utilities and
that the industry currently has no available alternatives for most or all of
these parties.
FORWARD-LOOKING STATEMENTS
The Management's Financial Discussion, including the discussion under "Year
2000," contains forward-looking statements within the meaning of federal
securities laws. Actual results are subject to risks and uncertainties,
including both 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
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Quarterly Report on Form 10-Q. The Company does not undertake any obligation to
publicly update any forward-looking statements.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
There have been no material changes in the legal proceedings previously
reported in the Company's Annual Report on Form 10-K for the year ended
February 28, 1998.
Item 6: Exhibits and Reports on 8-K
Exhibit 27 Financial Data Schedule. (This financial data schedule is
only required to be submitted with the registrant's Quarterly
Report on Form 10-Q as filed electronically to the SEC's
EDGAR database.)
Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
November 30, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
A.G. EDWARDS, INC.
(Registrant)
Date: January 14, 1999 /s/ Benjamin F. Edwards III
BENJAMIN F. EDWARDS, III
Principal Executive Officer
Date: January 14, 1999 /s/ Robert L. Proost
ROBERT L. PROOST
Principal Financial Officer
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> BD
<MUTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> NOV-30-1998
<CASH> 96,029
<RECEIVABLES> 2,240,348
<SECURITIES-RESALE> 220,000
<SECURITIES-BORROWED> 253,649
<INSTRUMENTS-OWNED> 259,525
<PP&E> 235,462
<TOTAL-ASSETS> 3,820,107
<SHORT-TERM> 0
<PAYABLES> 1,861,859
<REPOS-SOLD> 0
<SECURITIES-LOANED> 280,779
<INSTRUMENTS-SOLD> 29,937
<LONG-TERM> 0
0
0
<COMMON> 96,463
<OTHER-SE> 1,483,494
<TOTAL-LIABILITY-AND-EQUITY> 3,820,107
<TRADING-REVENUE> 151,547
<INTEREST-DIVIDENDS> 151,696
<COMMISSIONS> 869,747
<INVESTMENT-BANKING-REVENUES> 169,675
<FEE-REVENUE> 255,750
<INTEREST-EXPENSE> 4,659
<COMPENSATION> 1,047,405
<INCOME-PRETAX> 350,222
<INCOME-PRE-EXTRAORDINARY> 350,222
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 216,232
<EPS-PRIMARY> 2.27
<EPS-DILUTED> 2.22
</TABLE>
