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 May 31, 2000 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 June 30, 2000, there were 82,315,536 shares of A.G. Edwards, Inc. common
stock, par value $1, issued and outstanding.
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A.G. EDWARDS, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Consolidated balance sheets 1
Consolidated statements of earnings 2
Consolidated statements of cash flows 3
Notes to consolidated financial statements 4-5
Management's financial discussion 6-8
PART II. OTHER INFORMATION 9
SIGNATURES 10
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<CAPTION>
A.G. EDWARDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
May 31, February 29,
2000 2000
<S>
ASSETS
<C> <C>
Cash and cash equivalents $ 131,046 $ 154,487
Cash and government securities, segregated under
federal and other regulations 81,914 86,851
Securities purchased under agreements to resell 10,577 10,674
Securities borrowed 101,014 278,199
Receivables:
Customers 4,214,315 3,777,352
Brokers, dealers and clearing organizations 14,492 22,529
Fees, dividends and interest 78,974 62,989
Securities inventory, at fair value:
State and municipal 246,874 240,154
Government and agencies 36,919 57,943
Corporate 49,013 110,311
Investments 129,462 116,307
Property and equipment, at cost, net of accumulated depreciation
and amortization of $302,371 and $337,602 378,043 312,942
Deferred income taxes 47,138 75,361
Other assets 32,977 41,488
$5,552,758 $5,347,587
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans $ 305,200 $ 638,000
Checks payable 211,877 283,602
Securities loaned 1,865,450 637,684
Payables:
Customers 692,010 946,373
Brokers, dealers and clearing organizations 147,680 203,129
Securities sold but not yet purchased, at fair value 23,380 24,920
Employee compensation and related taxes 494,019 740,188
Income taxes 56,088 73,557
Other liabilities 77,975 83,012
Total Liabilities 3,873,679 3,630,465
Stockholders' Equity:
Preferred stock, $25 par value:
Authorized, 4,000,000 shares, none issued
Common stock, $1 par value:
Authorized, 550,000,000 shares
Issued, 96,463,114 shares 96,463 96,463
Additional paid-in capital 260,496 253,917
Retained earnings 1,737,380 1,645,332
2,094,339 1,995,712
Less - Treasury stock, at cost (13,007,976 and 9,254,005 shares) 415,260 278,590
Total Stockholders' Equity 1,679,079 1,717,122
$5,552,758 $5,347,587
<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 May 31,
2000 1999
<S>
REVENUES: <C> <C>
Commissions $411,278 $351,251
Principal transactions 79,517 57,863
Investment banking 55,186 59,024
Asset management and service fees 160,995 127,875
Interest 92,971 53,310
Other 10,471 1,813
810,418 651,136
EXPENSES:
Compensation and benefits 503,791 415,864
Occupancy and equipment 40,156 31,861
Communications 33,419 27,330
Floor brokerage and clearance 6,282 5,501
Interest 23,859 2,437
Other 32,186 31,270
639,693 514,263
EARNINGS BEFORE INCOME TAXES 170,725 136,873
INCOME TAXES 63,440 52,330
NET EARNINGS $107,285 $ 84,543
Earnings per share:
Diluted $ 1.24 $ .88
Basic $ 1.26 $ .89
Dividends per share $ 0.16 $ 0.15
Average common and common equivalent
shares outstanding (in thousands):
Diluted 86,288 96,134
Basic 84,871 94,655
<FN>
See Notes to Consolidated Financial Statements.
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<CAPTION>
A.G. EDWARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended May 31,
<S> 2000 1999
Cash Flows from Operating Activities: <C> <C>
Net earnings $ 107,285 $ 84,543
Noncash and nonoperating items included in earnings 50,453 19,775
Change in:
Segregated cash and government securities 4,937 (1,252)
Net securities borrowed and loaned 1,404,951 (24,240)
Net receivable from customers (691,326) (323,547)
Net payable to brokers, dealers
and clearing organizations (47,412) 40,141
Fees, dividends and interest receivable (15,985) (16,958)
Net securities inventory 74,062 (46,233)
Other assets and liabilities (342,818) (135,364)
Net cash from operating activities 544,147 (403,135)
Cash Flows from Investing Activities:
Purchase of property and equipment (82,553) (11,961)
Investments, net (7,050) (1,955)
Net cash from investing activities (89,603) (13,916)
Cash Flows from Financing Activities:
Bank loans (332,800) 475,000
Employee stock transactions 10,630 12,632
Cash dividends paid (13,838) (14,120)
Purchase of treasury stock (141,977) (34,541)
Net cash from financing activities (477,985) 438,971
Net change in Cash and Cash Equivalents (23,441) 21,920
Cash and Cash Equivalents, Beginning of Period 154,487 99,499
Cash and Cash Equivalents, End of Period $ 131,046 $ 121,419
Income tax payments totaled $47,327 and $13,549 during the three month periods ended May 31, 2000, and 1999,
respectively.
Interest payments totaled $15,527 and $1,440 during the three month periods ended May 31, 2000, and 1999,
respectively.
<FN>
See Notes to Consolidated Financial Statements.
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A.G. EDWARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2000
(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 are prepared in conformity with accounting principles
generally accepted in the United States of America. These financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended February 29, 2000. 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 three months ended May 31, 2000,
are not necessarily indicative of the results for the year ending
February 28, 2001. Where appropriate, prior year's financial information has
been reclassified to conform with the current year presentation.
STOCKHOLDERS' EQUITY:
Under the stock repurchase program, the Company purchased 3,965,500 shares at an
aggregate cost of $141,977 in the first quarter ended May 31, 2000. For the
quarter ended May 31, 1999, the Company purchased 1,000,000 shares at an
aggregate cost of $34,541.
Comprehensive earnings for the three month periods ended May 31, 2000 and 1999
were equal to the Company's net earnings.
NET CAPITAL REQUIRMENTS:
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. At May 31, 2000, Edwards' net capital of $979,076 was
$897,240 in excess of the minimum requirement.
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A.G. EDWARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2000
(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 May 31
2000 1999
Net earnings available to common stockholders $107,285 $84,543
Shares (in thousands):
Weighted average shares outstanding 84,871 94,655
Dilutive effect of employee stock plans 1,417 1,479
Total weighted average diluted shares 86,288 96,134
Diluted earnings per share $ 1.24 $ 0.88
Basic earnings per share $ 1.26 $ 0.89
ENTERPRISE WIDE DISCLOSURE:
The Company operates and is managed as a single business segment, that of
providing investment services to its clients through its financial consultants
in more than 670 sales 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
quarters ended May 31:
2000 1999
Transaction services $ 556,393 $ 476,707
Asset management services 136,908 110,341
Interest 92,971 53,310
Other 24,146 10,778
$ 810,418 $ 651,136
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A.G. EDWARDS, INC. AND SUBSIDIARIES
MANAGEMENT'S FINANCIAL DISCUSSION
THREE MONTHS ENDED MAY 31, 2000 COMPARED TO
THREE MONTHS ENDED MAY 31, 1999
Results of Operations
The three months ended May 31, 2000 produced strong revenue growth in nearly
every category in spite of some volatility in the equity and debt markets during
the period. This volatility was fueled to a certain degree by the Federal
Reserve raising the target Federal Funds rate for the sixth time in less than a
year in an effort to guard against "future inflation risk". The Dow Jones
Industrial Average began the period at 10,128 and rose to a peak of 11,287 in
mid-April, only to retreat to 10,522 by the end of the period. The Nasdaq
Composite Index began the period at 4,697 but declined to 3,401 by the end of
the period. However, investors maintained their overall interest in the equity
markets as trading volumes increased 25% and 65% over the prior year on the New
York Stock Exchange and Nasdaq, respectively. For the Company, total customer
trades increased 36% while the number of branches and financial consultants
increased to 678 and 6,853, which represent increases of 5% and 4%,
respectively, compared with the same period last year.
Total revenues increased $159 million (24%) to $810 million from $651 million
last year. Expenses were $640 million, an increase of $125 million (24%),
resulting in an increase in net profit margins to 13.2% this year from 13.0%
last year.
Total commission revenue increased $60 million (17%) reflecting increased
trading volume and, to a lesser extent, continued expansion of the Company's
distribution system. Equity related commissions rose $35 million (15%) and
mutual fund commissions rose $17 million (23%). Client demand for equities and
equity related mutual funds remained strong due to the combination of a robust
economic environment and low inflation.
Principal transaction revenue increased $22 million (37%) primarily as a result
of the rise in revenue from sales of equity products reflecting an increase in
the number of OTC equity trades resulting from higher volumes in the technology
driven Nasdaq market. In addition, the Company acted as a market maker in a
greater number of actively-traded, high volume, larger-capitalized securities
than in the prior year.
Investment banking revenue decreased slightly, down $4 million (7%). Management
fees declined $5 million (42%) primarily due to a decline in the number and size
of corporate offerings managed or co-managed this year. Revenue from
underwriting debt products declined $2 million (14%). New municipal bond
issuance is near a five-year low as state and local governments are finding that
strong economic growth has decreased their need to borrow. Corporate equity
unit trust revenue increased $9 million (52%) due to continued investor demand
for this product. Revenues from underwriting corporate stocks decreased $6
million (32%) due to rising interest rates and an industry-wide decrease in
domestic IPO activities this year.
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Asset management and service fees increased $33 million (26%). Fees from third-
party mutual funds and annuities rose $12 million (16%) reflecting the strong
cash flows into funds and annuities 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 $15 million
(43%). The average number of these accounts increased 55%, while the average
total assets in these programs increased 49%.
Interest revenue increased $40 million (74%). Interest revenue from margin
accounts rose $38 million (80%) due to a 54% increase in average margin balances
coupled with a rise in the average broker call rate. Interest revenues from
securities owned increased $2 million (48%) as a result of higher average
inventory.
Other revenue increased $9 million (478%) primarily due to changes in the fair
value of several private equity and venture capital fund investments held by the
Company.
Compensation and benefits increased $88 million (21%). Commission expense
increased $46 million (21%) due to the rise in commissionable revenue. General
and administrative salaries increased $18 million (25%), incentive-related
compensation rose $19 million (24%) and related benefits increased $5 million
(12%) primarily as a result of general increases for existing employees, higher
employment and higher Company earnings.
Occupancy and equipment expense and communications expense increased $14 million
(24%) as a result of increased business volume, branch and home office expansion
and technology related expenditures.
All remaining expenses increased $23 million (59%) primarily due to a $21
million (879%) increase in interest expense. The increase in interest expense
is due to increases in stock loans and bank loans used primarily to finance an
increase in average customer margin balances.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets fluctuate in the normal course of business, primarily
because of the timing of certain transactions. Customer receivables continued
to increase as a result of business expansion and the increased use of margin
borrowings by clients. This increase was financed primarily by short-term bank
loans and increased securities lending activities. The mix of bank loans and
securities lending arrangements fluctuates based on the interest rates available
on a day-to-day basis.
The expansion of the Company's headquarters with an additional office building,
a learning center and parking garage is progressing as planned. The total costs
of these projects are estimated to be $180 million.
During the first quarter, the Company purchased an additional 3.97 million
shares under its stock repurchase program at a cost of $142 million. A total of
26.3 million shares have been repurchased under this program since its inception
in May 1996.
The principal sources of financing the Company's business are stockholders'
equity, cash generated from operations, short-term bank borrowings and
securities lending activities. The Company believes it has adequate sources of
credit available, if needed, to finance higher trading volumes, branch and
headquarters expansion, stock repurchases and other capital expenditures.
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RISK MANAGEMENT
No material changes have occurred to the Company's policies, procedures and
controls or risk profile.
FORWARD LOOKING STATEMENTS
The Management's Financial Discussion 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 from those contemplated.
The risks include, but are not limited to, general economic conditions, actions
of competitors, regulatory actions, changes in legislation, risk management and
technology changes. Undue reliance should not be placed on the forward-looking
statements, which speak only as of the date of this Quarterly Report on Form 10-
Q. The Company does not undertake any obligation to publicly update any
forward-looking statements.
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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 29, 2000.
Item 4:Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders on June 22, 2000,
stockholders approved the following nominations and proposals:
Votes Votes
Nominations for director: Votes For Against Withheld*
Charmaine S. Chapman 64,261,360 2,228,244
Benjamin F. Edwards, IV 64,291,766 2,197,838
Dr. Mark S. Wrighton 64,513,998 1,975,606
Ratification of auditors 66,071,743 280,507 137,354
A total of 66,489,604 shares were present in person or by proxy at the Annual
Meeting.
*Includes abstentions and broker non-votes
Item 6:Exhibits and Reports on Form 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
May 31, 2000.
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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: July 14, 2000 /s/ Benjamin F. Edwards, III
BENJAMIN F. EDWARDS, III
Principal Executive Officer
Date: July 14, 2000 /s/ Robert L. Proost
ROBERT L. PROOST
Principal Financial Officer
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