THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF EARNINGS FOR
THE FISCAL YEAR ENDED FEBRUARY 29, 2000, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
Management's Financial Discussion
(Year references are to fiscal years ended February 29 (28) unless otherwise
specified.)
General Business Environment
A.G. Edwards, Inc., is a holding company whose primary subsidiary is the
national brokerage firm of A.G. Edwards & Sons, Inc. Through this and its other
operating subsidiaries (collectively, the Company), A.G. Edwards, Inc.,
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. A St. Louis-based financial
services firm, the Company has more than 670 locations and approximately 16,500
total employees in 49 states, the District of Columbia and London, England. 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, including online
trading firms. Because these factors are unpredictable and beyond the Company's
control, earnings may fluctuate significantly from period to period.
In addition to competition from firms traditionally engaged in the financial
services business, there has been increased competition in recent years from
other sources, such as commercial banks, insurance companies, online service
providers, sponsors of mutual funds and other companies offering financial
services both in the U.S. and globally. The financial services industry also
has experienced consolidation and convergence in recent years, as financial
institutions involved in a broad range of financial services industries have
merged. This convergence trend is expected to continue and could result in the
Company's competitors gaining greater capital and other resources, such as a
broader range of products and services and geographic diversity. In November
1999, the Gramm-Leach-Bliley Act was enacted, effectively repealing certain
sections of the 1933 Glass-Steagall Act. Its passage allows commercial banks,
securities firms and insurance firms to affiliate, which may accelerate
consolidation and lead to increasing competition in markets which traditionally
have been dominated by investment banks and retail securities firms.
The Company's fiscal 2000 was the fifth consecutive year of record
profitability. During the year, the Federal Reserve (the Fed) raised the federal
funds interest rate from 4.75 percent to 5.75 percent, which contributed to a
rise in yields on debt products. However, this did little to dampen investors'
enthusiasm for equities as a strong economy and low inflation provided
conditions for another year of increased investor activity, record trading
volumes and rising stock prices.
The high level of retail investor activity that existed in the prior four years
showed no signs of diminishing this year. The Dow Jones Industrial Average (the
Dow) began the year at 9,307 and continued its climb to 11,326 in late August.
Inflation fears led the Fed to raise interest rates three times between June 1
and November 30, and the Dow reacted by falling to 10,877 by the end of
November. Other than an increase in oil prices, the inflation that the Fed
feared never materialized and the economy remained strong. This kept investor
confidence high and propelled the Dow to a record close of 11,723 by mid-
January. After rising nearly 26 percent from the beginning of the year to its
peak in January and following another Fed rate hike on February 1, the Dow
experienced a sharp correction and ended the fiscal year at 10,128, trimming its
gain to 9 percent and equaling the gain experienced in fiscal 1999. The Nasdaq
average experienced no such correction and ended the year at its high of 4,697,
an increase of 105 percent in fiscal 2000 after a 29 percent gain in the prior
fiscal year. Investor demand for 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 fifth year in a row. Revenues for the Company rose 26 percent to
more than $2.8 billion from $2.2 billion in 1999. Revenues in 1999 were up 12
percent from more than $2 billion in 1998. Net earnings in 2000 increased 31
percent to $383 million from $292 million in the previous year. Net earnings in
1999 were up 9 percent from $269 million in 1998. Diluted earnings per share for
the Company were $4.08 in 2000, versus $3.00 and $2.75 in 1999 and 1998,
respectively. The Company's net profit margin was 13.6 percent in 2000,
compared to 13 percent in 1999 and 13.4 percent in 1998. The results for 2000
include a $75.2 million gain from an investment in a privately held investment
management company, which increased net earnings by $35.2 million or $0.37 per
diluted share.
20
<PAGE>
The number of A.G. Edwards financial consultants reached 6,823 at fiscal year-
end, an increase of 5 percent from the prior year-end. The number of total
locations at the end of 2000 was 672, up from 639 at year-end 1999. 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) 2000 vs. 1999 1999 vs. 1998
Revenues:
Commissions $246,489 21% $94,533 9%
Principal transactions 82,196 41 (5,930) (3)
Investment banking 6,718 3 28,083 15
Asset management and
service fees 117,564 28 97,272 30
Interest 47,076 23 20,642 11
Other 78,165 688 2,066 22
578,208 26 236,666 12
Expenses:
Compensation and benefits 335,014 23 154,766 12
Occupancy and equipment 24,780 21 22,187 23
Communications 11,769 11 5,689 6
Floor brokerage and clearance 734 4 1,108 6
Interest 17,190 305 4,192 292
Other 36,393 41 15,734 22
$425,880 24% $203,676 13%
Commissions
Commissions are the most significant source of revenue for the Company,
accounting for more than 50 percent of total revenue in each of the last three
years. Commission revenue rose 21 percent, from $1.2 billion in 1999 to $1.4
billion in 2000, and accounted for 43 percent of the Company's overall revenue
increase in 2000. 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.
Equity-related commission revenue increased 23 percent ($177 million) in 2000,
once again fueled by record trading volumes on the New York Stock Exchange and
the Nasdaq. Average daily trading volume for 2000 was up 23 percent on the New
York Stock Exchange and 40 percent on the Nasdaq.
Company revenues from mutual fund sales rose 11 percent ($31 million) in 2000.
Investor demand continued to be high for mutual funds, especially in the
technology sector, as evidenced by the surge in the technology-driven Nasdaq
composite average which rose 105 percent during the year. Sales of growth funds
and international equity funds also rose. Sales of variable annuities increased
29 percent ($39 million) in 2000, also due to the strong equity markets.
Recently, the Company launched Client Choice, a new fee-based pricing
alternative available to individual investors. As a result, future revenues
recorded within the commissions and asset management and service fees categories
may be affected by the number of clients choosing this service. The Company is
unable to predict the effect Client Choice may have on total revenues and net
earnings.
The 9 percent ($95 million) increase in total commissions in 1999 over 1998
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 1999 compared with 1998.
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 the
sale of and the holding of securities positions for resale to investors and are
included in principal transaction revenue.
Principal transactions revenue increased 41 percent ($82 million) in 2000.
Revenue from debt products increased 37 percent ($53 million) primarily due to
increased client demand for all types of debt securities as a result of rising
yields. Municipal bonds were particularly attractive, accounting for 66 percent
($35 million) of this increase, as yields reached levels not seen in four years.
Revenue from equity products rose 49 percent ($30 million) reflecting the strong
Nasdaq equity market.
21
<PAGE>
Revenues from principal transactions decreased 3 percent ($6 million) in 1999
compared to 1998 due to reduced client demand for debt securities as a result of
falling yields. A decline in sales of government debt securities was partially
offset by an increase in sales of municipal and corporate debt securities due to
a shift in client demand as a result of a widening of the interest rate yield
spread.
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 corporate and
governmental entities.
In 2000, investment banking revenue increased 3 percent ($7 million).
Underwriting fees and selling concessions increased 16 percent ($27 million) in
2000, principally because of a 15 percent ($18 million) increase in revenue from
corporate equity issues in 2000. Distribution of equity-based unit trusts
continued strong in 2000 reflecting increased client demand for these
specialized products. The increase in underwriting fees and selling concessions
was partially offset by a 36 percent ($20 million) decrease in management fees
due to participation as manager or co-manager in fewer offerings by the Company
this year.
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 the year.
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 annuities, 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 $118 million in 2000, an increase of 28
percent. Fees from third-party mutual funds and annuities were 21 percent ($55
million) higher than in 1999, reflecting 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 37 percent ($41 million) in 2000. The
average number of these accounts increased 39 percent, while the total assets in
these programs grew from $11.8 billion at the end of 1999 to $17.4 billion by
the close of 2000, an increase of 47 percent.
The 1999 increase in asset management and service fees of 30 percent ($97
million) over 1998 was primarily due to a 24 percent ($47 million) jump in
service fees from third party mutual funds. Fees from the administration of
client assets under third party management and from the Company's management
services in 1999 rose 57 percent ($40 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 23 percent ($47 million) in 2000, primarily
because of a 32 percent ($54 million) increase in interest earned on margin
accounts. The increase resulted from a 34 percent rise in average margin
balances partially offset by slightly lower average interest rates charged on
margin accounts. Interest earned on short-term investments decreased 77 percent
($9 million) as a result of a decrease in average short-term investments as
funds were primarily utilized to finance the rise in margin balances.
The increase in interest revenue of 11 percent ($21 million) in 1999 versus 1998
was principally due to a 14 percent ($21 million) increase in interest earned on
margin accounts as a result of an 18 percent rise in average margin balances and
from increased revenue from securities owned.
22
<PAGE>
Other Revenue
Other revenue increased 688 percent ($78.2) million principally as a result of a
gain of $75.2 million from the sale of one-half of the Company's investment in a
privately held investment management company and the related increase in the
carrying value of the remaining investment to its fair value. This investment
had been carried on the equity method of accounting, which was discontinued due
to the reduction of the Company's ownership and the terms surrounding the
remaining investment.
Expenses
Compensation and benefits rose 23 percent ($335 million) in 2000 and 12 percent
($155 million) in 1999. 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 2000 and 1999. General and administrative
salary expense increased 23 percent ($57 million) in 2000 and 17 percent ($37
million) in 1999 because of general salary increases and a 16 percent growth in
the number of support employees in 2000 versus 11 percent in 1999.
In 2000, occupancy and equipment expense rose 21 percent ($25 million) and
communications expense rose 11 percent ($12 million). These categories
increased primarily because of increased business volume, branch and
headquarters expansion, and the costs associated with the purchase of
technology-related equipment and software. Interest expense rose 305 percent
($17 million) due to an increase in short-term borrowings primarily needed to
finance the rise in customer margin balances. All remaining expenses
increased a combined 34 percent ($37 million) over last year due to branch
and headquarters expansion and increased transaction volume.
In 1999, all noncompensation-related expenses increased a combined 17 percent
($49 million), mainly as a result of expansion and technology-related
expenditures.
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. Customer receivables continued to
increase in 2000 as a result of business expansion and the increased use of
margin borrowing by clients. This increase was financed primarily by bank loans
and increased securities lending activities.
The principal sources for financing the Company's business are stockholders'
equity, cash generated from operations, short-term bank borrowings and
securities lending activities. Average bank borrowings of $218 million in 2000,
and $35 million in 1999 were primarily used to finance customer receivables.
The Company is currently expanding its headquarters with the construction of an
additional office building, a training/conference center and a parking garage.
The total costs of these projects are estimated to be $180 million.
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 11
million and 4.9 million shares at aggregate costs of $336 million and $180
million in 2000 and 1999, respectively. At February 29, 2000, a total of 22.4
million shares had been repurchased under this program.
The Company believes it has adequate sources of credit available, if needed, to
finance higher trading volumes, branch expansion, stock repurchases, dividend
payments 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.
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 to the Company
are market risk and credit risk.
23
<PAGE>
Credit Risk
Credit risk is discussed in Note 10 (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 to
the extent 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's management philosophy provides for communication among all
responsible parties throughout the trading day.
The Company's policy is to purchase inventory to provide investment product for
its clients. Consequently, the Company purchases only inventory which it
believes it can readily sell to its clients, thus reducing the Company's
exposure to liquidity risk but not to market fluctuations. In addition, maximum
inventory guidelines are established 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. 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 29, 2000, and February 28, 1999,
the potential daily loss in the 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 a 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 were to occur, the
Company calculated a potential loss in fair value of its debt inventory of $8.7
million at February 29, 2000, and $8.9 million at February 28, 1999.
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 materially from those
contemplated. The risks and uncertainties include, but are not limited to,
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.
24
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED TEN-YEAR FINANCIAL SUMMARY
Year Ended February 29, February 28, February 28, February 28, February 29,
2000 1999 1998 1997 1996
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues
Commissions:
Listed Securities $ 537,005 $ 505,226 $ 462,276 $ 365,908 $ 338,241
Options 62,708 49,830 44,188 33,850 29,432
Over-the-Counter Securities 331,992 199,472 190,092 178,752 142,696
Mutual Funds 312,833 281,782 255,005 214,029 184,616
Commodities 17,305 15,518 16,315 16,038 16,448
Insurance 164,583 128,109 117,528 101,365 82,112
Total 1,426,426 1,179,937 1,085,404 909,942 793,545
Principal Transactions:
Equities 90,202 60,538 61,184 58,427 55,334
Debt Securities 194,016 141,484 146,768 154,580 151,033
Total 284,218 202,022 207,952 213,007 206,367
Investment Banking:
Underwriting Fees
and Selling Concessions 190,236 163,419 152,029 114,426 80,572
Management Fees 35,483 55,582 38,889 41,733 24,427
Total 225,719 219,001 190,918 156,159 104,999
Asset Management and Service Fees 544,531 426,967 329,695 260,200 207,631
Interest:
Margin Account Balances 225,319 170,982 149,738 118,373 107,192
Securities Owned and Deposits 23,269 30,530 31,132 29,462 27,150
Total 248,588 201,512 180,870 147,835 134,342
Other 89,525 11,360 9,294 9,340 7,583
Total Revenues 2,819,007 2,240,799 2,004,133 1,696,483 1,454,467
Expenses
Compensation and Benefits 1,766,711 1,431,697 1,276,931 1,080,931 929,755
Occupancy and Equipment 143,463 118,683 96,496 85,883 79,077
Communications 116,407 104,638 98,949 86,257 80,364
Floor Brokerage and Clearance 21,667 20,933 19,825 18,149 16,275
Interest 22,818 5,628 1,436 2,065 3,153
Other 124,826 88,433 72,699 68,241 69,561
Total Expenses 2,195,892 1,770,012 1,566,336 1,341,526 1,178,185
Earnings Before Income Taxes 623,115 470,787 437,797 354,957 276,282
Income Taxes 240,194 178,670 168,500 135,900 105,700
Net Earnings $ 382,921 $ 292,117 $ 269,297 $ 219,057 $ 170,582
Per Share Data:
Diluted Earnings $ 4.08 $ 3.00 $ 2.75 $ 2.24 $ 1.77
Basic Earnings $ 4.16 $ 3.07 $ 2.81 $ 2.29 $ 1.80
Cash Dividends $ 0.61 $ 0.57 $ 0.51 $ 0.44 $ 0.40
Book Value $ 19.69 $ 17.16 $ 15.21 $ 13.12 $ 11.33
Other Data:
Total Assets $5,347,587 $3,803,132 $4,193,328 $4,244,340 $3,102,085
Stockholders' Equity $1,717,122 $1,627,737 $1,463,121 $1,261,303 $1,088,684
Cash Dividends $ 55,483 $ 54,002 $ 48,740 $ 41,851 $ 37,769
Pretax Return on Average Equity 37.3% 30.5% 32.1% 30.2% 27.5%
Return on Average Equity 22.9% 18.9% 19.8% 18.6% 17.0%
Net Earnings as a Percent of Revenues 13.6% 13.0% 13.4% 12.9% 11.7%
Average Common and Common Equivalent Shares
Outstanding (Diluted) 93,814 97,322 98,051 97,816 96,644
Average Common Shares
Outstanding (Basic) 92,140 95,252 95,950 95,483 94,621
<FN>
Share and per share data have been restated for stock splits and stock
dividends.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Year Ended February 28, February 28, February 28, February 28, February 29,
1995 1994 1993 1992 1991
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues
Commissions:
Listed Securities $ 236,629 $ 273,363 $ 231,312 $ 203,936 $ 140,096
Options 21,576 21,135 19,167 21,745 20,002
Over-the-Counter Securities 80,525 94,075 69,199 69,415 38,842
Mutual Funds 142,653 244,357 191,643 145,494 80,158
Commodities 15,261 16,766 13,016 13,941 12,322
Insurance 70,429 69,115 42,304 43,838 37,346
Total 567,073 718,811 566,641 498,369 328,766
Principal Transactions:
Equities 37,565 40,260 31,266 23,157 10,922
Debt Securities 203,460 146,705 184,040 165,284 145,732
Total 241,025 186,965 215,306 188,441 156,654
Investment Banking:
Underwriting Fees
and Selling Concessions 70,156 111,379 87,061 77,464 44,167
Management Fees 22,574 35,594 21,251 13,389 11,161
Total 92,730 146,973 108,312 90,853 55,328
Asset Management and Service Fees 164,547 144,699 113,936 91,849 63,623
Interest:
Margin Account Balances 89,971 60,491 50,098 47,026 51,209
Securities Owned and Deposits 15,548 14,074 14,631 16,915 15,025
Total 105,519 74,565 64,729 63,941 66,234
Other 7,448 6,628 5,464 5,206 4,302
Total Revenues 1,178,342 1,278,641 1,074,388 938,659 674,907
Expenses
Compensation and Benefits 756,736 828,409 692,127 594,404 422,524
Occupancy and Equipment 73,108 67,258 61,701 56,035 49,783
Communications 74,708 73,048 66,899 62,468 58,323
Floor Brokerage and Clearance 14,355 15,062 15,016 13,741 11,461
Interest 6,818 1,113 1,886 1,186 4,229
Other 53,288 50,180 46,774 42,793 36,925
Total Expenses 979,013 1,035,070 884,403 770,627 583,245
Earnings Before Income Taxes 199,329 243,571 189,985 168,032 91,662
Income Taxes 75,210 88,700 70,560 62,500 32,500
Net Earnings $ 124,119 $ 154,871 $ 119,425 $ 105,532 $ 59,162
Per Share Data:
Diluted Earnings $ 1.33 $ 1.71 $ 1.38 $ 1.25 $ 0.73
Basic Earnings $ 1.35 $ 1.75 $ 1.40 $ 1.28 $ 0.74
Cash Dividends $ 0.37 $ 0.35 $ 0.29 $ 0.25 $ 0.19
Book Value $ 9.84 $ 8.72 $ 7.11 $ 5.89 $ 4.79
Other Data:
Total Assets $2,224,282 $2,236,590 $2,111,192 $1,577,143 $1,402,627
Stockholders' Equity $ 919,281 $ 790,367 $ 615,240 $ 492,010 $ 385,869
Cash Dividends $ 34,200 $ 30,843 $ 24,624 $ 20,622 $ 15,480
Pretax Return on Average Equity 23.3% 34.7% 34.3% 38.3% 25.1%
Return on Average Equity 14.5% 22.0% 21.6% 24.0% 16.2%
Net Earnings as a Percent of Revenues 10.5% 12.1% 11.1% 11.2% 8.8%
Average Common and Common Equivalent Shares
Outstanding (Diluted) 93,267 90,530 86,740 84,152 81,023
Average Common Shares
Outstanding (Basic) 91,809 88,643 85,421 82,331 80,205
<FN>
Share and per share data have been restated for stock splits and stock dividends.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
February 29, February 28,
2000 1999
<S> <C> <C>
Assets
Cash and cash equivalents $ 154,487 $ 99,499
Cash and government securities, segregated
under federal and other regulations 86,851 57,959
Securities purchased under agreements to resell 10,674 14,838
Securities borrowed 278,199 243,507
Receivables:
Customers 3,777,352 2,626,316
Brokers, dealers and clearing organizations 22,529 27,855
Fees, dividends and interest 62,989 52,077
Securities inventory, at fair value:
State and municipal 240,154 144,180
Government and agencies 57,943 50,618
Corporate 110,311 72,297
Investments 116,307 63,142
Property and equipment, at cost, net of accumulated depreciation
and amortization of $337,602 and $279,034 312,942 245,410
Deferred income taxes 75,361 88,312
Other assets 41,488 17,122
$5,347,587 $3,803,132
Liabilities and Stockholders' Equity
Bank loans $ 638,000 $ --
Checks payable 283,602 226,516
Securities loaned 637,684 229,542
Payables:
Customers 946,373 949,076
Brokers, dealers and clearing organizations 203,129 68,419
Securities sold but not
yet purchased, at fair value 24,920 45,659
Employee compensation and related taxes 740,188 578,073
Income taxes 73,557 24,645
Other liabilities 83,012 53,465
Total Liabilities 3,630,465 2,175,395
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 253,917 239,998
Retained earnings 1,645,332 1,348,094
1,995,712 1,684,555
Less: Treasury stock, at cost (9,254,005 and 1,625,042 shares) 278,590 56,818
Total Stockholders' Equity 1,717,122 1,627,737
$5,347,587 $3,803,132
<FN>
See Notes to Consolidated Financial Statements.
27
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Year Ended February 29, February 28, February 28,
2000 1999 1998
<S> <C> <C> <C>
Revenues
Commissions $1,426,426 $1,179,937 $1,085,404
Principal transactions 284,218 202,022 207,952
Investment banking 225,719 219,001 190,918
Asset management
and service fees 544,531 426,967 329,695
Interest 248,588 201,512 180,870
Other 89,525 11,360 9,294
2,819,007 2,240,799 2,004,133
Expenses
Compensation
and benefits 1,766,711 1,431,697 1,276,931
Occupancy and equipment 143,463 118,683 96,496
Communications 116,407 104,638 98,949
Floor brokerage
and clearance 21,667 20,933 19,825
Interest 22,818 5,628 1,436
Other 124,826 88,433 72,699
2,195,892 1,770,012 1,566,336
Earnings Before
Income Taxes 623,115 470,787 437,797
Income Taxes 240,194 178,670 168,500
Net Earnings $ 382,921 $ 292,117 $ 269,297
Earnings per share:
Diluted $ 4.08 $ 3.00 $ 2.75
Basic $ 4.16 $ 3.07 $ 2.81
<FN>
See Notes to Consolidated Financial Statements.
28
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Years Ended February 29, 2000
Additional
Common Paid-in Retained Treasury
(Dollars in thousands, except per share amounts) Stock Capital Earnings Stock Total
<S> <C> <C> <C> <C> <C>
Balances, March 1, 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 7,506 (29,774) 78,677 56,409
Restricted stock 5,824 1,185 23,849 30,858
Stock split 3-for-2 32,150 (32,150)
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
Net earnings 382,921 382,921
Dividends declared--
$0.61 per share (55,483) (55,483)
Treasury stock acquired (336,028) (336,028)
Stock issued:
Employee stock
purchase/option plans 7,694 (39,532) 89,453 57,615
Restricted stock 6,225 9,332 24,803 40,360
Balances, February 29, 2000 $96,463 $253,917 $1,645,332 $(278,590) $1,717,122
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended February 29, February 28, February 28,
(Dollars in thousands) 2000 1999 1998
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net earnings $ 382,921 $ 292,117 $ 269,297
Noncash and nonoperating items included in net earnings:
Depreciation and amortization 63,380 50,369 42,079
Expense of restricted stock awards 34,244 28,149 25,155
Deferred income taxes 12,951 (17,880) (13,874)
Gain on investments (75,236) -- --
(Increase) decrease in operating assets:
Segregated cash and
government securities (28,892) (665) 343,697
Securities borrowed (34,692) 542,612 606,745
Receivable from customers (1,151,036) (397,188) (551,774)
Receivable from brokers,
dealers and clearing organizations 5,326 (15,334) 2,114
Fees, dividends and interest receivable (10,912) (4,790) (6,218)
Securities inventory (141,313) 136,558 (239,686)
Other assets (24,083) 6,461 (4,953)
Increase (decrease) in operating liabilities:
Checks payable 57,086 23,499 28,281
Securities loaned 408,142 (591,376) (637,508)
Payable to customers (2,703) 28,285 104,123
Payable to brokers, dealers and
clearing organizations 134,710 (117,337) 137,914
Securities sold but not yet purchased (20,739) 26,518 1,471
Employee compensation and related taxes 162,115 72,342 91,554
Income taxes 48,912 7,508 3,601
Other liabilities 29,547 (5,923) 16,730
Net cash from operating activities (150,272) 63,925 218,748
Cash Flows From Investing Activities
Securities purchased under agreements to resell 4,164 189,525 (4,363)
Purchase of property and equipment (130,912) (62,567) (84,489)
Investments, net 22,071 (22,170) (16,301)
Net cash from investing activities (104,677) 104,788 (105,153)
Cash Flows From Financing Activities
Net proceeds from bank loans 638,000 -- --
Employee stock transactions 63,731 78,527 62,112
Purchase of treasury stock (336,028) (180,175) (106,006)
Cash dividends paid (55,766) (52,330) (47,736)
Net cash from financing activities 309,937 (153,978) (91,630)
Net Increase in Cash and Cash Equivalents 54,988 14,735 21,965
Cash and Cash Equivalents,
at Beginning of Year 99,499 84,764 62,799
Cash and Cash Equivalents,
at End of Year $ 154,487 $ 99,499 $ 84,764
<FN>
Interest payments totaled $21,593 in 2000, $5,585 in 1999 and $3,245 in 1998.
Income taxes paid totaled $167,340 in 2000, $168,748 in 1999 and $165,618 in
1998.
Supplemental disclosures of noncash financing activities: Restricted stock
awards, net of forfeitures, totaled $34,611 in 2000, $28,602 in 1999 and $24,818
in 1998.
See Notes to Consolidated Financial Statements.
</TABLE>
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three years ended February 29,2000
(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 subsidiaries (collectively referred to
as the Company) and are prepared in conformity with accounting principles
generally accepted in the United States of America. In preparing financial
statements, management makes 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 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 6,800
financial consultants in more than 670 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, the
Company has offices in 49 states, the District of Columbia and London, England.
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 considered 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, securities
segregated under federal and other regulations, and investments 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.
Investments
The fair value of investments, for which a quoted market or dealer price is not
available, are based on management's estimates. Among the factors considered by
management in determining the fair value of investments are the cost of the
investment, terms and liquidity, developments since the acquisition of the
investment, the sales price of recently issued securities, the financial
condition and operating results of the issuer, earnings trends and consistency
of operating cash flows, the long-term business potential of the issuer, the
quoted market price of securities with similar quality and yield that are
publicly traded, and other factors generally pertinent to the valuation of
investments. The fair value of these investments is subject to a high degree of
volatility and may be susceptible to significant fluctuation in the near term.
These investments were valued at $72,587 and $22,534 at February 29, 2000 and
February 28, 1999, respectively.
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.
31
<PAGE>
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, including hardware and software,
is provided over estimated useful lives of three 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.
Comprehensive Earnings
Comprehensive earnings for each of the three years in the period ended February
29, 2000, was equal to the Company's net earnings.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133." SFAS 137 defers the effective
date for one year to fiscal years beginning after June 15, 2000. 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 $217,972 in 2000, $34,620 in 1999 and $10,656 in
1998, at effective interest rates of 5.5 percent, 5.8 percent and 6 percent,
respectively. Substantially all such borrowings were secured by customer-owned
securities held in margin accounts.
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 were 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:
2000 1999 1998
Pro forma net earnings $371,000 $280,000 $258,000
Pro forma
earnings per share:
Diluted $3.95 $2.87 $2.63
Basic $4.03 $2.94 $2.69
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 2, 2000, at 85 percent
of market price based on dates specified in the plan. Employees purchased
1,871,284 shares at $21.89 per share in 2000, 1,872,249 shares at $25.29 per
share in 1999 and 1,871,400 shares at $20.64 per share in 1998. 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 2000,
1999 and 1998, respectively: dividend yield of 2.01 percent, 1.51 percent and
1.34 percent; an expected life of one year; expected volatility of 36 percent,
43 percent and 34 percent; and risk-free interest rates of 5.42 percent, 4.55
percent and 5.68 percent. The fair value of the options granted in 2000, 1999
and 1998 was $5.99, $7.52 and $8.16 per option, respectively.
Restricted Stock and Stock Options
Under the Company's Incentive Stock Plan, three types of benefits may be awarded
to officers and key employees: restricted stock, stock options and stock
appreciation rights. Such awards are subject to forfeiture upon termination of
employment during the restricted period, generally three years from the award
date. Through February 29, 2000, no stock appreciation rights had been granted.
Restricted stock awards are made, and shares issued, without cash payment by the
employee. Eligible employees at February 29, 2000, were awarded 916,010 shares
with a market value of $36,018. At February 28, 1999 and 1998, the awards were
882,623 and 597,595 shares, respectively, with corresponding market values of
$28,685 and $25,732. Treasury shares were utilized for these awards.
32
<PAGE>
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 award and expire eight years from date of award, 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 2000, 1999
and 1998, respectively: dividend yield of 2.01 percent, 1.51 percent and 1.34
percent; expected lives of six years; expected volatility of 36 percent, 43
percent and 34 percent; risk-free interest rates of 6.62 percent, 5.49 percent
and 5.70 percent; and a forfeiture rate of 7 percent, 6 percent and 8 percent.
The fair value of options granted under this plan in 2000, 1999 and 1998 was
$14.99, $13.92 and $16.35 per option, respectively.
A summary of the status of the Company's stock options as of February 29 or 28,
2000, 1999 and 1998, and changes during the years ended on those dates is
presented as follows:
<TABLE>
<CAPTION>
2000 1999 1998
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 4,597 $22.91 4,445 $18.97 4,993 $14.39
Granted 1,006 $39.32 968 $32.50 575 $43.06
Exercised (723) $14.41 (793) $12.52 (1,050) $10.47
Forfeited (40) $32.03 (23) $28.26 (73) $17.50
Outstanding, end of year 4,840 $27.52 4,597 $22.91 4,445 $18.97
Treasury shares utilized for exercises 723 793 1,050
</TABLE>
The following table summarizes information about outstanding stock options at
February 29, 2000:
<TABLE>
<CAPTION>
33
<PAGE>
Options Outstanding Options Exercisable
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices (000) Life (years) Exercise Price (000) Exercise Price
<S> <C> <C> <C> <C> <C>
$11-$15 1,031 2.1 $13.32 1,031 $13.32
$16-$20 551 4.0 $16.59 551 $16.59
$21-$25 736 5.0 $21.21 736 $21.21
$31-$35 960 7.0 $32.50 0
$36-$40 1,006 8.0 $39.32 0
$41-$45 556 6.0 $43.06 0
4,840 2,318
</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 $104,787 in 2000,
$85,308 in 1999 and $76,933 in 1998 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
$43,933 in 2000, $34,799 in 1999 and $26,495 in 1998 in connection with this
plan. At February 29, 2000 and February 28, 1999, employee compensation and
related taxes included $151,298 and $116,121, 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 or loans to affiliates. At February 29, 2000, the
subsidiary's net capital of $899,932 was 23 percent of aggregate debit items and
$823,317 in excess of the minimum required.
34
<PAGE>
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:
2000 1999 1998
Current:
Federal $188,529 $169,286 $154,428
State and local 38,714 27,264 27,946
227,243 196,550 182,374
Deferred 12,951 (17,880) (13,874)
$240,194 $178,670 $168,500
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. Significant components of
deferred tax assets and liabilities at February 29, 2000, and February 28, 1999,
are as follows:
2000 1999
Deferred tax assets:
Employee benefits $123,243 $ 98,288
Other 8,120 5,964
131,363 104,252
Deferred tax liabilities:
Receivables 33,127 3,982
Investments 17,887 4,139
Property and equipment 3,464 6,665
Other 1,524 1,154
56,002 15,940
Net Deferred Tax Assets $ 75,361 $ 88,312
The Company's effective tax rate was 39 percent in 2000, 38 percent in 1999 and
39 percent in 1998, 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 2000, 1999 and 1998. No other single item had a material
impact on the difference in the rates.
35
<PAGE
7. Gain on Investment
In 2000, the Company recognized a gain of $75,200, which is included in other
revenue, from the sale of one-half of the Company's investment in a privately
held investment management company and the related increase in the carrying
value of the remaining investment to its fair value. This investment had been
carried on the equity method of accounting, which was discontinued due to the
reduction of the Company's ownership and the terms surrounding the remaining
investment.
8. Stockholders' Equity
Earnings Per Share
The following table presents the computations of basic and diluted earnings per
share:
2000 1999 1998
Net earnings available to
common stockholders $382,921 $292,117 $269,297
Shares (in thousands):
Weighted average
shares outstanding 92,140 95,252 95,950
Effect of dilutive common shares:
Restricted shares 551 423 386
Stock purchase plan 357 457 392
Stock option plan 766 1,190 1,323
Dilutive common shares 1,674 2,070 2,101
Total weighted average
diluted shares 93,814 97,322 98,051
Earnings per share:
Diluted $ 4.08 $ 3.00 $ 2.75
Basic $ 4.16 $ 3.07 $ 2.81
36
<PAGE>
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 11,032,500 shares with an aggregate cost of
$336,028 in 2000, 4,871,500 shares at a cost of $180,175 in 1999 and 3,438,000
shares at a cost of $106,006 in 1998. Repurchased shares are added to treasury
stock to be used for employee stock plans and to partially offset the past
effect of these plans. At February 29, 2000, the Company had repurchased
22,359,250 shares under this program.
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.
9. Commitments and Contingent Liabilities
The Company has long-term operating leases and commitments related to office
space, equipment and service agreements. Minimum commitments under all such
noncancelable leases and service agreements, some of which contain escalation
clauses and renewal options, at February 29, 2000, are as follows:
Year ending February 28 (29),
2001 $66,200
2002 62,200
2003 55,200
2004 45,400
2005 36,900
Later years 90,300
$356,200
Rental expense under all operating leases and service agreements was $61,827 in
2000, $52,657 in 1999 and $45,893 in 1998.
37
<PAGE>
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 29, 2000, would not have had a material effect on the
consolidated financial statements.
At February 29, 2000 and February 28, 1999, the Company had $144,662 and
$128,750, 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 held in margin accounts.
The Company is a defendant in a number of lawsuits, in some of which plaintiffs
claim substantial amounts, relating primarily to its securities and commodities
business. While results of litigation cannot be predicted with certainty,
management, after consultation with counsel, believes that resolution of all
such litigation will have no material adverse effect on the consolidated
financial statements of the Company.
10. Financial Instruments
Off-Balance Sheet Risk and Concentration of Credit Risk
The Company records customer transactions on a settlement date basis, generally
three business days after trade date. The risk of loss on unsettled
transactions is identical to 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 required from customers and other counterparties when
appropriate.
38
<PAGE>
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.
11. Enterprise-Wide Disclosure
The Company provides investment services to its clients through its financial
consultants in more than 670 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, annuities and insurance contracts, 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 29 (28):
2000 1999 1998
Transaction services $1,971,589 $1,623,648 $1,507,019
Asset management services 470,125 373,413 278,861
Interest 248,588 201,512 180,870
Other 128,705 42,226 37,383
$2,819,007 $2,240,799 $2,004,133
40
<PAGE>
We have audited the accompanying consolidated balance sheets of A.G. Edwards,
Inc. and subsidiaries as of February 29, 2000 and February 28, 1999, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended February 29, 2000. 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 auditing standards generally accepted
in the United States of America. 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 29, 2000 and February 28, 1999, and the results of their operations
and cash flows for each of the three years in the period ended February 29,
2000, in conformity with accounting principles generally accepted in the United
States of America.
April 20, 2000
St. Louis, Missouri
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<TABLE>
<CAPTION>
Dividends Stock Price Earnings Net Earnings
Declared Trading Range Revenues Before Tax Earnings per Share
per Share High -- Low (in millions) (in millions) (in millions) Basic Diluted
Fiscal 2000 by Quarter
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First $0.15 38 3/16 -- 30 7/8 $651.1 $136.9 $ 84.5 $0.89 $0.88
Second $0.15 33 9/16 -- 24 5/8 $636.1 $132.8 $ 82.3 $0.88 $0.86
Third $0.15 34 -- 24 1/4 $714.6 $184.1 $115.3 $1.25 $1.23
Fourth $0.16 34 3/16 -- 26 3/4 $817.2 $169.3 $100.8 $1.14 $1.11
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
<FN>
Per share data have been restated for stock splits and stock dividends.
</TABLE>
Stock Split History
As a result of stock splits and stock dividends, an investment of 100 shares of
A.G. Edwards stock at the time of the firm's initial public offering in calendar
1971 has grown to 3,627 shares today. Given the initial offering price of $12
per share, the value of that $1,200 investment would have increased 9,478
percent, or 17.46 percent compounded annually, to $114,931 as of February 29,
2000.
Dividend Growth History
A steadily increasing dividend has reflected A.G. Edwards' continued revenue and
earnings growth. Over the past 10-year period, the dividend has grown from $.19
per share to $.61 per share, an average 24 percent increase per year. Since the
firm went public, dividend payments have totaled more than $485 million. (Per
share data have been restated for stock splits and stock dividends.)
Stock Price History
A.G. Edwards stock, which trades on the New York Stock Exchange (symbol AGE),
closed at 31 11/16 on February 29, 2000. This represents a 290 percent increase
from the 8 1/8 closing price on February 28, 1991. (Per share data have been
restated for stock splits and stock dividends.)
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SHAREHOLDER INFORMATION
Annual Meeting
The 2000 Annual Meeting of Stockholders will be held at the Company's
headquarters, One North Jefferson, St. Louis, Missouri, on Thursday, June 22,
2000, 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 of Directors' 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 3 and October 2, 2000,
and January 2 and April 2, 2001.
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:
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 29, 2000, was
27,700.
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 and cash 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, Inc.
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