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, 1999 Commission file number 1-8527
A.G. EDWARDS, INC.
State of Incorporation: DELAWARE I.R.S. Employer Identification No: 43-1288229
ONE NORTH JEFFERSON AVENUE
ST. LOUIS, MISSOURI 63103
Registrant's telephone number, including area code: (314) 955-3000
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, 1999, there were 89,161,656 shares of A.G. Edwards, Inc. common
stock, par value $1, issued and outstanding.
<PAGE>
A.G. EDWARDS, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Consolidated balance sheets 1
Consolidated statements of earnings 2
Consolidated statements of cash flows 3
Notes to consolidated financial statements 4-6
Management's financial discussion 7-9
PART II. OTHER INFORMATION 10
SIGNATURES 11
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<CAPTION>
A.G. EDWARDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
<S>
November 30, February 28,
ASSETS 1999 1999
<C> <C>
Cash and cash equivalents $ 116,894 $ 99,499
Cash and government securities, segregated under
federal and other regulations 66,879 57,959
Securities purchased under agreements to resell 2,974 14,838
Securities borrowed 186,197 243,507
Receivables:
Customers 3,105,262 2,626,316
Brokers, dealers and clearing organizations 17,048 27,855
Fees, dividends and interest 60,233 52,077
Securities inventory, at fair value:
State and municipal 192,423 144,180
Government and agencies 58,790 50,618
Corporate 94,962 72,297
Property and equipment, at cost, net of accumulated depreciation
and amortization of $314,001 and $276,229 272,153 240,367
Deferred income taxes 67,581 88,312
Other assets 192,188 85,307
$4,433,584 $3,803,132
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans $ 566,900 $ --
Checks payable 229,383 226,516
Securities loaned 278,693 229,542
Payables:
Customers 720,027 949,076
Brokers, dealers and clearing organizations 148,241 68,419
Securities sold but not yet purchased, at fair value 28,763 45,659
Employee compensation and related taxes 604,168 578,073
Income taxes 42,510 24,645
Other liabilities 74,305 53,465
Total Liabilities 2,692,990 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 251,729 239,998
Retained earnings 1,555,771 1,348,094
1,903,963 1,684,555
Less - Treasury stock, at cost (5,587,060 and 1,625,042 shares) 163,369 56,818
Total Stockholders' Equity 1,740,594 1,627,737
$4,433,584 $3,803,132
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
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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
1999 1998 1999 1998
<S>
REVENUES: <C> <C> <C> <C>
Commissions $318,937 $266,697 $ 993,963 $ 869,747
Principal transactions 72,817 51,302 203,120 151,547
Investment banking 53,568 54,369 169,655 169,675
Asset management and service fees 126,072 99,750 374,885 294,823
Interest 63,015 49,269 174,105 151,696
Other 80,228 2,907 86,147 8,191
714,637 524,294 2,001,875 1,645,679
EXPENSES:
Compensation and benefits 425,590 329,013 1,248,455 1,047,405
Communications 30,842 26,788 84,699 78,361
Occupancy and equipment 36,473 29,809 102,213 86,326
Floor brokerage and clearance 5,155 5,608 15,866 15,630
Interest 6,572 1,547 14,752 4,659
Other 25,873 21,990 82,124 63,076
530,505 414,755 1,548,109 1,295,457
EARNINGS BEFORE INCOME TAXES 184,132 109,539 453,766 350,222
INCOME TAXES 68,830 41,570 171,610 133,990
NET EARNINGS $115,302 $ 67,969 $ 282,156 $ 216,232
Earnings per share:
Diluted $ 1.23 $ 0.70 $ 2.97 $ 2.22
Basic $ 1.25 $ 0.72 $ 3.02 $ 2.27
Dividends per share $ 0.15 $ 0.14 $ 0.45 $ 0.42
Average common and common equivalent
shares outstanding (000's omitted):
Diluted 93,847 97,070 95,075 97,459
Basic 92,040 95,148 93,403 95,345
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
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<CAPTION>
A.G. EDWARDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended November 30,
1999 1998
<S>
Cash Flows from Operating Activities: <C> <C>
Net earnings $ 282,156 $ 216,232
Noncash items included in earnings 9,547 57,474
Change in:
Segregated cash and government securities (8,920) (252,989)
Net securities borrowed and loaned 106,461 (7,669)
Net payable to brokers, dealers
and clearing organizations 90,629 435,985
Net receivable from customers (707,995) (336,560)
Fees, dividends and interest receivable (8,156) (6,244)
Net securities inventory (95,976) 154,924
Other assets and liabilities 18,537 (76,788)
Net cash from operating activities (313,717) 184,365
Cash Flows from Investing Activities:
Securities purchased under agreements to resell 11,864 (15,637)
Capital expenditures and other investments (79,409) (59,799)
Net cash from investing activities (67,545) (75,436)
Cash Flows from Financing Activities:
Bank loans 566,900 --
Employee stock transactions 58,321 73,362
Cash dividends paid (42,134) (39,008)
Purchase of treasury stock (184,430) (132,018)
Net cash from financing activities 398,657 (97,664)
Net change in Cash and Cash Equivalents 17,395 11,265
Cash and Cash Equivalents, Beginning of Period 99,499 84,764
Cash and Cash Equivalents, End of Period $ 116,894 $ 96,029
Income tax payments totaled $122,507 and $123,708 during the nine month periods
ended November 30, 1999, and 1998, respectively.
Interest payments totaled $13,429 and $4,609 during the nine month periods ended
November 30, 1999, and 1998, respectively.
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
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A.G. EDWARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 1999
(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, 1999. 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,
1999, are not necessarily indicative of the results for the year ending
February 29, 2000. Where appropriate, prior year's financial information has
been reclassified to conform with the current year presentation.
STOCKHOLDERS' EQUITY:
Options to purchase 1,875 shares of common stock granted under the Employee
Stock Purchase Plan are exercisable October 1, 2000, at 85% of market price
based on dates specified in the plan. Employees purchased 1,871 shares at
$21.89 per share in October 1999. Treasury shares were utilized for these
transactions.
Under the stock repurchase program, the Company purchased 6,192 shares at an
aggregate cost of $184,430 during the nine month period ended November 30, 1999.
For the nine month period ended November 30, 1998, the Company purchased 3,482
shares at an aggregate cost of $132,018.
Comprehensive earnings for the nine month periods ended November 30, 1999 and
1998 were equal to the Company's net earnings.
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<PAGE>
A.G. EDWARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 1999
(In thousands, except per share amounts)
(Unaudited)
INVESTMENTS:
In October 1990, the Company purchased, as a strategic investment
("Investment"), a minority interest in a privately held investment management
company, which manages several money market mutual funds that the Company
distributes. In November 1999, the investment management company exercised its
right to call one-half of the Investment in exchange for a cash payment of
$45,000. The Investment was carried on the Company's balance sheet using the
equity method of accounting and at the time of disposition was recorded at
$14,800. The $45,000 was based on a formula provided in the purchase agreement
which is substantially based on the financial position and results of
operations of the investment management company. Because of the reduction in
the Company's ownership and the terms surrounding the remaining Investment, the
equity method of accounting was discontinued and the Company's remaining
Investment was adjusted to fair value, which the Company believes is equal to
the amount to be received in connection with the call, or $45,000. The $45,000
receivable and $45,000 remaining Investment are included in Other Assets. The
effect of the call and the subsequent recording of the remaining Investment at
fair value on the Company's nine month results is as follows:
As Excluding
Reported Investment Difference
Revenues $2,001,875 $1,926,639 $75,236
Net Earnings $ 282,156 $ 246,961 $35,195
E.P.S. (diluted) $ 2.97 $ 2.60 $ 0.37
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. At November 30, 1999, Edwards' net capital of
$1,021,071 was $956,679 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, 1999
(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
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net earnings available to common stockholders $115,302 $67,969 $282,156 $216,232
Weighted average basic shares outstanding 92,040 95,148 93,403 95,345
Dilutive effect of employee stock plans 1,807 1,922 1,672 2,114
Total weighted average diluted shares 93,847 97,070 95,075 97,459
Diluted earnings per share $ 1.23 $ 0.70 $ 2.97 $ 2.22
Basic earnings per share $ 1.25 $ 0.72 $ 3.02 $ 2.27
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 660 branch offices. Transaction services include commissions and
sales credits earned by executing or facilitating the execution of security and
commodity trades. Asset management fees are earned by providing portfolio
advisory services through third-party managers, including mutual funds, and the
Company's in-house portfolio managers. The Company earns interest revenue
principally from financing its clients' margin accounts, debt securities carried
for resale and short-term investments.
The following table presents the Company's revenue by type of service for the
nine month periods ended November 30:
1999 1998
Transaction services $1,390,530 $1,206,809
Asset management services 322,932 255,750
Interest 174,105 151,696
Other 114,308 31,424
$2,001,875 $1,645,679
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A.G. EDWARDS, INC. AND SUBSIDIARIES
MANAGEMENT'S FINANCIAL DISCUSSION
NINE MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO
NINE MONTHS ENDED NOVEMBER 30, 1998
Results of Operations
Retail investors remained active during the nine months ended November 30, 1999
in spite of volatility in the market, as evidenced by fluctuations in the Dow
Jones Industrial Average (the Dow). The Dow began this fiscal year at 9,307 and
rose to a peak close of 11,326 in August, only to decline to 10,877 by November
30, 1999. The New York Stock Exchange and Nasdaq overall trading volumes
increased 20% and 31%, respectively, over the same period last year which
contributed to a 23% increase in equity related customer trades for the Company.
During the period the Federal Reserve raised the federal funds interest rate
from 4.75% to 5.50% which contributed to a rise in yields on debt products. The
number of branches increased 39 to 663 and the number of financial consultants
increased 284 to 6,716 since the end of the same period last year.
Total revenues increased $356 million (22%) to $2.0 billion from $1.6 billion
last year. Expenses were $1.5 billion, an increase of $252 million (20%). Net
profit margins improved to 14.1% this year from 13.1% last year. The results
include a $75.2 million gain in Other Revenues from an investment in a privately
held investment management company which increased net earnings by $35.2 million
or $0.37 per diluted share.
Commission revenue increased $124 million (14%). Equity related commission
revenue rose $90 million (17%) as a result of the increase in customer trades,
reflecting increased volume in the markets and, to a lesser extent, continued
expansion of the Company's distribution system. Insurance revenue increased $28
million (26%) primarily due to the continued strong demand for variable
annuities as a reflection of the strong equity markets.
Principal transaction revenue increased $52 million (34%) primarily as a result
of a $37 million (34%) rise in revenue from debt products. Sales of debt
products rose primarily due to rising yields this year which fueled an increase
in investor demand for fixed income products. Equity revenue increased $15
million (34%) due to an increase in the number of customer trades reflecting
higher Nasdaq volume.
Investment banking revenue was unchanged from the previous year. Underwriting
fees and concessions rose $15 million (12%) primarily due to increased customer
demand for equity unit trusts and certificates of deposit. Management fees
declined $15 million (32%) due to participation as manager or co-manager in
fewer corporate offerings and decreased fees from merger and acquisition
activity.
Asset management and service fees increased $80 million (27%). Fees from third-
party mutual funds rose $52 million (24%) reflecting the strong industry-wide
cash flows into funds and higher market valuations of existing assets. Fee-
based revenue resulting from the administration of client assets under third-
party management and from the Company's management services improved $28 million
(35%) due to an increase in the number of accounts and assets under management.
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Interest revenue increased $22 million (15%). Interest revenue from margin
accounts rose $28 million (22%) due to a 29% increase in average margin debits,
partially offset by a drop in the average interest rate charged on margin
accounts when compared to the same period of the prior year. Interest earned on
short-term investments fell $5 million (71%) as a result of a decrease in
average short-term investments as funds were primarily utilized to finance the
rise in margin debits.
Compensation and benefits increased $201 million (19%). Commission expense
increased $99 million (18%) due to the rise in commissionable revenue. General
and administrative salaries increased $40 million (21%), incentive-related
compensation rose $41 million (20%) and related benefits increased $21 million
(20%) primarily as a result of general increases, higher employment and higher
Company earnings.
Interest expense increased $10 million (217%) largely due to an increase in bank
loans primarily associated with the financing of customer margin balances.
All other expenses increased $42 million (17%) primarily as a result of branch
and home office expansion and technology related expenses.
THREE MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO
THREE MONTHS NOVEMBER 30, 1998
Net earnings for the quarter ended November 30, 1999 were $115 million on
revenues of $715 million compared to net earnings of $68 million on revenues of
$524 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.
LIQUIDITY AND CAPITAL RESOURCES
Bank loans consist of short-term borrowings and are primarily used to finance
customer receivables. At November 30, 1999 bank loans outstanding were $567
million. Average bank loans outstanding for the nine-month period ended
November 30, 1999, were $212 million at an average effective interest rate of
5.38%.
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<PAGE>
YEAR 2000
This section is a Year 2000 readiness disclosure pursuant to the provisions of
the Year 2000 Information Readiness and Disclosure Act.
The "Year 2000" issue arose because many computer hardware and software systems
use only two digits to represent the year. As a result, these systems and
programs may not accurately calculate dates beyond December 31, 1999, causing
system failures or miscalculations. The Company, along with the entire
financial 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 its
Year 2000 issues are complete. Mission critical systems, as well as non-
critical and non-information technology systems, have been assessed, modified,
tested and placed in production.
Management estimates the total cost of the Company's Year 2000 efforts will not
exceed $15 million. Most of these costs have already been incurred and
expensed. Actual costs may differ materially from this estimate.
The Company has incorporated various Year 2000 issues into its corporate
contingency plans. The plans include steps to address internal system
processing errors that may occur after December 31, 1999. The Company's
corporate contingency plan is a continually evolving document and is subject to
modification. Management continues to assess potential Year 2000 scenarios and
will update the contingency plan as necessary. Consideration was given to
alternatives for mission critical third parties. However, management believes
that the Company's primary mission critical third parties are securities and
commodities exchanges, clearing associations, and utilities, and that the
industry currently has no available alternatives for most or all of these
entities.
As of January 13, 2000, the Company has no knowledge of any material Year 2000
processing errors and appears to be Year 2000 compliant. As it is still early
in the year, the Company will continue to monitor and evaluate its systems for
ongoing compliance.
RISK MANAGEMENT
No material changes have occurred to the Company's policies, procedures,
controls or risk profile. A discussion of the Company's primary risks is
included in the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 1999. Such information is hereby incorporated by reference.
FORWARD LOOKING STATEMENTS
The Management's Financial Discussion including the discussion under "Year
2000," contains forward-looking statements within the meaning of federal
securities laws. Actual results are subject to risks and uncertainties,
including both those specific to the Company and those specific to the industry,
which could cause results to differ materially from those contemplated. The
risks and uncertainties include, but are not limited to, third-party or Company
failures to achieve timely, effective remediation of the Year 2000 issues, risk
management, general economic conditions, actions of competitors, regulatory
actions, changes in legislation and technology changes. Undue reliance should
not be placed on the forward-looking statements, which speak only as of the date
of this Quarterly Report on Form 10-Q. The Company does not undertake any
obligation to publicly update any forward-looking statements.
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<PAGE>
PART II. OTHER INFORMATION
Item 1:Legal Proceedings
There have been no material changes in the legal proceedings previously
reported in the Company's Annual Report on Form 10-K for the year ended
February 28, 1999.
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, 1999.
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, 2000 /s/Benjamin F. Edwards, III
BENJAMIN F. EDWARDS, III
Principal Executive Officer
Date: January 14, 2000 /s/Robert L. Proost
ROBERT L. PROOST
Principal Financial Officer
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-END> NOV-30-1999
<CASH> 116,894
<RECEIVABLES> 3,182,543
<SECURITIES-RESALE> 2,974
<SECURITIES-BORROWED> 186,197
<INSTRUMENTS-OWNED> 346,175
<PP&E> 272,153
<TOTAL-ASSETS> 4,433,584
<SHORT-TERM> 566,900
<PAYABLES> 1,701,819
<REPOS-SOLD> 0
<SECURITIES-LOANED> 278,693
<INSTRUMENTS-SOLD> 28,763
<LONG-TERM> 0
0
0
<COMMON> 96,463
<OTHER-SE> 1,644,131
<TOTAL-LIABILITY-AND-EQUITY> 4,433,584
<TRADING-REVENUE> 203,120
<INTEREST-DIVIDENDS> 174,105
<COMMISSIONS> 993,963
<INVESTMENT-BANKING-REVENUES> 169,655
<FEE-REVENUE> 374,885
<INTEREST-EXPENSE> 14,752
<COMPENSATION> 1,248,455
<INCOME-PRETAX> 453,766
<INCOME-PRE-EXTRAORDINARY> 453,766
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 282,156
<EPS-BASIC> 3.02
<EPS-DILUTED> 2.97
</TABLE>
