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 August 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 September 29, 2000, there were 80,884,927 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 4-5
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)
<S> August 31, February 29,
ASSETS 2000 2000
<C> <C>
Cash and cash equivalents $ 102,268 $ 154,487
Cash and government securities, segregated under
federal and other regulations 83,690 86,851
Securities purchased under agreements to resell 13,633 10,674
Securities borrowed 85,858 278,199
Receivables:
Customers 3,935,539 3,777,352
Brokers, dealers and clearing organizations 16,970 22,529
Fees, dividends and interest 85,052 62,989
Securities inventory, at fair value:
State and municipal 262,696 240,154
Government and agencies 56,433 57,943
Corporate 78,629 110,311
Investments 198,835 116,307
Property and equipment, at cost, net of accumulated depreciation
and amortization of $325,945 and $337,602 428,017 312,942
Deferred income taxes 53,743 75,361
Other assets 45,668 41,488
$5,447,031 $5,347,587
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans $ 414,100 $ 638,000
Checks payable 225,171 283,602
Securities loaned 1,409,055 637,684
Payables:
Customers 867,434 946,373
Brokers, dealers and clearing organizations 109,316 203,129
Securities sold but not yet purchased, at fair value 37,428 24,920
Employee compensation and related taxes 618,034 740,188
Income taxes 51,207 73,557
Other liabilities 91,171 83,012
Total Liabilities 3,822,916 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 262,728 253,917
Retained earnings 1,798,343 1,645,332
2,157,534 1,995,712
Less - Treasury stock, at cost (15,621,508 and 9,254,005 shares) 533,419 278,590
Total Stockholders' Equity 1,624,115 1,717,122
$5,447,031 $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 Six Months Ended
August 31, August 31,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES:
Commissions $325,134 $311,249 $ 736,412 $ 662,500
Principal transactions 74,226 72,440 153,743 130,303
Investment banking 41,410 57,063 96,596 116,087
Asset management and service fees 162,409 133,464 323,404 261,339
Interest 96,505 57,780 189,476 111,090
Other 10,250 4,106 20,721 5,919
709,934 636,102 1,520,352 1,287,238
EXPENSES:
Compensation and benefits 437,343 407,001 941,134 822,865
Occupancy and equipment 50,845 33,879 91,001 65,740
Communications 34,124 26,527 67,543 53,857
Floor brokerage and clearance 5,488 5,210 11,770 10,711
Interest 29,818 5,743 53,677 8,180
Other 29,578 24,981 61,764 56,251
587,196 503,341 1,226,889 1,017,604
EARNINGS BEFORE INCOME TAXES 122,738 132,761 293,463 269,634
INCOME TAXES 45,700 50,450 109,140 102,780
NET EARNINGS $ 77,038 $ 82,311 $ 184,323 $ 166,854
Earnings per share:
Diluted $ .93 $ .86 $ 2.17 $ 1.74
Basic $ .95 $ .88 $ 2.21 $ 1.77
Dividends per share $ .16 $ .15 $ .32 $ .30
Average common and common equivalent
shares outstanding (in thousands):
Diluted 83,608 95,245 84,948 95,690
Basic 81,704 93,515 83,287 94,085
<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)
Six Months Ended August 31,
<S> 2000 1999
Cash Flows from Operating Activities: <C> <C>
Net earnings $ 184,323 $ 166,854
Noncash and nonoperating items included in earnings 73,703 48,424
Change in:
Segregated cash and government securities 3,161 (1,267)
Net securities borrowed and loaned 29,601 9
Net receivable from customers (237,126) 73,058
Net payable to brokers, dealers
and clearing organizations (88,254) (588,964)
Fees, dividends and interest receivable (22,063) (25,435)
Net securities inventory 23,158 (146,578)
Other assets and liabilities (217,752) (44,901)
Net cash from operating activities (251,249) (518,800)
Cash Flows from Investing Activities:
Securities purchased under agreements to resell (2,959) 7,774
Purchase of property and equipment (157,516) (40,771)
Investments (73,721) (10,463)
Net cash from investing activities (234,196) (43,460)
Cash Flows from Financing Activities:
Bank loans (223,900) 535,000
Securities loaned 934,111 156,950
Employee stock transactions 16,973 15,513
Cash dividends paid (27,202) (28,232)
Purchase of treasury stock (266,756) (76,982)
Net cash from financing activities 433,226 602,249
Net change in Cash and Cash Equivalents (52,219) 39,989
Cash and Cash Equivalents, Beginning of Period 154,487 99,499
Cash and Cash Equivalents, End of Period $ 102,268 $ 139,488
Income tax payments totaled $101,820 and $54,657 during the six month periods
ended August 31, 2000, and 1999, respectively.
Interest payments totaled $47,704 and $6,229 during the six month periods ended
August 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
SIX MONTHS ENDED AUGUST 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 six
months ended August 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 period
presentation.
STOCKHOLDERS' EQUITY:
Under the stock repurchase program, the Company purchased 6,809,500 shares at an
aggregate cost of $266,756 during the six month period ended August 31, 2000.
For the six month period ended August 31, 1999, the Company purchased 2,483,700
shares at an aggregate cost of $76,982.
Comprehensive earnings for the six month periods ended August 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 August 31, 2000, Edwards' net capital of $904,053
was $823,142 in excess of the minimum requirement.
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<CAPTION>
A.G. EDWARDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED AUGUST 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 Six Months Ended
August 31, August 31,
2000 1999 2000 1999
<S>
Net earnings available to <C> <C> <C> <C>
common stockholders $77,038 $82,311 $184,323 $166,854
Shares (in thousands):
Weighted average shares outstanding 81,704 93,515 83,287 94,085
Dilutive effect of employee stock plans 1,904 1,730 1,661 1,605
Total weighted average diluted shares 83,608 95,245 84,948 95,690
Diluted earnings per share $ 0.93 $ 0.86 $ 2.17 $ 1.74
Basic earnings per share $ 0.95 $ 0.88 $ 2.21 $ 1.77
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 680 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:
Three Months Ended Six Months Ended
August 31, August 31,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Transaction services $448,461 $448,091 $1,004,854 $ 924,798
Asset management services 142,043 116,874 278,951 227,215
Interest 96,505 57,780 189,476 111,090
Other 22,925 13,357 47,071 24,135
$709,934 $636,102 $1,520,352 $1,287,238
-5-
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A.G. EDWARDS, INC. AND SUBSIDIARIES
MANAGEMENT'S FINANCIAL DISCUSSION
SIX MONTHS ENDED AUGUST 31, 2000 COMPARED TO
SIX MONTHS ENDED AUGUST 31, 1999
Results of Operations
The six months ended August 31, 2000 produced strong revenue gains in nearly
every category in spite of some volatility in the equity and debt markets this
year. This volatility may have been 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". In addition, the
high price of oil, the federal budget surplus and the U.S. Treasury Department's
buyback program all contributed to investors' uncertainty and the resulting
volatility in the markets. The Dow Jones Industrial Average began the period at
10,128 and ended the period at 11,215 for an increase of 10.7 percent, despite
the volatility during the period as the Dow was as low as 9,796 and as high as
11,287. The Nasdaq Composite Index began the period at 4,697 and ended the
period at 4,206 for a decline of 10.5 percent. However, at one point the
decline was 32.6 percent as the index closed at 3,165 on May 23, 2000.
Investors did not allow the markets' volatility to keep them on the sidelines as
trading volumes increased 27% and 59% over the prior year on the New York Stock
Exchange and Nasdaq, respectively. For the Company, total customer trades
increased 30% while the number of branches and financial consultants increased
to 685 and 6,858, which represent increases of 5% and 3%, respectively, compared
to last year.
Total revenues increased $233 million (18%) to $1.5 billion from $1.3 billion
last year. Expenses were $1.2 billion, an increase of $209 million (21%),
resulting in a decrease in net profit margins to 12.1% this year from 13.0% last
year.
Total commission revenue increased $74 million (11%) reflecting increased
trading volume and, to a lesser extent, continued expansion of the Company's
distribution system. Equity related commissions rose $45 million (11%), mutual
fund commissions rose $20 million (13%) and insurance commissions rose $9
million (11%). Client demand for equities, equity related mutual funds and
variable annuities remained strong due to the combination of a robust economic
environment and low inflation.
Principal transaction revenue increased $23 million (18%) primarily as a result
of a $31 million (91%) 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, larger-capitalized securities than
in the prior year. Revenue from sales of debt products declined $8 million
(8%), as bond investors were hesitant to enter the markets due to uncertainty
caused by federal and state budget surpluses, the U.S. Treasury Department's
buyback program and the Federal Reserve's stance on interest rates.
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Investment banking revenue decreased $19 million (17%). Revenue from
underwriting corporate stocks decreased $15 million (45%) following an industry-
wide decrease in domestic IPO activities this year. Management fees declined
$8 million (36%) primarily due to a decline in the number of corporate offerings
managed or co-managed this year. Revenue from underwriting debt products
declined $8 million (27%). 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 revenue increased $11
million (32%) due to strong investor demand for equity-based unit trusts.
Asset management and service fees increased $62 million (24%). Fees from third-
party mutual funds and annuities rose $22 million (14%) 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 $30 million
(43%). The average number of fee-based accounts increased 56%, while the
average total assets in these programs increased 49%.
Interest revenue increased $78 million (71%). Interest revenue from margin
accounts rose $74 million (74%) due to a 47% increase in average margin balances
coupled with a rise in the average broker call rate. Interest revenues from
securities owned increased $4 million (49%) as a result of higher average
inventory levels.
Other revenue increased $15 million (250%) 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 $118 million (14%). Commission expense
increased $54 million (13%) due to the rise in commissionable revenue. General
and administrative salaries increased $39 million (26%), incentive-related
compensation rose $17 million (11%) and related benefits increased $8 million
(9%) primarily as a result of general increases, higher employment and higher
Company earnings.
Occupancy and equipment expense and communication expense increased $39 million
(33%) as a result of technology-related expenditures, increased business volume
and branch and home office expansion.
All remaining expenses increased $52 million (69%) primarily due to a $45
million (556%) increase in interest expense. The increase in interest expense
is due to increases in securities lending and bank loans used to finance the
increase in margin balances, capital expenditures and stock repurchases.
-7-
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THREE MONTHS ENDED AUGUST 31, 2000 COMPARED TO
THREE MONTHS ENDED AUGUST 31, 1999
Net earnings for the quarter ended August 31, 2000 were $77 million on revenues
of $710 million compared to net earnings of $82 million on revenues of $636
million for the same period a year ago. The explanation of revenue and expense
fluctuations presented for the six-month period are generally applicable to the
three months of operations. The increase in revenues was outpaced by a rise in
expenses primarily due to higher employment, technology-related expenditures and
branch and home office expansion.
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 for the six-month period ended
August 31, 2000. This increase was financed primarily with 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.
During the first six months, the Company purchased 6.8 million shares under its
stock repurchase program. The cost of these repurchased shares was $267
million. A total of 29.2 million shares have been repurchased since this
program began in May 1996.
The principle sources of financing the Company's business are stockholder's
equity, cash generated from operations, short-term bank loans 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.
RISK MANAGEMENT
No material changes have occurred to the Company's policies, procedures and
controls for 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 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
August 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: October 16, 2000 /s/Benjamin F. Edwards, III
BENJAMIN F. EDWARDS, III
Principal Executive Officer
Date: October 16, 2000 /s/Robert L. Proost
ROBERT L. PROOST
Principal Financial Officer
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