UNITED STATES
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, 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 December 31, 2000, there were 80,318,765 shares of A.G. Edwards, Inc. common
stock, par value $1, issued and outstanding.
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A.G. EDWARDS, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Consolidated balance sheets 1
Consolidated statements of earnings 2
Consolidated statements of cash flows 3
Notes to consolidated financial statements 4-6
Management's financial discussion 7-10
PART II.OTHER INFORMATION 11
SIGNATURES 12
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<CAPTION>
A.G. EDWARDS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
November 30, February 29,
2000 2000
<S>
ASSETS
<C> <C>
Cash and cash equivalents $ 109,411 $ 154,487
Cash and government securities, segregated under
federal and other regulations 81,876 86,851
Securities purchased under agreements to resell 12,614 10,674
Securities borrowed 143,635 278,199
Receivables:
Customers 3,874,495 3,777,352
Brokers, dealers and clearing organizations 14,474 22,529
Fees, dividends and interest 65,713 62,989
Securities inventory, at fair value:
State and municipal 200,965 240,154
Government and agencies 64,517 57,943
Corporate 54,590 110,311
Investments 201,448 116,307
Property and equipment, at cost, net of accumulated depreciation
and amortization of $347,537 and $337,602 482,713 312,942
Deferred income taxes 75,610 75,361
Other assets 60,091 41,488
$5,442,152 $5,347,587
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 423,500 $ 638,000
Checks payable 175,565 283,602
Securities loaned 1,329,199 637,684
Payables:
Customers 914,015 946,373
Brokers, dealers and clearing organizations 139,858 203,129
Securities sold but not yet purchased, at fair value 22,451 24,920
Employee compensation and related taxes 613,954 740,188
Income taxes 52,068 73,557
Other liabilities 112,920 83,012
Total Liabilities 3,783,530 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 266,609 253,917
Retained earnings 1,852,618 1,645,332
2,215,690 1,995,712
Less - Treasury stock, at cost (15,262,403 and 9,254,005 shares) 557,068 278,590
Total Stockholders' Equity 1,658,622 1,717,122
$5,442,152 $5,347,587
<FN>
See Notes to Consolidated Financial Statements.
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A.G. EDWARDS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES:
Commissions $ 299,632 $ 312,914 $1,036,044 $ 975,414
Principal transactions 60,914 72,817 214,657 203,120
Investment banking 36,333 53,568 132,929 169,655
Asset management and service fees 166,257 132,095 489,661 393,434
Interest 93,652 63,015 283,128 174,105
Other 5,285 80,228 26,006 86,147
662,073 714,637 2,182,425 2,001,875
EXPENSES:
Compensation and benefits 402,991 425,590 1,344,125 1,248,455
Occupancy and equipment 56,176 36,473 147,177 102,213
Communications 35,087 30,842 102,630 84,699
Floor brokerage and clearance 5,629 5,155 17,399 15,866
Interest 28,079 6,572 81,756 14,752
Other 44,223 25,873 105,987 82,124
572,185 530,505 1,799,074 1,548,109
EARNINGS BEFORE INCOME TAXES 89,888 184,132 383,351 453,766
INCOME TAXES 32,670 68,830 141,810 171,610
NET EARNINGS $ 57,218 $ 115,302 $ 241,541 $ 282,156
Earnings per share:
Diluted $ .69 $ 1.23 $ 2.86 $ 2.97
Basic $ .71 $ 1.25 $ 2.92 $ 3.02
Dividends per share $ .16 $ .15 $ .48 $ .45
Average common and common equivalent
shares outstanding (in thousands):
Diluted 83,731 93,847 84,542 95,075
Basic 81,633 92,040 82,736 93,403
<FN>
See Notes to Consolidated Financial Statements.
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A.G. EDWARDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended November 30,
2000 1999
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 241,541 $ 282,156
Noncash and nonoperating items included in earnings 81,476 9,547
Change in:
Segregated cash and government securities 4,975 (8,920)
Net securities borrowed and loaned (27,285) 20,084
Net receivable from customers (129,501) (707,995)
Net payable to brokers, dealers
and clearing organizations (55,216) 90,629
Fees, dividends and interest receivable (2,724) (8,156)
Net securities inventory 85,867 (95,976)
Other assets and liabilities (269,386) 18,537
Net cash from operating activities (70,253) (400,094)
Cash Flows from Investing Activities:
Securities purchased under agreements to resell (1,940) 11,864
Purchase of property and equipment (237,783) (71,296)
Investments (74,946) (8,113)
Net cash from investing activities (314,669) (67,545)
Cash Flows from Financing Activities:
Short-term borrowings (214,500) 566,900
Securities loaned 853,364 86,377
Employee stock transactions 82,624 58,321
Cash dividends paid (40,137) (42,134)
Purchase of treasury stock (341,505) (184,430)
Net cash from financing activities 339,846 485,034
Net change in Cash and Cash Equivalents (45,076) 17,395
Cash and Cash Equivalents, Beginning of Period 154,487 99,499
Cash and Cash Equivalents, End of Period $ 109,411 $ 116,894
Income tax payments totaled $151,503 and $122,507 during the nine month periods
ended November 30, 2000, and 1999, respectively.
Interest payments totaled $77,111 and $13,429 during the nine month periods
ended November 30, 2000, and 1999, respectively.
<FN>
See Notes to Consolidated Financial Statements.
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A.G. EDWARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 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
consolidated 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 consolidated financial statements. The
results of operations for the nine months ended November 30, 2000, are not
necessarily indicative of the results for the year ending February 28, 2001.
Where appropriate, prior period's financial information has been reclassified to
conform with the current period presentation.
EMPLOYEE STOCK PLANS:
Options to purchase 1,875,000 shares of common stock granted under the Employee
Stock Purchase Plan are exercisable October 1, 2001, at 85% of market price
based on dates specified in the plan. Employees purchased 1,870,983 shares at
$32.33 per share in October 2000. Treasury shares were utilized for these
transactions.
STOCKHOLDERS' EQUITY:
Under its stock repurchase program, the Company purchased 8,384,200 shares at an
aggregate cost of $341,505 during the nine month period ended November 30, 2000.
For the nine month period ended November 30, 1999, the Company purchased
6,191,700 shares at an aggregate cost of $184,430.
On December 15, 2000, the Company amended its Shareholders' Rights Plan, among
other things, to eliminate the requirement that certain Board actions, including
redemption of the rights, be taken only by certain directors; to increase each
right's exercise price per share of common stock from $90 to $150; to eliminate
the ability of the stockholders under certain circumstances to cause the
redemption of the rights, and to permit the Board of Directors to reduce the
percentage of outstanding shares which, if acquired, would cause the issuance of
the rights from the current 20% to not less than 10%.
Comprehensive earnings for the nine month periods ended November 30, 2000 and
1999 were equal to the Company's net earnings.
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<CAPTION>
A.G. EDWARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 2000
(Dollars in thousands, except per share amounts)
(Unaudited)
The following table presents the computations of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
November 30, November 30,
2000 1999 2000 1999
<S>
Net earnings available to
common stockholders $ 57,218 $115,302 $241,541 $ 282,156
Shares (in thousands):
Weighted average shares outstanding 81,633 92,040 82,736 93,403
Dilutive effect of employee stock plans 2,098 1,807 1,806 1,672
Total weighted average diluted shares 83,731 93,847 84,542 95,075
Diluted earnings per share $ 0.69 $ 1.23 $ 2.86 $ 2.97
Basic earnings per share $ 0.71 $ 1.25 $ 2.92 $ 3.02
INVESTMENTS:
In November 1999, the Company recognized a gain of $75,236 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. The
effect of this gain on last year's nine month results was 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. As of November 30, 2000, Edwards' net capital of
$824,834 was $748,066 in excess of the minimum requirement.
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<CAPTION>
A.G. EDWARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 2000
(Dollars in thousands, except per share amounts)
(Unaudited)
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 692 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 Nine Months Ended
November 30, November 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Transaction services $ 404,310 $447,183 $1,409,164 $1,371,981
Asset management services 146,986 114,266 425,937 341,481
Interest 93,652 63,015 283,128 174,105
Other 17,125 90,173 64,196 114,308
$ 662,073 $714,637 $2,182,425 $2,001,875
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A.G. EDWARDS, INC.
MANAGEMENT'S FINANCIAL DISCUSSION
NINE MONTHS ENDED NOVEMBER 30, 2000 COMPARED TO
NINE MONTHS ENDED NOVEMBER 30, 1999
General Business Environment
Retail investors endured heavy volatility in the trading markets during the nine
months ended November 30, 2000. The Dow Jones Industrial Average (the Dow)
began this period at 10,128 and ended at 10,414 for an increase of 3%. However,
during the period the Dow closed as high as 11,311 and as low as 9,796. The
Nasdaq Composite Index began the period at 4,697 and ended at 2,598 for a
decline of 45%. While this decline was precipitous, a closer inspection reveals
a decline of 28% for the three months ended May 31, 2000, followed by an
increase of 24% for the three months ended August 31, 2000, and finally a
decrease of 38% for the three months ended November 30, 2000. Many factors
contributed to this volatility including the lofty valuations of many "new
economy stocks", uncertainty over the direction of interest rates, inflation
concerns fueled by the high price of oil and delay over the outcome of the
Presidential election. Investor activity overall was not slowed by the
volatility as The New York Stock Exchange and Nasdaq overall trading volumes
increased 26% and 58%, respectively, over the same period last year. However,
trading volumes did decline late in the period due to uncertainties in the
market. For the Company, trades in commission-based accounts increased 12%,
while total trades, including trades in fee-based accounts, increased 22%.
The number of branches increased 29 to 692 and the number of financial
consultants increased 241 to 6,957 since the end of the same period last year.
Results of Operations
Total revenues increased $181 million (9%) to $2.2 billion from $2.0 billion
last year. Expenses were $1.8 billion, an increase of $251 million (16%). Net
earnings fell 14% from the prior year and net profit margins declined to 11.1%
this year from 14.1% last year. The prior period's results include a $37.6
million realized gain from the disposition in November 1999 of one-half of an
investment in a privately held investment management company and a $37.6 million
unrealized gain from the recognition of the increased value of the remaining
investment. The total gain of $75.2 million, included in other revenue,
increased net earnings by $35.2 million. Excluding this one-time gain from the
prior period's results, total revenues increased $256 million (13%) and net
earnings decreased $5 million (2%). The increase in revenues was outpaced by a
rise in expenses primarily due to technology-related expenditures, higher
employment and branch and home office expansion.
Total commission revenue increased $61 million (6%) reflecting increased trading
volume and, to a lesser extent, continued expansion of the Company's
distribution system. Over-the-counter (OTC) equity commissions rose $41 million
(20%), mutual fund commissions rose $18 million (8%) and insurance commissions
rose $15 million (13%). As a partial offset, listed equity commissions fell $17
million (4%). Client demand for OTC equities, mutual funds and variable
annuities remained strong throughout most of the period.
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Principal transaction revenue increased $12 million (6%) primarily as a result
of a $32 million (55%) rise in revenue from sales of equity products reflecting
an increase in the number of OTC equity trades resulting from higher volume 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 $20 million
(14%) due to falling yields for much of this year compared to rising yields in
the prior year resulting in a decrease in investor demand for fixed income
products. In addition, many 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.
Investment banking revenue decreased $37 million (22%). Management fees
declined $12 million (37%) primarily due to a decline in the number of offerings
managed or co-managed this year. Revenue from underwriting debt products
declined $14 million (33%). New municipal bond issuance declined as strong
economic growth decreased state and local governments need to borrow. Revenue
from underwriting corporate stocks decreased $22 million (47%) following an
industry-wide decrease in domestic IPO activity this year. As a partial offset
to the above declines, corporate equity unit revenue increased $10 million (20%)
due to strong investor demand for equity-based unit trusts.
Asset management and service fees increased $96 million (25%). Fees from third-
party mutual funds and annuities rose $36 million (16%) reflecting strong cash
flows into funds and annuities. Fee-based revenue resulting from the
administration of client assets under third-party management and from the
Company's management services improved $48 million (44%). The average number of
fee-based accounts increased 26,000 (58%) while average total assets in these
programs increased $7 billion (47%).
Interest revenue increased $109 million (63%). Interest revenue from margin
accounts rose $103 million (65%) due to a 41% increase in average margin debits
coupled with a higher average broker call rate. Interest revenues from
securities owned increased $6 million (43%) as a result of higher average debt
inventory levels combined with higher average interest rates.
Compensation and benefits increased $96 million (8%). Commission expense
increased $46 million (7%) due to the rise in commissionable revenue. General
and administrative salaries increased $63 million (28%) and related benefits
increased $9 million (7%) primarily as a result of general increases and higher
employment. Incentive-related compensation fell $23 million (9%) as a result of
lower earnings.
Occupancy and equipment expense increased $45 million (44%) and communication
expense rose $18 million (21%) primarily due to a $36 million increase in
technology-related expenditures and, to a lesser extent, increased business
volume and branch and home office expansion.
All remaining expenses increased $92 million (82%) primarily due to a $67
million (454%) increase in interest expense resulting from increases in
securities lending and short-term borrowings used to finance the increase in
margin balances, capital expenditures and stock repurchases. The remaining
increase is primarily as a result of branch and home office expansion and
technology-related expenses.
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THREE MONTHS ENDED NOVEMBER 30, 2000 COMPARED TO
THREE MONTHS ENDED NOVEMBER 30, 1999
Net earnings for the quarter ended November 30, 2000 declined $58 million (50%)
to $57 million and revenues fell $53 million (7%) to $662 million compared to
net earnings of $115 million on revenues of $715 million for the same period a
year ago. Excluding the one-time gain from the prior year's three-month period,
total revenues increased $23 million (4%) and net earnings decreased $23 million
(29%) for the quarter ended November 30, 2000.
Total commission revenue declined $13 million (4%) primarily due to a $19
million (7%) decrease in equity related commissions and mutual fund commissions
reflecting lower trade volume in commission-based accounts partially offset by
a $6 million (16%) increase in insurance commissions reflecting increased sales
of variable annuities. Principal transaction revenue decreased $12 million
(16%) reflecting a decrease in investor demand for fixed income products as a
result of falling yields on debt products this period.
Compensation and benefits declined $23 million (5%) primarily due to a $39
million (42%) decrease in incentive-related compensation as a result of lower
earnings and a $9 million (4%) decrease in commission expense due to lower trade
volume partially offset by an increase in general and administrative salaries of
$24 million (30%) reflecting higher employment. For the remaining revenue and
expense categories, the explanation of fluctuations presented for the nine-month
period are generally applicable to the three months of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets fluctuate in the normal course of business, primarily
because of the timing of certain transactions. The principal sources for
financing the Company's business are stockholder's equity, cash generated from
operations, short-term borrowings and securities lending activities. The
Company believes it has adequate sources of credit available, if needed, to
finance client activities, branch and headquarters expansion, stock repurchases
and other capital expenditures.
Short-term borrowings consist of bank loans. The mix of bank loans and
securities lending arrangements fluctuates based on the interest rates available
on a day-to-day basis.
The Company is expanding its headquarters with an additional office building,
learning center and parking garage. The total cost of these projects is
estimated to be $215 million. The Company expended $31 million through November
30, 2000 in connection with these projects.
During the first nine months of the fiscal year, the Company purchased 8.4
million shares under its stock repurchase program. The cost of these
repurchased shares was $342 million. A total of 31 million shares have been
repurchased since this program began in May 1996.
RISK MANAGEMENT
No material changes have occurred related to the Company's policies, procedures,
controls or risk profile.
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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 2:Changes in Securities
On December 15, 2000, the Company amended its Shareholders' Rights Plan,
among other things, to eliminate the requirement that certain Board
actions, including redemption of the rights, be taken only by certain
directors; to increase each right's exercise price per share of common
stock from $90 to $150; to eliminate the ability of the stockholders
under certain circumstances to cause the redemption of the rights, and
to permit the Board of Directors to reduce the percentage of outstanding
shares which, if acquired, would cause the issuance of the rights from
the current 20% to not less than 10%.
Item 6:Exhibits and Reports on Form 8-K
Exhibit 4 Amendment No. 4 dated December 15, 2000, to the Rights
Agreement dated December 30, 1988 filed as Exhibit 4.5 to
Registrants Form 8-A/A on December 19, 2000.
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
On December 19, 2000, the Company filed Item 5 to Form 8-K related to
certain changes in its Shareholder's Rights Plan. A summary of which is
included under Item 2 of this Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
A.G. EDWARDS, INC.
(Registrant)
Date: January 16, 2001 \s\Benjamin F. Edwards, III
BENJAMIN F. EDWARDS, III
Principal Executive Officer
Date: January 16, 2001 \s\Robert L. Proost
ROBERT L. PROOST
Principal Financial Officer
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