-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TbCz0Nu5cImH/ciPtwU86QDmPiQHNLU6bozbiX80fXjIvpaLkzsAFV/JencTUwqN 5cVUrQyD1ra5lxoXqxmTSg== 0000718482-98-000013.txt : 19981016 0000718482-98-000013.hdr.sgml : 19981016 ACCESSION NUMBER: 0000718482-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981015 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDWARDS A G INC CENTRAL INDEX KEY: 0000718482 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 431288229 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08527 FILM NUMBER: 98726420 BUSINESS ADDRESS: STREET 1: ONE N JEFFERSON AVE CITY: ST LOUIS STATE: MO ZIP: 63103 BUSINESS PHONE: 3142893000 10-Q 1 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, 1998 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 30, 1998, there were 94,147,192 shares of A.G. Edwards, Inc. common stock, par value $1, issued and outstanding. 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
A.G. EDWARDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) (Unaudited) August 31, February 28, 1998 1998 ASSETS Cash and cash equivalents $ 106,647 $ 84,764 Cash and government securities, segregated under federal and other regulations 61,777 57,294 Securities purchased under agreements to resell 180,000 204,363 Securities borrowed 145,788 786,119 Receivables: Customers, less allowance for doubtful accounts of $3,870 and $3,800 2,353,844 2,229,128 Brokers, dealers and clearing organizations 9,821 12,521 Securities inventory, at fair value: State and municipal 106,582 142,692 Government and agencies 48,682 209,247 Corporate 59,064 51,714 Property and equipment, at cost, net of accumulated depreciation and amortization of $252,093 and $229,938 232,437 230,158 Deferred income taxes 68,834 70,432 Other assets 132,345 114,896 $ 3,505,821 $ 4,193,328 LIABILITIES AND STOCKHOLDERS' EQUITY Checks payable $ 136,224 $ 203,017 Securities loaned 186,593 820,918 Payables: Customers 512,571 920,791 Brokers, dealers and clearing organizations 590,574 185,756 Securities sold but not yet purchased, at fair value 24,039 19,141 Employee compensation and related taxes 457,236 505,731 Income taxes 18,747 17,137 Other liabilities 63,331 57,716 Total Liabilities 1,989,315 2,730,207 Stockholders' Equity: Preferred stock, $25 par value: Authorized, 4,000,000 shares, none issued Common stock, $1 par value: Authorized, 550,000,000 and 250,000,000 shares Issued, 96,463,114 shares 96,463 96,463 Additional paid-in capital 184,797 181,826 Retained earnings 1,318,270 1,196,568 1,599,530 1,474,857 Less - Treasury stock, at cost (1,983,109 and 284,173 shares) 83,024 11,736 Total Stockholders' Equity 1,516,506 1,463,121 $ 3,505,821 $ 4,193,328 See Notes to Consolidated Financial Statements.
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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, 1998 1997 1998 1997 REVENUES: Commissions $ 294,916 $ 293,005 $ 607,219 $ 530,638 Principal transactions 48,242 52,836 100,245 107,438 Investment banking 55,986 42,252 115,306 78,880 Asset management and service fees 97,545 75,477 190,904 143,126 Interest 51,640 43,514 102,427 84,357 Other 2,867 2,748 5,284 4,741 551,196 509,832 1,121,385 949,180 EXPENSES: Compensation and benefits 352,546 326,412 718,392 609,868 Communications 25,670 24,529 51,573 47,992 Occupancy and equipment 29,811 23,487 56,517 46,116 Floor brokerage and clearance 4,928 5,309 10,022 9,845 Interest 1,688 3,112 546 Other 19,766 17,350 41,086 33,197 434,409 397,087 880,702 747,564 EARNINGS BEFORE INCOME TAXES 116,787 112,745 240,683 201,616 INCOME TAXES 44,530 43,500 92,420 77,830 NET EARNINGS $ 72,257 $ 69,245 $ 148,263 $ 123,786 Earnings per share: Basic $ 0.76 $ 0.72 $ 1.55 $ 1.29 Diluted $ 0.74 $ 0.71 $ 1.52 $ 1.27 Dividends per share $ 0.14 $ 0.13 $ 0.28 $ 0.25 Average common shares outstanding (basic) 95,004 95,504 95,444 95,858 (000's omitted) Average common and common equivalent shares outstanding (diluted) 97,232 97,628 97,654 97,751 (000's omitted) See Notes to Consolidated Financial Statements.
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A.G. EDWARDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended August 31, 1998 1997 Cash Flows from Operating Activities: Net earnings $ 148,263 $ 123,786 Noncash items included in earnings 37,866 30,049 Change in: Segregated cash and government securities (4,483) 243,238 Net securities borrowed and loaned 6,006 (31,596) Net payable to brokers, dealers and clearing organizations 407,518 (12,550) Net receivable from customers (532,936) (216,180) Net securities inventory 194,223 12,984 Other assets and liabilities (133,721) (55,530) Net cash provided by operating activities 122,736 94,201 Cash Flows from Investing Activities: Securities purchased under agreements to resell 24,363 (15,000) Capital expenditures and other investments (32,098) (32,953) Net cash used in investing activities (7,735) (47,953) Cash Flows from Financing Activities: Employee stock transactions 24,003 14,817 Cash dividends paid (25,785) (23,816) Purchase of treasury stock (91,336) (41,471) Net cash used in financing activities (93,118) (50,470) Net increase/(decrease) in Cash and Cash Equivalents 21,883 (4,222) Cash and Cash Equivalents at March 1 84,764 62,799 Cash and Cash Equivalents at August 31 $ 106,647 $ 58,577 Income tax payments totaled $71,616 and $60,336 during the six month periods ended August 31, 1998, and 1997, respectively. Interest payments totaled $2,748 and $1,353 during the six month periods ended August 31, 1998, and 1997, respectively. See Notes to Consolidated Financial Statements.
-3- A.G. EDWARDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED AUGUST 31, 1998 (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 have been prepared in conformity with generally accepted accounting principles. These financial statements should be read in conjunction with the Company's annual report for the year ended February 28, 1998. 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, 1998, are not necessarily indicative of the results for the year ending February 28, 1999. Where appropriate, prior year's financial information has been reclassified to conform with the current year presentation. The Company has no components of other comprehensive income. STOCKHOLDERS' EQUITY: Under the stock repurchase program, the Company purchased 2,164,000 shares at an aggregate cost of $91,000 during the six month period ended August 31, 1998. For the six month period ended August 31, 1997, the Company purchased 1,638,000 shares at a cost of $41,000. 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 August 31, 1998, Edwards' net capital of $1,060,188 was $1,014,422 in excess of the minimum required. -4-
A.G. EDWARDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED AUGUST 31, 1998 (Dollars in thousands, except per share amounts) (Unaudited) EARNINGS PER SHARE: The following table presents the computations of basic and diluted earnings per share. (shares in thousands) Three Months Ended Six Months Ended August 31, August 31, 1998 1997 1998 1997 Net earnings available to common stockholders $ 72,257 $ 69,245 $ 148,263 $ 123,786 Weighted average basic shares outstanding 95,004 95,504 95,444 95,858 Dilutive effect of employee stock plans 2,228 2,124 2,210 1,893 Total weighted average diluted shares 97,232 97,628 97,654 97,751 Basic earnings per share $ 0.76 $ 0.72 $ 1.55 $ 1.29 Diluted earnings per share $ 0.74 $ 0.71 $ 1.52 $ 1.27
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal periods beginning after June 15, 1999. The adoption of this statement is not expected to have a material effect on the Company's financial statements. * * * * * -5- A.G. EDWARDS, INC. AND SUBSIDIARIES MANAGEMENT'S FINANCIAL DISCUSSION RESULTS OF OPERATIONS Six Months Ended August 31, 1998 Compared to Six Months Ended August 31, 1997 The six months ended August 31, 1998 saw a continuation of the high level of retail investor activity that existed during the last three fiscal years in spite of the dramatic downturn in the equity markets in late August of this year. The New York Stock Exchange and Nasdaq overall trading volumes increased 25% and 24%, respectively, over the prior year, which contributed to a 16% increase in total customer trades for the Company. The number and size of customer trades and the product mix generally affect the level of revenues. The number of branches and brokers increased to 616 and 6,388, which represent increases of 6% and 4%, respectively, compared with the same period last year. Total revenues increased $172 million (18%) to $1.1 billion from $949 million last year. Expenses were $881 million, an increase of $133 million (18%), resulting in a rise in net profit margin to 13.2% this year from 13.0% last year. Total commission revenue increased $77 million (14%), reflecting increased trading volume and, to a lesser extent, expansion of the Company's distribution system. Listed commissions rose $24 million (11%) while mutual fund and insurance sales increased $39 million (32%) and $14 million (22%), respectively. Client demand for equities, mutual funds and variable annuities remained strong due to the continuation of the relatively strong equity market conditions and increased volatility during the first six months of this fiscal year. Principal transaction revenue decreased $7 million (7%). Sales revenue from government bonds declined $5 million (19%) primarily as a result of lower yields this year. Corporate equity revenue decreased $2 million (8%) primarily due to the recent downturn in the equity market. Investment banking revenue increased $36 million (46%). Underwriting fees and concessions rose $23 million (37%) due to the continued strength in initial public offerings during the period coupled with an increased customer demand for equity-based unit trusts. Management fees increased $13 million (85%) due to participation as manager or co-manager in a larger number of corporate offerings coupled with increased activity in mergers and acquisitions this year. Asset management and service fees increased $48 million (33%). Fees from third- party mutual funds rose $24 million (28%) reflecting the strong industry-wide cash inflows to funds. Fees from the administration of client assets under third-party management and from the Company's management services improved $23 million (76%) due to a higher level of assets under management. Interest revenue increased $18 million (21%). Interest revenue from margin accounts rose $19 million (28%) due to a 28% increase in average margin debits. Interest revenues from securities owned increased $5 million (77%) as a result of higher average inventory. As a partial offset, interest earned on short-term investments declined $6 million (58%). -6- The rise in expenses is primarily due to the increase in compensation and benefits of $109 million (18%). Commission expense increased $55 million (17%) due to the rise in commissionable revenue. General and administrative salaries and related benefits increased primarily as a result of general increases and higher employment. Incentive-related compensation rose primarily as a result of higher earnings. Occupancy and equipment expenses increased $10 million (23%) as a result of branch and home office expansion. Three Months Ended August 31, 1998 Compared to Three Months Ended August 31, 1997 Net earnings for the quarter ended August 31, 1998 were $72 million on revenues of $551 million compared to net earnings of $69 million on revenues of $510 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. LIQUIDITY AND CAPITAL RESOURCES The Company's assets fluctuate in the normal course of business, primarily because of the timing of certain transactions, which may result in corresponding changes in related liabilities. Securities-lending transactions and related securities-borrowed transactions have decreased significantly reflecting management's re-evaluation of the profitability associated with this activity. The Company plans to purchase additional land adjacent to its St. Louis headquarters with the intent to construct an additional office building and a training/conference center. As this project is in the early planning stage of development, the costs associated with it are not yet known. These projects are expected to be financed from operations. YEAR 2000 The "Year 2000" issue arises because many computer hardware and software systems, including the Company's, use only two digits to represent the year. As a result, these systems and programs may not accurately calculate dates beyond 1999, causing system failures or miscalculations. The Company, along with the entire financial services industry, is heavily reliant on computer technology. Therefore, 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 a significant number of third parties with which it does business concerning their Year 2000 progress, there can be no assurance that these parties have provided accurate and complete information concerning their Year 2000 efforts or that their remediation efforts will succeed, nor can there be assurance that third parties not contacted will not have problems and adversely affect the Company's operations. -7- With respect to its internal systems, the Company's efforts to remediate the Year 2000 issues are proceeding according to plan. At September 30, 1998, all mission critical systems have been assessed, modified and tested. Non-critical systems and non-information technology systems are expected to be modified by December 31, 1998, with testing to continue throughout 1999. In July 1998, the Company participated in the Securities Industry Association's ("SIA") Year 2000 Beta Tests. No material problems were identified by the Company or, according to the SIA, other test participants. Beginning March 1999, the Company plans to participate in an industry-wide testing program. In addition, the Company will point-to-point test with significant counterparties throughout the remainder of calendar 1998 and 1999, as management considers appropriate. Management estimates the total cost of the Company's Year 2000 efforts will be less than $15 million. Most of these costs have already been incurred and expensed. However, as to future estimates and assumptions, there can be no assurance that these cost estimates will be correct. Actual costs may differ materially from these estimates. The Company is in the process of incorporating various Year 2000 issues into its corporate contingency plans and expects a written plan to be completed by mid- year in calendar 1999. The plan will include steps to handle internal system processing problems that may occur after December 31, 1999. Consideration will be given to alternatives for mission critical third parties. However, management believes that the Company's 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 parties. 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, 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. STOCKHOLDER PROPOSALS: Any stockholder proposals to be presented at the 1999 annual meeting of stockholders to be held June 24, 1999, must be received by the Company no later than January 10, 1999, at its principal executive office at One North Jefferson Avenue, St. Louis, Missouri 63103 in order to be considered for inclusion in the Company's proxy statement and proxy relating to that meeting. Stockholders wishing to nominate one or more candidates for election to the Board of Directors, or propose any other business to be considered at the stockholder meeting, must comply with a Bylaw provision dealing with such matters. Pursuant to the Bylaw provision, any stockholder of the Company eligible to vote in an election of directors may nominate one or more candidates for election to the Board of Directors or propose business to be brought before the stockholder meeting, by giving written notice to the Company not less than 60 days, April 25, 1999, nor more than 90 days, March 26, 1999, prior to the date of the meeting. -8- 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, 1998. 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 August 31, 1998. -9- 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 14, 1998 /s/ Benjamin F. Edwards III BENJAMIN F. EDWARDS, III Principal Executive Officer Date: October 14, 1998 /s/ Robert L. Proost ROBERT L. PROOST Principal Financial Officer -10- EX-27 2
BD 1000 6-MOS FEB-28-1999 AUG-31-1998 106,647 2,363,665 180,000 145,788 214,328 232,437 3,505,821 0 1,696,605 0 186,593 24,039 0 0 0 96,463 1,420,043 3,505,821 100,245 102,427 607,219 115,306 164,510 3,112 718,392 240,683 240,683 0 0 148,263 1.55 1.52
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