-----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, PM5IA9S6f6Vq4Yby5aYGAtTj14rgrhTixc+Azj+WsYagU3VkBFhxX8See6njMAOD Lfn/+8aFq0IYM1lx+k+y7w== 0000718482-99-000002.txt : 19990115 0000718482-99-000002.hdr.sgml : 19990115 ACCESSION NUMBER: 0000718482-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990114 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: 99506589 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 November 30, 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 December 31, 1998, there were 94,810,664 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 6-9 PART II. OTHER INFORMATION 9 SIGNATURES 10
A.G. EDWARDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) (Unaudited) November 30, February 28, 1998 1998 ASSETS Cash and cash equivalents $ 96,029 $ 84,764 Cash and government securities, segregated under federal and other regulations 310,283 57,294 Securities purchased under agreements to resell 220,000 204,363 Securities borrowed 253,649 786,119 Receivables: Customers, less allowance for doubtful accounts of $3,870 and $3,800 2,225,213 2,229,128 Brokers, dealers and clearing organizations 15,135 12,521 Securities inventory, at fair value: State and municipal 166,156 142,692 Government and agencies 32,581 209,247 Corporate 60,788 51,714 Property and equipment, at cost, net of accumulated depreciation and amortization of $263,650 and $229,938 235,462 230,158 Deferred income taxes 70,234 70,432 Other assets 134,577 114,896 $3,820,107 $4,193,328 LIABILITIES AND STOCKHOLDERS' EQUITY Checks payable $ 166,623 $ 203,017 Securities loaned 280,779 820,918 Payables: Customers 580,316 920,791 Brokers, dealers and clearing organizations 624,355 185,756 Securities sold but not yet purchased, at fair value 29,937 19,141 Employee compensation and related taxes 490,565 505,731 Income taxes 9,625 17,137 Other liabilities 57,950 57,716 Total Liabilities 2,240,150 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 150,702 181,826 Retained earnings 1,372,916 1,196,568 1,620,081 1,474,857 Less - Treasury stock, at cost (1,298,335 and 284,173 shares) 40,124 11,736 Total Stockholders' Equity 1,579,957 1,463,121 $3,820,107 $4,193,328 See Notes to Consolidated Financial Statements.
-1-
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, 1998 1997 1998 1997 REVENUES: Commissions $266,697 $294,399 $ 869,747 $ 822,113 Principal transactions 51,302 52,367 151,547 159,805 Investment banking 54,369 49,806 169,675 128,686 Asset management and service fees 99,750 82,729 294,823 228,779 Interest 49,269 45,978 151,696 130,335 Other 2,907 2,064 8,191 6,805 524,294 527,343 1,645,679 1,476,523 EXPENSES: Compensation and benefits 329,013 334,752 1,047,405 944,620 Communications 26,788 24,563 78,361 72,555 Occupancy and equipment 29,809 24,535 86,326 70,651 Floor brokerage and clearance 5,608 5,143 15,630 14,988 Interest 1,547 4,659 442 Other 21,990 20,319 63,076 53,620 414,755 409,312 1,295,457 1,156,876 EARNINGS BEFORE INCOME TAXES 109,539 118,031 350,222 319,647 INCOME TAXES 41,570 45,640 133,990 123,470 NET EARNINGS $ 67,969 $ 72,391 $ 216,232 $ 196,177 Earnings per share: Basic $ 0.72 $ 0.76 $ 2.27 $ 2.05 Diluted $ 0.70 $ 0.73 $ 2.22 $ 2.00 Dividends per share $ 0.14 $ 0.13 $ 0.42 $ 0.38 Average common shares outstanding (basic) 95,148 95,951 95,345 95,889 (000's omitted) Average common and common equivalent shares outstanding (diluted) 97,070 98,327 97,459 97,943 (000's omitted) See Notes to Consolidated Financial Statements.
-2-
A.G. EDWARDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended November 30, 1998 1997 Cash Flows from Operating Activities: Net earnings $ 216,232 $ 196,177 Noncash items included in earnings 57,474 47,381 Change in: Segregated cash and government securities (252,989) 339,273 Net securities borrowed and loaned (7,669) 3,305 Net payable to brokers, dealers and clearing organizations 435,985 12,043 Net receivable from customers (336,560) (622,788) Net securities inventory 154,924 (14,494) Other assets and liabilities (83,032) 5,350 Net cash from operating activities 184,365 (33,753) Cash Flows from Investing Activities: Securities purchased under agreements to resell (15,637) 128,274 Capital expenditures and other investments (59,799) (48,720) Net cash from investing activities (75,436) 79,554 Cash Flows from Financing Activities: Employee stock transactions 73,362 56,124 Cash dividends paid (39,008) (36,456) Purchase of treasury stock (132,018) (71,153) Net cash from financing activities (97,664) (51,485) Net change in Cash and Cash Equivalents 11,265 (5,684) Cash and Cash Equivalents at March 1 84,764 62,799 Cash and Cash Equivalents at November 30 $ 96,029 $ 57,115 Income tax payments totaled $123,708 and $119,100 during the nine month periods ended November 30, 1998, and 1997, respectively. Interest payments totaled $4,609 and $1,751 during the nine month periods ended November 30, 1998, and 1997, respectively. See Notes to Consolidated Financial Statements.
-3- A.G. EDWARDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED NOVEMBER 30, 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 on Form 10-K for the year ended February 28, 1998 and the Company's Quarterly Reports on Form 10-Q for the quarters ended May 31, 1998 and August 31, 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 nine months ended November 30, 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: Options to purchase 1,875,000 shares of common stock granted under the Employee Stock Purchase Plan are exercisable October 1, 1999, at 85% of market price based on dates specified in the plan. Employees purchased 1,872,249 shares at $25.29 per share in October 1998. Treasury shares were utilized for these transactions. Under the stock repurchase program, the Company purchased 3,482,000 shares at an aggregate cost of $132,000 during the nine month period ended November 30, 1998. For the nine month period ended November 30, 1997, the Company purchased 2,538,000 shares at a cost of $71,000. 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 November 30, 1998, Edwards' net capital of $1,082,322 was $1,036,932 in excess of the minimum required. -4-
A.G. EDWARDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED NOVEMBER 30, 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. Three Months Ended Nine Months Ended November 30, November 30, 1998 1997 1998 1997 Net earnings available to common stockholders $ 67,969 $ 72,391 $ 216,232 $ 196,177 (shares in thousands) Weighted average basic shares outstanding 95,148 95,951 95,345 95,889 Dilutive effect of employee stock plans 1,922 2,376 2,114 2,054 Total weighted average diluted shares 97,070 98,327 97,459 97,943 Basic earnings per share $ 0.72 $ 0.76 $ 2.27 $ 2.05 Diluted earnings per share $ 0.70 $ 0.73 $ 2.22 $ 2.00 * * * * * -5- A.G. EDWARDS, INC. AND SUBSIDIARIES MANAGEMENT'S FINANCIAL DISCUSSION NINE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED NOVEMBER 30, 1997 Results of Operations The nine months ended November 30, 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 1998. The equity markets subsequently rebounded as the Dow Jones Industrial Average rose 21% and the Nasdaq average increased 30% in the last three months of the period. The New York Stock Exchange and Nasdaq overall trading volumes increased 29% and 22%, respectively, over the prior year while total customer trades for the Company increased 12%. 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 624 and 6,432, which represent increases of 6% and 4%, respectively, compared with the same period last year. Total revenues increased $169 million (11%) to $1.65 billion from $1.48 billion last year. Expenses were $1.3 billion, an increase of $139 million (12%), resulting in a slight decline in net profit margins to 13.1% this year from 13.3% last year. Total commission revenue increased $48 million (6%), reflecting increased trading volume and, to a lesser extent, expansion of the Company's distribution system. Listed commissions rose $22 million (6%) while mutual fund and insurance sales increased $25 million (13%) and $13 million (13%), respectively. Client demand for listed equity securities, mutual funds and variable annuities remained high due to the continuation of the relatively strong equity market conditions and increased volatility during the first nine months of this fiscal year. As an offset, over-the-counter commissions decreased $12 million (8%). The downturn in the equity markets in August of this year accelerated a trend by our clients away from smaller over-the-counter stocks in favor of less volatile, more conservative issues. Principal transaction revenue decreased $8 million (5%). Revenue from government bonds declined $7 million (19%) primarily as a result of lower yields this year. Investment banking revenue increased $41 million (32%). Underwriting fees and concessions rose $19 million (18%) due to the continued strength in initial public offerings coupled with an increased customer demand for equity-based unit trusts. Management fees increased $22 million (92%) due to participation as manager or co-manager in a larger number of corporate offerings coupled with increases in merger and acquisition activity this year. Asset management and service fees increased $66 million (29%). Fees from third- party mutual funds rose $34 million (24%) 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 $32 million (64%) as a result of the growth in number of client accounts and higher market valuations of existing assets. -6- Interest revenue increased $21 million (16%). Interest revenue from customer margin accounts rose $23 million (21%) due to a 22% increase in average margin receivable. Interest revenues from securities owned increased $6 million (63%) as a result of higher average inventory. As a partial offset, a 51% reduction in short-term investments resulted in a $7 million (50%) decrease in interest earned. Compensation and benefits increased $103 million (11%). Commission expense increased $42 million (8%) due to the rise in commissionable revenue. General and administrative salaries and employee benefits increased $35 million (13%) primarily as a result of general increases and higher employment. Incentive- related compensation rose $26 million (14%) primarily as a result of higher earnings. Occupancy and equipment expenses increased $16 million (22%) as a result of branch and home office expansion. THREE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED NOVEMBER 30, 1997 Net earnings for the quarter ended November 30, 1998 were $68 million on revenues of $524 million compared to net earnings of $72 million on revenues of $527 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 with the exception of the following items: Total commission revenue decreased $28 million (9%) due to declines in mutual fund and over-the-counter revenues of $13 million (20%) and $12 million (22%), respectively. In spite of the increase in the Nasdaq trading volume, many retail investors were tentative following the downturn in the equity markets in August of this year and redirected their attention toward investment alternatives with less market risk. Compensation and benefits decreased $6 million (2%). Commission expense decreased $14 million (8%) due to the decline in commissionable revenue which also caused a $1 million (1%) decrease in incentive-related compensation. These were partially offset by the $9 million (10%) rise in general and administrative salaries and employee benefits as a result of general increases and higher employment. LIQUIDITY AND CAPITAL RESOURCES No material changes have taken place since August 31, 1998 regarding the Company's liquidity, capital resources and overall financial condition. -7- 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 arises 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 1999, causing system failures or miscalculations. The Company, along with the entire financial services 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 the Year 2000 issues are proceeding according to plan. Mission critical systems have been assessed, modified and tested. Non-critical systems and non- information technology systems have been assessed, with modifications and testing expected to be complete in March 1999. In July 1998, the Company participated in the Security 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 in 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 1999, as management considers appropriate. Management estimates the total cost of the Company's Year 2000 efforts to be less than $15 million. Most of these costs have already been incurred and expensed. 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 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 -8- Quarterly Report on Form 10-Q. The Company does not undertake any obligation to publicly update any forward-looking statements. 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 November 30, 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: January 14, 1999 /s/ Benjamin F. Edwards III BENJAMIN F. EDWARDS, III Principal Executive Officer Date: January 14, 1999 /s/ Robert L. Proost ROBERT L. PROOST Principal Financial Officer
EX-27 2 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
BD 1000 9-MOS FEB-28-1999 NOV-30-1998 96,029 2,240,348 220,000 253,649 259,525 235,462 3,820,107 0 1,861,859 0 280,779 29,937 0 0 0 96,463 1,483,494 3,820,107 151,547 151,696 869,747 169,675 255,750 4,659 1,047,405 350,222 350,222 0 0 216,232 2.27 2.22
-----END PRIVACY-ENHANCED MESSAGE-----