EX-13 2 0002.txt THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF EARNINGS FOR THE FISCAL YEAR ENDED FEBRUARY 29, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. Management's Financial Discussion (Year references are to fiscal years ended February 29 (28) unless otherwise specified.) General Business Environment A.G. Edwards, Inc., is a holding company whose primary subsidiary is the national brokerage firm of A.G. Edwards & Sons, Inc. Through this and its other operating subsidiaries (collectively, the Company), A.G. Edwards, Inc., provides securities and commodities brokerage, investment banking, trust, asset management and insurance services to its clients through one of the industry's largest retail branch distribution systems. A St. Louis-based financial services firm, the Company has more than 670 locations and approximately 16,500 total employees in 49 states, the District of Columbia and London, England. The Company's primary business is providing a full range of financial products and services, including investment banking, to its individual, institutional, corporate, governmental and municipal clients. Many factors affect the Company's revenues and profitability, including changes in economic conditions, the level and volatility of interest rates, inflation, political events, investor sentiment and competition from other financial institutions, including online trading firms. Because these factors are unpredictable and beyond the Company's control, earnings may fluctuate significantly from period to period. In addition to competition from firms traditionally engaged in the financial services business, there has been increased competition in recent years from other sources, such as commercial banks, insurance companies, online service providers, sponsors of mutual funds and other companies offering financial services both in the U.S. and globally. The financial services industry also has experienced consolidation and convergence in recent years, as financial institutions involved in a broad range of financial services industries have merged. This convergence trend is expected to continue and could result in the Company's competitors gaining greater capital and other resources, such as a broader range of products and services and geographic diversity. In November 1999, the Gramm-Leach-Bliley Act was enacted, effectively repealing certain sections of the 1933 Glass-Steagall Act. Its passage allows commercial banks, securities firms and insurance firms to affiliate, which may accelerate consolidation and lead to increasing competition in markets which traditionally have been dominated by investment banks and retail securities firms. The Company's fiscal 2000 was the fifth consecutive year of record profitability. During the year, the Federal Reserve (the Fed) raised the federal funds interest rate from 4.75 percent to 5.75 percent, which contributed to a rise in yields on debt products. However, this did little to dampen investors' enthusiasm for equities as a strong economy and low inflation provided conditions for another year of increased investor activity, record trading volumes and rising stock prices. The high level of retail investor activity that existed in the prior four years showed no signs of diminishing this year. The Dow Jones Industrial Average (the Dow) began the year at 9,307 and continued its climb to 11,326 in late August. Inflation fears led the Fed to raise interest rates three times between June 1 and November 30, and the Dow reacted by falling to 10,877 by the end of November. Other than an increase in oil prices, the inflation that the Fed feared never materialized and the economy remained strong. This kept investor confidence high and propelled the Dow to a record close of 11,723 by mid- January. After rising nearly 26 percent from the beginning of the year to its peak in January and following another Fed rate hike on February 1, the Dow experienced a sharp correction and ended the fiscal year at 10,128, trimming its gain to 9 percent and equaling the gain experienced in fiscal 1999. The Nasdaq average experienced no such correction and ended the year at its high of 4,697, an increase of 105 percent in fiscal 2000 after a 29 percent gain in the prior fiscal year. Investor demand for high-tech stocks, particularly Internet companies, fueled the rise in the Nasdaq market and resulted in record Nasdaq volume. Results of Operations Revenues, net earnings and earnings per share for the Company reached record levels for the fifth year in a row. Revenues for the Company rose 26 percent to more than $2.8 billion from $2.2 billion in 1999. Revenues in 1999 were up 12 percent from more than $2 billion in 1998. Net earnings in 2000 increased 31 percent to $383 million from $292 million in the previous year. Net earnings in 1999 were up 9 percent from $269 million in 1998. Diluted earnings per share for the Company were $4.08 in 2000, versus $3.00 and $2.75 in 1999 and 1998, respectively. The Company's net profit margin was 13.6 percent in 2000, compared to 13 percent in 1999 and 13.4 percent in 1998. The results for 2000 include a $75.2 million gain from an investment in a privately held investment management company, which increased net earnings by $35.2 million or $0.37 per diluted share. 20 The number of A.G. Edwards financial consultants reached 6,823 at fiscal year- end, an increase of 5 percent from the prior year-end. The number of total locations at the end of 2000 was 672, up from 639 at year-end 1999. The Company intends to continue expanding its distribution system as opportunities present themselves. The following table and discussion summarize the changes in the major categories of revenues and expenses for the past two years (dollars in thousands): Increase (Decrease) 2000 vs. 1999 1999 vs. 1998 Revenues: Commissions $246,489 21% $94,533 9% Principal transactions 82,196 41 (5,930) (3) Investment banking 6,718 3 28,083 15 Asset management and service fees 117,564 28 97,272 30 Interest 47,076 23 20,642 11 Other 78,165 688 2,066 22 578,208 26 236,666 12 Expenses: Compensation and benefits 335,014 23 154,766 12 Occupancy and equipment 24,780 21 22,187 23 Communications 11,769 11 5,689 6 Floor brokerage and clearance 734 4 1,108 6 Interest 17,190 305 4,192 292 Other 36,393 41 15,734 22 $425,880 24% $203,676 13% Commissions Commissions are the most significant source of revenue for the Company, accounting for more than 50 percent of total revenue in each of the last three years. Commission revenue rose 21 percent, from $1.2 billion in 1999 to $1.4 billion in 2000, and accounted for 43 percent of the Company's overall revenue increase in 2000. As commissions are transaction-based revenues, they are influenced by the number and size of client transactions and product mix and may vary considerably from period to period. Equity-related commission revenue increased 23 percent ($177 million) in 2000, once again fueled by record trading volumes on the New York Stock Exchange and the Nasdaq. Average daily trading volume for 2000 was up 23 percent on the New York Stock Exchange and 40 percent on the Nasdaq. Company revenues from mutual fund sales rose 11 percent ($31 million) in 2000. Investor demand continued to be high for mutual funds, especially in the technology sector, as evidenced by the surge in the technology-driven Nasdaq composite average which rose 105 percent during the year. Sales of growth funds and international equity funds also rose. Sales of variable annuities increased 29 percent ($39 million) in 2000, also due to the strong equity markets. Recently, the Company launched Client Choice, a new fee-based pricing alternative available to individual investors. As a result, future revenues recorded within the commissions and asset management and service fees categories may be affected by the number of clients choosing this service. The Company is unable to predict the effect Client Choice may have on total revenues and net earnings. The 9 percent ($95 million) increase in total commissions in 1999 over 1998 reflected increased retail investor activity due to higher stock prices and trading volumes as well as strong cash flows into mutual funds and variable annuities in 1999 compared with 1998. Principal Transactions The Company maintains inventories of debt and equity securities to satisfy investor demand and, therefore, effects certain transactions with its clients by acting as principal. Realized and unrealized gains and losses result from the sale of and the holding of securities positions for resale to investors and are included in principal transaction revenue. Principal transactions revenue increased 41 percent ($82 million) in 2000. Revenue from debt products increased 37 percent ($53 million) primarily due to increased client demand for all types of debt securities as a result of rising yields. Municipal bonds were particularly attractive, accounting for 66 percent ($35 million) of this increase, as yields reached levels not seen in four years. Revenue from equity products rose 49 percent ($30 million) reflecting the strong Nasdaq equity market. 21 Revenues from principal transactions decreased 3 percent ($6 million) in 1999 compared to 1998 due to reduced client demand for debt securities as a result of falling yields. A decline in sales of government debt securities was partially offset by an increase in sales of municipal and corporate debt securities due to a shift in client demand as a result of a widening of the interest rate yield spread. Investment Banking The Company derives investment banking revenue from underwriting public offerings of securities for corporate and governmental entities for sale to its clients. The Company also provides advisory services to corporate and governmental entities. In 2000, investment banking revenue increased 3 percent ($7 million). Underwriting fees and selling concessions increased 16 percent ($27 million) in 2000, principally because of a 15 percent ($18 million) increase in revenue from corporate equity issues in 2000. Distribution of equity-based unit trusts continued strong in 2000 reflecting increased client demand for these specialized products. The increase in underwriting fees and selling concessions was partially offset by a 36 percent ($20 million) decrease in management fees due to participation as manager or co-manager in fewer offerings by the Company this year. In 1999, investment banking revenue increased 15 percent ($28 million) due to the Company's participation in the industry-wide record levels of underwriting as domestic and foreign corporations raised record capital in U.S. markets during the year. Asset Management and Service Fees Asset management and service fees consist primarily of revenues earned from providing support and services in connection with client assets under third party management, including mutual funds and annuities, and the Company's trust services. These revenues include fees based on the amount of client assets under management and transaction-related fees, as well as fees related to the administration of custodial and other specialty accounts. Asset management and service fees rose $118 million in 2000, an increase of 28 percent. Fees from third-party mutual funds and annuities were 21 percent ($55 million) higher than in 1999, reflecting 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 37 percent ($41 million) in 2000. The average number of these accounts increased 39 percent, while the total assets in these programs grew from $11.8 billion at the end of 1999 to $17.4 billion by the close of 2000, an increase of 47 percent. The 1999 increase in asset management and service fees of 30 percent ($97 million) over 1998 was primarily due to a 24 percent ($47 million) jump in service fees from third party mutual funds. Fees from the administration of client assets under third party management and from the Company's management services in 1999 rose 57 percent ($40 million) as a result of the growth in the number of client accounts and higher market valuations of existing assets. Interest The Company earns interest revenue principally from financing its clients' margin accounts, debt securities carried in inventory for resale and short-term investments. Interest revenue rose 23 percent ($47 million) in 2000, primarily because of a 32 percent ($54 million) increase in interest earned on margin accounts. The increase resulted from a 34 percent rise in average margin balances partially offset by slightly lower average interest rates charged on margin accounts. Interest earned on short-term investments decreased 77 percent ($9 million) as a result of a decrease in average short-term investments as funds were primarily utilized to finance the rise in margin balances. The increase in interest revenue of 11 percent ($21 million) in 1999 versus 1998 was principally due to a 14 percent ($21 million) increase in interest earned on margin accounts as a result of an 18 percent rise in average margin balances and from increased revenue from securities owned. 22 Other Revenue Other revenue increased 688 percent ($78.2) million principally as a result of a gain of $75.2 million 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. Expenses Compensation and benefits rose 23 percent ($335 million) in 2000 and 12 percent ($155 million) in 1999. A significant portion of this expense is variable in nature and directly relates to commissionable sales and to the Company's profitability. The year-to-year comparisons generally reflect the increases in revenue and profitability in both 2000 and 1999. General and administrative salary expense increased 23 percent ($57 million) in 2000 and 17 percent ($37 million) in 1999 because of general salary increases and a 16 percent growth in the number of support employees in 2000 versus 11 percent in 1999. In 2000, occupancy and equipment expense rose 21 percent ($25 million) and communications expense rose 11 percent ($12 million). These categories increased primarily because of increased business volume, branch and headquarters expansion, and the costs associated with the purchase of technology-related equipment and software. Interest expense rose 305 percent ($17 million) due to an increase in short-term borrowings primarily needed to finance the rise in customer margin balances. All remaining expenses increased a combined 34 percent ($37 million) over last year due to branch and headquarters expansion and increased transaction volume. In 1999, all noncompensation-related expenses increased a combined 17 percent ($49 million), mainly as a result of expansion and technology-related expenditures. Income Taxes For information concerning the provision for income taxes and information regarding the difference between effective tax rates and statutory rates, see Note 6 (Income Taxes) of the Notes to Consolidated Financial Statements. 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 in 2000 as a result of business expansion and the increased use of margin borrowing by clients. This increase was financed primarily by bank loans and increased securities lending activities. The principal sources for financing the Company's business are stockholders' equity, cash generated from operations, short-term bank borrowings and securities lending activities. Average bank borrowings of $218 million in 2000, and $35 million in 1999 were primarily used to finance customer receivables. The Company is currently expanding its headquarters with the construction of an additional office building, a training/conference center and a parking garage. The total costs of these projects are estimated to be $180 million. Under the Company's stock repurchase program, which began in May 1996, the Company is authorized to repurchase up to 33 million shares of the Company's common stock over a 5 1/2 year period ending in 2001, in part to offset the issuance of stock under the employee stock plans. The Company purchased 11 million and 4.9 million shares at aggregate costs of $336 million and $180 million in 2000 and 1999, respectively. At February 29, 2000, a total of 22.4 million shares had been repurchased under this program. The Company believes it has adequate sources of credit available, if needed, to finance higher trading volumes, branch expansion, stock repurchases, dividend payments and major capital expenditures. The Company's principal subsidiary, A.G. Edwards & Sons, Inc., is required by the Securities and Exchange Commission (SEC) to maintain specified amounts of liquid net capital to meet its obligations to clients - see Note 5 (Net Capital Requirements) of the Notes to Consolidated Financial Statements. Risk Management General The business activities of the Company expose it to a variety of risks. Management of these risks is necessary for the long-term profitability of the Company. The Company manages these risks through the establishment of numerous policies, procedures and controls. The most significant risks to the Company are market risk and credit risk. 23 Credit Risk Credit risk is discussed in Note 10 (Financial Instruments - Off-Balance Sheet Risk and Concentration of Credit Risk) of the Notes to Consolidated Financial Statements. Market Risk Market risk is the risk of loss to the Company resulting from changes in interest rates, equity prices or both. The Company is exposed to market risk to the extent it maintains positions in fixed-income and equity securities. The Company primarily manages its risk through the establishment of trading policies and guidelines and through the implementation of control and review procedures. The Company's management philosophy provides for communication among all responsible parties throughout the trading day. The Company's policy is to purchase inventory to provide investment product for its clients. Consequently, the Company purchases only inventory which it believes it can readily sell to its clients, thus reducing the Company's exposure to liquidity risk but not to market fluctuations. In addition, maximum inventory guidelines are established by the Executive Committee for fixed- income and equity securities, subject to certain limited exceptions. Capital management and control are accomplished through review (by product managers and members of management outside of the trading area) of various reports, including reports that show current inventory profit and loss, inventory positions exceeding set limits, and aged positions. Additionally, real-time capital management data is available for intraday assessments. The Company does not act as a dealer, trader or end-user of complex derivative products, such as swaps, collars and caps. The Company provides advice and guidance on complex derivative products to selected clients; however, this activity does not involve the Company acquiring a position or commitment in these products. The Company will occasionally hedge a portion of its debt inventory through the use of financial futures contracts. These transactions are not material to the Company's financial condition or results of operations. Equity Price Risk Equity price risk refers to the risk of changes in the level or volatility of the price of equity securities. The Company is exposed to this risk as a result of its market making activities. At February 29, 2000, and February 28, 1999, the potential daily loss in the fair value of equity securities was not material. Interest Rate Risk Interest rate risk refers to the risk of changes in the level or volatility of interest rates, the speed of payments on mortgage-backed securities, the shape of the yield curve and credit spreads. The Company is exposed to this risk as a result of maintaining inventories of interest-rate-sensitive financial instruments. This is the Company's primary market risk. For the purposes of the SEC's disclosure requirements, the Company has elected to use a sensitivity approach to express the potential decrease in the fair value of the Company's interest rate sensitive financial instruments. The Company calculated the potential loss in fair value of its debt inventory by calculating the change in offering price of each inventory item resulting from a 10 percent increase in either the Treasury Yield curve for taxable products or the Municipal Market Data Corporation's AAA rated yield curve for tax-exempt products. Using this method, if such a 10 percent increase were to occur, the Company calculated a potential loss in fair value of its debt inventory of $8.7 million at February 29, 2000, and $8.9 million at February 28, 1999. 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 materially from those contemplated. The risks and uncertainties include, but are not limited to, 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 Annual Report. The Company does not undertake any obligation to publicly update any forward-looking statements. 24
CONSOLIDATED TEN-YEAR FINANCIAL SUMMARY Year Ended February 29, February 28, February 28, February 28, February 29, 2000 1999 1998 1997 1996 (In thousands, except per share amounts) Revenues Commissions: Listed Securities $ 537,005 $ 505,226 $ 462,276 $ 365,908 $ 338,241 Options 62,708 49,830 44,188 33,850 29,432 Over-the-Counter Securities 331,992 199,472 190,092 178,752 142,696 Mutual Funds 312,833 281,782 255,005 214,029 184,616 Commodities 17,305 15,518 16,315 16,038 16,448 Insurance 164,583 128,109 117,528 101,365 82,112 Total 1,426,426 1,179,937 1,085,404 909,942 793,545 Principal Transactions: Equities 90,202 60,538 61,184 58,427 55,334 Debt Securities 194,016 141,484 146,768 154,580 151,033 Total 284,218 202,022 207,952 213,007 206,367 Investment Banking: Underwriting Fees and Selling Concessions 190,236 163,419 152,029 114,426 80,572 Management Fees 35,483 55,582 38,889 41,733 24,427 Total 225,719 219,001 190,918 156,159 104,999 Asset Management and Service Fees 544,531 426,967 329,695 260,200 207,631 Interest: Margin Account Balances 225,319 170,982 149,738 118,373 107,192 Securities Owned and Deposits 23,269 30,530 31,132 29,462 27,150 Total 248,588 201,512 180,870 147,835 134,342 Other 89,525 11,360 9,294 9,340 7,583 Total Revenues 2,819,007 2,240,799 2,004,133 1,696,483 1,454,467 Expenses Compensation and Benefits 1,766,711 1,431,697 1,276,931 1,080,931 929,755 Occupancy and Equipment 143,463 118,683 96,496 85,883 79,077 Communications 116,407 104,638 98,949 86,257 80,364 Floor Brokerage and Clearance 21,667 20,933 19,825 18,149 16,275 Interest 22,818 5,628 1,436 2,065 3,153 Other 124,826 88,433 72,699 68,241 69,561 Total Expenses 2,195,892 1,770,012 1,566,336 1,341,526 1,178,185 Earnings Before Income Taxes 623,115 470,787 437,797 354,957 276,282 Income Taxes 240,194 178,670 168,500 135,900 105,700 Net Earnings $ 382,921 $ 292,117 $ 269,297 $ 219,057 $ 170,582 Per Share Data: Diluted Earnings $ 4.08 $ 3.00 $ 2.75 $ 2.24 $ 1.77 Basic Earnings $ 4.16 $ 3.07 $ 2.81 $ 2.29 $ 1.80 Cash Dividends $ 0.61 $ 0.57 $ 0.51 $ 0.44 $ 0.40 Book Value $ 19.69 $ 17.16 $ 15.21 $ 13.12 $ 11.33 Other Data: Total Assets $5,347,587 $3,803,132 $4,193,328 $4,244,340 $3,102,085 Stockholders' Equity $1,717,122 $1,627,737 $1,463,121 $1,261,303 $1,088,684 Cash Dividends $ 55,483 $ 54,002 $ 48,740 $ 41,851 $ 37,769 Pretax Return on Average Equity 37.3% 30.5% 32.1% 30.2% 27.5% Return on Average Equity 22.9% 18.9% 19.8% 18.6% 17.0% Net Earnings as a Percent of Revenues 13.6% 13.0% 13.4% 12.9% 11.7% Average Common and Common Equivalent Shares Outstanding (Diluted) 93,814 97,322 98,051 97,816 96,644 Average Common Shares Outstanding (Basic) 92,140 95,252 95,950 95,483 94,621 Share and per share data have been restated for stock splits and stock dividends.
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Year Ended February 28, February 28, February 28, February 28, February 29, 1995 1994 1993 1992 1991 (In thousands, except per share amounts) Revenues Commissions: Listed Securities $ 236,629 $ 273,363 $ 231,312 $ 203,936 $ 140,096 Options 21,576 21,135 19,167 21,745 20,002 Over-the-Counter Securities 80,525 94,075 69,199 69,415 38,842 Mutual Funds 142,653 244,357 191,643 145,494 80,158 Commodities 15,261 16,766 13,016 13,941 12,322 Insurance 70,429 69,115 42,304 43,838 37,346 Total 567,073 718,811 566,641 498,369 328,766 Principal Transactions: Equities 37,565 40,260 31,266 23,157 10,922 Debt Securities 203,460 146,705 184,040 165,284 145,732 Total 241,025 186,965 215,306 188,441 156,654 Investment Banking: Underwriting Fees and Selling Concessions 70,156 111,379 87,061 77,464 44,167 Management Fees 22,574 35,594 21,251 13,389 11,161 Total 92,730 146,973 108,312 90,853 55,328 Asset Management and Service Fees 164,547 144,699 113,936 91,849 63,623 Interest: Margin Account Balances 89,971 60,491 50,098 47,026 51,209 Securities Owned and Deposits 15,548 14,074 14,631 16,915 15,025 Total 105,519 74,565 64,729 63,941 66,234 Other 7,448 6,628 5,464 5,206 4,302 Total Revenues 1,178,342 1,278,641 1,074,388 938,659 674,907 Expenses Compensation and Benefits 756,736 828,409 692,127 594,404 422,524 Occupancy and Equipment 73,108 67,258 61,701 56,035 49,783 Communications 74,708 73,048 66,899 62,468 58,323 Floor Brokerage and Clearance 14,355 15,062 15,016 13,741 11,461 Interest 6,818 1,113 1,886 1,186 4,229 Other 53,288 50,180 46,774 42,793 36,925 Total Expenses 979,013 1,035,070 884,403 770,627 583,245 Earnings Before Income Taxes 199,329 243,571 189,985 168,032 91,662 Income Taxes 75,210 88,700 70,560 62,500 32,500 Net Earnings $ 124,119 $ 154,871 $ 119,425 $ 105,532 $ 59,162 Per Share Data: Diluted Earnings $ 1.33 $ 1.71 $ 1.38 $ 1.25 $ 0.73 Basic Earnings $ 1.35 $ 1.75 $ 1.40 $ 1.28 $ 0.74 Cash Dividends $ 0.37 $ 0.35 $ 0.29 $ 0.25 $ 0.19 Book Value $ 9.84 $ 8.72 $ 7.11 $ 5.89 $ 4.79 Other Data: Total Assets $2,224,282 $2,236,590 $2,111,192 $1,577,143 $1,402,627 Stockholders' Equity $ 919,281 $ 790,367 $ 615,240 $ 492,010 $ 385,869 Cash Dividends $ 34,200 $ 30,843 $ 24,624 $ 20,622 $ 15,480 Pretax Return on Average Equity 23.3% 34.7% 34.3% 38.3% 25.1% Return on Average Equity 14.5% 22.0% 21.6% 24.0% 16.2% Net Earnings as a Percent of Revenues 10.5% 12.1% 11.1% 11.2% 8.8% Average Common and Common Equivalent Shares Outstanding (Diluted) 93,267 90,530 86,740 84,152 81,023 Average Common Shares Outstanding (Basic) 91,809 88,643 85,421 82,331 80,205 Share and per share data have been restated for stock splits and stock dividends.
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CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) February 29, February 28, 2000 1999 Assets Cash and cash equivalents $ 154,487 $ 99,499 Cash and government securities, segregated under federal and other regulations 86,851 57,959 Securities purchased under agreements to resell 10,674 14,838 Securities borrowed 278,199 243,507 Receivables: Customers 3,777,352 2,626,316 Brokers, dealers and clearing organizations 22,529 27,855 Fees, dividends and interest 62,989 52,077 Securities inventory, at fair value: State and municipal 240,154 144,180 Government and agencies 57,943 50,618 Corporate 110,311 72,297 Investments 116,307 63,142 Property and equipment, at cost, net of accumulated depreciation and amortization of $337,602 and $279,034 312,942 245,410 Deferred income taxes 75,361 88,312 Other assets 41,488 17,122 $5,347,587 $3,803,132 Liabilities and Stockholders' Equity Bank loans $ 638,000 $ -- Checks payable 283,602 226,516 Securities loaned 637,684 229,542 Payables: Customers 946,373 949,076 Brokers, dealers and clearing organizations 203,129 68,419 Securities sold but not yet purchased, at fair value 24,920 45,659 Employee compensation and related taxes 740,188 578,073 Income taxes 73,557 24,645 Other liabilities 83,012 53,465 Total Liabilities 3,630,465 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 253,917 239,998 Retained earnings 1,645,332 1,348,094 1,995,712 1,684,555 Less: Treasury stock, at cost (9,254,005 and 1,625,042 shares) 278,590 56,818 Total Stockholders' Equity 1,717,122 1,627,737 $5,347,587 $3,803,132 See Notes to Consolidated Financial Statements. 27
(Dollars in thousands, except per share amounts) Year Ended February 29, February 28, February 28, 2000 1999 1998 Revenues Commissions $1,426,426 $1,179,937 $1,085,404 Principal transactions 284,218 202,022 207,952 Investment banking 225,719 219,001 190,918 Asset management and service fees 544,531 426,967 329,695 Interest 248,588 201,512 180,870 Other 89,525 11,360 9,294 2,819,007 2,240,799 2,004,133 Expenses Compensation and benefits 1,766,711 1,431,697 1,276,931 Occupancy and equipment 143,463 118,683 96,496 Communications 116,407 104,638 98,949 Floor brokerage and clearance 21,667 20,933 19,825 Interest 22,818 5,628 1,436 Other 124,826 88,433 72,699 2,195,892 1,770,012 1,566,336 Earnings Before Income Taxes 623,115 470,787 437,797 Income Taxes 240,194 178,670 168,500 Net Earnings $ 382,921 $ 292,117 $ 269,297 Earnings per share: Diluted $ 4.08 $ 3.00 $ 2.75 Basic $ 4.16 $ 3.07 $ 2.81 See Notes to Consolidated Financial Statements. 28
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Three Years Ended February 29, 2000 Additional Common Paid-in Retained Treasury (Dollars in thousands, except per share amounts) Stock Capital Earnings Stock Total Balances, March 1, 1997 $64,313 $236,682 $968,564 $(8,256) $1,261,303 Net earnings 269,297 269,297 Dividends declared-- $0.51 per share (48,740) (48,740) Treasury stock acquired (106,006) (106,006) Stock issued: Employee stock purchase/option plans 7,506 (29,774) 78,677 56,409 Restricted stock 5,824 1,185 23,849 30,858 Stock split 3-for-2 32,150 (32,150) Balances, February 28, 1998 96,463 217,862 1,160,532 (11,736) 1,463,121 Net earnings 292,117 292,117 Dividends declared-- $0.57 per share (54,002) (54,002) Treasury stock acquired (180,175) (180,175) Stock issued: Employee stock purchase/option plans 13,770 (52,177) 108,657 70,250 Restricted stock 8,366 1,624 26,436 36,426 Balances, February 28, 1999 96,463 239,998 1,348,094 (56,818) 1,627,737 Net earnings 382,921 382,921 Dividends declared-- $0.61 per share (55,483) (55,483) Treasury stock acquired (336,028) (336,028) Stock issued: Employee stock purchase/option plans 7,694 (39,532) 89,453 57,615 Restricted stock 6,225 9,332 24,803 40,360 Balances, February 29, 2000 $96,463 $253,917 $1,645,332 $(278,590) $1,717,122 See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended February 29, February 28, February 28, (Dollars in thousands) 2000 1999 1998 Cash Flows From Operating Activities Net earnings $ 382,921 $ 292,117 $ 269,297 Noncash and nonoperating items included in net earnings: Depreciation and amortization 63,380 50,369 42,079 Expense of restricted stock awards 34,244 28,149 25,155 Deferred income taxes 12,951 (17,880) (13,874) Gain on investments (75,236) -- -- (Increase) decrease in operating assets: Segregated cash and government securities (28,892) (665) 343,697 Securities borrowed (34,692) 542,612 606,745 Receivable from customers (1,151,036) (397,188) (551,774) Receivable from brokers, dealers and clearing organizations 5,326 (15,334) 2,114 Fees, dividends and interest receivable (10,912) (4,790) (6,218) Securities inventory (141,313) 136,558 (239,686) Other assets (24,083) 6,461 (4,953) Increase (decrease) in operating liabilities: Checks payable 57,086 23,499 28,281 Securities loaned 408,142 (591,376) (637,508) Payable to customers (2,703) 28,285 104,123 Payable to brokers, dealers and clearing organizations 134,710 (117,337) 137,914 Securities sold but not yet purchased (20,739) 26,518 1,471 Employee compensation and related taxes 162,115 72,342 91,554 Income taxes 48,912 7,508 3,601 Other liabilities 29,547 (5,923) 16,730 Net cash from operating activities (150,272) 63,925 218,748 Cash Flows From Investing Activities Securities purchased under agreements to resell 4,164 189,525 (4,363) Purchase of property and equipment (130,912) (62,567) (84,489) Investments, net 22,071 (22,170) (16,301) Net cash from investing activities (104,677) 104,788 (105,153) Cash Flows From Financing Activities Net proceeds from bank loans 638,000 -- -- Employee stock transactions 63,731 78,527 62,112 Purchase of treasury stock (336,028) (180,175) (106,006) Cash dividends paid (55,766) (52,330) (47,736) Net cash from financing activities 309,937 (153,978) (91,630) Net Increase in Cash and Cash Equivalents 54,988 14,735 21,965 Cash and Cash Equivalents, at Beginning of Year 99,499 84,764 62,799 Cash and Cash Equivalents, at End of Year $ 154,487 $ 99,499 $ 84,764 Interest payments totaled $21,593 in 2000, $5,585 in 1999 and $3,245 in 1998. Income taxes paid totaled $167,340 in 2000, $168,748 in 1999 and $165,618 in 1998. Supplemental disclosures of noncash financing activities: Restricted stock awards, net of forfeitures, totaled $34,611 in 2000, $28,602 in 1999 and $24,818 in 1998. See Notes to Consolidated Financial Statements.
30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three years ended February 29,2000 (Dollars in thousands, except per share amounts) 1. Summary of Significant Accounting Policies Basis of Financial Information-The consolidated financial statements include the accounts of A.G. Edwards, Inc., and its subsidiaries (collectively referred to as the Company) and are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing financial statements, management makes use of estimates concerning certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and certain revenues and expenses during the reporting period. Actual results could differ from these estimates. All material intercompany balances and transactions have been eliminated in consolidation. Where appropriate, prior years' financial information has been reclassified to conform with the current-year presentation. The Company operates and is managed as a single business segment providing investment services to its clients. The Company offers a wide range of services designed to meet clients' individual investment needs, including securities and commodities brokerage, asset management, insurance, trust, investment banking and other related services. These services are provided by more than 6,800 financial consultants in more than 670 locations of the Company's principal subsidiary, A.G. Edwards & Sons, Inc. Since these services are provided using the same sales and distribution personnel, support services and facilities, and all are provided to meet the needs of its clients, the Company does not identify or manage assets, revenues or expenses resulting from any service, or class of services, as a separate business segment. With headquarters in St. Louis, the Company has offices in 49 states, the District of Columbia and London, England. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments with maturities of 90 days or less at the date of acquisition. Securities Transactions Securities purchased under agreements to resell (Resale Agreements) and securities sold under agreements to repurchase are recorded at the contractual amounts that the securities will be resold/repurchased, including accrued interest. The Company's policy is to obtain possession or control of securities purchased under Resale Agreements and to obtain additional collateral when necessary to minimize the risk associated with this activity. Securities borrowed and securities loaned are recorded at the amount of the cash collateral provided for securities-borrowed transactions and received for securities-loaned transactions, respectively. The adequacy of the collateral is continuously monitored and adjusted when considered necessary to minimize the risk associated with this activity. Substantially all of these transactions are executed under master netting agreements, which give the Company right of offset in the event of counterparty default. Customer securities transactions are recorded on settlement date. Revenues and related expenses for transactions executed but unsettled are accrued on a trade- date basis. Receivables from and payables to customers include amounts due on cash and margin transactions. Securities owned by customers, including those that collateralize margin or other similar transactions, are not reflected on the Consolidated Balance Sheets. Securities inventory, securities sold but not yet purchased, securities segregated under federal and other regulations, and investments are recorded on a trade-date basis and are carried at fair value. Fair value is based on quoted market or dealer prices, pricing models, or management's estimates. Unrealized gains and losses are reflected in revenue. Investments The fair value of investments, for which a quoted market or dealer price is not available, are based on management's estimates. Among the factors considered by management in determining the fair value of investments are the cost of the investment, terms and liquidity, developments since the acquisition of the investment, the sales price of recently issued securities, the financial condition and operating results of the issuer, earnings trends and consistency of operating cash flows, the long-term business potential of the issuer, the quoted market price of securities with similar quality and yield that are publicly traded, and other factors generally pertinent to the valuation of investments. The fair value of these investments is subject to a high degree of volatility and may be susceptible to significant fluctuation in the near term. These investments were valued at $72,587 and $22,534 at February 29, 2000 and February 28, 1999, respectively. Investment Banking Investment banking revenue, which includes underwriting fees, selling concessions and management fees, is recorded when services for the transaction are substantially completed. Transaction-related expenses are deferred and later expensed to match revenue recognition. Stock-Based Compensation The Company applies the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), and related interpretations to account for its employee stock plans. Based on the provisions of the plans, no compensation expense has been recognized for options issued under these plans. Restricted stock awards are expensed in the year granted. 31 Property and Equipment Depreciation of buildings is provided using both straight-line and accelerated methods over estimated useful lives of 15 to 45 years. Leasehold improvements are amortized over the lesser of the life of the lease or estimated useful life of the improvement. Depreciation of equipment, including hardware and software, is provided over estimated useful lives of three to 10 years using both straight-line and accelerated methods. Income Taxes Income tax expense is provided for using the asset and liability method, under which deferred tax assets and liabilities are determined based upon the temporary differences between the financial statement and income tax bases of assets and liabilities, using current tax rates. The Company files a consolidated federal income tax return. Comprehensive Earnings Comprehensive earnings for each of the three years in the period ended February 29, 2000, was equal to the Company's net earnings. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS 137 defers the effective date for one year to fiscal years beginning after June 15, 2000. The statement establishes accounting and reporting standards for derivative instruments and hedging activities. The adoption of this statement is not expected to have a material effect on the Company's financial statements. 2. Bank Loans Bank loans are short-term borrowings with interest generally based on the federal funds rate. Such loans are payable on demand and may be unsecured or collateralized by customer-owned securities held in margin accounts. The average of such borrowings was $217,972 in 2000, $34,620 in 1999 and $10,656 in 1998, at effective interest rates of 5.5 percent, 5.8 percent and 6 percent, respectively. Substantially all such borrowings were secured by customer-owned securities held in margin accounts. 3. Employee Stock Plans The Company applies the provisions of APB No. 25 to account for its employee stock plans. If compensation expense for the Company's stock option and stock purchase plans were determined based on the estimated fair value of the options granted, consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net earnings and earnings per share would have been as follows: 2000 1999 1998 Pro forma net earnings $371,000 $280,000 $258,000 Pro forma earnings per share: Diluted $3.95 $2.87 $2.63 Basic $4.03 $2.94 $2.69 The Black-Scholes option pricing model was used to calculate the estimated fair value of the options. Employee Stock Purchase Plan Options to purchase 1,875,000 shares of common stock granted to employees under the Company's stock purchase plan are exercisable October 2, 2000, at 85 percent of market price based on dates specified in the plan. Employees purchased 1,871,284 shares at $21.89 per share in 2000, 1,872,249 shares at $25.29 per share in 1999 and 1,871,400 shares at $20.64 per share in 1998. Treasury shares were utilized for all of the shares purchased. The fair value of the options granted under this plan was estimated using the following assumptions for 2000, 1999 and 1998, respectively: dividend yield of 2.01 percent, 1.51 percent and 1.34 percent; an expected life of one year; expected volatility of 36 percent, 43 percent and 34 percent; and risk-free interest rates of 5.42 percent, 4.55 percent and 5.68 percent. The fair value of the options granted in 2000, 1999 and 1998 was $5.99, $7.52 and $8.16 per option, respectively. Restricted Stock and Stock Options Under the Company's Incentive Stock Plan, three types of benefits may be awarded to officers and key employees: restricted stock, stock options and stock appreciation rights. Such awards are subject to forfeiture upon termination of employment during the restricted period, generally three years from the award date. Through February 29, 2000, no stock appreciation rights had been granted. Restricted stock awards are made, and shares issued, without cash payment by the employee. Eligible employees at February 29, 2000, were awarded 916,010 shares with a market value of $36,018. At February 28, 1999 and 1998, the awards were 882,623 and 597,595 shares, respectively, with corresponding market values of $28,685 and $25,732. Treasury shares were utilized for these awards. 32 Nonqualified stock options are granted to purchase common stock at 100 percent of market value at date of grant. Such options are exercisable beginning three years from date of award and expire eight years from date of award, or earlier upon termination of employment. The fair value of each option grant was estimated at the date of grant using the following assumptions for 2000, 1999 and 1998, respectively: dividend yield of 2.01 percent, 1.51 percent and 1.34 percent; expected lives of six years; expected volatility of 36 percent, 43 percent and 34 percent; risk-free interest rates of 6.62 percent, 5.49 percent and 5.70 percent; and a forfeiture rate of 7 percent, 6 percent and 8 percent. The fair value of options granted under this plan in 2000, 1999 and 1998 was $14.99, $13.92 and $16.35 per option, respectively. A summary of the status of the Company's stock options as of February 29 or 28, 2000, 1999 and 1998, and changes during the years ended on those dates is presented as follows:
2000 1999 1998 Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise (000) Price (000) Price (000) Price Outstanding, beginning of year 4,597 $22.91 4,445 $18.97 4,993 $14.39 Granted 1,006 $39.32 968 $32.50 575 $43.06 Exercised (723) $14.41 (793) $12.52 (1,050) $10.47 Forfeited (40) $32.03 (23) $28.26 (73) $17.50 Outstanding, end of year 4,840 $27.52 4,597 $22.91 4,445 $18.97 Treasury shares utilized for exercises 723 793 1,050
The following table summarizes information about outstanding stock options at February 29, 2000:
33 Options Outstanding Options Exercisable Weighted Average Number Remaining Weighted Number Weighted Range of Outstanding Contractual Average Exercisable Average Exercise Prices (000) Life (years) Exercise Price (000) Exercise Price $11-$15 1,031 2.1 $13.32 1,031 $13.32 $16-$20 551 4.0 $16.59 551 $16.59 $21-$25 736 5.0 $21.21 736 $21.21 $31-$35 960 7.0 $32.50 0 $36-$40 1,006 8.0 $39.32 0 $41-$45 556 6.0 $43.06 0 4,840 2,318
4. Employee Profit Sharing Plan The Company has a defined contribution plan (401(k)) covering substantially all employees, whereby the Company is obligated to match, in specified amounts as defined therein, portions of contributions made by eligible employees. Additional contributions may be made at the discretion of the Company and are based on the Company's pretax earnings. The Company expensed $104,787 in 2000, $85,308 in 1999 and $76,933 in 1998 in connection with the 401(k). The Company also has an unfunded, nonqualified deferred compensation plan that provides benefits to participants whose contributions from the Company in the 401(k) are subject to Internal Revenue Service limitations. Participants earn interest on these benefits at the broker call rate. The Company expensed $43,933 in 2000, $34,799 in 1999 and $26,495 in 1998 in connection with this plan. At February 29, 2000 and February 28, 1999, employee compensation and related taxes included $151,298 and $116,121, respectively, related to this plan. 5. Net Capital Requirements A.G. Edwards & Sons, Inc., is subject to net capital rules administered by the Securities and Exchange Commission (SEC) and the New York Stock Exchange. Under such rules, this subsidiary must maintain net capital of not less than 2 percent of aggregate debit items, as defined, arising from customer transactions and would be restricted from expanding its business or paying cash dividends or advancing loans to affiliates if its net capital were less than 5 percent of such items. These rules also require A.G. Edwards & Sons, Inc., to notify and sometimes obtain approval of the SEC and other regulatory organizations for substantial withdrawals of capital or loans to affiliates. At February 29, 2000, the subsidiary's net capital of $899,932 was 23 percent of aggregate debit items and $823,317 in excess of the minimum required. 34 Certain other subsidiaries are also subject to minimum capital requirements that may restrict the payment of cash dividends and advances to A.G. Edwards, Inc. The only restriction with regard to the payment of cash dividends by A.G. Edwards, Inc., is its ability to obtain cash dividends and advances from its subsidiaries, if needed. 6. Income Taxes The provisions for income taxes consist of: 2000 1999 1998 Current: Federal $188,529 $169,286 $154,428 State and local 38,714 27,264 27,946 227,243 196,550 182,374 Deferred 12,951 (17,880) (13,874) $240,194 $178,670 $168,500 Deferred income taxes reflect temporary differences in the bases of the Company's assets and liabilities for income tax purposes and for financial reporting purposes, using current tax rates. These temporary differences result in taxable or deductible amounts in future years. Significant components of deferred tax assets and liabilities at February 29, 2000, and February 28, 1999, are as follows: 2000 1999 Deferred tax assets: Employee benefits $123,243 $ 98,288 Other 8,120 5,964 131,363 104,252 Deferred tax liabilities: Receivables 33,127 3,982 Investments 17,887 4,139 Property and equipment 3,464 6,665 Other 1,524 1,154 56,002 15,940 Net Deferred Tax Assets $ 75,361 $ 88,312 The Company's effective tax rate was 39 percent in 2000, 38 percent in 1999 and 39 percent in 1998, which differed from the federal statutory rate of 35 percent. State and local taxes, net of federal benefit, increased the effective rate by 4 percent in 2000, 1999 and 1998. No other single item had a material impact on the difference in the rates. 35 Stock Repurchase Program The Company's stock repurchase program, which began in May 1996, authorizes the Company to repurchase up to 33 million of its outstanding shares over a 5 1/2 year period. The Company purchased 11,032,500 shares with an aggregate cost of $336,028 in 2000, 4,871,500 shares at a cost of $180,175 in 1999 and 3,438,000 shares at a cost of $106,006 in 1998. Repurchased shares are added to treasury stock to be used for employee stock plans and to partially offset the past effect of these plans. At February 29, 2000, the Company had repurchased 22,359,250 shares under this program. Stockholders' Rights Plan The Company's Stockholders' Rights Plan, as amended, provides for the distribution of one Common Stock Purchase Right for each outstanding share of the Company's common stock. The rights cannot be exercised or traded apart from the common stock until, without the prior consent of the Company, a third party either acquires 20 percent or more of the Company's outstanding common stock or commences a tender or exchange offer that would result in the third party acquiring 20 percent or more of the outstanding common stock. Each right, upon becoming exercisable, entitles the registered holder to purchase one share of common stock for $60 from the Company. If a person actually acquires 20 percent or more of the Company's common stock without the Board of Directors' consent, then each right will entitle its holder, other than the acquiring company, to purchase for $60 the number of shares of the Company's common stock (or in the event of a merger or other business combination, the number of shares of the acquirer's stock) which has a market value of $120. The rights, which are redeemable by the Company at a price of $0.00256 each prior to a person's acquiring 20 percent or more of the Company's common stock, are subject to adjustment to prevent dilution and expire June 22, 2005. 9. Commitments and Contingent Liabilities The Company has long-term operating leases and commitments related to office space, equipment and service agreements. Minimum commitments under all such noncancelable leases and service agreements, some of which contain escalation clauses and renewal options, at February 29, 2000, are as follows: Year ending February 28 (29), 2001 $66,200 2002 62,200 2003 55,200 2004 45,400 2005 36,900 Later years 90,300 $356,200 Rental expense under all operating leases and service agreements was $61,827 in 2000, $52,657 in 1999 and $45,893 in 1998. 37 In the normal course of business, the Company enters into when-issued and underwriting commitments and delayed delivery transactions. Settlement of these transactions at February 29, 2000, would not have had a material effect on the consolidated financial statements. At February 29, 2000 and February 28, 1999, the Company had $144,662 and $128,750, respectively, of outstanding letters of credit, principally to satisfy margin deposit requirements with a clearing corporation. Of these amounts, $10,000 was collateralized by customer-owned securities held in margin accounts. The Company is a defendant in a number of lawsuits, in some of which plaintiffs claim substantial amounts, relating primarily to its securities and commodities business. While results of litigation cannot be predicted with certainty, management, after consultation with counsel, believes that resolution of all such litigation will have no material adverse effect on the consolidated financial statements of the Company. 10. Financial Instruments Off-Balance Sheet Risk and Concentration of Credit Risk The Company records customer transactions on a settlement date basis, generally three business days after trade date. The risk of loss on unsettled transactions is identical to that of settled transactions and relates to customers' and other counterparties' inability to fulfill their contracted obligations. In the normal course of business, the Company also executes customer transactions involving the sale of securities not yet purchased, the purchase and sale of futures contracts, and the writing of option contracts on both securities and futures. In the event customers or other counterparties, such as broker-dealers or clearing organizations, fail to satisfy their obligations, the Company may be required to purchase or sell financial instruments in order to fulfill its obligations at prices that may differ from amounts recorded in the balance sheet. Customer financing and securities settlement activities generally require the Company to pledge customer securities as collateral in support of various financing sources. Additionally, customer securities may be pledged as collateral to satisfy margin deposits at various clearing organizations. To the extent these counterparties are unable to fulfill their contracted obligation to return securities pledged, the Company is exposed to the risk of obtaining securities at prevailing market prices to meet its customer obligations. Securities sold but not yet purchased represent obligations of the Company to deliver specified securities at contracted prices. Settlement of such obligations may be at amounts greater than those recorded in the balance sheet. A substantial portion of the Company's assets and obligations result from transactions with customers and other counterparties who have provided financial instruments as collateral. Volatile trading markets could impair the value of such collateral and affect customers' and other counterparties' ability to satisfy their obligations to the Company. The Company manages its risk associated with the aforementioned transactions through position and credit limits and the continuous monitoring of collateral. Additional collateral is required from customers and other counterparties when appropriate. 38 Derivatives The Company does not act as dealer, trader or end-user of complex derivatives such as swaps, collars and caps. The Company provides advice and guidance on complex derivative products to selected clients; however, this activity does not involve the Company acquiring a position or commitment in these products. The Company will occasionally hedge a portion of its debt inventory through the use of financial futures contracts. These transactions are not material to the Company's financial condition or results of operations. Fair Value Considerations Substantially all of the Company's financial instruments are carried at fair value or amounts that approximate fair value. Customer receivables, primarily consisting of floating rate loans collateralized by margin securities, are charged interest at rates similar to other such loans made throughout the industry. The Company's remaining financial instruments are generally short- term in nature and liquidate at their carrying values. 11. Enterprise-Wide Disclosure The Company provides investment services to its clients through its financial consultants in more than 670 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, annuities and insurance contracts, 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 years ended February 29 (28): 2000 1999 1998 Transaction services $1,971,589 $1,623,648 $1,507,019 Asset management services 470,125 373,413 278,861 Interest 248,588 201,512 180,870 Other 128,705 42,226 37,383 $2,819,007 $2,240,799 $2,004,133 40 We have audited the accompanying consolidated balance sheets of A.G. Edwards, Inc. and subsidiaries as of February 29, 2000 and February 28, 1999, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended February 29, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of A.G. Edwards, Inc. and subsidiaries at February 29, 2000 and February 28, 1999, and the results of their operations and cash flows for each of the three years in the period ended February 29, 2000, in conformity with accounting principles generally accepted in the United States of America. April 20, 2000 St. Louis, Missouri 41
Dividends Stock Price Earnings Net Earnings Declared Trading Range Revenues Before Tax Earnings per Share per Share High -- Low (in millions) (in millions) (in millions) Basic Diluted Fiscal 2000 by Quarter First $0.15 38 3/16 -- 30 7/8 $651.1 $136.9 $ 84.5 $0.89 $0.88 Second $0.15 33 9/16 -- 24 5/8 $636.1 $132.8 $ 82.3 $0.88 $0.86 Third $0.15 34 -- 24 1/4 $714.6 $184.1 $115.3 $1.25 $1.23 Fourth $0.16 34 3/16 -- 26 3/4 $817.2 $169.3 $100.8 $1.14 $1.11 Fiscal 1999 by Quarter First $0.14 48 13/16 -- 40 1/8 $570.2 $123.9 $ 76.0 $0.79 $0.78 Second $0.14 48 7/16 -- 27 1/8 $551.2 $116.8 $ 72.3 $0.76 $0.74 Third $0.14 40 -- 25 1/8 $524.3 $109.5 $ 68.0 $0.72 $0.70 Fourth $0.15 41 -- 32 1/8 $595.1 $120.6 $ 75.8 $0.80 $0.78 Per share data have been restated for stock splits and stock dividends.
Stock Split History As a result of stock splits and stock dividends, an investment of 100 shares of A.G. Edwards stock at the time of the firm's initial public offering in calendar 1971 has grown to 3,627 shares today. Given the initial offering price of $12 per share, the value of that $1,200 investment would have increased 9,478 percent, or 17.46 percent compounded annually, to $114,931 as of February 29, 2000. Dividend Growth History A steadily increasing dividend has reflected A.G. Edwards' continued revenue and earnings growth. Over the past 10-year period, the dividend has grown from $.19 per share to $.61 per share, an average 24 percent increase per year. Since the firm went public, dividend payments have totaled more than $485 million. (Per share data have been restated for stock splits and stock dividends.) Stock Price History A.G. Edwards stock, which trades on the New York Stock Exchange (symbol AGE), closed at 31 11/16 on February 29, 2000. This represents a 290 percent increase from the 8 1/8 closing price on February 28, 1991. (Per share data have been restated for stock splits and stock dividends.) 42 SHAREHOLDER INFORMATION Annual Meeting The 2000 Annual Meeting of Stockholders will be held at the Company's headquarters, One North Jefferson, St. Louis, Missouri, on Thursday, June 22, 2000, at 10 a.m. The Notice of Annual Meeting, Proxy Statement and Proxy Voting Card are mailed in May to each stockholder. The Proxy Statement describes the items of business to be voted on at the Annual Meeting and provides information on the Board of Directors' nominees for director and their principal affiliations with other organizations, as well as other information about the Company. Quarterly Reports Mailed in June, September and December, the quarterly reports contain a chairman's letter, a balance sheet and a summary of earnings. Dividend Payment Dates The next four anticipated dividend payment dates are July 3 and October 2, 2000, and January 2 and April 2, 2001. Form 10-K The Form 10-K Annual Report filed with the Securities and Exchange Commission, which provides further details on A.G. Edwards' business, is available at no charge from: Secretary, A.G. Edwards, Inc. One North Jefferson St. Louis, Missouri 63103 Stock Exchange Listing A.G. Edwards, Inc., stock is traded on the New York Stock Exchange. (The stock symbol is AGE.) The approximate number of stockholders on February 29, 2000, was 27,700. Registrar/Transfer Agent The Bank of New York Shareholder Relations Department-11E P.O. Box 11258 Church Street Station New York, New York 10286-1258 (800) 524-4458 Account Protection Package The securities held by A.G. Edwards & Sons, Inc., for client accounts are protected up to $500,000, including up to $100,000 for cash claims, by the Securities Investor Protection Corporation (SIPC). In addition to the SIPC coverage, securities and cash held in client accounts are provided additional protection up to the full value of the account (as determined by SIPC) by a commercial insurance company. Exchange Memberships A.G. Edwards companies are members of all major stock and commodity exchanges, including the American, Boston, Chicago, New York, Pacific and Philadelphia stock exchanges; the Chicago Board Options Exchange; the Chicago Board of Trade; the Chicago Mercantile Exchange; the New York Mercantile Exchange; and other commodity exchanges. A.G. Edwards companies are also members of the National Futures Association and the National Association of Securities Dealers, Inc. 43