-----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, DSEGbbkv8zWYn+kdmDsPuUDh6whbq1M3/WhE/Rgev/GFkTg845SMeDyTyBpgO13q wP6Bk0JSDL6XR1vQMfJ3gw== /in/edgar/work/20000530/0000718482-00-000014/0000718482-00-000014.txt : 20000919 0000718482-00-000014.hdr.sgml : 20000919 ACCESSION NUMBER: 0000718482-00-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000530 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDWARDS A G INC CENTRAL INDEX KEY: 0000718482 STANDARD INDUSTRIAL CLASSIFICATION: [6211 ] IRS NUMBER: 431288229 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08527 FILM NUMBER: 645918 BUSINESS ADDRESS: STREET 1: ONE N JEFFERSON AVE CITY: ST LOUIS STATE: MO ZIP: 63103 BUSINESS PHONE: 3142893000 10-K 1 0001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _____________________ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended February 29, 2000 Commission file number 1-8527 A.G. EDWARDS, INC. State of Incorporation: DELAWARE I.R.S. Employer Identification No.: 43-1288229 ONE NORTH JEFFERSON AVENUE ST. LOUIS, MISSOURI 63103 Registrant's telephone number, including area code: (314) 955-3000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE RIGHTS TO PURCHASE COMMON STOCK NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE 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 . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) The aggregate market value of voting stock held by non-affiliates was approximately $3.2 billion at May 1, 2000. At May 1, 2000, there were 84,635,658 shares of A.G. Edwards, Inc. Common Stock, $1 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the A.G. Edwards, Inc. Annual Report Fiscal Year 2000 (the "2000 Annual Report to Stockholders") are incorporated by reference into Parts I, II and IV hereof. Portions of the Company's Proxy Statement filed with the SEC in connection with the Company's Annual Meeting of Stockholders to be held June 22, 2000 (the "Company's 2000 Proxy Statement") are incorporated by reference into Part III hereof. Other documents incorporated by reference in this report are listed in the Exhibit Index beginning on page 14 of this Form 10-K. 1 PART I ITEM 1. BUSINESS. (a) General Development of Business A.G. Edwards, Inc., a Delaware corporation, is a holding company incorporated in 1983 whose principal subsidiary, A.G. Edwards & Sons, Inc. (Edwards), is successor to a partnership founded in 1887. A.G. Edwards, Inc. and its directly owned and indirectly owned subsidiaries (collectively referred to as the Company) provide securities and commodities brokerage, asset management, insurance, trust, investment banking and other related financial services to individual, corporate, governmental and institutional clients. Edwards' business, primarily with individual clients, is conducted through one of the largest retail branch office networks (based upon number of offices and financial consultants) in the United States. At February 29, 2000, Edwards had 670 offices (up from 639 at the end of the prior fiscal year) in 49 states and the District of Columbia, and 15,451 full-time employees (up from 13,953), including 6,823 financial consultants (up from 6,528) providing services for approximately 2,740,000 clients (up from 2,340,000). No single client accounts for a significant portion of Edwards' business. Edwards is a member of all major securities exchanges in the United States, the National Association of Securities Dealers, Inc. (NASD) and the Securities Investor Protection Corporation (SIPC). Additionally, Edwards has memberships on several commodity exchanges and is registered with the Commodity Futures Trading Commission (CFTC) as a futures commission merchant (FCM). AGE Commodity Clearing Corp. (Clearing), a commodity clearing subsidiary, is registered with the CFTC as a FCM and operates exclusively as a commodity clearing company for Edwards. Clearing is a member of all major U.S. commodities exchanges and the National Futures Association (NFA). The five A.G. Edwards trust companies (collectively referred to as the Trust Companies), including a federally chartered savings bank, provide investment advisory, portfolio management and trust services. Gull-AGE Capital Group, Inc. serves as general partner of 99 real estate partnerships in connection with 30 limited partnerships sold by Edwards from 1982 through 1985. A.G. Edwards Capital, Inc. serves as general partner to two tandem private equity partnerships formed to invest in a portfolio of venture capital and buy-out funds and direct investments. (b) Financial Information About Industry Segments Information regarding industry segments is set forth in Note 1 (Summary of Significant Accounting Policies) of the Notes to Consolidated Financial Statements under the caption "Basis of Financial Information" appearing on page 28 of the 2000 Annual Report to Stockholders. Such information is hereby incorporated by reference. 2 (c) Narrative Description of Business Commissions, principal transactions, investment banking, and asset management and service fees were the principal sources of consolidated revenue for the last three fiscal years. The total amount of revenue contributed by these services, including the amount of total revenue by class of products or services that accounted for 10% or more of consolidated revenues, are set forth on pages 22 and 23 of the 2000 Annual Report to Stockholders under the caption "Ten-Year Financial Summary." Such information is hereby incorporated by reference. COMMISSIONS Commission revenue represents the most significant source of revenue for the Company, accounting for more than 50% of total revenue during the last five years. The following briefly describes the Company's sources of commission revenue. Listed and Over-the-Counter Securities. A significant portion of the Company's revenue is derived from commissions generated on securities transactions executed by Edwards, as a broker, in common and preferred stocks and debt instruments on exchanges or in the over-the-counter markets. Edwards' brokerage clients are primarily individual investors; however, resources continue to be directed to further the development of its institutional business. Edwards' commission rates for brokerage transactions vary with the size and complexity of the transactions, among other factors. Options. Edwards acts as broker in the purchase and sale of option contracts to buy or sell securities, primarily common stocks and stock indexes. Edwards holds memberships for trading on principal option exchanges. Mutual Funds. Edwards distributes mutual fund shares in continuous offerings of open-end funds. Income from the sale of mutual funds is derived primarily from the standard dealer's discount which varies as a percentage of the client's purchase price depending upon the size of the transaction and terms of the selling agreement. Revenues derived from mutual fund sales continue to be a significant portion of overall revenues. Edwards does not sponsor its own mutual fund products. Commodities and Financial Futures. Edwards acts as broker in the purchase and sale of commodity futures contracts, financial futures contracts and options on commodity and financial futures contracts. These contracts cover agricultural products, precious metals, currency, interest rate and stock index futures. Substantially all of Edwards' clients' futures transactions are executed and cleared through Clearing. Nearly all transactions in futures contracts are executed with a relatively low margin deposit, usually 3% to 12% of the total contract amount. Consequently, the risk to the client and resulting credit risk assumed by Edwards is substantial, generally greater than on securities transactions. To limit its exposure, Edwards requires its clients to meet minimum net worth requirements and other established credit standards, in addition to the margin deposits. Regulations of some commodity exchanges limit the allowable upward or downward price fluctuations for each commodity on a given day. These restrictions on price fluctuations may preclude purchases or sales necessary to limit losses or realize gains. 3 As a member of the clearing associations of the principal commodity exchanges, Clearing has potentially significant financial exposure in the event other members default on their obligations to the clearing houses of such exchanges. Insurance. As agent for several life insurance companies, Edwards distributes life insurance and tax-deferred annuities. Edwards also provides financial planning services to assist individuals in structuring financial portfolios to achieve their financial goals. In addition, A.G. Edwards Life Insurance Company is licensed to issue life insurance policies under the laws of Missouri, but has not issued any to date. PRINCIPAL TRANSACTIONS Client transactions in the equity and fixed income over-the-counter markets may be effected by Edwards acting as principal as well as agent. Principal transactions, including market making, require maintaining inventories of securities to satisfy customer order flow. These securities are valued in the Company's financial statements at fair value and unrealized gains or losses are included in the results of operations. Securities fluctuations may be sudden and sharp as a result of changes in market conditions. To the extent Edwards can correctly anticipate such changes, risks may be reduced by varying inventory levels or by use of hedging strategies. INVESTMENT BANKING Edwards is an underwriter of corporate and municipal securities, certificates of deposit, as well as corporate and municipal unit investment trusts and closed- end mutual funds. Edwards' municipal underwriting activities include areas of specialization in kindergarten through 12th grade schools, sports and entertainment, municipal finance, housing, higher education, health care, and public utilities. Corporate finance activities are focused on five major areas: industrial growth, real estate, financial services, emerging growth, consumer products and energy. As an underwriter, usually in conjunction with other broker-dealers and financial institutions, Edwards purchases securities for resale to its clients. Edwards acts as a consultant to corporations and municipal entities in planning their capital needs and determining the most advantageous means for raising capital. It also advises clients in merger and acquisition activities and acts as agent in private placements. Underwriting involves risk. As an underwriter, Edwards may incur losses if it is unable to resell the securities it is committed to purchase or if it is forced to liquidate all or a part of its commitment at less than the purchase price. Under federal and state securities laws, an underwriter is exposed to substantial potential liability for material misstatements or omissions of fact in the prospectus used to describe the securities being offered. Generally, issuers agree to indemnify underwriters against such liabilities, but otherwise, underwriters are not specifically insured. In addition, the commitment of capital to underwriting may reduce Edwards' regulatory net capital position and, consequently, its underwriting participation may be limited by the requirement that it must at all times be in compliance with the net capital rules administered by the Securities and Exchange Commission (SEC). 4 Although it is generally more profitable to manage or co-manage an underwriting, as opposed to being a participant, managers generally commit to underwriting a greater portion of the offering than the other members of the underwriting group and consequently, managers assume a greater risk. ASSET MANAGEMENT AND SERVICE FEES Asset management and service fees consist primarily of revenues earned for providing support and services in connection with assets under third-party management, including mutual funds, and revenues from assets under management by Edwards. 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. Edwards, through the Trust Companies, provides its clients with personal, ERISA and custodial trust services. Clients desiring professional money management are offered three types of account portfolio services. Edwards, acting as investment manager, offers portfolio management strategies based on the client's investment objectives. Edwards' investment consulting service offers the Private Advisor Service, which provides clients with third-party investment management, performance measurement, management search and related consulting services. The PathwaysSM, Spectrum, Fund Navigator and Fund Advisor investment advisory programs are personalized, fee-based asset allocation programs that utilize load and no-load mutual fund investments. Clients select from established asset allocation models, or customize their own, based on their investment objectives, risk tolerance and time horizon. Under the new Client Choice program, clients can execute transactions and receive ongoing personalized advice from their financial consultant for an annual fee based on the value of their assets held at Edwards. Edwards offers the UltraAsset Account, Total Asset Account(R) and the Cash Convenience Account, which combine a full-service brokerage account with a money market fund. These programs provide for the automatic investment of customer free credit balances in one of several money market funds. Interest is not paid on free credit balances held in client accounts. In addition, the UltraAsset and Total Asset Accounts allow clients access to their margin securities and money market shares through the use of debit cards and checking account services provided by a major bank. The UltraAsset Account offers additional advanced features and special investment portfolio reports. Edwards provides custodial services to its clients for the various types of self-directed individual retirement accounts provided for under the Internal Revenue Code. MARGIN FINANCING Securities transactions are executed on a cash or margin basis. In margin transactions, Edwards extends credit to its clients for a portion of the purchase price, with the clients' securities held as collateral. The amount of credit is limited by the initial margin regulations issued by the Board of Governors of the Federal Reserve System. The current prescribed minimum initial margin for equity securities is equal to 50% of the value of equity securities purchased. 5 The regulations of the various exchanges require minimum maintenance margins, which are below the initial margin. Edwards' maintenance requirements generally exceed the exchanges' requirements. Such requirements are intended to reduce the risk that a market decline will reduce the value of the collateral below that of the client's indebtedness before the collateral can be liquidated. A substantial portion of the Company's assets and obligations result from transactions with clients who have provided financial instruments as collateral. The Company manages its risk associated with these transactions through position and credit limits, and the continuous monitoring of collateral. Additional information regarding risks associated with client transactions is set forth in Note 10 (Financial Instruments) of the Notes to Consolidated Financial Statements under the caption "Off-Balance Sheet Risk and Concentration of Credit Risk" appearing on page 32 of the 2000 Annual Report to Stockholders. Such information is hereby incorporated by reference. A client, borrowing in a margin account, is charged an interest rate based on the broker call loan rate plus up to an additional 2 1/2% depending on the amount of the client's borrowings during each interest period. Interest earned on these balances represents an important source of revenue for Edwards. Although borrowings from banks, either unsecured or secured by the clients' collateral securities, are an available source of funds to carry client margin accounts, the Company's stockholders' equity, cash received from loans of the clients' collateral securities to other brokers and, to the extent permitted by regulations, customer free credit balances provide most of the funds required. PRIVATE CLIENT SERVICES Edwards' Private Client Services group assists individuals and businesses meet a wide range of financial and investment needs. Individual investors can receive tailored asset allocation, tax- and risk-reduction strategies, portfolio reviews of stocks, bonds and mutual funds (including concentrated equity strategies) and comprehensive estate planning recommendations. Closely-held and publicly-traded business clients can access services for risk management, employee benefit programs (retirement plans and key employee compensation), capital formation and management and ownership succession. CPI Qualified Plan Consultants, Inc., acquired in fiscal 2000, provides third- party administration services for employee benefit plans to closely held businesses and corporations. INVESTMENT ACTIVITIES The Company's investment activities include, among other things, making investments in equity and equity-related securities in connection with merger, acquisition and private investment transactions, either for the accounts of private investment funds in which the Company participates or, to a lesser extent, for its own account. These activities include venture capital investments and investments in portfolio and operating companies. 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. 6 RESEARCH Edwards provides both technical market analysis and fundamental analysis of numerous industries and individual securities for use by its financial consultants and clients. In addition, reviews and analysis of general economic conditions, along with asset allocation recommendations, are also available. These services are provided by Edwards' research analysts, economists and market strategists. Revenues from research activities are derived principally through resulting transactions on an agency or principal basis. COMPETITION All aspects of the Company's business are highly competitive. Edwards competes with numerous broker-dealers, including on-line services, some of whom possess greater financial resources than the Company. Edwards competes for clients on the basis of price, quality of service, financial resources and reputation. There is constant competition to attract and retain personnel within the securities industry. Competition for the investment dollar and for clients has increased from other sources, such as commercial banks, savings institutions, mutual fund management companies, investment advisory companies as well as from other companies offering insurance, real estate and other investment opportunities. Recent regulatory actions, which reduced certain restrictions on bank affiliates engaging in securities activities, increased competition from commercial banks and their affiliates for securities underwriting activities and other brokerage services. 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 increased competition in markets which traditionally have been dominated by investment banks and retail securities firms. REGULATION Edwards, as a broker-dealer and FCM, is subject to various federal and state laws which specifically regulate its activities as a broker-dealer in securities and commodities, as an investment advisor and as an insurance agent. Clearing, as a FCM, is regulated as a broker in commodities. Edwards and Clearing are also subject to various regulatory requirements imposed by the securities and commodities exchanges and the NASD. The primary purpose of these requirements is to enhance the protection of customer assets. Under certain circumstances, these rules may limit the ability of the Company to make withdrawals of capital from Edwards and Clearing. These laws and regulatory requirements generally 7 subject Edwards and Clearing to standards of solvency with respect to capital requirements, financial reporting requirements, approval of qualifications of personnel engaged in various aspects of its business, record keeping and business practices, the handling of their clients' funds resulting from securities and commodities transactions and the extension of credit to clients on margin transactions. Infractions of these rules and regulations may include suspension of individual employees or their supervisors, termination of employees, limitations on certain aspects of Edwards' and Clearing's regulated businesses, as well as censures and fines, or proceedings of a civil or criminal nature which could result in a temporary or permanent suspension of a part or all of Edwards' and Clearing's activities. Information regarding regulatory minimum net capital is set forth in Note 5 of the Notes to Consolidated Financial Statements under the caption "Net Capital Requirements" appearing on pages 30 and 31 of the 2000 Annual Report to Stockholders. Such information is hereby incorporated by reference. A.G. Edwards & Sons (U.K.) Limited is registered under the laws of the United Kingdom and is regulated as a securities broker-dealer by the Securities and Futures Authority. Additionally, the four state-chartered trust companies are separately regulated by banking or trust laws of the states in which they are incorporated or do business. A.G. Edwards Trust Company FSB, a federal savings bank, is regulated by the Office of Thrift Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC) and by the SEC as an investment advisor. A.G. Edwards Life Insurance Company is regulated by the insurance laws of the State of Missouri. The Ceres Investment Company, a commodity pool operator and general partner of three commodity pools sponsored by Edwards, is regulated by the CFTC and the NFA. ITEM 2. PROPERTIES. The Company's headquarters are located at One North Jefferson Avenue, St. Louis, Missouri. It consists of several buildings owned by the Company which contain approximately 1,600,000 square feet of general office space, as well as underground and surface parking and a five story parking garage. The buildings are located on approximately 20 acres of land owned by the Company. The Company owns approximately 22 acres of land adjacent to its headquarters and is using this property principally for additional employee parking areas. In addition, the Company owns four additional office buildings which are used for information technology facilities, contingency planning facilities and trust company office. The Company is currently expanding its headquarters with the construction of an additional office building, an additional parking garage and a learning center. The remainder of the Company's branch offices occupy leased premises. Aggregate annual rental for branch office premises for the year ended February 29, 2000, was $55,577,000. ITEM 3. LEGAL PROCEEDINGS. (a) Litigation The Company is a defendant in lawsuits and arbitrations, 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. 8 (b) Proceedings Terminated during the Fourth Quarter of the Fiscal Year Covered by This Report. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended February 29, 2000. 9 EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth the executive officers of the Company as of May 1, 2000. Executive officers are appointed by the Board of Directors to hold office until their successors are appointed and qualified. Year First Appointed Executive Name Age Office & Title Officer of the Company Benjamin F. Edwards III 68 Chairman of the Board, 1983 President and Chief Executive Officer of the Company. Chairman of the Board, President and Chief Executive Officer of Edwards. Employee of Edwards for 43 years. Director of Edwards since 1967. Mary V. Atkin 45 Corporate Vice President 1999 of Edwards. Director of the Information Technology Division of Edwards since 1999. Manager of Corporate Communications of Edwards prior to 1999. Employee of Edwards for 22 years. Director of Edwards since 1993. Robert L. Bagby 56 Vice Chairman of the Board 1991 of the Company. Vice Chairman of the Board, Executive Vice President and Director of the Branch Division of Edwards. Employee of Edwards for 25 years. Director of Edwards since 1979. Donnis L. Casey 52 Corporate Vice President 1996 of Edwards. Director of the Staff Division of Edwards since 1996. Assistant Director of the Staff Division of Edwards prior to 1996. Employee of Edwards for 33 years. Director of Edwards since 1993. 10 Year First Appointed Executive Name Age Office & Title Officer of the Company Benjamin F. Edwards IV 44 Vice Chairman of the Board 1996 of the Company since 1999. Vice Chairman of the Board of Edwards since 1999. Executive Vice President and Director of the Sales and Marketing Division of Edwards since 1997. Director of the Investment Banking Division of Edwards from 1999 to 2000. Regional Manager of Edwards from 1995 to 1997. Employee of Edwards for 22 years. Director of Edwards since 1994. Alfred E. Goldman 66 Corporate Vice President, 1991 Director of Market Analysis of Edwards. Employee of Edwards for 40 years. Director of Edwards since 1967. Douglas L. Kelly 51 Vice President and 1994 Secretary of the Company. Corporate Vice President, Secretary, and Director of Law and Compliance of Edwards. Employee of Edwards for 6 years. Director of Edwards since 1994. Ronald J. Kessler 52 Corporate Vice President 1996 of Edwards. Director of the Operations Division since 1998. Assistant Director of Operations from 1988 to 1998. Employee of Edwards for 32 years. Director of Edwards since 1989. Thomas H. Martin Jr. 40 Assistant Treasurer of the 1999 Company since 1999. Vice President of Edwards. Controller of the Company and Edwards since 1999. Accounting Manager prior to 1999. Employee of Edwards for 19 years. 11 Paul F. Pautler 55 Senior Vice President of 2000 Edwards. Director of Investment Banking since March 2000. Director of Corporate Finance since 1999. Managing Director of Mergers and Acquisitions 1997 to 1999. Employee of Edwards for 3 years. Partner at the law firm of Thompson Coburn LLC for 16 years prior to joining Edwards. Director of Edwards since March 2000. Joseph G. Porter 39 Assistant Treasurer of the 1999 Company since 1999. Senior Vice President and Assistant Director of Administration of Edwards. Principal Accounting Officer of the Company and Edwards since 1999. Accounting Manager prior to 1999. Employee of Edwards for 17 years. Robert L. Proost 62 Vice President, Chief 1990 Financial Officer and Treasurer of the Company. Corporate Vice President, Treasurer, Chief Financial Officer, and Director of the Administration Division of Edwards. Employee of Edwards for 12 years. Director of Edwards since 1989. Benjamin F. Edwards III and Benjamin F. Edwards IV are father and son. 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by this item is contained in the 2000 Annual Report to Stockholders on page 44 under the caption "Quarterly Financial Information" and on page 45 under the caption "Shareholder Information." Such information is hereby incorporated by reference. The approximate number of equity security holders of record includes customers who hold the Company's stock in their accounts on the books of Edwards. ITEM 6. SELECTED FINANCIAL DATA. The information required by this item is contained on pages 22 and 23 of the 2000 Annual Report to Stockholders under the caption "Ten-Year Financial Summary." Such information is hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this item is contained on pages 17 through 21 of the 2000 Annual Report to Stockholders under the caption "Management's Financial Discussion." Such information is hereby incorporated by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required by this item is contained in Management's Financial Discussion under the caption "Risk Management" on page 20 and 21 of the 2000 Annual Report to Stockholders. Such information is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this item is contained in the Consolidated Financial Statements and Notes thereto, together with the Independent Auditors' Report thereon of Deloitte & Touche LLP dated April 20, 2000, and under the caption "Quarterly Financial Information" on pages 24 through 33 and page 44, respectively, of the 2000 Annual Report to Stockholders. Such information is hereby incorporated by reference. Additional Information: Edwards maintains a Stockbrokers Blanket Bond insuring various loss contingencies. Under the terms of the current policy, Edwards is responsible for the first $1,000,000 of each such occurrence. 13 The securities held by Edwards for client accounts are protected up to $500,000, including up to $100,000 for cash claims, by 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 accounts (as determined by SIPC) by a commercial insurance company. Neither SIPC protection nor the additional protection applies to fluctuations in the market value of securities. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item is included under the caption "Election of Directors - Nominees for Directors" on pages 4 through 7 of the Company's 2000 Proxy Statement and in Part I of this Form 10-K on pages 9 through 11 under the caption "Executive Officers of the Company." Such information is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is included under the captions "Director Compensation," "Executive Compensation" and "Performance Graph" on pages 8 through 19 of the Company's 2000 Proxy Statement. Such information is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is contained on pages 9 and 10 of the Company's 2000 Proxy Statement under the caption "Ownership of the Company's Common Stock." Such information is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is contained on page 20 of the Company's 2000 Proxy Statement under the caption "Certain Transactions." Such information is hereby incorporated by reference. 14 PART IV ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K. PAGE INDEX NUMBER (a) 1. Financial Statements Independent Auditors' Report (X) Consolidated balance sheets (X) Consolidated statements of earnings (X) Consolidated statements of stockholders' equity (X) Consolidated statements of cash flows (X) Notes to consolidated financial statements (X) (X) The consolidated financial statements, together with the Independent Auditors' Report thereon of Deloitte & Touche LLP included on pages 24 through 33 of the Company's 2000 Annual Report to Stockholders, are hereby incorporated by reference. 2. Financial Statement Schedules All schedules are omitted due to the absence of conditions under which they are required or because the required information is provided in the consolidated financial statements or notes thereto. 3. Exhibits* Some of the following exhibits were previously filed as exhibits to other reports or registration statements filed by the Registrant and are incorporated by reference as indicated below. 3(i) Certificate of Incorporation filed as Exhibit 3(i) to the Registrant's Form 10-K for the fiscal year ended February 28, 1993. 3(ii) By-laws filed as Exhibit 3(ii) to the Registrant's Form 10-K for the fiscal year ended February 28, 1994. 4(i) Reference is made to Articles IV, V, X, XII, XIII and XV of the Certificate of Incorporation filed as Exhibit 3(i) to this Form 10-K. 4(ii) Reference is made to Article II, Article III Sections 1 and 15, Article IV Sections 1 and 3, Article VI and Article VII Sections 1-3 of the By-laws filed as Exhibit 3(ii) to this Form 10-K. 4(iii) Rights Agreement dated as of December 30, 1988 between A.G. Edwards, Inc. and Boatmen's Trust Company as Rights Agent filed as Exhibit 4 to the Registrant's Form 8-K Report dated December 30, 1988. 15 4(iv) Amendment No. 1 to the Rights Agreement dated December 30, 1988, between A.G. Edwards, Inc. and Boatmen's Trust Company as Rights Agent, dated May 24, 1991 filed as Exhibit 4.4 to Registrant's Form 10-K for the fiscal year ended February 29, 1992. 4(v) Amendment No. 2 to the Rights Agreement dated December 30, 1988, between A.G. Edwards, Inc. and Boatmen's Trust Company as Rights Agent, dated June 22, 1995 filed with the Registrant's Form 8-A/A on August 17, 1995. 4(vi) Amendment No. 3 to the Rights Agreement dated December 30, 1988, between A.G. Edwards, Inc. and Boatmen's Trust Company as Rights Agent, dated July 11, 1997, filed as Exhibit 4.6 to Registrant's Form 10-K for the fiscal year ended February 28, 1998. 10 A.G. Edwards, Inc. 1988 Incentive Stock Plan (as amended and restated) filed as Exhibit 10 to Registrant's second quarter 1999 Form 10-Q, filed on October 14, 1999. 11 Computation of per share earnings is set forth in Note 8 (Stockholders' Equity) of the Notes to Consolidated Financial Statements under the caption "Earnings Per Share" appearing on page 31 of the 2000 Annual Report to Stockholders and incorporated herein by reference. 13 The 2000 Annual Report to Stockholders. Except for those portions of pages expressly incorporated by reference, the 2000 Annual Report to Stockholders is not deemed filed as part of this Annual Report on Form 10-K. 21 Registrant's Subsidiaries. 23 Independent Auditors' Consent. 24 Power of Attorney. 27 Financial Data Schedule. This Financial Data Schedule is only required to be submitted with the Registrant's Annual Report on Form 10-K as filed electronically to the SEC's EDGAR database. *Numbers correspond to document numbers in Exhibit Table of Item 601 of Regulation S-K. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of the year ended February 29, 2000. 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: May 18, 2000 By /s/ Benjamin F. Edwards III Benjamin F. Edwards III, Chairman of the Board 17 POWER OF ATTORNEY EXHIBIT 24 KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Benjamin F. Edwards III, and Robert L. Proost and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Report, any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Benjamin F. Edwards III Chairman of the Board, May 18, 2000 Benjamin F. Edwards III President and Director (Chief Executive Officer) /s/ Robert L. Proost Treasurer and Director May 18, 2000 Robert L. Proost (Principal Financial Officer) /s/ Robert L. Bagby Vice Chairman of the Board May 18, 2000 Robert L. Bagby and Director /s/ Benjamin F. Edwards IV Vice Chairman of the Board May 18, 2000 Benjamin F. Edwards IV and Director /s/ Dr. E. Eugene Carter Director May 18, 2000 Dr. E. Eugene Carter /s/ Charmaine S. Chapman Director May 18, 2000 Charmaine S. Chapman Director May 18, 2000 Dr. Louis Fernandez /s/ Samuel C. Hutchinson Jr. Director May 18, 2000 Samuel C. Hutchinson Jr. /s/ Ronald J. Kessler Director May 18, 2000 Ronald J. Kessler /s/ Thomas H. Martin Jr. Controller May 18, 2000 Thomas H. Martin Jr. /s/ Joseph G. Porter Principal Accounting Officer May 18, 2000 Joseph G. Porter 18 EXHIBIT INDEX Exhibit Description 13 2000 Annual Report to Stockholders. 21 Registrant's Subsidiaries. 23 Independent Auditors' Consent. 24 Power of Attorney. Included on Signature Page 17. 19 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.
29
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 EX-21 3 0003.txt EXHIBIT 21 A.G. EDWARDS, INC. REGISTRANT'S SUBSIDIARIES The following listing includes the registrant's directly-owned subsidiaries and indirect;y-owned subsidiaries (certain subsidiaries which are not significant are omitted from the listing), all of which are included in the consolidated financial statements: Place of Incorporation/ Name of Company Organization Subdiary of A.G. Edwards & Sons, Inc. (Edwards) Delaware Registrant The Ceres Investment Company Missouri Edwards AGE Commodity Clearing Corp. Delaware Registrant A.G. Edwards Life Insurance Company Missouri Registrant Edwards Development Corporation Missouri Registrant A.G. Edwards Trust Company (Missouri Trust) Missouri Registrant A.G.Edwards Investment Management Consulting Services, Inc. Missouri Missouri Trust A.G. Edwards Trust Company (New Jersey Trust) New Jersey Registrant A.G. Edwards Trust Company (Texas Trust) Texas Registrant A.G. Edwards Trust Company (Florida Trust) Florida Registrant A.G. Edwards Trust Company FSB Federal Charter Registrant A.G.E. Properties, Inc. (Properties) Missouri Registrant A.G.E. Realty Corp. Missouri Properties A.G.E. Redevelopment Corporation Missouri Properties GULL-AGE Capital Group, Inc. Delaware Registrant AGE Investments, Inc. Delaware Registrant A.G. Edwards Capital Inc. Delaware Registrant AGE Capital Holding, Inc. Delaware Registrant AGE International, Inc. (Internationl) Delaware Registrant A.G. Edwards & Sons (UK) Limited United Kingdom International CPI Qualified Plan Consultants, Inc. Delaware Registrant EX-23 4 0004.txt EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements (File Nos. 33-61949, 33-52786, 33-36609 and 33-23837) of the A.G. Edwards, Inc. 1988 Incentive Stock Plan on Form S-8 of our report dated April 20, 2000, appearing in and/or incorporated by reference in the Annual Report on Form 10-K of A.G. Edwards, Inc. for the year ended February 29, 2000. /s/ Deloitte & Touche LLP May 26, 2000 St. Louis, Missouri EX-27 5 0005.txt
BD 1000 YEAR FEB-29-2000 FEB-29-2000 154,487 3,862,870 10,674 278,199 408,408 312,942 5,347,587 638,000 2,173,292 0 637,684 24,920 0 0 0 96,463 1,620,659 5,347,587 284,218 248,588 1,426,426 225,719 544,531 22,818 1,766,711 623,115 623,115 0 0 382,921 4.16 4.08
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