10-Q 1 0001.txt 3RD QUARTER 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________________ FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended November 30, 2000 Commission file number 1-8527 A.G. EDWARDS, INC. State of Incorporation: DELAWARE I.R.S. Employer Identification No: 43-1288229 ONE NORTH JEFFERSON AVENUE ST. LOUIS, MISSOURI 63103 Registrant's telephone number, including area code: (314) 955-3000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At December 31, 2000, there were 80,318,765 shares of A.G. Edwards, Inc. common stock, par value $1, issued and outstanding. A.G. EDWARDS, INC. INDEX Page PART I. FINANCIAL INFORMATION Consolidated balance sheets 1 Consolidated statements of earnings 2 Consolidated statements of cash flows 3 Notes to consolidated financial statements 4-6 Management's financial discussion 7-10 PART II.OTHER INFORMATION 11 SIGNATURES 12
A.G. EDWARDS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) (Unaudited) November 30, February 29, 2000 2000 ASSETS Cash and cash equivalents $ 109,411 $ 154,487 Cash and government securities, segregated under federal and other regulations 81,876 86,851 Securities purchased under agreements to resell 12,614 10,674 Securities borrowed 143,635 278,199 Receivables: Customers 3,874,495 3,777,352 Brokers, dealers and clearing organizations 14,474 22,529 Fees, dividends and interest 65,713 62,989 Securities inventory, at fair value: State and municipal 200,965 240,154 Government and agencies 64,517 57,943 Corporate 54,590 110,311 Investments 201,448 116,307 Property and equipment, at cost, net of accumulated depreciation and amortization of $347,537 and $337,602 482,713 312,942 Deferred income taxes 75,610 75,361 Other assets 60,091 41,488 $5,442,152 $5,347,587 LIABILITIES AND STOCKHOLDERS' EQUITY Short-term borrowings $ 423,500 $ 638,000 Checks payable 175,565 283,602 Securities loaned 1,329,199 637,684 Payables: Customers 914,015 946,373 Brokers, dealers and clearing organizations 139,858 203,129 Securities sold but not yet purchased, at fair value 22,451 24,920 Employee compensation and related taxes 613,954 740,188 Income taxes 52,068 73,557 Other liabilities 112,920 83,012 Total Liabilities 3,783,530 3,630,465 Stockholders' Equity: Preferred stock, $25 par value: Authorized, 4,000,000 shares, none issued Common stock, $1 par value: Authorized, 550,000,000 shares Issued, 96,463,114 shares 96,463 96,463 Additional paid-in capital 266,609 253,917 Retained earnings 1,852,618 1,645,332 2,215,690 1,995,712 Less - Treasury stock, at cost (15,262,403 and 9,254,005 shares) 557,068 278,590 Total Stockholders' Equity 1,658,622 1,717,122 $5,442,152 $5,347,587 See Notes to Consolidated Financial Statements.
-1-
A.G. EDWARDS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended November 30, November 30, 2000 1999 2000 1999 REVENUES: Commissions $ 299,632 $ 312,914 $1,036,044 $ 975,414 Principal transactions 60,914 72,817 214,657 203,120 Investment banking 36,333 53,568 132,929 169,655 Asset management and service fees 166,257 132,095 489,661 393,434 Interest 93,652 63,015 283,128 174,105 Other 5,285 80,228 26,006 86,147 662,073 714,637 2,182,425 2,001,875 EXPENSES: Compensation and benefits 402,991 425,590 1,344,125 1,248,455 Occupancy and equipment 56,176 36,473 147,177 102,213 Communications 35,087 30,842 102,630 84,699 Floor brokerage and clearance 5,629 5,155 17,399 15,866 Interest 28,079 6,572 81,756 14,752 Other 44,223 25,873 105,987 82,124 572,185 530,505 1,799,074 1,548,109 EARNINGS BEFORE INCOME TAXES 89,888 184,132 383,351 453,766 INCOME TAXES 32,670 68,830 141,810 171,610 NET EARNINGS $ 57,218 $ 115,302 $ 241,541 $ 282,156 Earnings per share: Diluted $ .69 $ 1.23 $ 2.86 $ 2.97 Basic $ .71 $ 1.25 $ 2.92 $ 3.02 Dividends per share $ .16 $ .15 $ .48 $ .45 Average common and common equivalent shares outstanding (in thousands): Diluted 83,731 93,847 84,542 95,075 Basic 81,633 92,040 82,736 93,403 See Notes to Consolidated Financial Statements. -2-
A.G. EDWARDS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Nine Months Ended November 30, 2000 1999 Cash Flows from Operating Activities: Net earnings $ 241,541 $ 282,156 Noncash and nonoperating items included in earnings 81,476 9,547 Change in: Segregated cash and government securities 4,975 (8,920) Net securities borrowed and loaned (27,285) 20,084 Net receivable from customers (129,501) (707,995) Net payable to brokers, dealers and clearing organizations (55,216) 90,629 Fees, dividends and interest receivable (2,724) (8,156) Net securities inventory 85,867 (95,976) Other assets and liabilities (269,386) 18,537 Net cash from operating activities (70,253) (400,094) Cash Flows from Investing Activities: Securities purchased under agreements to resell (1,940) 11,864 Purchase of property and equipment (237,783) (71,296) Investments (74,946) (8,113) Net cash from investing activities (314,669) (67,545) Cash Flows from Financing Activities: Short-term borrowings (214,500) 566,900 Securities loaned 853,364 86,377 Employee stock transactions 82,624 58,321 Cash dividends paid (40,137) (42,134) Purchase of treasury stock (341,505) (184,430) Net cash from financing activities 339,846 485,034 Net change in Cash and Cash Equivalents (45,076) 17,395 Cash and Cash Equivalents, Beginning of Period 154,487 99,499 Cash and Cash Equivalents, End of Period $ 109,411 $ 116,894 Income tax payments totaled $151,503 and $122,507 during the nine month periods ended November 30, 2000, and 1999, respectively. Interest payments totaled $77,111 and $13,429 during the nine month periods ended November 30, 2000, and 1999, respectively. See Notes to Consolidated Financial Statements.
-3- A.G. EDWARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED NOVEMBER 30, 2000 (Dollars in thousands, except per share amounts) (Unaudited) FINANCIAL STATEMENTS: The consolidated financial statements include the accounts of A.G. Edwards, Inc., and its wholly owned subsidiaries (collectively referred to as the "Company"), including its principal subsidiary, A.G. Edwards & Sons, Inc. ("Edwards"), and are prepared in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended February 29, 2000. All adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods have been reflected. All such adjustments consist of normal recurring accruals unless otherwise disclosed in these interim consolidated financial statements. The results of operations for the nine months ended November 30, 2000, are not necessarily indicative of the results for the year ending February 28, 2001. Where appropriate, prior period's financial information has been reclassified to conform with the current period presentation. EMPLOYEE STOCK PLANS: Options to purchase 1,875,000 shares of common stock granted under the Employee Stock Purchase Plan are exercisable October 1, 2001, at 85% of market price based on dates specified in the plan. Employees purchased 1,870,983 shares at $32.33 per share in October 2000. Treasury shares were utilized for these transactions. STOCKHOLDERS' EQUITY: Under its stock repurchase program, the Company purchased 8,384,200 shares at an aggregate cost of $341,505 during the nine month period ended November 30, 2000. For the nine month period ended November 30, 1999, the Company purchased 6,191,700 shares at an aggregate cost of $184,430. On December 15, 2000, the Company amended its Shareholders' Rights Plan, among other things, to eliminate the requirement that certain Board actions, including redemption of the rights, be taken only by certain directors; to increase each right's exercise price per share of common stock from $90 to $150; to eliminate the ability of the stockholders under certain circumstances to cause the redemption of the rights, and to permit the Board of Directors to reduce the percentage of outstanding shares which, if acquired, would cause the issuance of the rights from the current 20% to not less than 10%. Comprehensive earnings for the nine month periods ended November 30, 2000 and 1999 were equal to the Company's net earnings. -4-
A.G. EDWARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED NOVEMBER 30, 2000 (Dollars in thousands, except per share amounts) (Unaudited) The following table presents the computations of basic and diluted earnings per share: Three Months Ended Nine Months Ended November 30, November 30, 2000 1999 2000 1999 Net earnings available to common stockholders $ 57,218 $115,302 $241,541 $ 282,156 Shares (in thousands): Weighted average shares outstanding 81,633 92,040 82,736 93,403 Dilutive effect of employee stock plans 2,098 1,807 1,806 1,672 Total weighted average diluted shares 83,731 93,847 84,542 95,075 Diluted earnings per share $ 0.69 $ 1.23 $ 2.86 $ 2.97 Basic earnings per share $ 0.71 $ 1.25 $ 2.92 $ 3.02 INVESTMENTS: In November 1999, the Company recognized a gain of $75,236 from the sale of one- half of the Company's investment in a privately held investment management company and the related increase in the carrying value of the remaining investment to its fair value. This investment had been carried on the equity method of accounting, which was discontinued due to the reduction of the Company's ownership and the terms surrounding the remaining investment. The effect of this gain on last year's nine month results was as follows: As Excluding Reported Investment Difference Revenues $2,001,875 $ 1,926,639 $ 75,236 Net Earnings $ 282,156 $ 246,961 $ 35,195 E.P.S. (diluted) $ 2.97 $ 2.60 $ 0.37 NET CAPITAL REQUIREMENTS: Edwards is subject to the net capital rule administered by the Securities and Exchange Commission ("SEC"). This rule requires Edwards to maintain a minimum net capital, as defined, and to notify and sometimes obtain the approval of the SEC and other regulatory organizations for substantial withdrawals of capital and loans to affiliates. As of November 30, 2000, Edwards' net capital of $824,834 was $748,066 in excess of the minimum requirement. -5- A.G. EDWARDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED NOVEMBER 30, 2000 (Dollars in thousands, except per share amounts) (Unaudited) ENTERPRISE WIDE DISCLOSURE: The Company operates and is managed as a single business segment, that of providing investment services to its clients through its financial consultants in 692 sales offices. Transaction services include commissions and sales credits earned by executing or facilitating the execution of security and commodity trades. Asset management fees are earned by providing portfolio advisory services through third-party managers, including mutual funds, and the Company's in-house portfolio managers. The Company earns interest revenue principally from financing its clients' margin accounts, debt securities carried for resale and short-term investments. The following table presents the Company's revenue by type of service: Three Months Ended Nine Months Ended November 30, November 30, 2000 1999 2000 1999 Transaction services $ 404,310 $447,183 $1,409,164 $1,371,981 Asset management services 146,986 114,266 425,937 341,481 Interest 93,652 63,015 283,128 174,105 Other 17,125 90,173 64,196 114,308 $ 662,073 $714,637 $2,182,425 $2,001,875 -6-
A.G. EDWARDS, INC. MANAGEMENT'S FINANCIAL DISCUSSION NINE MONTHS ENDED NOVEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED NOVEMBER 30, 1999 General Business Environment Retail investors endured heavy volatility in the trading markets during the nine months ended November 30, 2000. The Dow Jones Industrial Average (the Dow) began this period at 10,128 and ended at 10,414 for an increase of 3%. However, during the period the Dow closed as high as 11,311 and as low as 9,796. The Nasdaq Composite Index began the period at 4,697 and ended at 2,598 for a decline of 45%. While this decline was precipitous, a closer inspection reveals a decline of 28% for the three months ended May 31, 2000, followed by an increase of 24% for the three months ended August 31, 2000, and finally a decrease of 38% for the three months ended November 30, 2000. Many factors contributed to this volatility including the lofty valuations of many "new economy stocks", uncertainty over the direction of interest rates, inflation concerns fueled by the high price of oil and delay over the outcome of the Presidential election. Investor activity overall was not slowed by the volatility as The New York Stock Exchange and Nasdaq overall trading volumes increased 26% and 58%, respectively, over the same period last year. However, trading volumes did decline late in the period due to uncertainties in the market. For the Company, trades in commission-based accounts increased 12%, while total trades, including trades in fee-based accounts, increased 22%. The number of branches increased 29 to 692 and the number of financial consultants increased 241 to 6,957 since the end of the same period last year. Results of Operations Total revenues increased $181 million (9%) to $2.2 billion from $2.0 billion last year. Expenses were $1.8 billion, an increase of $251 million (16%). Net earnings fell 14% from the prior year and net profit margins declined to 11.1% this year from 14.1% last year. The prior period's results include a $37.6 million realized gain from the disposition in November 1999 of one-half of an investment in a privately held investment management company and a $37.6 million unrealized gain from the recognition of the increased value of the remaining investment. The total gain of $75.2 million, included in other revenue, increased net earnings by $35.2 million. Excluding this one-time gain from the prior period's results, total revenues increased $256 million (13%) and net earnings decreased $5 million (2%). The increase in revenues was outpaced by a rise in expenses primarily due to technology-related expenditures, higher employment and branch and home office expansion. Total commission revenue increased $61 million (6%) reflecting increased trading volume and, to a lesser extent, continued expansion of the Company's distribution system. Over-the-counter (OTC) equity commissions rose $41 million (20%), mutual fund commissions rose $18 million (8%) and insurance commissions rose $15 million (13%). As a partial offset, listed equity commissions fell $17 million (4%). Client demand for OTC equities, mutual funds and variable annuities remained strong throughout most of the period. -7- Principal transaction revenue increased $12 million (6%) primarily as a result of a $32 million (55%) rise in revenue from sales of equity products reflecting an increase in the number of OTC equity trades resulting from higher volume in the technology-driven Nasdaq market. In addition, the Company acted as a market maker in a greater number of actively-traded, larger-capitalized securities than in the prior year. Revenue from sales of debt products declined $20 million (14%) due to falling yields for much of this year compared to rising yields in the prior year resulting in a decrease in investor demand for fixed income products. In addition, many bond investors were hesitant to enter the markets due to uncertainty caused by federal and state budget surpluses, the U.S. Treasury Department's buyback program and the Federal Reserve's stance on interest rates. Investment banking revenue decreased $37 million (22%). Management fees declined $12 million (37%) primarily due to a decline in the number of offerings managed or co-managed this year. Revenue from underwriting debt products declined $14 million (33%). New municipal bond issuance declined as strong economic growth decreased state and local governments need to borrow. Revenue from underwriting corporate stocks decreased $22 million (47%) following an industry-wide decrease in domestic IPO activity this year. As a partial offset to the above declines, corporate equity unit revenue increased $10 million (20%) due to strong investor demand for equity-based unit trusts. Asset management and service fees increased $96 million (25%). Fees from third- party mutual funds and annuities rose $36 million (16%) reflecting strong cash flows into funds and annuities. Fee-based revenue resulting from the administration of client assets under third-party management and from the Company's management services improved $48 million (44%). The average number of fee-based accounts increased 26,000 (58%) while average total assets in these programs increased $7 billion (47%). Interest revenue increased $109 million (63%). Interest revenue from margin accounts rose $103 million (65%) due to a 41% increase in average margin debits coupled with a higher average broker call rate. Interest revenues from securities owned increased $6 million (43%) as a result of higher average debt inventory levels combined with higher average interest rates. Compensation and benefits increased $96 million (8%). Commission expense increased $46 million (7%) due to the rise in commissionable revenue. General and administrative salaries increased $63 million (28%) and related benefits increased $9 million (7%) primarily as a result of general increases and higher employment. Incentive-related compensation fell $23 million (9%) as a result of lower earnings. Occupancy and equipment expense increased $45 million (44%) and communication expense rose $18 million (21%) primarily due to a $36 million increase in technology-related expenditures and, to a lesser extent, increased business volume and branch and home office expansion. All remaining expenses increased $92 million (82%) primarily due to a $67 million (454%) increase in interest expense resulting from increases in securities lending and short-term borrowings used to finance the increase in margin balances, capital expenditures and stock repurchases. The remaining increase is primarily as a result of branch and home office expansion and technology-related expenses. -8- THREE MONTHS ENDED NOVEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED NOVEMBER 30, 1999 Net earnings for the quarter ended November 30, 2000 declined $58 million (50%) to $57 million and revenues fell $53 million (7%) to $662 million compared to net earnings of $115 million on revenues of $715 million for the same period a year ago. Excluding the one-time gain from the prior year's three-month period, total revenues increased $23 million (4%) and net earnings decreased $23 million (29%) for the quarter ended November 30, 2000. Total commission revenue declined $13 million (4%) primarily due to a $19 million (7%) decrease in equity related commissions and mutual fund commissions reflecting lower trade volume in commission-based accounts partially offset by a $6 million (16%) increase in insurance commissions reflecting increased sales of variable annuities. Principal transaction revenue decreased $12 million (16%) reflecting a decrease in investor demand for fixed income products as a result of falling yields on debt products this period. Compensation and benefits declined $23 million (5%) primarily due to a $39 million (42%) decrease in incentive-related compensation as a result of lower earnings and a $9 million (4%) decrease in commission expense due to lower trade volume partially offset by an increase in general and administrative salaries of $24 million (30%) reflecting higher employment. For the remaining revenue and expense categories, the explanation of fluctuations presented for the nine-month period are generally applicable to the three months of operations. LIQUIDITY AND CAPITAL RESOURCES The Company's assets fluctuate in the normal course of business, primarily because of the timing of certain transactions. The principal sources for financing the Company's business are stockholder's equity, cash generated from operations, short-term borrowings and securities lending activities. The Company believes it has adequate sources of credit available, if needed, to finance client activities, branch and headquarters expansion, stock repurchases and other capital expenditures. Short-term borrowings consist of bank loans. The mix of bank loans and securities lending arrangements fluctuates based on the interest rates available on a day-to-day basis. The Company is expanding its headquarters with an additional office building, learning center and parking garage. The total cost of these projects is estimated to be $215 million. The Company expended $31 million through November 30, 2000 in connection with these projects. During the first nine months of the fiscal year, the Company purchased 8.4 million shares under its stock repurchase program. The cost of these repurchased shares was $342 million. A total of 31 million shares have been repurchased since this program began in May 1996. RISK MANAGEMENT No material changes have occurred related to the Company's policies, procedures, controls or risk profile. -9- FORWARD LOOKING STATEMENTS The Management's Financial Discussion contains forward-looking statements within the meaning of federal securities laws. Actual results are subject to risks and uncertainties, including both those specific to the Company and those specific to the industry, which could cause results to differ from those contemplated. The risks include, but are not limited to, general economic conditions, actions of competitors, regulatory actions, changes in legislation, risk management and technology changes. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. The Company does not undertake any obligation to publicly update any forward-looking statements. -10- PART II. OTHER INFORMATION Item 1:Legal Proceedings There have been no material changes in the legal proceedings previously reported in the Company's Annual Report on Form 10-K for the year ended February 29, 2000. Item 2:Changes in Securities On December 15, 2000, the Company amended its Shareholders' Rights Plan, among other things, to eliminate the requirement that certain Board actions, including redemption of the rights, be taken only by certain directors; to increase each right's exercise price per share of common stock from $90 to $150; to eliminate the ability of the stockholders under certain circumstances to cause the redemption of the rights, and to permit the Board of Directors to reduce the percentage of outstanding shares which, if acquired, would cause the issuance of the rights from the current 20% to not less than 10%. Item 6:Exhibits and Reports on Form 8-K Exhibit 4 Amendment No. 4 dated December 15, 2000, to the Rights Agreement dated December 30, 1988 filed as Exhibit 4.5 to Registrants Form 8-A/A on December 19, 2000. Exhibit 27 Financial Data Schedule. (This financial data schedule is only required to be submitted with the registrant's Quarterly Report on Form 10-Q as filed electronically to the SEC's EDGAR database.) Reports on Form 8-K On December 19, 2000, the Company filed Item 5 to Form 8-K related to certain changes in its Shareholder's Rights Plan. A summary of which is included under Item 2 of this Form 10-Q. -11- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. A.G. EDWARDS, INC. (Registrant) Date: January 16, 2001 \s\Benjamin F. Edwards, III BENJAMIN F. EDWARDS, III Principal Executive Officer Date: January 16, 2001 \s\Robert L. Proost ROBERT L. PROOST Principal Financial Officer -12-