-----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, NaJndFl7x+jXU/xIjiSFzMj46pE+d8eze3RsrTeoLkk/uwkW/v0besenbn1HFqBx crS+0mTttrvDszJYodKEEA== 0000718482-98-000008.txt : 19980601 0000718482-98-000008.hdr.sgml : 19980601 ACCESSION NUMBER: 0000718482-98-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980529 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDWARDS A G INC CENTRAL INDEX KEY: 0000718482 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 431288229 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08527 FILM NUMBER: 98634281 BUSINESS ADDRESS: STREET 1: ONE N JEFFERSON AVE CITY: ST LOUIS STATE: MO ZIP: 63103 BUSINESS PHONE: 3142893000 10-K 1 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 28, 1998 Commission file number 1-8527 A.G. EDWARDS, INC. State of Incorporation: DELAWARE I.R.S. Employer Identification No.: 43-1288229 ONE NORTH JEFFERSON AVENUE ST. LOUIS, MISSOURI 63103 Registrant's telephone number, including area code: (314) 955-3000 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. [ ] The aggregate market value of voting stock held by non-affiliates was approximately $4.3 billion at April 30, 1998. At April 30, 1998, there were 95,593,006 shares of A.G. Edwards, Inc. Common Stock, $1 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the fiscal year ended February 28, 1998 (the "1998 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 18, 1998 (the "Company's 1998 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) in the United States. At February 28, 1998, Edwards had 594 offices (up from 569 at the end of the prior fiscal year) in 49 states and the District of Columbia, and 12,967 full-time employees (up from 12,031), including 6,289 investment brokers (up from 6,070) providing services for approximately 2,060,000 clients (up from 1,880,000). 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. AGE Commodity Clearing Corp. (Clearing), a commodity clearing subsidiary, is registered with the CFTC as a futures commission merchant (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 four A.G. Edwards Trust companies provide investment advisory, portfolio management and trust services. Gull-AGE Capital Group, Inc. serves as general partner of 59 real estate partnerships in connection with 24 limited partnerships sold by Edwards from 1982 through 1985. (b) Financial Information About Industry Segments The Company operates in one principal line of business, that of providing investment services. Because the Company's services use the same distribution personnel and facilities, and the same support services, it is impractical to identify the assets, expenses and profitability of any one class of service. (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 its consolidated revenues, are set forth on pages 2 22 and 23 of the 1998 Annual Report to Stockholders under the caption "Ten-Year Financial Summary." Such information is hereby incorporated by reference. The Company markets and distributes its products and services to its clients in 49 states and the District of Columbia through its branch office network, 6,289 investment brokers and 6,678 support employees. COMMISSIONS Commission revenue represents the most significant source of revenue for the Company, accounting for more than 50% of total revenue in four of 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 affected 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. 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 A.G. Edwards Trust Companies, provides its clients with personal, ERISA and custodial trust services. Through four separate state charters, the A.G. Edwards Trust Companies are able to provide trust services to clients in most states. 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. Through Asset Performance Monitor(R), Edwards provides its clients access to third-party investment management, performance measurement, management search and related consulting services. The Pathways(SM), Spectrum, Fund Navigator and Fund Advisor 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. 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 as provided 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 client's 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. The regulations of the various exchanges require minimum maintenance 5 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 9 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 1998 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 helps 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. RESEARCH Edwards provides both technical market analysis and fundamental analysis of numerous industries and individual securities for use by its investment brokers 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. 6 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, the quality of its services, financial resources and reputation within the clients' communities. 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, legislative proposals, calling for further reductions on restrictions for brokerage service and underwriting activities, may also lead to increased competition from commercial banks and their affiliates. 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 A.G. Edwards, Inc. to make withdrawals of capital from Edwards and Clearing. These laws and regulatory requirements generally 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 even 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 page 30 of the 1998 Annual Report to Stockholders. Such information is hereby incorporated by reference. Under the Market Reform Act of 1990 and the Futures Trading Practices Act of 1992, the SEC and CFTC, respectively, adopted regulations requiring certain registered broker-dealers and FCMs to maintain, preserve and periodically describe and report their risk management policies and certain other information concerning affiliates whose activities are reasonably likely to have a material impact on the financial or operating condition of the broker-dealer or FCM. Edwards and Clearing are each subject to one or both of these laws and related regulations. 7 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 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 four commodity pools sponsored by Edwards, is regulated by the CFTC and the NFA. OTHER MATTERS Information concerning the Company's year 2000 compliance efforts is contained in the Management's Discussion and Analysis under Item 7 of this Form 10-K. Such information is hereby incorporated by reference. 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 1,500,000 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 630,000 square feet of land owned by the Company. The Company also owns approximately 407,000 square feet of land adjacent to its headquarters and is using this property principally for additional employee parking areas. The Company completed construction of an additional headquarters building in February 1998 at a total cost of approximately $43 million. Also, the Company owns two of its branch office buildings and two additional office buildings which serve as a data processing and contingency planning facility. The remainder of the Company's branch offices occupy leased premises. Aggregate annual rental for branch office premises for the year ended February 28, 1998, was $41,859,000. ITEM 3. LEGAL PROCEEDINGS. (a) Litigation The Company is a defendant in numerous 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. (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 28, 1998. 8 EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth the executive officers of the Company as of May 1, 1998. Executive officers are appointed by the Board of Directors to hold office until their successors are appointed and qualified.
Year First Appointed Executive Officer of the Name Age Office & Title Company Benjamin F. Edwards III 66 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 41 years. Director of Edwards since 1967. Robert G. Avis 66 Vice Chairman of the Board of 1984 the Company. Vice Chairman of the Board, Executive Vice President of Edwards, Director of the Investment Banking Division since 1989 and Director of the Sales and Marketing Division of Edwards from 1984 to 1997. Employee of Edwards for 32 years. Director of Edwards since 1970. Robert L. Bagby 54 Vice Chairman of the Board of 1991 the Company. Vice Chairman of the Board, Executive Vice President, and since 1995, Director of the Branch Division of Edwards. Assistant Director of the Branch Division of Edwards prior to 1995. Employee of Edwards for 23 years. Director of Edwards since 1979. 9 Year First Appointed Executive Officer of the Name Age Office & Title Company Donnis L. Casey 50 Corporate Vice President of Edwards. 1996 Director of the Staff Division of Edwards since 1996. Assistant Director of the Staff Division prior to 1996. Employee of Edwards for 31 years. Director of Edwards since 1993. Benjamin F. Edwards IV 42 Executive Vice President of Edwards. 1996 Director of the Sales and Marketing Division since 1997. Regional Officer of Edwards from 1995 to 1997. Assistant Branch Manager of Edwards from 1991 to 1995. Employee of Edwards for 20 years. Director of Edwards since 1994. Alfred E. Goldman 64 Corporate Vice President, Technical 1991 Market Analysis of Edwards. Employee of Edwards for 38 years. Director of Edwards since 1967. Douglas L. Kelly 49 Secretary of the Company. 1994 Corporate Vice President, Secretary of Edwards. Director of Law and Compliance of Edwards since 1994. Partner at the law firm of Peper, Martin, Jensen, Maichel and Hetlage prior to joining the Company. Employee of Edwards for 4 years. Director of Edwards since 1994. Ronald J. Kessler 50 Corporate Vice President of Edwards. 1996 Director of Operations since January 1998. Assistant Director of Operations prior to January 1998. Employee of Edwards for 30 years. Director of Edwards since 1989. 10 Year First Appointed Executive Officer of the Name Age Office & Title Company Eugene J. King 66 Vice President, Controller and 1983 Assistant Treasurer of the Company. Senior Vice President, Assistant Treasurer and Controller of Edwards. Employee of Edwards for 27 years. Director of Edwards since 1988. Robert L. Proost 60 Vice President and Treasurer of the 1990 Company. Corporate Vice President, Treasurer, Assistant Secretary and Director of Administration of Edwards. Employee of Edwards for 10 years. Director of Edwards since 1989. Benjamin F. Edwards III and Benjamin F. Edwards IV are father and son. Benjamin F. Edwards III and Robert G. Avis are stepbrothers.
11 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 1998 Annual Report to Stockholders on page 43 under the caption "Quarterly Financial Information" and on page 44 under the caption "Stockholder 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 1998 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 18 through 21 of the 1998 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 does not yet apply to the Company as its market capitalization at January 28, 1997, was less than $2.5 billion. 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 23, 1998, and under the caption "Quarterly Financial Information" on pages 24 through 33 and page 43 of the 1998 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. 12 The securities held by Edwards 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 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 6 of the Company's 1998 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" and "Executive Compensation" on pages 7 through 16 of the Company's 1998 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 7 and 8 of the Company's 1998 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 17 of the Company's 1998 Proxy Statement under the caption "Certain Transactions." Such information is hereby incorporated by reference. 13 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 1998 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. 14 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, 1998, between A.G. Edwards, Inc. and Boatmen's Trust Company as Rights Agent, dated July 11, 1997, filed as Exhibit 4.6 to this Form 10-K. 10(i) A.G. Edwards, Inc. 1988 Incentive Stock Plan (as amended and restated) filed as Exhibit 10.2 to Registrant's Form 10-K for the fiscal year ended February 29, 1992. 10(ii) Certificate of Amendment dated April 27, 1993 to A.G. Edwards, Inc. 1988 Incentive Stock Plan (Exhibit 10(i)) filed as Exhibit 10(iii) to Registrant's Form 10-K for the fiscal year ended February 28, 1994. 11 Computation of per share earnings may be clearly determined from the consolidated financial statements and notes thereto contained on pages 24 through 33 in the Company's Annual Report to Stockholders for the fiscal year ended February 28, 1998 and incorporated herein by reference. 13 Annual Report to Stockholders for the fiscal year ended February 28, 1998. Except for those portions of pages expressly incorporated by reference, the 1998 Annual Report to Stockholders is not deemed filed as part of this Annual Report on Form 10-K. 21 Subsidiaries of the Registrant. 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 28, 1998. 15 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 21, 1998 By /s/ Benjamin F. Edwards III Benjamin F. Edwards III, Chairman of the Board 16 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 21, 1998 Benjamin F. Edwards III President and Director (Chief Executive Officer) /s/ Robert L. Proost Treasurer May 21, 1998 Robert L. Proost (Principal Financial Officer) /s/ Eugene J. King Vice President May 21, 1998 Eugene J. King (Principal Accounting Officer) /s/ Robert G. Avis Vice Chairman of the Board May 21, 1998 Robert G. Avis and Director /s/ Robert L. Bagby Vice Chairman of the Board May 21, 1998 Robert L. Bagby and Director /s/ Dr. E. Eugene Carter Director May 21, 1998 Dr. E. Eugene Carter Director May 21, 1998 Charmain S. Chapman /s/ Benjamin F. Edwards IV Director May 21, 1998 Benjamin F. Edwards IV /s/ Dr. Louis Fernandez Director May 21, 1998 Dr. Louis Fernandez /s/ Samuel C. Hutchinson Jr. Director May 21, 1998 Samuel C. Hutchinson Jr. 17 EXHIBIT INDEX Exhibit Description 4.6 Amendment No. 3 to the Rights Agreement (available on request) 13 1998 Annual Report to Stockholders. 21 Subsidiaries of the Registrant. 23 Independent Auditors' Consent. 24 Power of Attorney. Included on Signature Page 17. 18 EX-4.6 2 AMENDMENT NO. 3 TO THE RIGHTS AGREEMENT DATED DECEMBER 30, 1988 THIS AGREEMENT is made and entered into as of this 11th day of July, 1997, by and between A.G. Edwards, Inc., a Delaware corporation (the "Company"), and Boatmen's Trust Company, a Missouri corporation (the "Rights Agent"). WITNESSETH: WHEREAS, the Company and the Rights Agent executed a Rights Agreement dated December 30, 1988 which was thereafter amended by Amendment No. 1 to the Rights Agreement entered into on the 24th day of May, 1991 and was thereafter amended by Amendment No. 2 to the Rights Agreement entered into as of the 22nd day of June, 1995 (collectively, the "Rights Agreement"). WHEREAS, Boatmen's Trust Company has informed the Company that Boatmen's Trust Company no longer will serve as the Rights Agent. WHEREAS, the Company believes it is in the best interest of the Company and its shareholders to amend the Rights Agreement to allow the resignation of the Rights Agent by agreement between the Rights Agent and the Company, to allow selection of a Rights Agent whose principal office is in a state other than the state of Missouri, and to amend the legend which is to be placed on the common stock certificates. WHEREAS, pursuant to Section 26 of the Rights Agreement, the Company and the Rights Agent are authorized to amend the Rights Agreement without the approval of any holders of Rights Certificates if, prior to the Distribution Date as defined in the Rights Agreement, the Company deems the change to be necessary or desirable and the Rights Agent determines that such a change will not adversely affect its interests under the Rights Agreement; and WHEREAS, the Company deems it desirable and in the best interest of the Company and its stockholders to amend the provisions of Section 21 of the Rights Agreement so that the Rights Agent may resign by agreement of the Rights Agent and the Company and so that the Rights Agent may have its principal office in a state other than the State of Missouri and to amend Section 3(c) of the Rights Agreement governing the legend on the certificates representing the shares of common stock. WHEREAS, the Rights Agents has determined that the proposed changes to the provisions of Section 21 and to Section 3(c) of the Rights Agreement will not adversely affect its interests under the Rights Agreement. NOW THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. Amendment of Rights Agreement. (a) Section 21 of the Rights Agreement is hereby amended in its entirety to read as follows: "The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company, and to each transfer agent of the Common Stock, by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Stock, by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. The Rights Agent and the Company may agree to the resignation of the Rights Agent at any time. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting or if the Rights Agent and the Company agree to the resignation of the Rights Agent, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of 30 days after agreement as to such resignation, after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights Certificate (who shall, with such notice, submit his Rights Certificate for inspection by the Company), then the registered holder of any Rights Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of the States of Missouri or New York (or of any other state of the United States so long as such corporation is authorized to do business as a banking institution in the States of Missouri or New York), in good standing, having a principal office in the state of Missouri or New York or of any other state of the United States, which is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $100,000,000. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock, and mail a notice thereof in writing to the registered holders of the Rights Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be." (b) Section 3(c) of the Rights Agreement is hereby amended in its entirety to read as follows: "Rights shall be issued in respect of all shares of Common Stock (whether originally issued or delivered from the Company's treasury) issued after the Record Date but prior to the earlier of the Distribution Date or the Expiration Date (as hereinafter defined). Certificates representing such shares of Common Stock shall bear either the legend authorized by the Rights Agreement prior to Amendment No. 3 of the Rights Agreement or the following legend: This certificate also evidences and entitles the holder hereof to certain Rights as set forth in the Rights Agreement entered into by A.G. Edwards, Inc. (the "Company"), dated as of December 30, 1988, as amended (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal offices of the Company. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Company will mail to the holder of this certificate a copy of the Rights Agreement without charge promptly after receipt of a written request therefor. Under certain circumstances, Rights beneficially owned by Acquiring Persons (as defined in the Rights Agreement) and any subsequent holder of such Rights may become null and void." With respect to such certificates containing the foregoing legend or the legend authorized by the Rights Agreement prior to Amendment No. 3 to the Rights Agreement, until the Distribution Date, the Rights associated with the Common Stock shall be represented by such certificates alone, and the surrender for transfer of any of such certificates, shall also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. Section 2. Savings Clause. All of the provisions of the Rights Agreement not amended by this Agreement shall remain in full force and effect. Section 3. Miscellaneous. (a) This Amendment, as it amends the Rights Agreement as previously amended, constitutes the entire agreement and understanding of the parties with respect to the subject matter hereof, and it supersedes all prior negations, commitments, representations and undertakings of the parties with respect to the subject matter hereof. Any terms used herein, which are not defined herein, shall have the meanings attached to them in the Rights Agreement. (b) This Agreement shall be binding upon and insure to the benefit of the Company, the Rights Agent and their respective successors and permitted assigns. (c) This Agreement shall be deemed to be a contract made under the laws of the State of Missouri and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts made and to be performed entirely within such State. (d) This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and their respective corporate seals to be hereto affixed and attested, all on the day and year first above written. ATTEST: A.G. EDWARDS, INC. By: /s/ Douglas L. Kelly__________ By: /s/ Robert L. Bagby______ Name: Douglas L. Kelly Name: Robert L. Bagby Title: Corporate Vice President and Secretary Title: Vice Chairman and Executive Vice President ATTEST: BOATMEN'S TRUST COMPANY By: /s/ Jerry L. Rector__________ By: /s/ H.E. Bradford__________ Name: Jerry L. Rector_____________ Name: H. Eugene Bradford_______ Title: Vice President______________ Title: Senior Vice President____ EX-13 3 MANAGEMENT'S FINANCIAL DISCUSSION (Year references are to fiscal years ended February 28 or 29 unless otherwise specified.) GENERAL BUSINESS ENVIRONMENT A.G. Edwards, Inc., is a holding company which, through its operating subsidiaries (collectively, the Company), 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. Its principal subsidiary, A.G. Edwards & Sons, Inc., is a St. Louis- based financial services firm with more than 590 locations and approximately 13,800 total employees in 49 states. The Company's primary business is providing a full range of financial products and services to individual investors. The Company also provides products and services to institutional investors and investment banking services to 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. Because these factors are unpredictable and beyond the Company's control, earnings may fluctuate significantly from period to period. Calendar 1997 and the Company's fiscal 1998, which ended February 28, 1998, once again resulted in record profitability for the securities industry and the Company. A strong economy, low inflation and low interest rates provided conditions for another year of increased investor activity, record trading volumes and rising stock prices in the domestic equity markets. Although some volatility in interest rates occurred early in calendar 1997, inflation remained low, resulting in a continuation of lower returns to fixed-income investors. As a result, retail investors continued to shift their holdings to the equity markets. After beginning the fiscal year at 6,878, the Dow Jones Industrial Average surpassed the 8,000 mark in July 1997 for the first time. Following the crisis in the Asian financial markets, the Dow Jones Industrial Average fell 554 points to 7,161 on October 27, the largest one-day point drop in market history. The Dow then rebounded to finish the fiscal year at an all-time high of 8,546, a 24 percent rise for the year, following a 25 percent gain in fiscal 1997. The Nasdaq average jumped 35 percent, following a 19 percent gain in the prior fiscal year. The volatility in the markets on October 27 and 28, 1997, led to unprecedented daily trading volume as both the New York Stock Exchange and the Nasdaq exceeded 1 billion shares on October 28 for the first time. RESULTS OF OPERATIONS Revenues, net earnings and earnings per share for the Company once again reached record levels in 1998 as the securities industry experienced its most profitable year on record. Revenues for the Company rose 18 percent to just more than $2 billion from $1.7 billion in 1997. Revenues in 1997 were up 17 percent from $1.5 billion in 1996. Net earnings of $269 million in 1998 increased 23 percent from $219 million in the previous year. Net earnings in 1997 were up 28 percent from $171 million in 1996. Basic earnings per share for the Company were $2.81 in 1998, versus $2.29 and $1.80 in 1997 and 1996, respectively. Diluted earnings per share for the Company were $2.75 in 1998, versus $2.24 and $1.77 in 1997 and 1996, respectively. The Company's net profit margin was a record 13.4 percent in 1998, compared with 12.9 percent in 1997 and 11.7 percent in 1996. The number of A.G. Edwards investment brokers reached 6,289 at fiscal year end, an increase of 4 percent from the prior year end. The number of locations at the end of 1998 was 594, up from 569 at year-end 1997. 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):
1998 vs. 1997 1997 vs. 1996 Increase (Decrease) Revenues: Commissions $179,736 19% $122,717 15% Principal transactions (5,055) (2) 6,640 3 Investment banking 34,759 22 51,160 49 Asset management and service fees 65,221 27 46,249 24 Interest 33,035 22 13,493 10 Other (46) (1) 1,757 23 $307,650 18% $242,016 17% Expenses: Compensation and benefits $196,000 18% $151,176 16% Communications 12,692 15 5,893 7 Occupancy and equipment 10,613 12 6,806 9 Floor brokerage and clearance 1,676 9 1,874 12 Interest (629) (30) (1,088) (35) Other 4,458 7 (1,320) (2) $224,810 17% $163,341 14%
18 COMMISSIONS Commissions are the most significant source of revenue for the Company, accounting for more than 50 percent of total revenue in both 1998 and 1997. Commission revenue rose 19 percent, from $929 million in 1997 to $1.1 billion in 1998, and accounted for more than 58 percent of the Company's overall revenue increase in 1998. As commissions are transaction-based revenues, they are directly influenced by changes in trading volume and may vary considerably from period to period. Listed equity securities commissions increased 26 percent ($96 million) and over-the-counter equity commission revenue rose 6 percent ($11 million) in 1998, once again fueled by record trading volumes and higher stock prices on the New York Stock Exchange and the Nasdaq. For the industry, average daily trading volume for 1998 was up 26 percent on the New York Stock Exchange and 17 percent on the Nasdaq. Company revenues from mutual fund sales rose 19 percent ($42 million) in 1998, consistent with industry-wide record cash flows into funds. Following this trend, sales of variable annuities increased $21 million (21 percent). Fiscal 1997's 15 percent ($123 million) increase in total commissions over fiscal 1996 reflected increased retail investor activity due to higher stock prices and trading volumes as well as strong cash flows into mutual funds in 1997 compared with 1996. 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 holding securities positions for resale to investors and are included in principal transaction revenue. Principal transaction revenue decreased 2 percent ($5 million) in 1998, primarily because of an 8 percent ($6 million) decline in sales of municipal debt securities. Lower yields and the strength of the equity markets reduced client demand for municipal securities. In 1997, revenues from principal transactions increased 3 percent ($7 million) over 1996. Sales of municipal debt securities in 1997 in-creased 15 percent ($9 million). Partially offsetting this increase was a decline in sales of corporate and government debt securities. INVESTMENT BANKING The Company derives investment banking revenue from underwriting public offerings of securities for corporations and governmental entities and by providing advisory services to these clients. In 1998, investment banking revenue jumped 22 percent to $191 million from $156 million in 1997 as a result of the Company's participation in the industry- wide record levels of equity underwriting and merger and acquisition activities. Underwriting fees and selling concessions increased 33 percent ($38 million) in 1998, principally because of a 46 percent ($42 million) increase in revenue from corporate equity and debt issues in 1998, which was partially offset by a 7 percent ($3 million) decline in management fees. In 1997, favorable market conditions for investment banking activities resulted in revenue growth of 49 percent ($51 million) over 1996. Underwriting fees and selling concessions advanced 42 percent ($34 million) in 1997, primarily because of a 43 percent rise in revenue associated with corporate equity and debt issues. Fees from serving as managing underwriter in corporate and municipal offerings and as advisor in merger and acquisition activities rose 71 percent ($17 million), primarily as a result of two large transactions in 1997. 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 the A.G. Edwards Trust Companies. 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 $65 million in 1998, an increase of 27 percent. Fees from third-party mutual funds were 25 percent ($37 million) higher than 1997's fees, reflecting the strong industry-wide cash 19 inflows to funds and higher market valuations of existing assets. Fees resulting from the administration of client assets under other third-party management and from the Company's management services improved 57 percent ($26 million) in 1998. The average number of these accounts increased 57 percent, while the total assets in these programs grew from $5.8 billion at the end of 1997 to $9.5 billion by the close of 1998, an increase of 64 percent. The 1997 increase of 24 percent ($46 million) over 1996 was primarily due to a 24 percent ($28 million) jump in service fees from third-party mutual funds. Fees from the Company's management services in 1997 rose 44 percent ($14 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, from debt securities carried for resale and from short-term investments. Interest revenue rose 22 percent ($33 million) in 1998, primarily because of a 27 percent ($31 million) increase in interest earned on margin accounts. The increase resulted from a 24 percent rise in average margin debits combined with slightly higher interest rates charged on margin accounts. Interest revenues from securities owned increased $3 million, while interest earned on short-term investments decreased slightly. The 1997 versus 1996 increase was principally due to a 10 percent ($11 million) increase in interest earned on margin accounts and from increased short-term investments. EXPENSES Compensation and benefits, the major component of the Company's overall expenses, rose 18 percent ($196 million) in 1998 and 16 percent ($151 million) in 1997. A significant portion of this expense is variable in nature and directly relates to commissionable sales and to the Company's profitability. Thus the year-to-year comparisons generally reflect the increases in revenue and profitability in both 1998 and 1997. General and administrative salary expense increased 17 percent ($31 million) in 1998 and 13 percent ($22 million) in 1997 because of general salary increases and a 12 percent growth in the number of support employees this year and 8 percent last year. Communication expense rose 15 percent ($13 million) in 1998, primarily because of increased business volume coupled with branch and headquarters expansion. Occupancy and equipment increased 12 percent ($11 million) in 1998, principally because of branch expansion and the cost associated with the purchase of technology-related equipment. All remaining expenses increased a combined 6 percent ($6 million) over last year. In 1997, all non-compensation-related expenses increased a combined 5 percent ($12 million), mainly as a result of expansion. 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 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, which may result in corresponding changes in related liabilities. Securities-lending transactions and related securities-borrowed transactions decreased from fiscal 1997, reflecting the record level of securities sold "short" in the stock market last year. Customer receivables continued to increase in 1998 as a result of business expansion. The increase in government securities inventory, and the related increase in payables to brokers and dealers, resulted from the Company's designation this year as a member of the Government National Mortgage Association's selling group and an underwriting of such securities in progress at February 28, 1998. The decrease in cash and government securities segregated under federal and other regulations reflects the use of excess resale agreements primarily to fund the increase in customer receivables. The principal sources for financing the Company's assets are stockholders' equity, proceeds from securities lending, bank loans, customer free-credit balances and other payables. The Company has no long-term debt. Cash generated 20 from operations and proceeds from employee stock plans have kept bank borrowings at low levels in the past three years. Average daily borrowings were $11 million in 1998, $2 million in 1997 and $5 million in 1996. Capital expenditures for the past three years have been financed from operations. Construction of an additional headquarters building has been completed, and the Company began to occupy the new space in February 1998. The Company expended $43 million for this construction through February 28, 1998. 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. In 1998, the Company purchased 3.4 million shares at an aggregate cost of $106 million. In 1997, 3.4 million shares were purchased at an aggregate cost of $65 million. These treasury shares were purchased with funds generated from operations. Future purchases, as well as dividend payments and the costs of expansion, are also expected to be funded from operations. The Company has adequate sources of credit available, if needed, to finance higher trading volumes, branch expansion, stock repurchases and major capital expenditures. Management believes that, if necessary, additional sources of credit are available. 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 of the Notes to Consolidated Financial Statements). A.G. Edwards & Sons, Inc.'s net capital, in excess of that required by the SEC, was approximately $940 million on February 28, 1998, up from $850 million the previous year. YEAR 2000 The "Year 2000" issue arises because many computer hardware and software systems use only two digits to represent the year. As a result, these systems and programs may not accurately calculate dates beyond 1999, causing system failures or miscalculations leading to disruptions in the Company's operations if the Company fails to correct Year 2000 issues. With respect to its internal systems, the Company's efforts to remediate the Year 2000 issues are proceeding according to plan. The Company expects to complete its programming efforts before the end of calendar 1998 and devote 1999 to industry-wide and internal testing. The costs of these efforts have not had, and are not expected to have, a material impact on the Company's financial condition or results of operations. Remediation efforts go beyond the Company's internal computer systems and require coordination with industry groups, vendors, clients and other third parties to assure that their systems and related interfaces are compliant. The Company could be adversely affected to the extent third parties with which it interfaces or has contractual relations have not properly addressed their Year 2000 issues or to the extent economic conditions or customers are adversely affected by Year 2000 issues. ****************************************************************************** The Management's Financial Discussion, including the discussion under "Year 2000," together with other sections of this Annual Report, contains forward- looking statements within the meaning of federal securities laws. Actual results are subject to risks and uncertainties, including both those specific to the Company and those specific to the industry which could cause results to differ materially from those contemplated. The risks and uncertainties include, but are not limited to, third-party or Company failures to achieve timely, effective remediation of the Year 2000 issues, general economic conditions, actions of competitors, regulatory actions, changes in legislation and technology changes. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date of this Annual Report. The Company does not undertake any obligation to publicly update any forward-looking statements. 21
TEN-YEAR FINANCIAL SUMMARY Year Ended: 1998 1997 1996 1995 1994 (In thousands, except per share amounts) Revenues Commissions: Listed Securities $ 462,276 $ 365,908 $ 338,241 $ 236,629 $ 273,363 Options 44,188 33,850 29,432 21,576 21,135 Over-the-Counter Securities 190,092 178,752 142,696 80,525 94,075 Mutual Funds 263,733 222,146 189,109 147,709 248,146 Commodities 16,315 16,038 16,448 15,261 16,766 Insurance 131,925 112,099 90,150 77,117 74,862 Total 1,108,529 928,793 806,076 578,817 728,347 Principal Transactions: Equities 61,184 58,427 55,334 37,565 40,260 Debt Securities 146,768 154,580 151,033 203,460 146,705 Total 207,952 213,007 206,367 241,025 186,965 Investment Banking: Underwriting Fees and Selling Concessions 152,029 114,426 80,572 70,156 111,379 Management Fees 38,889 41,733 24,427 22,574 35,594 Total 190,918 156,159 104,999 92,730 146,973 Asset Management and Service Fees 306,570 241,349 195,100 152,803 135,163 Interest: Margin Account Balances 149,738 118,373 107,192 89,971 60,491 Securities Owned and Deposits 31,132 29,462 27,150 15,548 14,074 Total 180,870 147,835 134,342 105,519 74,565 Other 9,294 9,340 7,583 7,448 6,628 Total Revenues 2,004,133 1,696,483 1,454,467 1,178,342 1,278,641 Expenses Compensation and Benefits 1,276,931 1,080,931 929,755 756,736 828,409 Communications 98,949 86,257 80,364 74,708 73,048 Occupancy and Equipment 96,496 85,883 79,077 73,108 67,258 Floor Brokerage and Clearance 19,825 18,149 16,275 14,355 15,062 Interest 1,436 2,065 3,153 6,818 1,113 Other Operating Expenses 72,699 68,241 69,561 53,288 50,180 Total Expenses 1,566,336 1,341,526 1,178,185 979,013 1,035,070 Earnings Before Income Taxes 437,797 354,957 276,282 199,329 243,571 Income Taxes 168,500 135,900 105,700 75,210 88,700 Net Earnings $ 269,297 $ 219,057 $ 170,582 $ 124,119 $ 154,871 Per Basic Earnings $ 2.81 $ 2.29 $ 1.80 $ 1.35 $ 1.75 Share Diluted Earnings $ 2.75 $ 2.24 $ 1.77 $ 1.33 $ 1.71 Data Cash Dividends $ 0.51 $ 0.44 $ 0.40 $ 0.37 $ 0.35 Book Value $ 15.21 $ 13.12 $ 11.33 $ 9.84 $ 8.72 Other Data Total Assets $4,193,328 $4,244,340 $3,102,085 $2,224,282 $2,236,590 Stockholders' Equity $1,463,121 $1,261,303 $1,088,684 $ 919,281 $ 790,367 Cash Dividends $ 48,740 $ 41,851 $ 37,769 $ 34,200 $ 30,843 Return on Average Equity 19.8% 18.6% 17.0% 14.5% 22.0% Pre-tax Return on Average Equity 32.1% 30.2% 27.5% 23.3% 34.7% Net Earnings as a Percent of Revenues 13.4% 12.9% 11.7% 10.5% 12.1% Average Common Shares Outstanding (Basic) 95,950 95,483 94,621 91,809 88,643 Average Common and Common Equivalent Shares Outstanding (Diluted) 98,051 97,816 96,644 93,267 90,530 Share and per share data have been restated for stock splits and stock dividends.
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TEN-YEAR FINANCIAL SUMMARY Year Ended: 1993 1992 1991 1990 1989 (In thousands, except per share amounts) Revenues Commissions: Listed Securities $ 231,312 $ 203,936 $ 140,096 $ 129,288 $ 95,276 Options 19,167 21,745 20,002 18,141 14,201 Over-the-Counter Securities 69,199 69,415 38,842 38,236 30,608 Mutual Funds 193,820 146,377 80,529 70,299 46,675 Commodities 13,016 13,941 12,322 11,941 12,413 Insurance 46,757 47,343 39,514 40,424 39,082 Total 573,271 502,757 331,305 308,329 238,255 Principal Transactions: Equities 31,266 23,157 10,922 11,741 9,166 Debt Securities 184,040 165,284 145,732 116,624 97,247 Total 215,306 188,441 156,654 128,365 106,413 Investment Banking: Underwriting Fees and Selling Concessions 87,061 77,464 44,167 42,395 54,308 Management Fees 21,251 13,389 11,161 11,542 12,071 Total 108,312 90,853 55,328 53,937 66,379 Asset Management and Service Fees 107,306 87,461 61,084 47,020 30,654 Interest: Margin Account Balances 50,098 47,026 51,209 50,489 44,260 Securities Owned and Deposits 14,631 16,915 15,025 14,817 11,321 Total 64,729 63,941 66,234 65,306 55,581 Other 5,464 5,206 4,302 4,066 3,430 Total Revenues 1,074,388 938,659 674,907 607,023 500,712 Expenses Compensation and Benefits 692,127 594,404 422,524 374,119 301,421 Communications 66,899 62,468 58,323 52,527 47,601 Occupancy and Equipment 61,701 56,035 49,783 42,560 36,097 Floor Brokerage and Clearance 15,016 13,741 11,461 10,031 9,400 Interest 1,886 1,186 4,229 6,314 8,604 Other Operating Expenses 46,774 42,793 36,925 29,948 45,292 Total Expenses 884,403 770,627 583,245 515,499 448,415 Earnings Before Income Taxes 189,985 168,032 91,662 91,524 52,297 Income Taxes 70,560 62,500 32,500 32,700 17,348 Net Earnings $ 119,425 $ 105,532 $ 59,162 $ 58,824 $ 34,949 Per Basic Earnings $ 1.40 $ 1.28 $ 0.74 $ 0.74 $ 0.44 Share Diluted Earnings $ 1.38 $ 1.25 $ 0.73 $ 0.73 $ 0.44 Data Cash Dividends $ 0.29 $ 0.25 $ 0.19 $ 0.19 $ 0.17 Book Value $ 7.11 $ 5.89 $ 4.79 $ 4.30 $ 3.76 Other Data Total Assets $2,111,192 $1,577,143 $1,402,627 $1,126,004 $1,062,640 Stockholders' Equity $ 615,240 $ 492,010 $ 385,869 $ 343,539 $ 300,585 Cash Dividends $ 24,624 $ 20,622 $ 15,480 $ 15,185 $ 13,904 Return on Average Equity 21.6% 24.0% 16.2% 18.3% 12.2% Pre-tax Return on Average Equity 34.3% 38.3% 25.1% 28.4% 18.2% Net Earnings as a Percent of Revenues 11.1% 11.2% 8.8% 9.7% 7.0% Average Common Shares Outstanding (Basic) 85,421 82,331 80,205 79,976 79,300 Average Common and Common Equivalent Shares Outstanding (Diluted) 86,740 84,152 81,023 80,884 79,679 Share and per share data have been restated for stock splits and stock dividends.
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CONSOLIDATED BALANCE SHEETS February 28, February 28, 1998 1997 (In thousands, except share amounts) Assets Cash and cash equivalents $ 84,764 $ 62,799 Cash and government securities, segregated under federal and other regulations 57,294 400,991 Securities purchased under agreements to resell 204,363 200,000 Securities borrowed 786,119 1,392,864 Receivables: Customers, less allowance for doubtful accounts of $3,800 and $3,550 2,229,128 1,677,354 Brokers, dealers and clearing organizations 12,521 14,635 Securities inventory, at fair value: State and municipal 142,692 98,516 Government and agencies 209,247 39,666 Corporate 51,714 25,785 Property and equipment, at cost, net of accumulated depreciation and amortization of $229,938 and $196,414 230,158 189,795 Deferred income taxes 70,432 56,558 Other assets 114,896 85,377 $4,193,328 $4,244,340 Liabilities Checks payable $ 203,017 $ 174,736 Securities loaned 820,918 1,458,426 Payables: Customers 920,791 816,668 Brokers, dealers and clearing organizations 185,756 47,842 Securities sold but not yet purchased, at fair value 19,141 17,670 Employee compensation and related taxes 505,731 414,177 Income taxes 17,137 13,536 Other liabilities 57,716 39,982 Total Liabilities 2,730,207 2,983,037 Stockholders' Preferred stock, $25 par value: Equity Authorized, 4,000,000 shares, none issued Common stock, $1 par value: Authorized, 250,000,000 shares Issued, 96,463,114 and 64,312,658 shares 96,463 64,313 Additional paid-in capital 181,826 229,235 Retained earnings 1,196,568 976,011 1,474,857 1,269,559 Less - Treasury stock, at cost (284,173 and 234,921 shares) 11,736 8,256 Total Stockholders' Equity 1,463,121 1,261,303 $4,193,328 $4,244,340 See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF EARNINGS Year Ended: February 28, February 28, February 29, 1998 1997 1996 (In thousands, except per share amounts) Revenues Commissions $1,108,529 $ 928,793 $ 806,076 Principal transactions 207,952 213,007 206,367 Investment banking 190,918 156,159 104,999 Asset management and service fees 306,570 241,349 195,100 Interest 180,870 147,835 134,342 Other 9,294 9,340 7,583 2,004,133 1,696,483 1,454,467 Expenses Compensation and benefits 1,276,931 1,080,931 929,755 Communications 98,949 86,257 80,364 Occupancy and equipment 96,496 85,883 79,077 Floor brokerage and clearance 19,825 18,149 16,275 Interest 1,436 2,065 3,153 Other 72,699 68,241 69,561 1,566,336 1,341,526 1,178,185 Earnings before income taxes 437,797 354,957 276,282 Income taxes 168,500 135,900 105,700 Net earnings $ 269,297 $ 219,057 $ 170,582 Earnings per share: Basic $ 2.81 $ 2.29 $ 1.80 Diluted $ 2.75 $ 2.24 $ 1.77 See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Three years ended February 28, 1998 Common Additional Retained Unamortized Treasury Total Stock Paid-in Earnings Expense of Stock Capital Restricted Stock Awards (In thousands, except per share amounts) Balances, March 1, 1995 $62,294 $194,863 $ 665,992 $ (3,868) $ 0 $ 919,281 Net earnings 170,582 170,582 Cash dividends - $0.40 per share (37,769) (37,769) Treasury stock acquired (12,511) (12,511) Stock issued: Employee stock purchase/option plans 1,376 22,282 3,280 26,938 Restricted stock 643 14,913 189 2,739 18,484 Amortization of restricted stock awards 3,679 3,679 Balances, February 29, 1996 64,313 232,058 798,805 0 (6,492) 1,088,684 Net earnings 219,057 219,057 Cash dividends - $0.44 per share (41,851) (41,851) Treasury stock acquired (64,805) (64,805) Stock issued: Employee stock purchase/option plans (6,041) 42,938 36,897 Restricted stock 3,218 20,103 23,321 Balances, February 28, 1997 64,313 229,235 976,011 0 (8,256) 1,261,303 Net earnings 269,297 269,297 Cash dividends - $0.51 per share (48,740) (48,740) Treasury stock acquired (106,006) (106,006) Stock issued: Employee stock purchase/option plans (22,107) 78,677 56,570 Restricted stock 7,009 23,849 30,858 Stock split-3-for-2 32,150 (32,150) Cash paid for fractional shares (161) (161) Balances, February 28, 1998 $96,463 $181,826 $1,196,568 $ 0 $ (11,736) $1,463,121 See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended: February 28, February 28, February 29, 1998 1997 1996 (In thousands) Cash Flows Net earnings $269,297 $219,057 $170,582 From Operating Noncash items included in earnings: Activities Depreciation and amortization 37,855 33,066 31,141 Amortization/expense of restricted stock awards 25,155 22,173 21,697 Deferred items (13,874) (13,944) (13,096) (Increase) decrease in operating assets: Segregated cash and government securities 343,697 1,794 (358,977) Securities borrowed 606,745 (779,598) (333,595) Receivable from brokers, dealers and clearing organizations 2,114 (714) 15,825 Receivable from customers (551,774) (249,291) (68,891) Securities inventory (239,686) 31,825 (43,230) Other assets (13,218) (9,388) (10,274) Increase (decrease) in operating liabilities: Checks payable 28,281 25,766 41,997 Securities loaned (637,508) 797,937 280,762 Payable to brokers, dealers and clearing organizations 137,914 (30,805) (4,319) Payable to customers 104,123 96,679 304,248 Securities sold but not yet purchased 1,471 (4,201) (17,607) Employee compensation and related taxes 91,554 83,079 84,978 Income taxes 3,601 906 10,260 Other liabilities 17,734 275 8,081 Net cash provided by operating activities 213,481 224,616 119,582 Cash Flows Securities purchased under agreements to resell (4,363) (107,987) (49,194) From Investing Purchase of property and equipment (78,218) (44,305) (42,127) Activities Long-Term investments included in other assets (16,301) 6,499 5,738 Net cash used in investing activities (98,882) (145,793) (85,583) Cash Flows Employee stock transactions 62,273 38,045 27,404 From Financing Purchase of treasury stock (106,006) (64,805) (12,511) Activities Cash dividends paid (48,740) (41,851) (37,769) Cash paid for fractional shares (161) Net cash used in financing activities (92,634) (68,611) (22,876) Cash and Cash Net increase in cash and cash equivalents 21,965 10,212 11,123 Equivalents Cash and cash equivalents, at beginning of year 62,799 52,587 41,464 Cash and cash equivalents, at end of year $ 84,764 $ 62,799 $ 52,587 Interest payments totaled $3,245 in 1998, $2,650 in 1997 and $3,806 in 1996. Income taxes paid totaled $165,618 in 1998, $145,216 in 1997 and $106,740 in 1996. Supplemental disclosures of noncash financing activities: Restricted stock awards, net of forfeitures, totaled $24,818 in 1998, $21,768 in 1997 and $18,291 in 1996. See Notes to Consolidated Financial Statements.
27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three years ended February 28, 1998 (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 wholly owned subsidiaries (collectively referred to as the Company) and are prepared in conformity with generally accepted accounting principles. In accordance with generally accepted accounting principles and industry practice, management has made 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 is in one principal line of business, that of providing investment services, including securities and commodities brokerage, asset management, insurance, trust, investment banking and other related financial services to individual retail, corporate, governmental and institutional clients. These services are provided through its principal subsidiary, A.G. Edwards & Sons, Inc., and other wholly owned subsidiaries. All per share amounts and share data have been restated to reflect a 3-for- 2 stock split declared in August 1997, effected in the form of a stock dividend. 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. Cash and government securities segregated under federal and other regulations included Resale Agreements of $350,000 in 1997. 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 deemed 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. Securities inventory, securities sold but not yet purchased, and securities segregated under federal and other regulations 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. 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 ex-penses 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. Accordingly, no compensation expense has been recognized for options issued under these plans. Restricted stock awards are expensed in the year granted, which coincides with the defined service period. Prior to 1994, the awards were amortized over the three-year vesting period. 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 is provided over estimated useful lives of five to 10 years using both straight-line and accelerated methods. 28 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. Recent Accounting Pronouncements Effective January 1, 1998, the Company adopted certain provisions of Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which are applicable to its business. SFAS No. 125 introduced a financial-components approach that focuses on the recognition of financial assets and liabilities an entity controls and the derecognition of financial assets and liabilities for which control has been transferred. The adoption of this statement did not have a material effect on the Company's financial condition or results of operations. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." These statements, which are effective for fiscal years beginning after December 15, 1997, establish standards for the reporting and display of comprehensive income and the disclosure requirements related to segments. 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 $10,656 in 1998, $2,191 in 1997 and $4,878 in 1996, at effective interest rates of 6.0 percent, 5.8 percent and 6.5 percent, respectively. Substantially all such borrowings were secured by customer-owned securities. There were no borrowings outstanding at February 28, 1998 and 1997. 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 options and stock purchase plans was 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: 1998 1997 1996 Net earnings $258,000 $214,000 $166,000 Earnings per share Basic $ 2.69 $ 2.24 $ 1.75 Diluted $ 2.63 $ 2.19 $ 1.72 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 1, 1998, at 85 percent of market price based on dates specified in the plan. Employees purchased 1,871,400 shares at $20.64 per share in 1998, 1,870,325 shares at $14.98 per share in 1997 and 1,870,610 shares at $12.06 per share in 1996. Treasury shares were utilized for all of the shares purchased in 1998 and 1997. The fair value of the options granted under this plan was estimated using the following assumptions for 1998, 1997 and 1996, respectively: dividend yield of 1.34 percent, 2.21 percent and 2.41 percent; an expected life of one year; expected volatility of 34 percent, 25 percent and 23 percent; and risk-free interest rates of 5.68 percent, 5.74 percent and 5.81 percent. The fair value of the options granted in 1998, 1997 and 1996 was $8.16, $3.93 and $3.45, respectively. Restricted Stock and Stock Options Under the Company's Incentive Stock Plan, three types of benefits may be granted to officers and key employees: restricted stock, stock options and stock appreciation rights. Such awards are subject to forfeiture upon termination of employment during a restricted period. Through February 28, 1998, no stock appreciation rights have been granted. Restricted stock awards are made, and shares issued, without cash payment by the employee. The shares are restricted for a vesting period, generally three years from the award date. Eligible employees as of February 28, 1998, were awarded 597,595 shares with a market value of $25,732. At February 28 (29), 1997 and 1996, the awards were 1,040,724 and 1,114,133 shares, respectively, with corresponding market values of $22,070 and $18,480. As of February 28, 1998, restricted stock awards covering 3,343,009 shares were outstanding, with the restrictions expiring at various dates through the year 2001. 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 grant and expire eight years from date of grant, or earlier upon termination of employment. The fair value of each option grant was 29 estimated at the date of grant using the following assumptions for 1998, 1997 and 1996, respectively: dividend yield of 1.34 percent, 2.21 percent and 2.41 percent; expected lives of six years; expected volatility of 34 percent, 25 percent and 23 percent; risk-free interest rates of 5.70 percent, 6.41 percent and 5.89 percent; and a forfeiture rate of 6 percent, 8 percent and 8 percent. The fair value of options granted under this plan in 1998, 1997 and 1996 was $16.35, $6.29 and $4.38, respectively. A summary of the status of the Company's stock options as of February 28 (29), 1998, 1997 and 1996, and changes during the years ended on those dates is presented as follows:
1998 1997 1996 Shares Weighted- Shares Weighted- Shares Weighted- (000) Average (000) Average (000) Average Exercise Exercise Exercise Price Price Price Outstanding, beginning of year 4,993 $14.39 4,862 $12.61 4,512 $11.35 Granted 575 $43.06 792 $21.21 845 $16.59 Exercised (1,050) $10.47 (620) $9.18 (405) $6.89 Forfeited (73) $17.50 (41) $13.67 (90) $12.97 Outstanding, end of year 4,445 $18.97 4,993 $14.39 4,862 $12.61 Treasury shares utilized for exercises 1,050 620 200
The following table summarizes information about outstanding stock options at February 28, 1998:
Options Outstanding Options Exercisable Range of Number Weighted-Average Weighted- Number Weighted Exercise Outstanding Remaining Average Exercisable Average Prices (000) Contractual Exercise (000) Exercise Life (years) Price Price $5 - $10 202 1.0 $ 9.23 202 $ 9.23 $11 - $15 2,096 3.8 $13.40 2,096 $13.40 $16 - $20 805 6.0 $16.59 0 $21 - $25 767 7.0 $21.21 0 $40 - $45 575 8.0 $43.06 0 4,445 2,298
4. EMPLOYEE PROFIT SHARING PLANS 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 pre-tax earnings. The Company expensed $76,933 in 1998, $65,754 in 1997 and $56,107 in 1996 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. The Company expensed $22,961 in 1998, $17,296 in 1997 and $10,463 in 1996 in connection with this plan. At February 28, 1998 and 1997, the employee compensation and related taxes liability included deferred compensation for this plan of $87,041 and $63,690, respectively. 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 and loans to affiliates. At February 28, 1998, the subsidiary's net capital of $984,524 was 44 percent of aggregate debit items and $940,029 in excess of the minimum required. 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. 30 6. INCOME TAXES The provisions for income taxes consist of: 1998 1997 1996 Current: Federal $154,428 $124,871 $ 99,934 State and local 27,946 24,973 18,862 182,374 149,844 118,796 Deferred (13,874) (13,944) (13,096) $168,500 $135,900 $105,700 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. Deferred tax assets totaled $86,607 at February 28, 1998, and $73,337 at February 28, 1997, and consisted primarily of employee benefits that are not currently deductible. The Company expects to fully realize these deferred tax assets, given the Company's historical levels of earnings and related taxes paid; accordingly, no valuation allowance has been established. Deferred tax liabilities totaled $16,175 at February 28, 1998, and $16,779 at February 28, 1997, and consisted primarily of accelerated depreciation deductions. The Company's effective tax rate was 39 percent in 1998 and 38 percent in 1997 and 1996, 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 1998, 1997 and 1996. No other single item had a material impact on the difference in the rates. 7. STOCKHOLDERS' EQUITY Earnings per Share Effective February 28, 1998, the Company adopted SFAS No. 128, "Earnings Per Share" (EPS). Under SFAS No. 128, basic and diluted EPS replace primary and fully diluted EPS. Basic EPS is calculated by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is similar to basic EPS but adjusts for the effect of potential common shares. EPS information for prior periods has been restated to conform with SFAS No. 128. The following table presents the computations of basic and diluted EPS.
1998 1997 1996 Net earnings available to common stockholders $269,297 $219,057 $170,582 (shares in thousands) Weighted average shares outstanding 95,950 95,483 94,621 Effect of dilutive common shares: Restricted shares 386 557 469 Stock purchase plan 392 305 382 Stock option plan 1,323 1,471 1,171 Dilutive common shares 2,101 2,333 2,022 Total weighted average diluted shares 98,051 97,816 96,643 Basic EPS $ 2.81 $ 2.29 $ 1.80 Diluted EPS $ 2.75 $ 2.24 $ 1.77
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 51/2 year period. This program superseded an existing stock repurchase program. The Company purchased 3,438,000 shares with an aggregate cost of $106,006 in 1998, 3,433,500 shares at a cost of $64,805 in 1997 and 750,000 shares at a cost of $12,511 in 1996. Repurchased shares are added to treasury stock to be used for employee stock plans and to partially offset the past effect of these plans. 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 31 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. 8. COMMITMENTS AND CONTINGENT LIABILITIES The Company has long-term operating leases for office space and communications equipment. Minimum rental commitments under all such noncancelable leases, some of which contain escalation clauses and renewal options, at February 28, 1998, are as follows: Year ending February 28 (29), 1999 $ 45,900 2000 40,600 2001 36,500 2002 31,200 2003 25,100 Later years 59,100 $238,400 Rental expense under all operating leases and equipment maintenance contracts was $45,893 in 1998, $39,598 in 1997 and $36,381 in 1996. 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 28, 1998, would not have had a material effect on the consolidated financial statements. At February 28, 1998 and 1997, the Company had $109,850 and $119,975, respectively, of outstanding letters of credit, principally to satisfy margin deposit requirements with a clearing corporation. Of this amount, $10,000 and $15,000, respectively, were collateralized by customer-owned securities. 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. 9. 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 requested from customers and other counterparties when appropriate. 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. 32 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of A.G. Edwards, Inc.: We have audited the accompanying consolidated balance sheets of A.G. Edwards, Inc. and subsidiaries as of February 28, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended February 28, 1998. 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 generally accepted auditing standards. 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 as of February 28, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 1998, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP April 23, 1998 St. Louis, Missouri 33
QUARTERLY FINANCIAL INFORMATION (Unaudited) Cash Stock Price Revenues Earnings Net Earnings Dividends Trading Range (in millions) Before Tax Earnings per Share per Share High-Low (in millions) (in millions) Basic Diluted Fiscal 1997 By Quarter First $0.10 2/3 17 1/2 - 15 $428.5 $ 92.0 $56.4 $0.59 $0.58 Second $0.10 2/3 19 11/16 - 17 $407.1 $ 85.0 $52.2 $0.55 $0.54 Third $0.10 2/3 21 1/4 - 18 1/4 $404.5 $ 81.0 $51.0 $0.53 $0.52 Fourth $0.12 27 1/2 - 20 3/16 $456.4 $ 97.0 $59.5 $0.62 $0.60 Fiscal 1998 By Quarter First $0.12 25 13/16 - 20 1/2 $439.3 $ 88.9 $54.5 $0.57 $0.56 Second $0.13 29 1/8 - 23 15/16 $509.8 $112.7 $69.2 $0.72 $0.71 Third $0.13 39 - 26 9/16 $527.3 $118.0 $72.4 $0.76 $0.73 Fourth $0.13 43 - 34 3/8 $527.7 $118.2 $73.2 $0.76 $0.75 Per share data have been restated for stock splits and stock dividends.
43 STOCKHOLDER INFORMATION Annual Meeting The 1998 Annual Meeting of Stockholders will be held at the company's headquarters, One North Jefferson, St. Louis, Missouri, on Thursday, June 18, 1998, 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's 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 1 and October 1, 1998, and January 4 and April 1, 1999. Form 10-K The Form 10-K Annual Report filed with the Securities and Exchange Commission, which provides further details on A.G. EdwardsO business, is available at no charge from the: 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 28, 1998, was 24,400. Registrar/Transfer Agent The Bank of New York Shareholder Relations Department-11E P.O. Box 11258 Church Street Station New York, New York 10286-1002 (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 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. 44 EX-21 4 EXHIBIT 21 A.G. EDWARDS, INC. REGISTRANT'S SUBSIDIARIES The following listing includes the registrant's directly-owned subsidiaries and indirectly-owned subsidiaries (certain subsidiaries which are not significant are omitted from the listing), all of which are included in the consolidated financial statements: State of Incorporation/ Name of Company Organization Subsidiary of A.G. Edwards & Sons, Inc. (Edwards) Delaware Registrant The Ceres Investment Company Missouri Edwards Indianapolis Historic Partners Indiana 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 Asset Performance Monitor, Inc. Missouri Missouri Trust A.G. Edwards Trust Company New Jersey Registrant A.G. Edwards Trust Company Texas Registrant A.G. Edwards Trust Company Florida 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 EX-23 5 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 23, 1998, 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 28, 1998. /s/ Deloitte & Touche LLP May 27, 1998 St. Louis, Missouri EX-27.1 6
BD 1000 12-MOS FEB-28-1998 FEB-28-1998 84,764 2,241,649 204,363 786,119 403,653 230,158 4,193,328 0 1,678,963 0 820,918 19,141 0 0 0 96,463 1,366,658 4,193,328 207,952 180,870 1,108,529 190,918 255,736 1,436 1,276,931 437,797 437,797 0 0 269,297 2.81 2.75
EX-27.2 7
BD 1000 YEAR YEAR 3-MOS 6-MOS 9-MOS FEB-28-1997 FEB-29-1996 FEB-28-1997 FEB-28-1997 FEB-28-1997 FEB-28-1997 FEB-29-1996 MAY-31-1996 AUG-31-1996 NOV-30-1996 62,799 52,587 62,713 51,250 42,400 1,691,989 1,441,984 1,598,904 1,608,398 1,638,543 200,000 92,013 121,954 45,000 154,170 1,392,864 613,266 628,622 510,878 914,582 163,967 195,792 166,383 155,230 146,637 189,795 178,556 178,611 178,984 182,588 4,244,340 3,102,085 3,044,422 2,837,971 3,504,151 0 0 0 0 0 1,453,423 1,278,704 1,128,272 1,044,424 1,249,325 0 0 0 0 0 1,458,426 660,489 687,741 571,093 975,089 17,670 21,871 29,944 33,588 35,454 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 64,313 64,313 64,313 64,313 64,313 1,196,990 1,024,371 1,064,282 1,080,838 1,134,746 4,244,340 3,102,085 3,044,422 2,837,971 3,504,151 213,007 206,367 53,486 107,376 159,576 147,835 134,342 35,026 70,891 108,061 928,793 806,076 246,762 454,388 672,336 156,159 104,999 34,121 81,809 117,833 193,263 151,088 44,430 91,276 139,183 2,065 3,153 718 1,205 1,640 1,080,931 929,755 275,476 533,887 791,445 354,957 276,282 91,962 176,932 257,942 354,957 276,282 91,962 176,932 257,942 0 0 0 0 0 0 0 0 0 0 219,057 170,582 56,442 108,662 159,682 2.29 1.80 .59 1.14 1.67 2.24 1.77 .58 1.12 1.64
EX-27.3 8
BD 1000 3-MOS 6-MOS 9-MOS FEB-28-1998 FEB-28-1998 FEB-28-1998 MAY-31-1997 AUG-31-1997 NOV-30-1997 70,998 58,577 57,115 1,747,650 1,927,075 2,195,282 115,000 224,362 62,363 977,296 910,066 818,528 219,153 165,534 192,069 196,953 202,789 207,389 3,628,568 3,802,346 3,746,013 0 0 0 1,155,076 1,410,076 1,343,164 0 9,363 9,363 1,083,535 944,032 887,395 21,820 32,221 31,278 0 0 0 0 0 0 0 0 0 64,313 96,469 96,463 1,233,260 1,236,930 1,308,262 3,628,568 3,802,346 3,746,013 54,602 107,438 159,805 40,843 84,357 130,335 237,633 530,638 826,988 36,628 78,880 128,686 55,561 117,312 185,285 546 0 0 283,456 609,868 944,620 88,871 201,616 319,647 88,871 201,616 319,647 0 0 0 0 0 0 54,541 123,786 196,177 .57 1.29 2.05 .56 1.27 2.00
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