-----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, Qh4Xdr6zyAihdxwqFbinNTbuERgWN1OwXOnPgYaaFh7+l1bC+cr0VCrzBvoah2II b+VZB5Z78m/oB3CYsFQnDQ== 0000718482-99-000019.txt : 19990624 0000718482-99-000019.hdr.sgml : 19990624 ACCESSION NUMBER: 0000718482-99-000019 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990528 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-K405 SEC ACT: SEC FILE NUMBER: 001-08527 FILM NUMBER: 99637129 BUSINESS ADDRESS: STREET 1: ONE N JEFFERSON AVE CITY: ST LOUIS STATE: MO ZIP: 63103 BUSINESS PHONE: 3142893000 10-K405 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, 1999 Commission file number 1-8527 A.G. EDWARDS, INC. State of Incorporation: DELAWARE I.R.S. Employer Identification No.: 43-1288229 ONE NORTH JEFFERSON AVENUE ST. LOUIS, MISSOURI 63103 Registrant's telephone number, including area code: (314) 955-3000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE RIGHTS TO PURCHASE COMMON STOCK NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ( X ) No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) The aggregate market value of voting stock held by non-affiliates was approximately $3.3 billion at April 30, 1999. At April 30, 1999, there were 94,461,086 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, 1999 (the "1999 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 24, 1999 (the "Company's 1999 Proxy Statement") are incorporated by reference into Part III hereof. Other documents incorporated by reference in this report are listed in the Exhibit Index beginning on page 14 of this Form 10-K. 1 PART I ITEM 1. BUSINESS. (a) General Development of Business A.G. Edwards, Inc., a Delaware corporation, is a holding company incorporated in 1983 whose principal subsidiary, A.G. Edwards & Sons, Inc. (Edwards), is successor to a partnership founded in 1887. A.G. Edwards, Inc. and its directly owned and indirectly owned subsidiaries (collectively referred to as the Company) provide securities and commodities brokerage, asset management, insurance, trust, investment banking and other related financial services to individual, corporate, governmental and institutional clients. Edwards' business, primarily with individual clients, is conducted through one of the largest retail branch office networks (based upon number of offices and financial consultants) in the United States. At February 28, 1999, Edwards had 639 offices (up from 594 at the end of the prior fiscal year) in 49 states and the District of Columbia, and 13,953 full-time employees (up from 12,967), including 6,528 financial consultants (up from 6,289) providing services for approximately 2,340,000 clients (up from 2,060,000). No single client accounts for a significant portion of Edwards' business. Edwards is a member of all major securities exchanges in the United States, the National Association of Securities Dealers, Inc. (NASD) and the Securities Investor Protection Corporation (SIPC). Additionally, Edwards has memberships on several commodity exchanges and is registered with the Commodity Futures Trading Commission (CFTC) as a futures commission merchant (FCM). AGE Commodity Clearing Corp. (Clearing), a commodity clearing subsidiary, is registered with the CFTC as a FCM and operates exclusively as a commodity clearing company for Edwards. Clearing is a member of all major U.S. commodities exchanges and the National Futures Association (NFA). The five A.G. Edwards trust companies (collectively referred to as the Trust Companies), including a federally chartered savings bank, provide investment advisory, portfolio management and trust services. Gull-AGE Capital Group, Inc. serves as general partner of 59 real estate partnerships in connection with 24 limited partnerships sold by Edwards from 1982 through 1985. (b) Financial Information About Industry Segments Information regarding industry segments is set forth in Note 1 (Summary of Significant Accounting Policies) of the Notes to Consolidated Financial Statements under the caption "Basis of Financial Information" appearing on page 28 of the 1999 Annual Report to Stockholders. Such information is hereby incorporated by reference. (c) Narrative Description of Business Commissions, principal transactions, investment banking, and asset management and service fees were the principal sources of consolidated revenue for the last three fiscal years. The total amount of revenue contributed by these services, including the amount of total revenue by class of products or services that accounted for 10% or more of consolidated revenues, are set forth on pages 22 and 23 of the 1999 Annual Report to Stockholders under the caption "Ten-Year Financial Summary." Such information is hereby incorporated by reference. 2 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. 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. 3 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). 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. 4 ASSET MANAGEMENT AND SERVICE FEES Asset management and service fees consist primarily of revenues earned for providing support and services in connection with assets under third-party management, including mutual funds, and revenues from assets under management by Edwards. These revenues include fees based on the amount of client assets under management and transaction-related fees, as well as fees related to the administration of custodial and other specialty accounts. Edwards, through the Trust Companies, provides its clients with personal, ERISA and custodial trust services. Clients desiring professional money management are offered three types of account portfolio services. Edwards, acting as investment manager, offers portfolio management strategies based on the client's investment objectives. Edwards' investment consulting service offers the Private Advisor Service (formerly known as Asset Performance Monitor(R)), which provides clients with third-party investment management, performance measurement, management search and related consulting services, and the Strategic Asset Account, a fee-based pricing alternative. The PathwaysSM, Spectrum, Fund Navigator, Fund Advisor and Strategic Asset Account investment advisory programs are personalized, fee-based asset allocation programs that utilize load and no-load mutual fund investments. Clients select from established asset allocation models, or customize their own, based on their investment objectives, risk tolerance and time horizon. 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 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. 5 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 (Financial Instruments) of the Notes to Consolidated Financial Statements under the caption "Off-Balance Sheet Risk and Concentration of Credit Risk" appearing on page 32 of the 1999 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 financial consultants and clients. In addition, reviews and analysis of general economic conditions, along with asset allocation recommendations, are also available. These services are provided by Edwards' research analysts, economists and market strategists. Revenues from research activities are derived principally through resulting transactions on an agency or principal basis. COMPETITION All aspects of the Company's business are highly competitive. Edwards competes with numerous broker-dealers, including on-line services, some of whom possess greater financial resources than the Company. Edwards competes for clients on the basis of price, quality of service, financial resources and reputation. There is constant competition to attract and retain personnel within the securities industry. Competition for the investment dollar and for clients has increased from other sources, such as commercial banks, savings institutions, mutual fund management companies, investment advisory companies as well as from other companies offering insurance, real estate and other investment opportunities. 6 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 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 1999 Annual Report to Stockholders. Such information is hereby incorporated by reference. Additionally, the four state-chartered trust companies are separately regulated by banking or trust laws of the states in which they are incorporated or do business. A.G. Edwards Trust Company FSB, a federal savings bank, is regulated by the Office of Thrift Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC) and by the SEC as an investment advisor. A.G. Edwards Life Insurance Company is regulated by the insurance laws of the State of Missouri. The Ceres Investment Company, a commodity pool operator and general partner of three commodity pools sponsored by Edwards, is regulated by the CFTC and the NFA. OTHER MATTERS Information concerning the Company's year 2000 compliance efforts is contained under Item 7 of this Form 10-K. Such information is hereby incorporated by reference. 7 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 660,000 square feet of land owned by the Company. The Company also owns approximately 520,000 square feet of land adjacent to its headquarters and is using this property principally for additional employee parking areas. Also, the Company owns one 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, 1999, was $48,176,000. ITEM 3. LEGAL PROCEEDINGS. (a) Litigation The Company is a defendant in lawsuits and arbitrations, in some of which plaintiffs claim substantial amounts, relating primarily to its securities and commodities business. While results of litigation cannot be predicted with certainty, management, after consultation with counsel, believes that resolution of all such litigation will have no material adverse effect on the consolidated financial statements of the Company. (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, 1999. 8 EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth the executive officers of the Company as of May 1, 1999. Executive officers are appointed by the Board of Directors to hold office until their successors are appointed and qualified. Year First Appointed Executive Name Age Office & Title Officer of the Company Benjamin F. Edwards III 67 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 42 years. Director of Edwards since 1967. Mary V. Atkin 44 Corporate Vice President 1999 of Edwards. Director of Information Technology of Edwards since March 1999. Manager of Corporate Communications of Edwards prior to March 1999. Employee of Edwards for 21 years. Director of Edwards since 1993. Robert G. Avis 67 Executive Vice President 1984 of Edwards. Vice Chairman of the Board of the Company until March 1999. Vice Chairman of the Board and Director of the Investment Banking Division of Edwards from 1989 to March 1999. Director of the Sales and Marketing Division of Edwards from 1984 to 1997. Employee of Edwards for 33 years. Director of Edwards since 1970. 9 Robert L. Bagby 55 Vice Chairman of the Board 1991 of 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 24 years. Director of Edwards since 1979. Donnis L. Casey 51 Corporate Vice President 1996 of Edwards. Director of the Staff Division of Edwards since 1996. Assistant Director of the Staff Division of Edwards prior to 1996. Employee of Edwards for 32 years. Director of Edwards since 1993. Benjamin F. Edwards IV 43 Vice Chairman of the Board 1996 of the Company since March 1999. Vice Chairman of the Board and Director of the Investment Banking Division of Edwards since March 1999. Executive Vice President and Director of the Sales and Marketing Division of Edwards since 1997. Regional Officer of Edwards from 1995 to 1997. Assistant Branch Manager of Edwards from 1991 to 1995. Employee of Edwards for 21 years. Director of Edwards since 1994. Alfred E. Goldman 65 Corporate Vice President, 1991 Director of Market Analysis of Edwards. Employee of Edwards for 39 years. Director of Edwards since 1967. 10 Douglas L. Kelly 50 Vice President and 1994 Secretary of the Company. Corporate Vice President, Secretary, and Director of Law and Compliance of Edwards. Employee of Edwards for 5 years. Director of Edwards since 1994. Ronald J. Kessler 51 Corporate Vice President 1996 of Edwards. Director of Operations since January 1998. Assistant Director of Operations prior to January 1998. Employee of Edwards for 31 years. Director of Edwards since 1989. Thomas H. Martin Jr. 39 Assistant Treasurer of the 1999 Company since March 1999. Vice President of Edwards. Controller of the Company and Edwards since March 1999. Accounting Manager prior to March 1999. Employee of Edwards for 18 years. Joseph G. Porter 38 Assistant Treasurer of the 1999 Company since March 1999. Vice President of Edwards. Principal Accounting Officer of the Company and Edwards since March 1999. Accounting Manager prior to March 1999. Employee of Edwards for 16 years. Robert L. Proost 61 Vice President and 1990 Treasurer of the Company. Corporate Vice President, Treasurer, Assistant Secretary and Director of Administration of Edwards. Employee of Edwards for 11 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 1999 Annual Report to Stockholders on page 43 under the caption "Quarterly Financial Information" and on page 44 under the caption "Shareholder Information." Such information is hereby incorporated by reference. The approximate number of equity security holders of record includes customers who hold the Company's stock in their accounts on the books of Edwards. ITEM 6. SELECTED FINANCIAL DATA. The information required by this item is contained on pages 22 and 23 of the 1999 Annual Report to Stockholders under the caption "Ten-Year Financial Summary." Such information is hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this item is contained on pages 17 through 21 of the 1999 Annual Report to Stockholders under the caption "Management's Financial Discussion." Such information is hereby incorporated by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required by this item is contained in Management's Financial Discussion under the caption "Risk Management" on page 21 of the 1999 Annual Report to Stockholders. Such information is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this item is contained in the Consolidated Financial Statements and Notes thereto, together with the Independent Auditors' Report thereon of Deloitte & Touche dated April 22, 1999, and under the caption "Quarterly Financial Information" on pages 24 through 33 and page 43 of the 1999 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 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 3 through 6 of the Company's 1999 Proxy Statement and in Part I of this Form 10-K on pages 9 through 11 under the caption "Executive Officers of the Company." Such information is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is included under the captions "Director Compensation," "Executive Compensation" and "Performance Graph" on pages 7 through 16 of the Company's 1999 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 1999 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 1999 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, included on pages 24 through 33 of the Company's 1999 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 Registrant's Form 10-K for the fiscal year ended February 28, 1998. 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, 1999 and incorporated herein by reference. 13 Annual Report to Stockholders for the fiscal year ended February 28, 1999. Except for those portions of pages expressly incorporated by reference, the 1999 Annual Report to Stockholders is not deemed filed as part of this Annual Report on Form 10-K. 21 Registrant's Subsidiaries. 23 Independent Auditors' Consent. 24 Power of Attorney. 27 Financial Data Schedule. This Financial Data Schedule is only required to be submitted with the Registrant's Annual Report on Form 10-K as filed electronically to the SEC's EDGAR database. *Numbers correspond to document numbers in Exhibit Table of Item 601 of Regulation S-K. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of the year ended February 28, 1999. 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 20, 1999 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 20, 1999 Benjamin F. Edwards III President and Director (Chief Executive Officer) /s/ Robert L. Proost Treasurer and Director May 20, 1999 Robert L. Proost (Principal Financial Officer) /s/ Robert L. Bagby Vice Chairman of the Board May 20, 1999 Robert L. Bagby and Director /s/ Benjamin F. Edwards IV Vice Chairman of the Board Benjamin F. Edwards IV and Director May 20, 1999 /s/ Dr. E. Eugene Carter Director May 20, 1999 Dr. E. Eugene Carter /s/ Charmaine S. Chapman Director May 20, 1999 Charmaine S. Chapman Director May 20, 1999 Dr. Louis Fernandez /s/ Samuel C. Hutchinson Jr. Director May 20, 1999 Samuel C. Hutchinson Jr. /s/ Ronald J. Kessler Director May 20, 1999 Ronald J. Kessler /s/ Thomas H. Martin Controller May 20, 1999 Thomas H. Martin Jr. /s/ Joseph G. Porter Principal Accounting Officer May 20, 1999 Joseph G. Porter 17 EXHIBIT INDEX Exhibit Description 13 1999 Annual Report to Stockholders. 21 Registrant's Subsidiaries. 23 Independent Auditors' Consent. 24 Power of Attorney. Included on Signature Page 17. 18 EX-13 2 EXHIBIT 13 Management's Financial Discussion (Year references are to fiscal years ended February 28 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 639 locations and approximately 14,800 total employees in 49 states and the District of Columbia. The Company's primary business is providing a full range of financial products and services, including investment banking, to its individual, institutional, corporate, governmental and municipal clients. Many factors affect the Company's revenues and profitability, including changes in economic conditions, the level and volatility of interest rates, inflation, political events, investor sentiment and competition from other financial institutions. Because these factors are unpredictable and beyond the Company's control, earnings may fluctuate significantly from period to period. The Company's fiscal 1999 was the fourth consecutive year of record profitability. 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. The mid-year volatility of the equity markets slowed activity slightly, only to rebound to record levels by calendar year end as the Federal Reserve lowered interest rates three times in less than three months. Despite some volatility in interest rates early in fiscal 1999, 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. The year began with a continuation of the high level of retail investor activity that existed in the prior three years. The Dow Jones Industrial Average (the Dow) began the year at 8,546 and continued its climb to a peak of 9,374 in mid-July. But the fear of inflation, lower corporate earnings and turmoil in the foreign markets sent the Dow tumbling in late July to a low of 7,539 on August 31. After the Federal Reserve began to lower interest rates in September, the Dow rebounded to a record of 9,643 in early January, only to finish the year at 9,307. In spite of this volatility, the Dow ended the year up 9 percent, following a 24 percent gain in 1998. The NASDAQ average jumped 29 percent for the year, following a 35 percent gain in the prior year. Investor demand and volatility in high-tech stocks, particularly Internet companies, fueled the rise in the NASDAQ market and resulted in record NASDAQ volume. Results of Operations Revenues, net earnings and earnings per share for the Company reached record levels for the fourth year in a row in 1999. Revenues for the Company rose 12 percent to just more than $2.2 billion from $2.0 billion in 1998. Revenues in 1998 were up 18 percent from $1.7 billion in 1997. Net earnings of $292 million in 1999 increased 9 percent from $269 million in the previous year. Net earnings in 1998 were up 23 percent from $219 million in 1997. Diluted earnings per share for the Company were $3.00 in 1999, versus $2.75 and $2.24 in 1998 and 1997, respectively. The Company's net profit margin was 13.0 percent in 1999, compared to 13.4 percent in 1998 and 12.9 percent in 1997. The number of A.G. Edwards financial consultants reached 6,528 at fiscal year end, an increase of 4 percent from the prior year end. The number of locations at the end of 1999 was 639, up from 594 at year-end 1998. The Company intends to continue expanding its distribution system as opportunities present themselves. The following table and discussion summarize the changes in the major categories of revenues and expenses for the past two years (dollars in thousands): Increase (Decrease) 1999 vs. 1998 1998 vs. 1997 Revenues: Commissions $ 101,718 9% $179,125 19% Principal transactions (5,930) (3) (5,055) (2) Investment banking 28,083 15 34,759 22 Asset management and service fees 90,087 29 65,832 26 Interest 20,642 11 33,035 22 Other 2,066 22 (46) (1) $ 236,666 12% $307,650 18% Expenses: Compensation and benefits $ 154,766 12% $196,000 18% Communications 5,689 6 12,692 15 Occupancy and equipment 22,187 23 10,613 12 Floor brokerage and clearance 1,108 6 1,676 9 Interest 4,192 292 (629) (30) Other 15,734 22 4,458 7 $ 203,676 13% $224,810 17% 17 Commissions Commissions are the most significant source of revenue for the Company, accounting for more than 50 percent of total revenue in each year. Commission revenue rose 9 percent, from $1.1 billion in 1998 to $1.2 billion in 1999, and accounted for more than 43 percent of the Company's overall revenue increase in 1999. As commissions are transaction-based revenues, they are influenced by the number and size of client transactions and product mix and may vary considerably from period to period. Listed equity securities commissions increased 9 percent ($43 million) and over-the-counter equity commission revenue rose 5 percent ($9 million) in 1999, 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 1999 was up 28 percent on the New York Stock Exchange and 24 percent on the NASDAQ. The Company's increases trailed the industry, primarily due to its lesser share of higher institutional volume on the exchanges and its client base not investing as heavily in the high-tech and Internet sectors, which have caused the overall volumes to rise significantly. Company revenues from mutual fund sales rose 11 percent ($27 million) in 1999. Investor demand continued to be high for mutual funds in spite of a volatile year in the equity markets. Industry-wide, cash flows into funds remained strong with only the month of August resulting in a net cash outflow. Following this trend, sales of variable annuities increased 13 percent ($16 million) for 1999. Fiscal 1998's 19 percent ($179 million) increase in total commissions over fiscal 1997 reflected increased retail investor activity due to higher stock prices and trading volumes as well as strong cash flows into mutual funds and variable annuities in 1998 compared with 1997. 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 3 percent ($6 million) in 1999, due to reduced client demand for debt securities as a result of lower yields and the strength of the equity markets. Revenue from sales of government debt securities declined 22 percent ($10 million) but was partially offset by a combined 5 percent ($5 million) rise from sales of municipal and corporate debt securities. The decline in government securities sales and the increase in sales of municipal and corporate debt securities was primarily due to client demand shifting from government to municipal and corporate debt securities as a result of a widening of the interest rate yield spreads. Revenues from principal transactions decreased 2 percent ($5 million) in 1998 as compared to 1997. Revenue from sales of municipal debt securities in 1998 decreased 8 percent ($6 million) due to lower yields and the strength of the equity markets. Investment Banking The Company derives investment banking revenue from underwriting public offerings of securities for corporate and governmental entities for sale to its clients. The Company also provides advisory services to these same corporate and governmental entities. In 1999, investment banking revenue increased 15 percent ($28 million) due to the Company's participation in the industry-wide record levels of underwriting as domestic and foreign corporations raised record capital in U.S. markets during calendar 1998. Underwriting fees and selling concessions increased 7 percent ($11 million) in 1999, principally because of a 9 percent ($10 million) increase in revenue from corporate equity issues in 1999. The initial public offering market continued to be strong, as did client demand for equity-based unit trusts. Management fees increased 43 percent ($17 million) due to participation as manager or co-manager in a larger number of corporate offerings coupled with increased activity in mergers and acquisitions this year. In 1998, favorable market conditions for investment banking activities resulted in revenue growth of 22 percent ($35 million) over 1997. Underwriting fees and selling concessions advanced 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. 18 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 Company's trust services. These revenues include fees based on the amount of client assets under management and transaction-related fees, as well as fees related to the administration of custodial and other specialty accounts. Asset management and service fees rose $90 million in 1999, an increase of 29 percent. Fees from third-party mutual funds were 24 percent ($47 million) higher than 1998's fees, reflecting the strong industry-wide cash flows into funds and higher market valuations of existing assets. Fees resulting from the administration of client assets under third-party management and from the Company's management services improved 57 percent ($40 million) in 1999. The average number of these accounts increased 61 percent, while the total assets in these programs grew from $9.5 billion at the end of 1998 to $11.8 billion by the close of 1999, an increase of 24 percent. The 1998 increase in asset management and service fees of 26 percent ($66 million) over 1997 was primarily due to a 24 percent ($37 million) jump in service fees from third-party mutual funds. Fees from the Company's management services in 1998 rose 57 percent ($26 million) as a result of the growth in the number of client accounts and higher market valuations of existing assets. Interest The Company earns interest revenue principally from financing its clients' margin accounts, debt securities carried in inventory for resale and short-term investments. Interest revenue rose 11 percent ($21 million) in 1999, primarily because of a 14 percent ($21 million) increase in interest earned on margin accounts. The increase resulted from an 18 percent rise in average margin debits partially offset by slightly lower interest rates charged on margin accounts in the later part of the year. Interest revenues from securities owned increased $4 million, while interest earned on short-term investments decreased $5 million as inventory levels were higher and average short-term investments declined. The 1998 versus 1997 increase in interest revenue was principally due to a 27 percent ($31 million) increase in interest earned on margin accounts as a result of a 24 percent rise in average margin balances and from increased revenue from securities owned. Expenses Compensation and benefits, the major component of the Company's overall expenses, rose 12 percent ($155 million) in 1999 and 18 percent ($196 million) in 1998. A significant portion of this expense is variable in nature and directly relates to commissionable sales and to the Company's profitability. The year-to-year comparisons generally reflect the increases in revenue and profitability in both 1999 and 1998. General and administrative salary expense increased 17 percent ($37 million) in 1999 and 17 percent ($31 million) in 1998 because of general salary increases and an 11 percent growth in the number of support employees in 1999 and 12 percent in 1998. Communication expense rose 6 percent ($6 million) in 1999, primarily because of increased business volume coupled with branch expansion. Occupancy and equipment increased 23 percent ($22 million) in 1999, principally because of branch and headquarters expansion and the cost associated with the purchase of technology-related equipment. All remaining expenses increased a combined 22 percent ($21 million) over last year due to branch and headquarters expansion and increased security transactions. In 1998, all non-compensation-related expenses increased a combined 11 percent ($29 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 (Income Taxes) of the Notes to Consolidated Financial Statements. Liquidity and Capital Resources The Company's assets fluctuate in the normal course of business, primarily because of the timing of certain transactions. Securities-loaned transactions and related securities-borrowed transactions decreased from fiscal 1998, reflecting management's re-evaluation of the profitability of this activity. Customer receivables continued to increase in 1999 as a result of business expansion and the increased participation by clients in the markets during the past year. The decrease in government securities inventory from 1998, and the related decrease in payables to brokers and dealers, was due to an underwriting of government securities which was in progress at February 28, 1998. 19 The principal sources for financing the Company's business are stockholders' equity and cash generated from operations. Average bank borrowings of $35 million in 1999, $11 million in 1998 and $2 million in 1997 were primarily used to finance customer receivables. Capital expenditures for the past three years have been financed primarily from operations. The Company plans to purchase additional land adjacent to its St. Louis headquarters with the intent to construct an additional office building, a training/conference center and a parking garage. As these projects are in the early planning stage of development, the costs associated with them are unknown. These projects are expected to be financed primarily from operations. Under the Company's stock repurchase program, which began in May 1996, the Company is authorized to repurchase up to 33 million shares of the Company's common stock over a 5 1/2 year period ending in 2001, in part to offset the issuance of stock under the employee stock plans. The Company purchased 4.9 million and 3.4 million shares at aggregate costs of $180 million and $106 million in 1999 and 1998, respectively. At February 28, 1999, a total of 11.3 million shares had been purchased under this program. These treasury shares were purchased with funds generated from operations and proceeds from employee stock plans. Future treasury share purchases, dividend payments and the costs of expansion are expected to be financed from the same sources. The Company has adequate sources of credit available, if needed, to finance higher trading volumes, branch expansion, stock repurchases and major capital expenditures. The Company's principal subsidiary, A.G. Edwards & Sons, Inc., is required by the Securities and Exchange Commission (SEC) to maintain specified amounts of liquid net capital to meet its obligations to clients -- see Note 5 (Net Capital Requirements) of the Notes to Consolidated Financial Statements. Under such rules, the subsidiary would be restricted from expanding its business, paying cash dividends or advancing loans to affiliates if its net capital were to go below certain levels. The rules also require A.G. Edwards & Sons, Inc., to notify and sometimes obtain approval from the SEC and other regulatory organizations for substantial withdrawals of capital and loans to affiliates. A.G. Edwards & Sons, Inc.'s net capital in excess of these levels was approximately $909 million on February 28, 1999, up from $873 million the previous year. Year 2000 This section is a Year 2000 readiness disclosure pursuant to the provisions of the Year 2000 Information Readiness and Disclosure Act. The "Year 2000" issue arose 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 December 31, 1999, causing system failures or miscalculations. The Company, along with the entire financial services industry, is heavily reliant on computer technology. As such, any unresolved Year 2000 issues of the Company, other industry members or entities that support the industry may result in a material and negative impact on the Company's operations or financial condition. While the Company has contacted significant third parties concerning their Year 2000 progress, there can be no assurance that these other parties have provided accurate and complete information concerning their Year 2000 efforts. With respect to its internal systems, the Company's efforts to remediate the Year 2000 issues are proceeding according to plan. Mission critical systems have been assessed, modified, tested and placed in production. Non-critical and non-information technology systems have been assessed, with modifications and testing scheduled to be complete in June 1999. The Company is currently participating in an industry-wide testing program with other broker-dealers, clearing organizations, securities exchanges and depository institutions. The Securities Industry Association has reported that preliminary results of the testing program have been favorable. In addition, the Company will continue both internal and point-to-point testing with significant counterparties throughout calendar 1999. Management estimates the total cost of the Company's Year 2000 efforts will not exceed $15 million. Most of these costs have already been incurred and expensed. Actual costs may differ materially from this estimate. The Company has incorporated various Year 2000 issues into its corporate contingency plans. The plans include steps to address internal system processing errors that may occur after December 31, 1999. Consideration was given to alternatives for mission critical third parties. However, management believes that the Company's primary mission critical third parties are securities and commodities exchanges, clearing associations, and utilities, and that the industry currently has no available alternatives for most or all of these entities. 20 Risk Management General The business activities of the Company expose it to a variety of risks. Management of these risks is necessary for the long-term profitability of the Company. The Company manages these risks through the establishment of numerous policies, procedures and controls. The most significant risks that affect the Company are market risk and credit risk. Credit risk is discussed in Note 9 (Financial Instruments ---- Off-balance Sheet Risk and Concentration of Credit Risk) of the Notes to Consolidated Financial Statements. Market Risk Market risk is the risk of loss to the Company resulting from changes in interest rates, equity prices or both. The Company is exposed to market risk since it maintains positions in fixed-income and equity securities. The Company primarily manages its risk through the establishment of trading policies and guidelines and through the implementation of control and review procedures. The Company has a hands-on management philosophy which provides for clear communication between all responsible parties throughout the trading day. The Company's policy is to purchase inventory to provide investment product for its clients. As a result, the Company purchases only inventory which it believes it can readily sell to its clients, thus reducing the Company's exposure to liquidity but not to market fluctuations. In addition, maximum inventory guidelines are set by the Executive Committee for fixed-income and equity securities, subject to certain limited exceptions. Capital management and control are accomplished through review, by product managers and members of management outside of the trading area, of various reports, including reports that show current inventory profit and loss, inventory positions exceeding set limits, and aged positions. Additionally, real-time capital management data is available for intraday assessments. The Company does not act as a dealer, trader or end-user of complex derivative products, such as swaps, collars and caps. The Company provides advice and guidance on complex derivative products to selected clients; however, this activity does not involve the Company acquiring a position or commitment in these products. The Company will occasionally hedge a portion of its debt inventory through the use of financial futures contracts, with related profits and losses recorded in income. These transactions are not material to the Company's financial condition or results of operations. Equity Price Risk Equity price risk refers to the risk of changes in the level or volatility of the price of equity securities. The Company is exposed to this risk as a result of its market-making activities. At February 28, 1999, the potential daily loss in fair value of equity securities was not material. Interest Rate Risk Interest rate risk refers to the risk of changes in the level or volatility of interest rates, the speed of payments on mortgage-backed securities, the shape of the yield curve and credit spreads. The Company is exposed to this risk as a result of maintaining inventories of interest-rate- sensitive financial instruments. This is the Company's primary market risk. For the purposes of the SEC's disclosure requirements, the Company has elected to use the sensitivity approach to express the potential decrease in the fair value of the Company's interest-rate-sensitive financial instruments. The Company calculated the potential loss in fair value of its debt inventory by calculating the change in offering price of each inventory item resulting from a 10 percent increase in either the Treasury Yield curve for taxable products or the Municipal Market Data Corporation's AAA rated yield curve for tax-exempt products. Using this method, if such a 10 percent increase in yield were to occur, the Company calculated a potential loss in fair value of its debt inventory, at February 28, 1999, of $8.9 million. ****************************************************************************** Forward-Looking Statements The Management's Financial Discussion, including the discussion under "Year 2000," contains forward-looking statements within the meaning of federal securities laws. Actual results are subject to risks and uncertainties, including both 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
Year Ended: 1999 1998 1997 1996 1995 (In thousands, except per share amounts) Revenues Commissions: Listed Securities $ 505,226 $ 462,276 $ 365,908 $ 338,241 $ 236,629 Options 49,830 44,188 33,850 29,432 21,576 Over-the-Counter Securities 199,472 190,092 178,752 142,696 80,525 Mutual Funds 281,782 255,005 214,029 184,616 142,653 Commodities 15,518 16,315 16,038 16,448 15,261 Insurance 149,691 131,925 112,099 90,150 77,117 Total 1,201,519 1,099,801 920,676 801,583 573,761 Principal Transactions: Equities 60,538 61,184 58,427 55,334 37,565 Debt Securities 141,484 146,768 154,580 151,033 203,460 Total 202,022 207,952 213,007 206,367 241,025 Investment Banking: Underwriting Fees and Selling Concessions 163,419 152,029 114,426 80,572 70,156 Management Fees 55,582 38,889 41,733 24,427 22,574 Total 219,001 190,918 156,159 104,999 92,730 Asset Management and Service Fees 405,385 315,298 249,466 199,593 157,859 Interest: Margin Account Balances 170,982 149,738 118,373 107,192 89,971 Securities Owned and Deposits 30,530 31,132 29,462 27,150 15,548 Total 201,512 180,870 147,835 134,342 105,519 Other 11,360 9,294 9,340 7,583 7,448 Total Revenues 2,240,799 2,004,133 1,696,483 1,454,467 1,178,342 Expenses Compensation and Benefits 1,431,697 1,276,931 1,080,931 929,755 756,736 Communications 104,638 98,949 86,257 80,364 74,708 Occupancy and Equipment 118,683 96,496 85,883 79,077 73,108 Floor Brokerage and Clearance 20,933 19,825 18,149 16,275 14,355 Interest 5,628 1,436 2,065 3,153 6,818 Other Operating Expenses 88,433 72,699 68,241 69,561 53,288 Total Expenses 1,770,012 1,566,336 1,341,526 1,178,185 979,013 Earnings Before Income Taxes 470,787 437,797 354,957 276,282 199,329 Income Taxes 178,670 168,500 135,900 105,700 75,210 Net Earnings $ 292,117 $ 269,297 $ 219,057 $ 170,582 $ 124,119 Per Share Data Diluted Earnings $ 3.00 $ 2.75 $ 2.24 $ 1.77 $ 1.33 Basic Earnings $ 3.07 $ 2.81 $ 2.29 $ 1.80 $ 1.35 Dividends Declared $ 0.57 $ 0.51 $ 0.44 $ 0.40 $ 0.37 Book Value $ 17.16 $ 15.21 $ 13.12 $ 11.33 $ 9.84 Other Data Total Assets $ 3,803,132 $ 4,193,328 $ 4,244,340 $ 3,102,085 $ 2,224,282 Stockholders' Equity $ 1,627,737 $ 1,463,121 $ 1,261,303 $ 1,088,684 $ 919,281 Dividends Declared $ 54,002 $ 48,740 $ 41,851 $ 37,769 $ 34,200 Return on Average Equity 18.9% 19.8% 18.6% 17.0% 14.5% Pretax Return on Average Equity 30.5% 32.1% 30.2% 27.5% 23.3% Net Earnings as a Percent of Revenues 13.0% 13.4% 12.9% 11.7% 10.5% Average Common and Common Equivalent Shares Outstanding (Diluted) 97,322 98,051 97,816 96,644 93,267 Average Common Shares Outstanding (Basic) 95,252 95,950 95,483 94,621 91,809 Share and per share data have been restated for stock splits and stock dividends.
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Year Ended: 1994 1993 1992 1991 1990 (In thousands, except per share amounts) Revenues Commissions: Listed Securities $ 273,363 $ 231,312 $ 203,936 $ 140,096 $ 129,288 Options 21,135 19,167 21,745 20,002 18,141 Over-the-Counter Securities 94,075 69,199 69,415 38,842 38,236 Mutual Funds 244,357 191,643 145,494 80,158 69,998 Commodities 16,766 13,016 13,941 12,322 11,941 Insurance 74,862 46,757 47,343 39,514 40,424 Total 724,558 571,094 501,874 330,934 308,028 Principal Transactions: Equities 40,260 31,266 23,157 10,922 11,741 Debt Securities 146,705 184,040 165,284 145,732 116,624 Total 186,965 215,306 188,441 156,654 128,365 Investment Banking: Underwriting Fees and Selling Concessions 111,379 87,061 77,464 44,167 42,395 Management Fees 35,594 21,251 13,389 11,161 11,542 Total 146,973 108,312 90,853 55,328 53,937 Asset Management and Service Fees 138,952 109,483 88,344 61,455 47,321 Interest: Margin Account Balances 60,491 50,098 47,026 51,209 50,489 Securities Owned and Deposits 14,074 14,631 16,915 15,025 14,817 Total 74,565 64,729 63,941 66,234 65,306 Other 6,628 5,464 5,206 4,302 4,066 Total Revenues 1,278,641 1,074,388 938,659 674,907 607,023 Expenses Compensation and Benefits 828,409 692,127 594,404 422,524 374,119 Communications 73,048 66,899 62,468 58,323 52,527 Occupancy and Equipment 67,258 61,701 56,035 49,783 42,560 Floor Brokerage and Clearance 15,062 15,016 13,741 11,461 10,031 Interest 1,113 1,886 1,186 4,229 6,314 Other Operating Expenses 50,180 46,774 42,793 36,925 29,948 Total Expenses 1,035,070 884,403 770,627 583,245 515,499 Earnings Before Income Taxes 243,571 189,985 168,032 91,662 91,524 Income Taxes 88,700 70,560 62,500 32,500 32,700 Net Earnings $ 154,871 $ 119,425 $ 105,532 $ 59,162 $ 58,824 Per Share Data Diluted Earnings $ 1.71 $ 1.38 $ 1.25 $ 0.73 $ 0.73 Basic Earnings $ 1.75 $ 1.40 $ 1.28 $ 0.74 $ 0.74 Dividends Declared $ 0.35 $ 0.29 $ 0.25 $ 0.19 $ 0.19 Book Value $ 8.72 $ 7.11 $ 5.89 $ 4.79 $ 4.30 Other Data Total Assets $ 2,236,590 $ 2,111,192 $ 1,577,143 $ 1,402,627 $ 1,126,004 Stockholders' Equity $ 790,367 $ 615,240 $ 492,010 $ 385,869 $ 343,539 Dividends Declared $ 30,843 $ 24,624 $ 20,622 $ 15,480 $ 15,185 Return on Average Equity 22.0% 21.6% 24.0% 16.2% 18.3% Pretax Return on Average Equity 34.7% 34.3% 38.3% 25.1% 28.4% Net Earnings as a Percent of Revenues 12.1% 11.1% 11.2% 8.8% 9.7% Average Common and Common Equivalent Shares Outstanding (Diluted) 90,530 86,740 84,152 81,023 80,884 Average Common Shares Outstanding (Basic) 88,643 85,421 82,331 80,205 79,976 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, (In thousands, except share amounts) 1999 1998 Assets Cash and cash equivalents $ 99,499 $ 84,764 Cash and government securities, segregated under federal and other regulations 57,959 57,294 Securities purchased under agreements to resell 14,838 204,363 Securities borrowed 243,507 786,119 Receivables: Customers 2,626,316 2,229,128 Brokers, dealers and clearing organizations 27,855 12,521 Fees, dividends and interest 52,077 47,287 Securities inventory, at fair value: State and municipal 144,180 142,692 Government and agencies 50,618 209,247 Corporate 72,297 51,714 Property and equipment, at cost, net of accumulated depreciation and amortization of $276,229 and $229,938 240,367 230,158 Deferred income taxes 88,312 70,432 Other assets 85,307 67,609 $ 3,803,132 $ 4,193,328 Liabilities and Stockholders' Equity Checks payable $226,516 $ 203,017 Securities loaned 229,542 820,918 Payables: Customers 949,076 920,791 Brokers, dealers and clearing organizations 68,419 185,756 Securities sold but not yet purchased, at fair value 45,659 19,141 Employee compensation and related taxes 578,073 505,731 Income taxes 24,645 17,137 Other liabilities 53,465 57,716 Total Liabilities 2,175,395 2,730,207 Stockholders' Equity: Preferred stock, $25 par value: Authorized, 4,000,000 shares, none issued Common stock, $1 par value: Authorized, 550,000,000 and 250,000,000 shares Issued, 96,463,114 shares 96,463 96,463 Additional paid-in capital 239,998 217,862 Retained earnings 1,348,094 1,160,532 1,684,555 1,474,857 Less: Treasury stock, at cost (1,625,042 and 284,173 shares) 56,818 11,736 Total Stockholders' Equity 1,627,737 1,463,121 $ 3,803,132 $ 4,193,328 See Notes to Consolidated Financial Statements.
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Consolidated Statements of Earnings Year Ended February 28, (In thousands, except per share amounts) 1999 1998 1997 Revenues Commissions $ 1,201,519 $ 1,099,801 $ 920,676 Principal transactions 202,022 207,952 213,007 Investment banking 219,001 190,918 156,159 Asset management and service fees 405,385 315,298 249,466 Interest 201,512 180,870 147,835 Other 11,360 9,294 9,340 2,240,799 2,004,133 1,696,483 Expenses Compensation and benefits 1,431,697 1,276,931 1,080,931 Communications 104,638 98,949 86,257 Occupancy and equipment 118,683 96,496 85,883 Floor brokerage and clearance 20,933 19,825 18,149 Interest 5,628 1,436 2,065 Other 88,433 72,699 68,241 1,770,012 1,566,336 1,341,526 Earnings Before Income Taxes 470,787 437,797 354,957 Income Taxes 178,670 168,500 135,900 Net Earnings $ 292,117 $ 269,297 $ 219,057 Earnings per share: Diluted $3.00 $2.75 $2.24 Basic $3.07 $2.81 $2.29 See Notes to Consolidated Financial Statements.
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Consolidated Statements of Stockholders' Equity Three Years Ended February 28, 1999 Additional (In thousands, except per share amounts) Common Paid-in Retained Treasury Stock Capital Earnings Stock Total Balances, March 1, 1996 $ 64,313 $ 232,058 $ 798,805 $ (6,492) $ 1,088,684 Net earnings 219,057 219,057 Dividends declared $0.44 per share (41,851) (41,851) Treasury stock acquired (64,805) (64,805) Stock issued: Employee stock purchase/option plans 3,403 (9,444) 42,938 36,897 Restricted stock 1,221 1,997 20,103 23,321 Balances, February 28, 1997 64,313 236,682 968,564 (8,256) 1,261,303 Net earnings 269,297 269,297 Dividends declared $0.51 per share (48,740) (48,740) Treasury stock acquired (106,006) (106,006) Stock issued: Employee stock purchase/option plans 7,667 (29,774) 78,677 56,570 Restricted stock 5,824 1,185 23,849 30,858 Stock split 3-for-2 32,150 (32,150) Cash paid for fractional shares (161) (161) Balances, February 28, 1998 96,463 217,862 1,160,532 (11,736) 1,463,121 Net earnings 292,117 292,117 Dividends declared $0.57 per share (54,002) (54,002) Treasury stock acquired (180,175) (180,175) Stock issued: Employee stock purchase/option plans 13,770 (52,177) 108,657 70,250 Restricted stock 8,366 1,624 26,436 36,426 Balances, February 28, 1999 $ 96,463 $ 239,998 $ 1,348,094 $(56,818) $ 1,627,737 See Notes to Consolidated Financial Statements.
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Consolidated Statements of Cash Flows Year Ended February 28, (In thousands) 1999 1998 1997 Cash Flows From Operating Activities Net earnings $ 292,117 $ 269,297 $ 219,057 Noncash items included in earnings: Depreciation and amortization 47,564 37,855 33,066 Expense of restricted stock awards 28,149 25,155 22,173 Deferred income taxes (17,880) (13,874) (13,944) (Increase) decrease in operating assets: Segregated cash and government securities (665) 343,697 1,794 Securities borrowed 542,612 606,745 (779,598) Receivable from brokers, dealers and clearing organizations (15,334) 2,114 (714) Receivable from customers (397,188) (551,774) (249,291) Fees, dividends and interest receivable (4,790) (6,218) (4,458) Securities inventory 136,558 (239,686) 31,825 Other assets 4,472 (7,000) (4,930) Increase (decrease) in operating liabilities: Checks payable 23,499 28,281 25,766 Securities loaned (591,376) (637,508) 797,937 Payable to brokers, dealers and clearing organizations (117,337) 137,914 (30,805) Payable to customers 28,285 104,123 96,679 Securities sold but not yet purchased 26,518 1,471 (4,201) Employee compensation and related taxes 72,342 91,554 83,079 Income taxes 7,508 3,601 906 Other liabilities (5,923) 16,730 (1,021) Net cash from operating activities 59,131 212,477 223,320 Cash Flows From Investing Activities Securities purchased under agreements to resell 189,525 (4,363) (107,987) Purchase of property and equipment (57,773) (78,218) (44,305) Long-term investments included in other assets (22,170) (16,301) 6,499 Net cash from investing activities 109,582 (98,882) (145,793) Cash Flows From Financing Activities Employee stock transactions 78,527 62,273 38,045 Purchase of treasury stock (180,175) (106,006) (64,805) Cash dividends paid (52,330) (47,736) (40,555) Cash paid for fractional shares (161) Net cash from financing activities (153,978) (91,630) (67,315) Net Increase in Cash and Cash Equivalents 14,735 21,965 10,212 Cash and Cash Equivalents, at Beginning of Year 84,764 62,799 52,587 Cash and Cash Equivalents, at End of Year $ 99,499 $ 84,764 $ 62,799 Interest payments totaled $5,585 in 1999, $3,245 in 1998 and $2,650 in 1997. Income taxes paid totaled $168,748 in 1999, $165,618 in 1998 and $145,216 in 1997. Supplemental disclosures of noncash financing activities: Restricted stock awards, net of forfeitures, totaled $28,602 in 1999, $24,818 in 1998 and $21,768 in 1997. See Notes to Consolidated Financial Statements.
27 Notes to Consolidated Financial Statements (Three years ended February 28, 1999) (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 operates, and is managed, as a single business segment, that of providing investment services to its clients. The Company offers a wide range of services designed to meet clients' individual investment needs, including securities and commodities brokerage, asset management, insurance, trust, investment banking, and other related services. These services are provided by more than 6,500 financial consultants in more than 630 branch locations of the Company's principal subsidiary, A.G. Edwards & Sons, Inc. Since these services are provided using the same sales and distribution personnel, support services and facilities, and all are provided to meet the needs of its clients, the Company does not identify or manage assets, revenues or expenses resulting from any service, or class of services, as a separate business segment. With headquarters in St. Louis, A.G. Edwards & Sons, Inc. has offices in 49 states and the District of Columbia. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments with maturities of 90 days or less at the date of acquisition. Securities Transactions Securities purchased under agreements to resell (Resale Agreements) and securities sold under agreements to repurchase are recorded at the contractual amounts that the securities will be resold/repurchased, including accrued interest. The Company's policy is to obtain possession or control of securities purchased under Resale Agreements and to obtain additional collateral when necessary to minimize the risk associated with this activity. Securities borrowed and securities loaned are recorded at the amount of the cash collateral provided for securities-borrowed transactions and received for securities-loaned transactions, respectively. The adequacy of the collateral is continuously monitored and adjusted when 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. Receivables from and payables to customers include amounts due on cash and margin transactions. Securities owned by customers, including those that collateralize margin or other similar transactions, are not reflected on the Consolidated Balance Sheets. Securities inventory, securities sold but not yet purchased, 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 expenses are deferred and later expensed to match revenue recognition. Stock-Based Compensation The Company applies the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), and related interpretations to account for its employee stock plans. Based on the provisions of the plans, no compensation expense has been recognized for options issued under these plans. Restricted stock awards are expensed in the year granted, which coincides with the defined service 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. 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. 28 Comprehensive Earnings Effective March 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which established standards for the reporting and display of comprehensive earnings and its components. Comprehensive earnings for each of the three years in the period ended February 28, 1999, was equal to the Company's net earnings. Recent Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure about Segments of an Enterprise and Related Information," which established standards for the disclosure requirements related to segments. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal periods beginning after June 15, 1999. The statement establishes accounting and reporting standards for derivative instruments and hedging activities. The adoption of this statement is not expected to have a material effect on the Company's financial statements. 2. Bank Loans Bank loans are short-term borrowings with interest generally based on the federal funds rate. Such loans are payable on demand and may be unsecured or collateralized by customer-owned securities held in margin accounts. The average of such borrowings was $34,620 in 1999, $10,656 in 1998 and $2,191 in 1997, at effective interest rates of 5.8 percent, 6.0 percent and 5.8 percent, respectively. Substantially all such borrowings were secured by customer-owned securities. There were no borrowings outstanding at February 28, 1999 and 1998. 3. Employee Stock Plans The Company applies the provisions of APB No. 25 to account for its employee stock plans. If compensation expense for the Company's stock option and stock purchase plans 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:
1999 1998 1997 Pro forma net earnings $280,000 $258,000 $214,000 Pro forma earnings per share: Diluted $2.87 $2.63 $2.19 Basic $2.94 $2.69 $2.24
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, 1999, at 85 percent of market price based on dates specified in the plan. Employees purchased 1,872,249 shares at $25.29 per share in 1999, 1,871,400 shares at $20.64 per share in 1998 and 1,870,325 shares at $14.98 per share in 1997. Treasury shares were utilized for all of the shares purchased. The fair value of the options granted under this plan was estimated using the following assumptions for 1999, 1998 and 1997, respectively: dividend yield of 1.51 percent, 1.34 percent and 2.21 percent; an expected life of one year; expected volatility of 43 percent, 34 percent and 25 percent; and risk- free interest rates of 4.55 percent, 5.68 percent and 5.74 percent. The fair value of the options granted in 1999, 1998 and 1997 was $7.52, $8.16 and $3.93, 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, 1999, no stock appreciation rights had 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, 1999, were awarded 882,623 shares with a market value of $28,685. At February 28, 1998 and 1997, the awards were 597,595 and 1,040,724 shares, respectively, with corresponding market values of $25,732 and $22,070. Treasury shares were utilized for these awards. 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 estimated at the date of grant using the following assumptions for 1999, 1998 and 1997, respectively: dividend yield of 1.51 percent, 1.34 percent and 2.21 percent; expected lives of six years; expected volatility of 43 percent, 34 percent and 25 percent; risk-free interest rates of 5.49 percent, 5.70 percent and 6.41 percent; and a forfeiture rate of 6 percent, 6 percent and 8 percent. The fair value of options granted under this plan in 1999, 1998 and 1997 was $13.92, $16.35 and $6.29, respectively. 29 A summary of the status of the Company's stock options as of February 28, 1999, 1998 and 1997, and changes during the years ended on those dates is presented as follows:
1999 1998 1997 Shares Weighted- Shares Weighted- Shares Weighted- (000) Average (000) Average (000) Average Exercise Exercise Exercise Price Price Price Outstanding, beginning of year 4,445 $18.97 4,993 $14.39 4,862 $12.61 Granted 968 $32.50 575 $43.06 792 $21.21 Exercised (793) $12.52 (1,050) $10.47 (620) $ 9.18 Forfeited (23) $11.83 (73) $17.50 (41) $13.67 Outstanding, end of year 4,597 $22.91 4,445 $18.97 4,993 $14.39 Treasury shares utilized for exercises 793 1,050 620
The following table summarizes information outstanding stock options at February 28, 1999:
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 $11-$15 1,507 2.7 $13.31 1,507 $13.31 $16-$20 796 5.0 $16.59 796 $16.59 $21-$25 755 6.0 $21.21 0 $30-$35 968 8.0 $32.50 0 $40-$45 571 7.0 $43.06 0 4,597 2,303
4. Employee Profit Sharing Plan The Company has a defined contribution plan (401(k)) covering substantially all employees whereby the Company is obligated to match, in specified amounts as defined therein, portions of contributions made by eligible employees. Additional contributions may be made at the discretion of the Company and are based on the Company's pretax earnings. The Company expensed $85,308 in 1999, $76,933 in 1998 and $65,754 in 1997 in connection with the 401(k). The Company also has an unfunded, nonqualified deferred compensation plan that provides benefits to participants whose contributions from the Company in the 401(k) are subject to Internal Revenue Service limitations. Participants earn interest on these benefits at the broker call rate. The Company expensed $34,799 in 1999, $26,495 in 1998 and $20,092 in 1997 in connection with this plan. At February 28, 1999 and 1998, employee compensation and related taxes included $116,121 and $87,041, respectively, related to this plan. 5. Net Capital Requirements A.G. Edwards & Sons, Inc., is subject to net capital rules administered by the Securities and Exchange Commission (SEC) and the New York Stock Exchange. Under such rules, this subsidiary must maintain net capital of not less than 2 percent of aggregate debit items, as defined, arising from customer transactions and would be restricted from expanding its business or paying cash dividends or advancing loans to affiliates if its net capital were less than 5 percent of such items. These rules also require A.G. Edwards & Sons, Inc., to notify and sometimes obtain approval of the SEC and other regulatory organizations for substantial withdrawals of capital and loans to affiliates. At February 28, 1999, the subsidiary's net capital of $1,039,169 was 40 percent of aggregate debit items and $987,189 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. 6. Income Taxes The provisions for income taxes consist of: 1999 1998 1997 Current: Federal $ 169,286 $ 154,428 $124,871 State and local 27,264 27,946 24,973 196,550 182,374 149,844 Deferred (17,880) (13,874) (13,944) $ 178,670 $ 168,500 $135,900 30 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 $105,490 at February 28, 1999, and $86,607 at February 28, 1998, 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 $17,178 at February 28, 1999, and $16,175 at February 28, 1998, and consisted primarily of accelerated depreciation deductions. The Company's effective tax rate was 38 percent in 1999, 39 percent in 1998 and 38 percent in 1997, 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 1999, 1998 and 1997. No other single item had a material impact on the difference in the rates. 7. Stockholders' Equity Earnings per Share The following table presents the computations of basic and diluted earnings per share.
1999 1998 1997 Net earnings available to common stockholders $292,117 $269,297 $219,057 Shares (in thousands): Weighted average shares outstanding 95,252 95,950 95,483 Effect of dilutive common shares: Restricted shares 423 386 557 Stock purchase plan 457 392 305 Stock option plan 1,190 1,323 1,471 Dilutive common shares 2,070 2,101 2,333 Total weighted average diluted shares 97,322 98,051 97,816 Earnings, per Share: Diluted $3.00 $2.75 $2.24 Basic $3.07 $2.81 $2.29
Stock Repurchase Program The Company's stock repurchase program, which began in May 1996, authorizes the Company to repurchase up to 33 million of its outstanding shares over a 5 1/2 year period. The Company purchased 4,871,500 shares with an aggregate cost of $180,175 in 1999, 3,438,000 shares at a cost of $106,006 in 1998 and 3,433,500 shares at a cost of $64,805 in 1997. 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 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, 1999, are as follows: Year ending February 28 (29), 2000 $53,900 2001 50,600 2002 45,400 2003 39,100 2004 32,000 Later years 69,000 $290,000 Rental expense under all operating leases and equipment maintenance contracts was $52,657 in 1999, $45,893 in 1998 and $39,598 in 1997. 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, 1999, would not have had a material effect on the consolidated financial statements. 31 At February 28, 1999 and 1998, the Company had $128,750 and $109,850, respectively, of outstanding letters of credit, principally to satisfy margin deposit requirements with a clearing corporation. Of these amounts, $10,000 was collateralized by customer-owned securities. 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. 10. Enterprise Wide Disclosure The Company provides investment services to its clients through its financial consultants in more than 630 branch offices. Transaction services include commissions and sales credits earned by executing or facilitating the execution of security and commodity trades. Asset management fees are earned by providing portfolio advisory services through third-party managers, including mutual funds, and the Company's in-house portfolio managers. The Company earns interest revenue principally from financing its clients' margin accounts, debt securities carried for resale and short-term investments. The following table presents the Company's revenue by type of service for the years ended February 28:
1999 1998 1997 Transaction services $1,645,230 $1,521,416 $1,312,143 Asset management services 351,831 264,464 201,380 Interest 201,512 180,870 147,835 Other 42,226 37,383 35,125 $2,240,799 $2,004,133 $1,696,483
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, 1999 and 1998, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended February 28, 1999. 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 at February 28, 1999 and 1998, and the results of their operations and cash flows for each of the three years in the period ended February 28, 1999, in conformity with generally accepted accounting principles. /S/DELOITTE & TOUCHE LLP April 22, 1999 St. Louis, Missouri 33
QUARTERLY FINANCIAL INFORMATION (Unaudited) Dividends Stock Price Revenues Earnings Net Earnings Declared Trading Range (in millions) Before Tax Earnings per Share per Share High -- Low (in millions) (in millions) Basic Diluted Fiscal 1999 by Quarter First $0.14 48 13/16 -- 40 1/8 $570.2 $123.9 $76.0 $0.79 $0.78 Second $0.14 48 7/16 -- 27 1/8 $551.2 $116.8 $72.3 $0.76 $0.74 Third $0.14 40 -- 25 1/8 $524.3 $109.5 $68.0 $0.72 $0.70 Fourth $0.15 41 -- 32 1/8 $595.1 $120.6 $75.8 $0.80 $0.78 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
[FN] Per share data have been restated for stock splits and stock dividends. 43 Annual Meeting The 1999 Annual Meeting of Stockholders will be held at the company's headquarters, One North Jefferson, St. Louis, Missouri, on Thursday, June 24, 1999, 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, 1999, and January 3 and April 3, 2000. Form 10-K The Form 10-K Annual Report filed with the Securities and Exchange Commission, which provides further details on A.G. Edwards' business, is available at no charge from 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, 1999, was 29,200. Registrar/Transfer Agent The Bank of New York Shareholder Relations Department--11E P.O. Box 11258 Church Street Station New York, New York 10286-1258 (800) 524-4458 Account Protection Package The securities held by A.G. Edwards & Sons, Inc., for client accounts are protected up to $500,000, including up to $100,000 for cash claims, by the Securities Investor Protection Corporation (SIPC). In addition to the SIPC coverage, securities 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 3 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 AGE Commodity Clearing Corp. Delaware Registrant A.G. Edwards Life Insurance Company Missouri Registrant Edwards Development Corporation Missouri Registrant A.G. Edwards Trust Company (Missouri Trust) Missouri Registrant A.G. Edwards Investment Management Consulting Services, Inc. Missouri Missouri Trust A.G. Edwards Trust Company New Jersey Registrant A.G. Edwards Trust Company Texas Registrant A.G. Edwards Trust Company Florida Registrant A.G. Edwards Trust Company FSB Federal Registrant A.G.E. Properties, Inc. (Properties) Missouri Registrant A.G.E. Realty Corp. Missouri Properties A.G.E. Redevelopment Corporation Missouri Properties GULL-AGE Capital Group, Inc. Delaware Registrant AGE Investments, Inc. Delaware Registrant A.G. Edwards Capital, Inc. Delaware Registrant AGE Capital Holding, Inc. Delaware Registrant EX-23 4 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 22, 1999, 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, 1999. /s/ Deloitte & Touche LLP May 27, 1999 St. Louis, Missouri EX-27 5
BD 1000 12-MOS FEB-28-1999 FEB-28-1999 99,499 2,654,171 14,838 243,507 267,095 240,367 3,803,132 0 1,822,084 0 229,542 45,659 0 0 0 96,463 1,531,274 3,803,132 202,022 201,512 1,201,519 219,001 351,831 5,628 1,431,697 470,787 470,787 0 0 292,117 3.07 3.00
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