10-K

UNITED STATES 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, 2005

Commission file number 1-8527

 

 

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:

Title of each class	Name of each exchange 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]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X]  No     .

The aggregate market value of the voting and non voting common equity held by non affiliates computed by reference to the price at which the common equity was last sold was approximately $2.7 billion as of August 31, 2004.

At May 2, 2005, there were 77,009,770 shares of A.G. Edwards, Inc. common stock, $1 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the A.G. Edwards, Inc. Proxy Statement filed with the Securities and Exchange Commission (“SEC”) in connection with the Company’s Annual Meeting of Stockholders to be held June 23, 2005, (the “Company’s 2005 Proxy Statement”) are incorporated by reference into Part III hereof, as indicated. Other documents incorporated by reference in this report are listed in the Exhibit Index of this Form 10-K.

A.G. EDWARDS, INC.

TABLE OF CONTENTS

		Page
Part I
Item 1	Business		3
Item 2	Properties		7
Item 3	Legal Proceedings		7
Item 4	Submission of Matters to a Vote of Security Holders		8
Part II
Item 5	Market for Registrant’s Common Equity and Related Stockholder Matters		10
Item 6	Selected Financial Data		12
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 7A	Quantitative and Qualitative Disclosures About Market Risk		25
Item 8	Financial Statements and Supplementary Data		25
Item 9	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		47
Item 9A	Controls and Procedures		47
Item 9B	Other Information		48
Part III
Item 10	Directors and Executive Officers of the Registrant		48
Item 11	Executive Compensation		48
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		49
Item 13	Certain Relationships and Related Transactions		49
Item 14	Principal Accountant Fees and Services		49
Part IV
Item 15	Exhibits and Financial Statement Schedules		50

 

PART I

ITEM 1.     BUSINESS.

(a)     General Development of Business

A.G. Edwards, Inc., a Delaware corporation, is a financial services holding company incorporated in 1983 whose principal subsidiary, A.G. Edwards & Sons, Inc. (“Edwards”), is the 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, investment banking, trust, asset management, financial and retirement planning, insurance products, and other related financial services to individual, corporate, governmental, municipal and institutional clients through one of the industry’s largest retail branch distribution systems. At February 28, 2005, the Company had more than 700 locations in 49 states, the District of Columbia, London, England, and Geneva, Switzerland and nearly 15,400 full-time employees, including 6,890 financial consultants providing services for approximately 3,600,000 clients.

Edwards is a securities broker-dealer whose 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. 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”). In addition, Edwards has memberships on several domestic commodity exchanges and is registered with the Commodity Futures Trading Commission (“CFTC”) as a futures commission merchant (“FCM”).

A.G. Edwards Trust Company FSB (“Trust Company”) is a federally chartered savings bank that provides investment advisory, portfolio management and trust services. A.G. Edwards & Sons (U.K.) Limited is a securities broker-dealer located in London, England, with an office located in Geneva, Switzerland. A.G. Edwards Capital, Inc. serves as general partner to four private equity partnerships formed to invest in portfolios of venture capital and buy out funds and direct investments. A.G. Edwards Technology Group, Inc. provides information technology services to the Company. Beaumont Insurance Company is a Vermont captive insurance company that centralizes certain risk management functions and provides access to reinsurance markets.

(b)     Financial Information About Industry Segments

The Company operates and is managed as a single business segment providing investment services to its clients. 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.

(c)     Narrative Description of Business

The total amount of revenue by class of products or services that accounted for 10% or more of consolidated net revenues are set forth under Item 6 of this Form 10-K under the caption “Consolidated Five-Year Summary.”

Commissions

Commission revenue represents the most significant source of revenue for the Company, accounting for approximately 40% of total revenue each 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 net 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.

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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 many of the 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 significantly from the standard dealer’s discount, which varies as a percentage of the client’s purchase price depending on the size of the transaction and terms of the selling agreement. Revenues derived from mutual fund sales continue to be a significant portion of net 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.

Insurance.  As agent for several unaffiliated life insurance companies, Edwards distributes life insurance and tax-deferred annuities.

Asset Management and Service Fees

Asset management and service fee revenues consist primarily of revenues earned for providing support and services in connection with assets under third-party management, including mutual funds, managed futures funds, money market funds, annuities and insurance contracts, as well as 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.

The Company manages client assets through the Trust Company and through Edwards’ asset management service. The Company offers a fee-based transaction account, known as Client Choice, and a non discretionary advisory program, known as Portfolio Advisor. The Company also offers fee-based fund advisory programs that allow clients to select from recommended, established asset allocation models or customize their own models in certain programs. The fund advisory programs are known individually as AGE Allocation Advisors, AGE Pathways, AGE Professional Fund Advisor and AGE Mutual Fund Marketplace. Additionally, the Company offers separately managed accounts, known as Private Advisor Service and Select Advisor, to provide clients access to third-party investment management and related consulting services in addition to Edwards’ asset management service.

Edwards offers the UltraAsset Account, Total Asset Account® 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 uninvested credit balances held in client accounts. In addition, the UltraAsset and Total Asset Accounts allow clients access to their margin and money market accounts through the use of debit cards and checking account services provided by an unaffiliated major bank. The UltraAsset Account offers additional advanced features and special investment portfolio reports. Clients are provided the opportunity to apply for an A.G. Edwards credit card provided by an unaffiliated major bank.

Edwards also provides custodial services to its clients for the various types of self-directed individual retirement accounts as provided under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”).

Principal Transactions

Client transactions in the equity and fixed-income over-the-counter markets may be effected by Edwards acting as principal or 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 consolidated financial statements at fair value, and unrealized gains or losses are included in the Company’s results of operations.

Investment Banking

Edwards is an underwriter for public offerings of corporate and municipal securities as well as corporate and municipal unit investment trusts and closed-end investment companies. Edwards’ public finance activities include areas of specialization for municipal and governmental entities in primary and secondary schools, sports and

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entertainment, municipal finance, housing, higher education, health care, and public utilities. Corporate finance activities are focused on three industry groups: financial institutions and real estate, energy, and emerging growth. As an underwriter, usually in conjunction with other broker-dealers, Edwards purchases securities for resale to its clients. Edwards acts as an advisor to corporations and municipal entities in reviewing 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.

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, and the clients’ securities are 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.

Edwards utilizes a variety of sources to finance client margin accounts, including its stockholders’ equity, customer free credit balances and, to the extent permitted by regulations, cash received from loans of the clients’ collateral securities to other brokers and borrowings from banks, either unsecured or secured by the clients’ collateral securities.

Private Client Services

Edwards’ Private Client Services group assists individuals and businesses with 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 financial and estate planning recommendations. Closely held and publicly traded business clients can access services for business insurance, employee benefit programs (retirement plans and key employee compensation), and management and ownership succession.

Investment Activities

The Company’s investment activities primarily include investing in equity and equity-related securities in connection with private investment transactions, either for the accounts of Company-sponsored private equity partnerships or for its own account. These activities include mutual fund investments, including those made in connection with its deferred compensation plan, venture capital investments, and investments in portfolio and operating companies. A.G. Edwards Capital, Inc. is a general partner to the Company-sponsored private equity partnerships and provides them with investment advisory and administrative services. The fair value of these investments is subject to a higher degree of volatility and may include significant risks of loss while attempting to obtain higher returns than those available from publicly traded securities.

Research

Edwards provides both technical market and fundamental analysis of numerous industries and individual securities for use by its financial consultants and clients. In addition, review and analysis of general economic conditions, along with asset allocation recommendations, are available. These services are provided by Edwards’ research analysts, economists and market strategists.

Competition

All aspects of the Company’s business are highly competitive. In addition to continued competition from firms traditionally engaged in the investment services business, there has been increased competition in recent years from other sources such as commercial banks, insurance companies, online service providers, mutual fund sponsors and other companies offering investment services both in the United States and globally for a similar client base, including the client base served by the Company.

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Regulation

Edwards, as a broker-dealer and a FCM, is subject to various federal and state laws that specifically regulate its activities as a broker-dealer in securities and commodities, as an investment advisor, and as an insurance agent. Edwards is also subject to various regulatory requirements imposed by the securities and commodities exchanges and the NASD. The primary purpose of these requirements is to enhance the protection of customer assets. Under certain circumstances, these rules may limit the ability of the Company to make withdrawals of capital from Edwards. These laws and regulatory requirements generally subject Edwards 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 its 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 or monetary penalties against individual employees or their supervisors, termination of employees and limitations on certain aspects of Edwards’ regulated businesses, as well as censures and fines or proceedings of a civil or criminal nature that could result in a temporary or permanent suspension of a part or all of Edwards’ activities.

As a registered broker-dealer, Edwards is subject to net capital rules administered by the SEC and the New York Stock Exchange (“NYSE”). 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 Edwards to notify and sometimes obtain approval of the SEC and other regulatory organizations for substantial withdrawals of capital or loans to affiliates. At February 28, 2005, Edwards’ net capital of $666 million was 30 percent of aggregate debit items and $623 million 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 the Company. The only restriction with regard to the payment of cash dividends by the Company is its ability to obtain cash through dividends and advances from its subsidiaries or borrowings, if needed. See Note 7 (Net Capital Requirements) of the Notes to Consolidated Financial Statements.

Broker-dealers are also subject to other regulations covering the operations of their business, including sales and trading practices; use of client funds and securities; and the conduct of directors, officers and employees. Broker-dealers are also subject to regulation by state securities administrators in those states where they do business. Violations of the regulations governing the actions of a broker-dealer can result in the revocation of broker-dealer licenses; the imposition of censures or fines; the issuance of cease and desist orders; and the suspension or expulsion from the securities business of a firm, its officers or its employees. The SEC and the national securities exchanges emphasize in particular the need for supervision and control by broker-dealers of their employees.

A.G. Edwards & Sons (U.K.) Limited is registered under the laws of the United Kingdom and is regulated as a securities broker-dealer by the Financial Services Authority. The Trust Company, a federally chartered savings bank, is regulated by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation and by the SEC as an investment advisor. A.G. Edwards Capital, Inc. is registered with the SEC as an investment advisor. Beaumont Insurance Company is regulated by the Vermont Department of Banking, Insurance, Securities and Health Care Administration.

(d)     Financial information about geographic areas

Revenues from the Company’s non-U.S. operations are currently not material. See Note 13 (Enterprise Wide Disclosure) of the Notes to Consolidated Financial Statements.

(e)     Available information

The Company files annual, quarterly and current reports, proxy statements and other information with the SEC.

The public may read and copy the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of

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the Public Reference Room by calling the SEC at 1-800-SEC-0330. This information may also be obtained from the SEC’s Web site at www.sec.gov.

The Company makes available free of charge its most recent annual report on Form 10-K, its quarterly reports on Form 10-Q for the current fiscal year, its recent current reports on Form 8-K (and amendments to these reports), its most recent proxy statement and its most recent summary annual report to shareholders, among other SEC filings, on its Web site at www.agedwards.com. In some cases, these documents may not be available on the Company’s Web site as soon as they are available on the SEC’s Web site.

ITEM 2.     PROPERTIES.

The Company’s headquarters are located at One North Jefferson Avenue, St. Louis, Missouri, 63103. It consists of several buildings owned by the Company, which contain approximately 2,600,000 square feet of general office space as well as underground and surface parking and two parking garages. In addition, the Company owns one additional office building in the St. Louis area, which is used for information technology and contingency planning facilities. The Company’s branch offices total more than 700 and, with a few exceptions, occupy leased premises throughout the United States as well as leased offices in London, England, and Geneva, Switzerland.

ITEM 3.     LEGAL PROCEEDINGS.

(a)     Litigation

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. Management has determined that it is likely that ultimate resolution in favor of the plaintiffs will result in losses to the Company on certain of these claims and as a result, establishes accruals for potential litigation losses. The Company also is involved, from time to time, in investigations and proceedings by governmental and self-regulatory agencies, certain of which may result in adverse judgments, fines or penalties. Factors considered by management in estimating the Company’s reserves for these matters are the loss and damages sought by the plaintiffs, the merits of the claims, the total cost of defending the litigation, the likelihood of a successful defense against the claims, and the potential for fines and penalties from regulatory agencies. Management, based on its understanding of the facts, reasonably estimates a range of loss and accrues what it considers appropriate to reserve against probable loss for certain claims and regulatory matters. While results of litigation and investigations and proceedings by governmental and self-regulatory agencies or the results of judgments, fines or penalties cannot be predicted with certainty, management, after consultation with counsel believes that resolution of all such matters will not have a material adverse effect on the consolidated balance sheets, statements of earnings or statements of cash flows of the Company, except that, as stated under “Mutual Fund Matters” (included under Item 7 of this Form 10-K), the Company believes, based on current knowledge and after consulting with counsel, that the impact of the matters discussed under “Mutual Fund Matters” will not be material to the consolidated financial condition of the Company, but could be material to the operating results in one or more periods.

(b)     Proceedings Terminated During the Fourth Quarter of the Fiscal Year Covered by This Report

Not applicable.

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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, 2005.

Executive Officers of the Company

The following table sets forth the executive officers of the Company as of May 1, 2005. Executive officers are appointed by the Board of Directors to hold office until their successors are appointed and qualified.

Name	Age		Office and Title	Year First Appointed Executive Officer of the Company
Robert L. Bagby		61	Chairman of the Board and Chief Executive Officer of the Company and Edwards since 2001. Vice Chairman of the Board, Executive Vice President and Director of the Branch Division of Edwards prior to 2001. Employee of Edwards for 30 years. Director of Edwards since 1979.		1991
Ronald J. Kessler		57	Vice Chairman of the Board of the Company and Edwards since 2001. Executive Vice President of Edwards. Director of the Operations Division of Edwards. Employee of Edwards for 37 years. Director of Edwards since 1989.		1996
Mary V. Atkin		50	Director of the Staff Division of Edwards since March 2005. Executive Vice President of Edwards since 2001. Director of Corporate Strategy from November 2003 to February 2005. President of A.G. Edwards Technology Group, Inc. from 2001 to 2003. Employee of Edwards for 27 years. Director of Edwards since 1993.		1999
Gene M. Diederich		46	Executive Vice President of Edwards since February 2005. Director of the Branch Division of Edwards since March 2005. Regional Manager of Edwards from 2002 to 2005. Branch Manager of Edwards from 1996 to 2002. Employee of Edwards for 21 years. Director of Edwards since 2003.		2005
Charles J. Galli		64	Senior Vice President and Regional Manager of Edwards. Employee of Edwards for 26 years. Director of Edwards since 1990.		2001
Alfred E. Goldman		71	Corporate Vice President, Director of Market Analysis of Edwards. Employee of Edwards for 45 years. Director of Edwards since 1967.		1991
Richard F. Grabish		56	Chairman and Chief Executive Officer of A.G. Edwards Trust Company FSB since 2001. President of A.G. Edwards Trust Company FSB from 1987 to 2001. Senior Vice President of Edwards. Assistant Director of Sales and Marketing Division of Edwards. Employee of Edwards for 24 years. Director of Edwards since 1988.		2001

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Name	Age		Office and Title	Year First Appointed Executive Officer of the Company
Douglas L. Kelly		56	Vice President, Secretary of the Company, Chief Financial Officer and Treasurer of the Company since 2001. Executive Vice President, Secretary, Director of the Law and Compliance Division of Edwards, Chief Financial Officer, and Treasurer and Director of the Administration Division of Edwards since 2001. Employee of Edwards for 11 years. Director of Edwards since 1994.		1994
Thomas H. Martin Jr.		45	Assistant Treasurer of the Company. Vice President of the Company since 2002. Controller of the Company and Edwards. Vice President of Edwards. Employee of Edwards for 24 years.		1999
Peter M. Miller		47	Executive Vice President and Director of the Sales and Marketing Division of Edwards since 2002. Regional Manager of Edwards from 1995 to 2002. Employee of Edwards for 16 years. Director of Edwards since 1997.		2002
John C. Parker		45	Executive Vice President of Edwards. Director and President of the A.G. Edwards Technology Group, Inc. of Edwards since November 2003. Senior Vice President of the A.G. Edwards Technology Group, Inc. of Edwards from 2001 to 2003. Employee of Edwards for more than three years. Employed as Vice President of Information Services for Northwest Airlines from 1999 to 2001 and with Delta Airlines for 17 years in various positions. Director of Edwards since 2002.		2003
Paul F. Pautler		59	Executive Vice President and Director of the Capital Markets Division of Edwards since 2000. Director of Corporate Finance of Edwards from 1999 to 2001. Employee of Edwards for seven years. Director of Edwards since 2000.		2000
Joseph G. Porter		44	Assistant Treasurer of the Company. Vice President of the Company since 2002. Principal Accounting Officer of the Company and Edwards. Senior Vice President and Assistant Director of the Administration Division of Edwards. Employee of Edwards for 22 years. Director of Edwards since 2001.		1999

 

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PART II

ITEM 5.     MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.

Quarterly Financial Information
(Unaudited)

											Earnings Per Share
	Dividends Declared per Share		Stock Price Trading Range High – Low		Net Revenues (In millions)		Earnings Before Tax (In millions)		Net Earnings (In millions)		Diluted		Basic
Fiscal 2005 by Quarter
First	$	0.16	$	40.50 – $34.40	$	665.9	$	73.3	$	46.3	$	0.57	$	0.58
Second	$	0.16	$	37.46 – $31.09	$	614.3	$	63.1	$	40.6	$	0.52	$	0.52
Third	$	0.16	$	39.74 – $33.46	$	638.0	$	77.9	$	49.2	$	0.63	$	0.64
Fourth	$	0.16	$	44.09 – $39.10	$	689.5	$	80.1	$	50.4	$	0.65	$	0.66
Fiscal 2004 by Quarter
First	$	0.16	$	33.00 – $23.00	$	557.9	$	43.3	$	27.9	$	0.35	$	0.35
Second	$	0.16	$	38.99 – $32.51	$	638.8	$	57.4	$	37.5	$	0.46	$	0.47
Third	$	0.16	$	41.80 – $34.72	$	629.3	$	60.8	$	39.7	$	0.49	$	0.49
Fourth	$	0.16	$	40.21 – $33.74	$	696.8	$	83.7	$	54.4	$	0.67	$	0.68

 

Issuer Purchases of Equity Securities

The following table presents the number of shares purchased monthly under the Company’s stock repurchase program for the three-month period ended February 28, 2005.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan		Maximum Number of Shares That May Yet Be Purchased Under the Plans
December (12/1/04–12/31/04)		145,454	$	40.31		145,454		9,975,764
January (1/1/05–1/31/05)		166,480	$	41.92		166,480		9,809,284
February (2/1/05–2/28/05)		146,429	$	42.94		146,429		9,662,855
Total		458,363	$	41.74		458,363

 

In November 2002, the Board of Directors authorized the repurchase of up to 10,000,000 shares of the Company’s outstanding common stock during the period January 1, 2003, through December 31, 2004. This repurchase program was completed December 3, 2004.

In November 2004, the Board of Directors authorized the repurchase of up to 10,000,000 shares of the Company’s outstanding common stock during the period November 19, 2004 through December 31, 2006.

Stock Issuance

On July 2, 2004 and pursuant to the terms of the A.G. Edwards, Inc. Non Employee Director Stock Compensation Plan (the “Plan”), the Company issued a total of 4,529 shares of unregistered Company common stock to the Company’s non employee directors equal to one-half of such directors’ annual compensation (as defined in such Plan). The issuance of these unregistered shares qualifies as an exempt transaction pursuant to Section 4(2) of the Securities Act of 1933.

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Annual Meeting

The 2005 Annual Meeting of Stockholders (the “Annual Meeting”) will be held at the Company’s headquarters, One North Jefferson Avenue, St. Louis, Missouri, 63103 on Thursday, June 23, 2005, at 10 a.m. CDT. The Notice of Annual Meeting, Proxy Statement and Proxy Voting Card are mailed on or around May 16, 2005, to each stockholder of record at the close of business on May 2, 2005. The Proxy Statement describes the items of business to be voted on at the Annual Meeting and provides information on the Board of Directors’ nominees for directors and their principal affiliations with other organizations as well as other information about the Company.

Dividend Payment Dates

The next four anticipated dividend payment dates are July 1 and October 3, 2005, and January 3 and April 3, 2006.

Stock Exchange Listing

The Company’s stock is traded on the NYSE under the symbol AGE. The approximate number of stockholders on February 28, 2005, was 23,000. The approximate number of stockholders of record includes customers who hold the Company’s stock in their accounts on the books of Edwards.

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

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ITEM 6.     SELECTED FINANCIAL DATA.

Consolidated Five-Year Summary

Year Ended	February 28, 2005			February 29, 2004			February 28, 2003			February 28, 2002			February 28, 2001
	(In thousands, except per share amounts)
Revenues
Commissions:
Listed securities	$	440,680		$	448,035		$	387,483		$	403,921		$	482,136
Options		22,274			23,669			23,485			28,453			55,883
Over-the-counter securities		94,478			115,425			70,864			111,065			295,921
Mutual funds		259,179			260,518			201,567			214,339			293,307
Commodities and financial futures		25,536			27,758			19,331			13,289			13,158
Insurance		192,019			205,622			185,249			174,281			184,762
Total		1,034,166			1,081,027			887,979			945,348			1,325,167
Asset management and service fees:
Distribution fees		498,026			366,735			336,636			377,923			370,193
Fee-based accounts		323,769			246,943			225,888			220,315			214,296
Service fees		97,282			109,708			90,493			79,694			83,625
Total		919,077			723,386			653,017			677,932			668,114
Principal transactions:
Equities		75,504			79,662			58,436			73,553			114,363
Debt securities		178,395			217,224			252,688			246,131			177,912
Total		253,899			296,886			311,124			319,684			292,275
Investment banking:
Underwriting fees and selling concessions		174,555			240,094			184,220			186,839			144,725
Management fees		71,067			81,767			66,960			69,590			28,572
Total		245,622			321,861			251,180			256,429			173,297
Interest:
Margin account balances		107,611			74,662			86,189			150,365			331,980
Securities owned and deposits		21,132			21,470			20,474			23,451			35,027
Total		128,743			96,132			106,663			173,816			367,007
Other		30,288			6,384			10,239			6,592			31,630
Total Revenues		2,611,795			2,525,676			2,220,202			2,379,801			2,857,490
Interest expense		4,114			2,859			5,850			27,415			104,550
Net Revenues		2,607,681			2,522,817			2,214,352			2,352,386			2,752,940
Non-Interest Expenses
Compensation and benefits		1,699,156			1,642,999			1,448,199			1,551,898			1,763,037
Communication and technology		241,830			272,047			282,603			295,353			242,530
Occupancy and equipment		151,426			137,617			134,149			133,240			126,594
Marketing and business development		65,682			53,262			45,649			47,434			55,041
Floor brokerage and clearance		21,341			22,495			22,464			21,912			22,957
Other		133,839			149,123			109,854			128,029			87,627
Restructuring		—			—			—			82,462			—
Total Non-Interest Expenses		2,313,274			2,277,543			2,042,918			2,260,328			2,297,786
Earnings Before Income Taxes		294,407			245,274			171,434			92,058			455,154
Income Taxes		107,933			85,789			52,606			20,557			167,677
Net Earnings	$	186,474		$	159,485		$	118,828		$	71,501		$	287,477
Per Share Data:
Diluted Earnings	$	2.37		$	1.97		$	1.46		$	0.88		$	3.43
Basic Earnings	$	2.39		$	1.99		$	1.48		$	0.89		$	3.50
Cash Dividends	$	0.64		$	0.64		$	0.64		$	0.64		$	0.64
Book Value	$	23.21		$	22.08		$	20.92		$	20.42		$	20.29
Other Data:
Total Assets	$	4,687,797		$	4,436,085		$	3,980,094		$	4,187,170		$	4,859,984
Stockholders’ Equity	$	1,787,691		$	1,778,319		$	1,688,537		$	1,647,796		$	1,626,344
Cash Dividends	$	49,392		$	51,007		$	51,034		$	51,043		$	51,962
Pre-tax Return on Average Equity		16.5	%		14.1	%		10.3	%		5.6	%		27.2	%
Return on Average Equity		10.5	%		9.2	%		7.1	%		4.4	%		17.2	%
Net Earnings as a Percent of Net Revenues		7.2	%		6.3	%		5.4	%		3.0	%		10.4	%
Average Common and Common Equivalent Shares Outstanding (Diluted)		78,766			80,990			81,177			81,282			83,925
Average Common Shares Outstanding (Basic)		77,908			80,031			80,133			80,013			82,096

 

Note: Where appropriate, prior years’ financial information has been reclassified to conform to current-year presentation.

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ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

(Year references are to fiscal years ended February 28(29) unless otherwise specified)

Introduction

A.G. Edwards, Inc. is a financial services holding company whose primary subsidiary is the national brokerage firm of A.G. Edwards & Sons, Inc. (“Edwards”). A.G. Edwards, Inc. and its operating subsidiaries (collectively, the “Company”), provide securities and commodities brokerage, investment banking, trust, asset management, retirement and financial planning, insurance products, and other related financial services to individual, corporate, governmental, municipal and institutional clients through one of the industry’s largest retail branch distribution systems. The Company is a St. Louis-based financial services firm with more than 700 locations and nearly 15,400 full-time employees in 49 states, the District of Columbia, London, England and Geneva, Switzerland.

The number of the Company’s financial consultants at year-end was 6,890, a decrease of 90 (1 percent) from the prior year-end. The total number of locations at the end of 2005 was 721, up 11 from the end of 2004.

Executive Summary

Many factors affect the Company’s net revenues and profitability, including economic and market conditions, the level and volatility of interest rates, inflation, political events, investor sentiment, legislative and regulatory developments, and competition. Because many of these factors are unpredictable and beyond the Company’s control, earnings may fluctuate significantly from year to year.

Fiscal 2005 saw a continued interest by the retail investor in the equity markets, primarily through diversified investments as market and economic conditions showed improvement, albeit at significantly less robust levels than those seen in 2004. The Dow Jones Industrial Average (“DJIA”) increased 182 points (2 percent) to close the year at 10,766, the Standard & Poor’s 500 Index (“S&P 500”) increased 59 points (5 percent) to close the year at 1,204, and the Nasdaq Composite Index (“Nasdaq”) increased 22 points (1 percent) to close the year at 2,052. Activity on the major exchanges was mixed when compared to the previous year. Overall trading volumes on the New York Stock Exchange (“NYSE”) increased 1.1 percent in 2005 and 1.5 percent in 2004, while overall trading volumes on the Nasdaq decreased 0.5 percent in 2005 but increased 5.4 percent in 2004.

The Company generates revenues primarily through Edwards. These revenues can be categorized into four main components: transaction-based revenues, asset management services, interest on margin accounts and underwriting and management fees from investment banking transactions.

Transaction-based revenues are driven from the purchase or sale of securities by clients for their accounts. The Company earns commissions for acting as an agent for the client in the equity and fixed-income markets, as a dealer when the client purchases either fixed-income or equity securities from inventory, or from selling concessions when the client purchases newly issued securities in investment banking transactions. These revenues can be affected by trading volumes, by market and economic conditions, and by investor sentiment because the Company’s clients are primarily retail-oriented.

Revenues from asset management services are based principally on the amount of certain client assets purchased or held through the Company. These assets may be managed by the Company or by third-party investment managers, including mutual funds, managed futures funds, money market funds, annuities and insurance contracts. The Company manages client assets through the A.G. Edwards Trust Company FSB, a wholly owned subsidiary, and through Edwards’ asset management service. The Company offers a fee-based transaction account, known as Client Choice, and a non discretionary advisory program known as Portfolio Advisor. The Company also offers fee-based fund advisory programs that allow clients to select from recommended, established asset allocation models or customize their own models in certain programs. The fund advisory programs are known individually as AGE Allocation Advisors, AGE Pathways, AGE Professional Fund Advisor and AGE Mutual Fund Marketplace. Additionally, the Company offers separately managed accounts, known as Private Advisor Service and Select Advisor, to provide clients access to third-party investment management and related consulting services, as well as Edwards’ asset management service.

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The SEC adopted rules effective April 15, 2005, with compliance dates between April 15, 2004, and October 24, 2005, concerning when broker-dealers providing advice will and will not be exempted from the Investment Advisers Act of 1940 (the “Advisers Act”). The Company is still evaluating the effect of the rules on the Company’s business accounts and services. The rules will require additional disclosures for certain brokerage accounts at Edwards and may make certain accounts and services subject to the Advisers Act that were not previously subject to the act or require changes in such accounts and services. Accounts and services subject to the Advisers Act are subject, among other things, to additional disclosures, a fiduciary standard of care and restrictions on certain transactions.

Client assets in fee-based accounts increased $3.5 billion (13 percent) from the end of 2004. An analysis of changes in assets in fee-based accounts from February 29, 2004, to February 28, 2005 is detailed below (dollars in thousands):

Assets in fee-based accounts	February 28, 2005		February 29, 2004		Difference
Fund advisory programs	$	9,871,000	$	7,096,000		39	%
Separately managed accounts		11,438,000		10,997,000		4	%
Company-managed and other fee-based accounts		9,443,000		9,182,000		3	%
Total assets in fee-based accounts	$	30,752,000	$	27,275,000		13	%

 

Interest revenue is derived primarily from financing clients’ margin transactions. These revenues are based on the amount of client margin balances and the rate of interest charged on these balances.

Investment banking management fees result from bringing new issues of securities, both equity-based and fixed income-based, to the market for issuers. The issuers are generally corporate or municipal clients but may be institutional clients in the case of exchange-traded funds and related products. The fees generated from these transactions vary depending on the number and size of transactions successfully completed.

The Company’s expenses are primarily related to compensation and benefits. The largest components are variable in nature and relate to commissions paid to the Company’s financial consultants related to transaction-based or asset management services and incentive compensation, which is largely based on the profitability of the Company. The Company is focusing on making a larger portion of its non compensation expenses more variable in nature, particularly those expenses related to its back-office systems.

The results for fiscal 2005 include a $10 million charge in occupancy and equipment expenses, which represents the cumulative effect of correcting the recognition period for rent-escalation clauses and lease incentives included in certain branch-office leases. The results for fiscal 2005 also include an $8 million credit in other expenses, to correctly recognize state registration fees for Edwards’ financial consultants over the registration period. The correcting entries were recorded in the fourth quarter of fiscal 2005 and were not material to the quarter, the year, or any prior period’s consolidated financial information.

In 2005, the Company experienced an increase in net revenues, net earnings and earnings per share versus the previous fiscal year, as it did in 2004 compared to 2003. Net revenues increased 3 percent to $2.6 billion in 2005 after increasing 14 percent to $2.5 billion in 2004. In 2005, the Company’s overall results benefited from increasing client interest in fee-based products and services, as revenues from asset management and service fees increased $196 million (27 percent). Meanwhile, the Company’s revenues from equity-based transactions decreased $87 million (10 percent) and revenues from fixed income-based transactions, primarily corporate and municipal debt, decreased $51 million (18 percent). The revenue results of both equity-based and fixed income-based transactions reflect decreased interest in individual securities. Net earnings increased $27 million (17 percent) to $186 million in 2005 after increasing $41 million (34 percent) to $159 million in 2004. Diluted earnings per share for the Company were $2.37 in 2005 versus $1.97 in 2004 and $1.46 in 2003. The Company’s profit margin was 7.2 percent in 2005, 6.3 percent in 2004 and 5.4 percent in 2003.

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The following table illustrates the composition of the Company’s net revenues for 2005, 2004 and 2003:

	2005			2004			2003
Commissions		40	%		43	%		40	%
Asset management and service fees		35	%		28	%		30	%
Principal transactions		10	%		12	%		14	%
Investment banking		9	%		13	%		11	%
Net interest		5	%		4	%		5	%
Other		1	%		—			—

 

In addition to continued competition from firms traditionally engaged in the investment services business, there has been increased competition in recent years from other sources, such as commercial banks, insurance companies, online service providers, mutual fund sponsors and other companies offering financial services both in the United States and globally for a similar client base, including the client base served by the Company.

Results of Operations

The following table and discussion summarize the changes in major categories of revenues and expenses for the past two fiscal years (dollars in thousands):

Increase (Decrease)	2005 vs. 2004					2004 vs. 2003
Revenues
Commissions	$	(46,861	)	(4	)%	$	193,048		22	%
Asset management and service fees		195,691		27			70,369		11
Principal transactions		(42,987	)	(14	)		(14,238	)	(5	)
Investment banking		(76,239	)	(24	)		70,681		28
Interest		32,611		34			(10,531	)	(10	)
Other		23,904		374			(3,855	)	(38	)
Total Revenues		86,119		3			305,474		14
Interest expense		1,255		44			(2,991	)	(51	)
Net Revenues	$	84,864		3	%	$	308,465		14	%
Non-Interest Expenses
Compensation and benefits	$	56,157		3	%	$	194,800		13	%
Communication and technology		(30,217	)	(11	)		(10,556	)	(4	)
Occupancy and equipment		13,809		10			3,468		3
Marketing and business development		12,420		23			7,613		17
Floor brokerage and clearance		(1,154	)	(5	)		31		0
Other		(15,284	)	(10	)		39,269		36
Total Non-Interest Expenses	$	35,731		2	%	$	234,625		11	%

 

Commissions

Commission revenues arise from activities in transaction-based accounts in listed and over-the-counter securities, mutual funds, futures, options, and insurance products. As commissions are transaction-based revenues, they are influenced by the number, size and market value of client transactions and by product mix. The relatively flat trading volumes on the major stock exchanges along with greater client interest in fee-based products and services were reflected in the Company’s commission revenues, which decreased $47 million (4 percent) from $1.08 billion in 2004 to $1.03 billion in 2005. Commissions from listed transactions decreased $9 million (2 percent), and over-the-counter transactions decreased $21 million (18 percent). Revenues from commodities and financial futures decreased $2 million (8 percent). Decreased interest in variable annuities resulted in a $14 million (7 percent) decline in insurance revenues.

The $193 million (22 percent) increase in commission revenues in 2004 over 2003 resulted primarily from greater investor participation in the equity markets given the favorable market conditions during that period. Commissions from listed transactions increased $61 million (15 percent), over-the-counter transactions increased $45 million (63 percent), and mutual funds increased $59 million (29 percent). Revenues from commodities,

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managed futures funds and insurance products increased a combined $29 million (14 percent) as investors also increased their interest in these investment products.

Asset Management and Service Fees

Asset management and service fees include fees based on the value of client assets under management and transaction-related service fees as well as fees related to the administration of custodial and other specialty accounts. These revenues consist primarily of revenues earned from providing support and services in connection with client assets under third-party management, including mutual funds, managed futures funds, money market funds, annuities and insurance contracts as well as the Company’s trust services and other fee-based accounts. (Please refer to “Mutual Fund Matters” below.)

Asset management and service fee revenues increased $196 million (27 percent) in 2005. Fees received in connection with client assets under third-party management and the Company’s trust services and fee-based transaction accounts increased $77 million (31 percent), primarily as a result of an increase in the number of accounts choosing fee-based alternatives and the increased valuation of these accounts. Fees received from third-party mutual funds and insurance providers increased $92 million (32 percent) primarily reflecting the individual investor’s return to the equity markets through diversified investments. Revenues from fees received from third-party investment managers in connection with the distribution of certain third-party money market funds offered by the Company increased $43 million (146 percent). For a portion of 2003 and 2004 these money market funds had reached expense caps due to low money fund yields. In the third quarter of 2004, the investors in these money market funds voted to lift the funds’ expense caps. Service fees decreased $12 million (11 percent) primarily due to the March 2004 sale of CPI Qualified Plan Consultants, Inc. (“CPI”), a third-party administrator of employee benefit plans and a wholly owned subsidiary, to a group of investors headed by CPI’s management.

In 2004, asset management and service fees increased $70 million (11 percent) from 2003 for mainly the same reasons as those in comparing 2005 results to 2004. The 2004 results additionally reflect a $19 million (21 percent) increase primarily from changes to some of the Company’s account services fees.

Principal Transactions

The Company maintains inventories of fixed-income and equity securities to satisfy client demand and, therefore, effects certain transactions with its clients by acting as a principal. Realized and unrealized gains and losses result from the sale and holding of securities positions for resale to clients and are included in principal transaction revenue.

In 2005, revenue from principal transactions decreased $43 million (14 percent) from 2004, directly reflecting investors’ decreased interest in fixed-income products. Revenue from the sale of municipal, government and corporate fixed-income securities decreased $39 million (18 percent). Revenue from the sale of corporate equity securities decreased $4 million (5 percent) reflecting decreased activity in the over-the-counter equity markets.

In 2004, revenue from principal transactions decreased $14 million (5 percent) from 2003. Revenue from the sale of municipal and corporate fixed-income securities decreased $34 million (17 percent), while revenues from the sale of corporate equity securities increased $21 million (36 percent). These results reflected investors’ shift away from fixed-income products toward equity investments.

Investment Banking

The Company derives investment banking revenues from underwriting public offerings of securities for corporate and governmental entities for sale to its clients. The Company also provides advisory services to corporate and governmental entities.

Revenues from investment banking activities decreased $76 million (24 percent) in 2005. Underwriting fees and selling concessions from corporate equity transactions decreased $53 million (30 percent) and management fees decreased $11 million (13 percent). These changes largely reflect lower volume in the underwriting of a variety of closed-end funds and other equity products in interest-rate-sensitive sectors. Underwriting fees and selling concessions from corporate, municipal and government debt products declined $12 million (19 percent) due to reduced offerings of debt products due to a rising rate environment.

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In 2004, investment banking revenues increased $71 million (28 percent). Underwriting fees and selling concessions from corporate equity transactions increased $76 million (77 percent), and management fees increased $15 million (22 percent), while revenues derived from debt products decreased $20 million (24 percent) as clients sought higher yields and greater exposure to the equity markets.

Net Interest Revenue

Interest revenue net of interest expense increased $31 million (34 percent) during 2005. In January 2004, the Company changed the base rate upon which margin interest is calculated from the broker call rate to the prime rate. Additionally, the Company saw slight increases in average client margin balances, and the Federal Funds rate increased 1.5 percent during 2005. In 2004, these revenues decreased $8 million (7 percent) due to declines in average client margin balances and in average interest rates.

Other Revenue

Other revenue increased $24 million during 2005, reflecting gains of $10 million on the sale of shares in the Chicago Mercantile Exchange and the mark-to-market on other shares in this exchange that the Company currently holds. Other revenue for 2005 additionally reflects a $6 million insurance settlement as a result of business interruptions following September 11, 2001, and a $10 million increase in private equity investment valuations.

Compensation and Benefits

Compensation and benefits increased $56 million (3 percent) in 2005. A significant portion of this expense is variable in nature and relates to commissionable sales (sales upon which payments are made to financial consultants) and to incentive compensation, which are based largely upon the Company’s profitability. The year-to-year comparisons generally reflect the changes in commissionable sales and profitability in both 2005 and 2004. The variable components within compensation and benefits, including commissions paid to financial consultants and incentive compensation, increased $32 million (3 percent) in 2005 as a result of increased sales and earnings. Administrative salaries and other fixed components increased $24 million (5 percent) as a result of general wage increases and higher medical costs.

In 2004, compensation and benefits increased $195 million (13 percent). The variable components within compensation and benefits increased $204 million (20 percent) following increased sales and earnings. Administrative salaries and other fixed components decreased $9 million (2 percent) as a result of fewer employees and lower medical costs due to plan changes.

Communication and Technology

Communication and technology expenses decreased $30 million (11 percent) in 2005 largely resulting from decreased depreciation and lower leasing costs associated with financial consultants’ workstations and lower amortization of the development costs associated with the Company’s online account access service. These decreases were partially offset by increased professional expenses for outside consultants working on the Company’s Gateway Initiative. Depreciation related to the Company’s broker workstations will increase as the installation of new workstations is completed.

In 2004, communication and technology expenses decreased $11 million (4 percent) principally related to lower costs associated with financial consultants’ workstations.

Occupancy and Equipment

Occupancy and equipment expenses increased $14 million (10 percent) during 2005 primarily due to the $10 million charge recorded to correct the recognition period for rent-escalation clauses and lease incentives included in certain branch-office leases.

In 2004, occupancy and equipment expenses increased due to depreciation of the recently completed home office expansion.

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Marketing and Business Development

Marketing and business development increased $12 million (23 percent) in 2005 and $8 million (17 percent) in 2004 primarily as a result of additional advertising expenses associated with the Company’s branding initiative. While the amount has not been determined with certainty, the Company expects its branding initiative to cost approximately $20 million annually, with fluctuations from quarter to quarter.

All Other Expenses

All remaining operational expenses decreased $16 million (10 percent) in 2005. Legal and consulting service expenses increased $17 million as a result of additional resources needed to address various regulatory changes, investigations and legal matters. This was partially offset by an $8 million credit recorded to correctly recognize state registration fees for the Company’s financial consultants over the registration period. In addition, other expenses declined due to charges in 2004 related to the Georgia consent order and the breakpoint discount reserve discussed below.

In 2004, other expenses increased $39 million (36 percent) due primarily to a $20 million increase in the reserve associated with certain payments agreed to under a consent order with the Georgia Secretary of State’s Securities and Business Regulation Division and the establishment of a $4.5 million reserve for mutual fund breakpoint refunds to clients as required by the National Association of Securities Dealers (“NASD”). The charge for the breakpoint reserve, net of decreases in related compensation expenses, was $2.6 million. In addition, the cost of professional consulting and auditing services related to legal and other regulatory matters increased $9 million in 2004 and insurance expense increased $2 million due to higher premiums for various insurance coverages.

Income Taxes

The Company’s effective tax rate was 37 percent for the current year, compared to 35 percent for the prior year. For additional information regarding the difference between effective tax rates and statutory rates, see Note 8 (Income Taxes) of the Notes to Consolidated Financial Statements. In addition, see the discussion under “Critical Accounting Estimates” below.

Mutual Fund Matters

The SEC, the NASD, the NYSE and other regulators, including several states, as well as Congress, have examined or are examining the manner in which mutual funds compensate broker-dealers in connection with the sale of mutual funds. Edwards has provided information in connection with certain related examinations. Regulatory changes may require additional disclosures by mutual fund companies, broker-dealers or both and may affect the methods of compensating broker-dealers for mutual fund sales. The SEC adopted rules, effective December 13, 2004, prohibiting mutual funds from paying for the distribution of their shares with brokerage commissions. Certain mutual fund companies have notified Edwards that they have changed the amount of compensation they will pay for brokerage transactions. Edwards continues to compete actively for transaction business from institutional clients. Edwards is not able to predict the impact of changes related to mutual funds, including changes to date, additional changes that may occur in regulations, or changes caused by the actions of mutual fund companies. However, the effect could be significant and adverse.

Edwards has received information requests or subpoenas from the SEC, the NASD, the NYSE, several states and the United States Department of Justice with respect to mutual fund transactions that involve market timing, late trading or both. The SEC, the NASD and certain states have examined certain branch offices and have or will take statements from employees of Edwards in connection with such mutual fund transactions. In addition, Edwards has received requests for information concerning timing of mutual fund transactions in variable annuity sub accounts.

The Commonwealth of Massachusetts has filed an administrative complaint against Edwards concerning certain mutual fund transactions in Edwards’ Boston-Back Bay office. The complaint alleges violations of securities laws by mutual fund market timing transactions and seeks a cease and desist order, an administrative fine in an unspecified amount, compensation to mutual fund holders for losses alleged to have resulted from market timing, and other relief. Other regulatory actions or claims may occur related to market timing or other mutual fund activities.

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The SEC has asked Edwards, like other firms that use the National Securities Clearing Corporation’s Fund/SERV system to submit and clear mutual fund orders, to review systems and controls for mutual fund orders to prevent late trading, and to review all mutual fund orders for a year to determine whether late trading in mutual funds occurred. As a result of the reviews of systems and controls, Edwards has changed certain policies and procedures and developed and implemented additional policies and procedures relating to the receipt and supervision of mutual fund orders.

Edwards has been named as a defendant in a lawsuit that seeks class-action status filed in the state of Missouri that alleges, among other matters, that mutual fund transactions with certain customers were influenced by undisclosed shared revenue payments. Edwards is currently reviewing the suit.

The NASD has advised Edwards that it has made a preliminary determination to recommend that disciplinary action be brought against Edwards concerning the sale of mutual fund class-B shares and class-C shares based upon, it is believed, the grounds for recommending such sales, suitability violations, and Edwards supervisory procedures. The NASD orally proposed a settlement, including a fine, the offer to customers to switch to class-A shares and reimbursement for any disadvantage based on actual performance and the retention of an independent consultant to review supervisory procedures. Edwards is currently reviewing the allegations.

The NASD has advised Edwards that it has made a preliminary determination to recommend a disciplinary action against Edwards concerning the sale of certain mutual funds to IRA accounts in 2001 and 2002 for which certain mutual fund companies made additional payments to Edwards for sales.

The Company is not able to determine or predict with certainty the impact of the matters described above individually or in the aggregate in terms of eventual fines, other payments or losses, or changes in operations, product offerings or expenses because of the preliminary stages of certain of such matters, the uncertainty of outcomes and the evolving basis of such regulatory actions. The Company believes, based on current knowledge and after consulting with counsel, that the impact of such matters will not be material to the consolidated financial condition of the Company, but could be material to operating results in one or more periods.

Auction Rate Securities

Edwards and other financial services firms have been asked by the SEC to voluntarily review the supervision and operation of certain auction rate securities transactions. Edwards has performed its review. Regulatory actions or claims may result from the information developed during the review. The Company is unable to determine with certainty the impact of any such action or claims, if any, on its results of operations for future periods. However, based on currently known facts, the Company believes that the resolution of any such matters, if brought, would not have a material adverse effect on the Company’s consolidated balance sheets, statements of earnings or statements of cash flows.

Prospectus Delivery Requirements

Edwards and other financial services firms have received information requests from the NYSE with respect to delivery of prospectuses to customers. Edwards has performed the review and responded to the NYSE’s inquiry. Regulatory actions or claims may result from the information developed during the review. The Company is unable to determine with certainty the impact of any such action or claims, if any, on its results of operations for future periods. However, based on currently known facts, the Company believes that the resolution of any such matters, if brought, would not have a material adverse effect on the Company’s consolidated balance sheets, statements of earnings or statements of cash flows.

Liquidity and Capital Resources

The Company’s assets fluctuate in the normal course of business, primarily due to the timing of certain transactions. The principal sources for financing the Company’s business are stockholders’ equity, cash generated from operations, short-term bank loans and securities-lending arrangements. The Company has no long-term debt. Average short-term bank loans of $32 million and $75 million and average securities-lending arrangements of $196 million and $181 million in 2005 and 2004, respectively, were primarily used to finance customer receivables.

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The Company is engaged in a major business process and technology transformation program, the Gateway Initiative, which, when fully developed and implemented, will update the Company’s technology infrastructure, streamline its back-office processing and strengthen its data management capabilities. The Company has currently designated up to $196 million, including internal development costs, to fund this program. Total costs through February 28, 2005, were $165 million, of which $48 million was capitalized. Significant components of this program are expected to be completed in fiscal year 2006 including migration to an application service provider, which is scheduled to occur in May 2005. Thomson Financial, Inc. (“Thomson”), an application service provider, will provide the software and computer operations that support the Company’s securities processing functions. The Company entered into an 86-month Hosting and Services Agreement with Thomson in October 2004. Under this agreement, which starts upon conversion, minimum payments are $10 million a year with an expected range of payments between $18 million and $22 million a year. While the Company’s migration of its back-office systems to Thomson is intended to better align trade-processing expenses with client transaction activity, the Company intends to maintain certain of its existing back-office systems for a transitional period of approximately 12 to 18 months.

In March 2004, the Company sold CPI to a group of investors headed by CPI’s management. The transaction price was $17 million, with $11 million received immediately and the remainder to be received over a five-year period. CPI had approximately 350 employees at the date of sale.

In November 2004, the Company’s Board of Directors authorized the repurchase of up to 10 million shares of the Company’s outstanding stock during the period November 19, 2004, through December 31, 2006. In November 2002, the Company’s Board of Directors authorized the repurchase of up to 10 million shares of the Company’s outstanding common stock during the period of January 1, 2003, through December 31, 2004. The Company purchased 7,026,392 shares at an aggregate cost of $250 million in 2005; 3,102,854 shares at an aggregate cost of $105 million in 2004; and 3,145,319 shares at an aggregate cost of $115 million in 2003, under these authorizations and other previously authorized plans.

Tabular Disclosure of Contractual Obligations

The following table summarizes information about the Company’s long-term contractual commitments and obligations as of February 28, 2005 (dollars in thousands):

Contractual Obligations	Total		2006		2007–2008		2009–2010		More than 5 years
Operating lease obligations	$	451,200	$	72,300	$	156,500	$	112,300	$	110,100
Communications, technology, and other service commitments		187,000		45,400		71,400		48,100		22,100
	$	638,200	$	117,700	$	227,900	$	160,400	$	132,200

 

The Company had committed $127 million to various private equity partnerships, of which $43 million remained unfunded at February 28, 2005. These commitments are subject to calls by the partnerships as funds are needed.

The Company has commitments to its employees for deferred compensation in the amount of $224 million that becomes payable in future years as defined in the plan and determined by participants’ request or retirement. For additional information regarding the deferred compensation liability, see Note 3 (Employee Profit Sharing Plan) of the Notes to Consolidated Financial Statements.

Management believes the Company has adequate sources of credit available, if needed, to finance customer-trading volumes, expansion of its branch system, stock repurchases, dividend payments and major capital expenditures. At February 28, 2005, the Company, with certain limitations, had access to $1.3 billion in uncommitted lines of credit as well as the ability to increase its securities lending activities.

The Company’s principal subsidiary, A.G. Edwards & Sons, Inc., is required by the SEC to maintain specified amounts of liquid net capital to meet its obligations to clients. See Note 7 (Net Capital Requirements) of the Notes to Consolidated Financial Statements.

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Critical Accounting Estimates

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. In preparing these consolidated financial statements, management makes use of certain estimates and assumptions. See Note 1 (Summary of Significant Accounting Policies) of the Notes to Consolidated Financial Statements. The Company believes that of its significant accounting policies, the following critical policies, estimates and assumptions may involve a higher degree of judgment and complexity and are the most susceptible to significant fluctuations in the near term.

Valuation of Investments

The fair value of investments, for which a quoted market or dealer price is not available, is based on management’s estimate. Among the factors considered by management in determining the fair value of investments are cost, terms and liquidity of the investment, the sale price of recently issued securities, the financial condition and operating results of the issuer, earnings trends and consistency of operating cash flows, the long-term business potential of the issuer, the quoted market price of securities with similar quality and yields that are publicly traded, and other factors generally pertinent to the valuation of investments.

Valuation of Stock Options

The Company applies the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations to account for options granted under its Incentive Stock Plan. Based on the provisions of this plan, no compensation expense has been recognized for options issued under this plan. The fair value of the stock options is estimated using expected dividend yields of the Company’s stock, the expected volatility of the stock, the expected length of time the options remain outstanding, risk-free interest rates and expected forfeiture rates. Changes in one or more of these factors may significantly affect the estimated fair value of the stock options. Please see Recent Accounting Pronouncements below for discussion of pending guidance on stock-based compensation.

Software Development Costs

The Company applies the provisions of American Institute of Certified Public Accountants Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” to account for costs associated with internally developed software. The Company capitalizes the costs associated with software development based on guidance provided in the statement. The primary factors considered in determining the amount to capitalize include the stage of the development effort and the type of work being performed. Only costs incurred during the application development stage are capitalized. When placed in service, these costs are typically amortized over three to five years and are included in communication and technology expense on the Company’s consolidated statements of earnings.

Allowance for Doubtful Accounts From Customers

Receivables from customers consist primarily of floating rate loans collateralized by margin securities. Management estimates an allowance for doubtful accounts to reserve for potential losses from unsecured and partially unsecured customer accounts deemed uncollectible. The facts and circumstances surrounding each receivable and the number of shares, price and volatility of the underlying collateral are considered by management in determining the allowance. Management continually evaluates its receivables from customers for collectibility and possible write-off. The Company manages the credit risk associated with its receivables from customers through credit limits and continuous monitoring of collateral.

Legal Reserves and Regulatory Matters

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. Management has determined that it is likely that ultimate resolution in favor of the plaintiffs will result in losses to the Company on certain of these claims and as a result, establishes accruals for potential litigation losses. The Company also is involved, from time to time, in investigations and proceedings by governmental and self-regulatory agencies, certain of which may result in

21

adverse judgments, fines or penalties. Factors considered by management in estimating the Company’s reserve for these matters are the loss and damages sought by the plaintiffs, the merits of the claims, the total cost of defending the litigation, the likelihood of a successful defense against the claims, and the potential for fines and penalties from regulatory agencies. Management, based on its understanding of the facts, reasonably estimates a range of loss and accrues what it considers appropriate to reserve against probable loss for certain claims and regulatory matters. While results of litigation and investigations and proceedings by governmental and self-regulatory agencies or the results of judgments, fines or penalties cannot be predicted with certainty, management, after consultation with counsel believes that resolution of all such matters are not expected to have a material adverse effect on the consolidated balance sheets, statements of earnings or statements of cash flows of the Company, except that, as stated under “Mutual Fund Matters” included under Item 7 of this Form 10-K, the Company believes, based on current knowledge and after consulting with counsel, that the impact of the matters discussed under “Mutual Fund Matters” will not be material to the consolidated financial condition of the Company, but could be material to the operating results in one or more periods.

Income Taxes

The Company operates in multiple taxing jurisdictions, and as a result, accruals for tax contingencies require management to make estimates and judgments with respect to the ultimate tax liability in any given year. Actual results could vary from these estimates. In management’s opinion, adequate provisions for income taxes have been made for all years.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and measurement based on the grant-date fair value of the award. It also requires the cost to be recognized over the period during which an employee is required to provide service in exchange for the award (presumptively the vesting period). SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25 and its related interpretations. As modified by the SEC on April 21, 2005, SFAS No. 123R is effective for fiscal years beginning after June 15, 2005, and applies to all awards granted, modified, repurchased, or cancelled after that date. The Company elected early adoption of SFAS No. 123R on March 1, 2005, using the modified prospective method.

Under the modified prospective method of SFAS No. 123R, the Company is required to recognize compensation expense for the outstanding portion of any awards for which compensation expense had not previously been recognized or disclosed under SFAS No. 123. The Company currently recognizes the compensation expense of restricted stock awards and discloses the pro forma compensation expense of stock option awards in the year of the award. Under SFAS No. 123R, the Company will recognize compensation expense for restricted stock and stock option awards over the vesting period, generally three years following the award. As the Company will have recognized compensation expense or disclosed pro forma compensation expense related to all outstanding awards as of the adoption date, there will be no compensation expense recognized for these outstanding awards in future periods. In addition, as the awards related to fiscal year 2006 will not be issued until the end of fiscal year 2006, the compensation expense related to those awards will not be recognized in 2006 but over the subsequent vesting period. As restricted stock and stock option awards are determined each year, the impact to the Company’s consolidated financial statements of the adoption of SFAS No. 123R cannot be predicted with certainty. However, the fair value of restricted stock awards recognized in compensation expense ranged in value from $22 million to $35 million over the last three fiscal years, and the fair value of stock option awards disclosed in the footnotes to the consolidated financial statements, but not included in compensation expense, over the last three fiscal years ranged from $5 million to $8 million.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” which requires the consolidation by a business enterprise of variable interest entities if the business enterprise is the primary beneficiary. FIN 46 was effective January 31, 2003, for the Company with respect to interests in variable interest entities obtained after that date. With respect to interests in variable interest entities existing prior to February 1,

22

2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) (“FIN 46R”), which extended the effective date to the period ended May 31, 2004. The Company’s adoption of FIN 46R did not have a material impact on the Company’s consolidated financial statements. The Company did not acquire any variable interest entities subsequent to February 1, 2003.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies that SFAS No. 143, “Accounting for Asset Retirement Obligations,” requires that an entity recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company has not yet determined the impact that the adoption of this interpretation will have on its consolidated financial statements.

Risk Management

General

The business activities of the Company expose it to a variety of risks. Management of these risks is necessary for the long-term profitability of the Company. The Company manages these risks through the establishment of numerous policies, procedures and controls. The most significant risks to the Company are operational, legal, credit and market risk.

Off-Balance Sheet Arrangements

The Company does not rely on off-balance sheet arrangements or transactions with unconsolidated, special purpose or limited purpose entities to manage its risks.

Operational Risk

Operational risk refers generally to the risk of loss resulting from the Company’s operations including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in the Company’s operating systems, and inadequacies or breaches in the Company’s control processes. The Company operates in diverse markets and is reliant on the ability of its employees and systems to process high numbers of transactions. In the event of a breakdown or improper operation of systems or improper actions by employees, the Company could suffer financial loss, regulatory sanctions and damage to its reputation.

In order to mitigate and control operational risk, the Company developed, and continues to enhance, specific policies and procedures that are designed to identify and manage operational risk at appropriate levels. For example, the Company has procedures that require that all transactions are accurately recorded and properly reflected in the Company’s books and records and are confirmed on a timely basis, that position valuations are subject to periodic independent review procedures, and that collateral and adequate documentation (e.g., master agreements) are obtained from counterparties in appropriate circumstances. The Company also uses periodic self-assessments and Internal Audit examinations as further reviews of operational risk.

Legal Risk

Legal risk includes the risk of non compliance with applicable legal and regulatory requirements and the risk that a counterparty’s performance obligations will be unenforceable. The Company is generally subject to extensive regulation in the different jurisdictions in which it conducts its business. The Company has established procedures based on legal and regulatory requirements that are designed to ensure compliance with all applicable statutory and regulatory requirements. The Company also has established procedures that are designed to ensure that senior management’s policies relating to conduct, ethics and business practices are followed. In connection with its business, the Company has various procedures addressing significant issues such as regulatory capital requirements, sales and trading practices, new products, use and safekeeping of customer funds and securities, extension of credit, collection activities, money laundering, privacy, and record keeping.

Credit Risk

Credit risk is discussed in Note 12 (Financial Instruments — Off-Balance Sheet Risk and Concentration of Credit Risk) of the Notes to Consolidated Financial Statements.

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Market Risk

Market risk is the risk of loss to the Company resulting from changes in interest rates, equity prices or both and has an indirect effect on the Company’s credit risk as it relates to the value of customer collateral. The Company is exposed to market risk to the extent it maintains positions in fixed-income and equity securities. The Company primarily manages its risk through the establishment of trading policies and guidelines and through the implementation of control and review procedures. The Company’s management philosophy provides for communication among all responsible parties throughout the trading day.

The Company’s policy is to purchase inventory to provide investment products for its clients. Consequently, the Company purchases only inventory that it believes it can readily sell to its clients, thus reducing the Company’s exposure to liquidity risk but not market fluctuations. In addition, the Executive Committee of Edwards establishes maximum inventory guidelines 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 areas) 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 assessment.

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 position in its debt inventory through the use of financial futures contracts and treasury securities. These transactions are not material to the Company’s consolidated 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, 2005, and February 29, 2004, the potential daily loss in the fair value of equity securities was not material.

Included in investments are $146 million in mutual funds and treasury securities that the Company uses to hedge its deferred compensation liability. The potential daily gain or loss in the fair value of these mutual funds is offset by a similar potential change in the value of the deferred compensation liability. Also included in investments are $141 million in private equity investments that are subject to a high degree of volatility and may be susceptible to significant fluctuations particularly in the near term.

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.

The Company elects to use a sensitivity analysis approach to express the potential decrease in the fair value of the Company’s debt inventory consisting of interest-rate-sensitive financial instruments. The Company calculated the potential loss in fair value of its debt inventory by calculating the change in the 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 occurred, the Company calculated a potential loss in fair value of its debt inventory of $4 million at February 28, 2005, and $11 million at February 29, 2004.

Forward-Looking Statements

The Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-K contain forward-looking statements within the meaning of federal securities laws. Actual results are subject to risks and uncertainties, including both those specific to the Company and those specific to the industry, which could cause results to differ materially from those contemplated. The risks and uncertainties include, but are not limited to, general economic conditions; the actions of competitors; actions of clients; regulatory actions or changes; governmental and fiscal policy; changes in legislation; interest rate changes; changes in

24

accounting standards; risk management; technology changes and costs; estimates of capital expenditures; implementation and effects of the estimates for the branding initiative; client interest in specific products and services; outsourcing agreements including implementation and conversion; expense reduction strategies; workforce reductions; changes in payment for mutual fund distribution; disposition of real estate holdings; and statements about management expectations, strategic objectives and growth opportunities. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date of this Form 10-K. The Company does not undertake any obligation to publicly update any forward-looking statements.

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information required by this item is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Risk Management — Market Risk” of this Form 10-K.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Supplemental Data

The quarterly financial data required by this item is included under Item 5 of Part II of this Form 10-K under the caption “Quarterly Financial Information.”

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)).

Management assessed the effectiveness of the Company’s internal control over financial reporting as of February 28, 2005. In making this assessment Company management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework. Management has concluded that, as of February 28, 2005, the Company’s internal control over financial reporting is effective based on those criteria.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The Company’s independent registered public accounting firm audited management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of February 28, 2005, as stated in their report appearing below, which expresses unqualified opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting as of February 28, 2005.

May 2, 2005

25

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
A.G. Edwards, Inc.
St. Louis, Missouri

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that A.G. Edwards, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of February 28, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of February 28, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 28, 2005, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended February 28, 2005 of the Company and our report dated May 3, 2005 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

/s/ Deloitte & Touche LLP

St. Louis, Missouri
May 3, 2005

26

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
A.G. Edwards, Inc.
St. Louis, Missouri

We have audited the accompanying consolidated balance sheets of A.G. Edwards, Inc. and subsidiaries (the “Company”) as of February 28, 2005 and February 29, 2004, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the three years in the period ended February 28, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of A.G. Edwards, Inc. and subsidiaries as of February 28, 2005 and February 29, 2004, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of February 28, 2005, based on Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 3, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

St. Louis, Missouri
May 3, 2005

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Financial Statements

A.G. Edwards, Inc.
Consolidated Balance Sheets

	February 28, 2005		February 29, 2004
	(Dollars in thousands, except per share amounts)
Assets
Cash and cash equivalents	$	209,039	$	107,565
Cash and government securities, segregated under federal and other regulations		392,241		373,726
Securities purchased under agreements to resell		235,540		22,355
Securities borrowed		117,302		106,034
Receivables:
Customers, less allowance for doubtful accounts of $8,045 and $45,593		2,236,170		2,373,007
Brokers and dealers		37,387		13,888
Clearing organizations		1,514		805
Fees, dividends and interest		104,605		90,053
Securities inventory, at fair value:
State and municipal		190,150		292,741
Government and agencies		152,532		30,806
Corporate		57,521		83,103
Investments		337,394		298,441
Property and equipment, at cost, net of accumulated depreciation and amortization of $715,328 and $639,756		503,976		498,706
Deferred income taxes		60,189		94,191
Other assets		52,237		50,664
	$	4,687,797	$	4,436,085
Liabilities and Stockholders’ Equity
Short-term bank loans	$	16,400	$	28,300
Checks payable		299,120		257,566
Securities loaned		207,012		231,438
Payables:
Customers		749,901		1,125,014
Brokers and dealers		655,486		43,448
Clearing organizations		80,252		110,003
Securities sold but not yet purchased, at fair value		36,439		44,908
Employee compensation and related taxes		440,833		440,764
Deferred compensation		223,821		206,734
Income taxes		7,378		13,588
Other liabilities		183,464		156,003
Total Liabilities		2,900,106		2,657,766
Stockholders’ Equity:
Preferred stock, $25 par value:
Authorized, 4,000,000 shares, none issued		—		—
Common stock, $1 par value:
Authorized, 550,000,000 shares: issued, 96,463,114 shares		96,463		96,463
Additional paid-in capital		295,478		292,699
Retained earnings		2,137,114		2,029,562
		2,529,055		2,418,724
Less: Treasury stock, at cost (19,442,437 and 15,936,194 shares)		741,364		640,405
Total Stockholders’ Equity		1,787,691		1,778,319
	$	4,687,797	$	4,436,085

 

See Notes to Consolidated Financial Statements.

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A.G. Edwards, Inc.
Consolidated Statements of Earnings

Year Ended	February 28, 2005		February 29, 2004		February 28, 2003
	(Dollars in thousands, except per share amounts)
Revenues
Commissions	$	1,034,166	$	1,081,027	$	887,979
Asset management and service fees		919,077		723,386		653,017
Principal transactions		253,899		296,886		311,124
Investment banking		245,622		321,861		251,180
Interest		128,743		96,132		106,663
Other		30,288		6,384		10,239
Total Revenues		2,611,795		2,525,676		2,220,202
Interest expense		4,114		2,859		5,850
Net Revenues		2,607,681		2,522,817		2,214,352
Non-Interest Expenses
Compensation and benefits		1,699,156		1,642,999		1,448,199
Communication and technology		241,830		272,047		282,603
Occupancy and equipment		151,426		137,617		134,149
Marketing and business development		65,682		53,262		45,649
Floor brokerage and clearance		21,341		22,495		22,464
Other		133,839		149,123		109,854
Total Non-Interest Expenses		2,313,274		2,277,543		2,042,918
Earnings Before Income Taxes		294,407		245,274		171,434
Income Taxes		107,933		85,789		52,606
Net Earnings	$	186,474	$	159,485	$	118,828
Earnings Per Share:
Diluted	$	2.37	$	1.97	$	1.46
Basic	$	2.39	$	1.99	$	1.48

 

See Notes to Consolidated Financial Statements.

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A.G. Edwards, Inc.
Consolidated Statements of Stockholders’ Equity

(Three Years Ended February 28, 2005)

	Common Stock		Additional Paid-In Capital			Retained Earnings			Treasury Stock			Total Stockholders’ Equity
	(Dollars in thousands, except per share amounts)
Balances, March 1, 2002	$	96,463	$	286,480		$	1,892,189		$	(627,336	)	$	1,647,796
Net earnings							118,828						118,828
Dividends declared — $0.64 per share							(51,034	)					(51,034	)
Treasury stock acquired										(114,500	)		(114,500	)
Stock issued:
Employee stock purchase/option plans				1,432			(10,320	)		75,396			66,508
Restricted stock				1,116			(6,338	)		26,161			20,939
Balances, February 28, 2003		96,463		289,028			1,943,325			(640,279	)		1,688,537
Net earnings							159,485						159,485
Dividends declared — $0.64 per share							(51,007	)					(51,007	)
Treasury stock acquired										(105,455	)		(105,455	)
Stock issued:
Employee stock purchase/option plans				3,883			(22,241	)		79,284			60,926
Restricted stock				(212	)					26,045			25,833
Balances, February 29, 2004		96,463		292,699			2,029,562			(640,405	)		1,778,319
Net earnings							186,474						186,474
Dividends declared — $0.64 per share							(49,392	)					(49,392	)
Treasury stock acquired										(250,123	)		(250,123	)
Stock issued:
Employee stock purchase/option plans				1,761			(25,436	)		112,582			88,907
Restricted stock				1,018			(4,094	)		36,582			33,506
Balances, February 28, 2005	$	96,463	$	295,478		$	2,137,114		$	(741,364	)	$	1,787,691

 

See Notes to Consolidated Financial Statements.

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A.G. Edwards, Inc.
Consolidated Statements of Cash Flows

Year Ended	February 28, 2005			February 29, 2004			February 28, 2003
	(Dollars in thousands)
Cash Flows From Operating Activities:
Net earnings	$	186,474		$	159,485		$	118,828
Noncash and nonoperating items included in earnings:
Depreciation and amortization		111,519			127,296			131,903
Expense of restricted stock awards		33,076			29,384			19,415
Deferred income taxes		34,002			(416	)		(315	)
(Gain) Loss on investments, net		(21,798	)		598			9,193
Allowance for doubtful accounts		(916	)		1,274			9,009
(Increase) decrease in operating assets:
Cash and government securities, segregated		(18,515	)		(270,012	)		(10,793	)
Securities purchased under agreements to resell		(213,185	)		197,645			(175,177	)
Securities borrowed		(11,268	)		(28,904	)		(8,866	)
Receivable from customers		137,753			(313,603	)		412,937
Receivable from brokers and dealers		(23,499	)		7,304			22,555
Receivable from clearing organizations		(709	)		472			(409	)
Fees, dividends and interest receivable		(14,552	)		(30,002	)		15,953
Securities inventory		6,447			13,384			(64,397	)
Trading investments, net		(11,134	)		(43,478	)		(20,739	)
Other assets		(12,723	)		11,504			18,093
Increase (decrease) in operating liabilities:
Checks payable		41,554			21,041			(3,082	)
Securities sold under agreements to repurchase		—			—			(45,861	)
Securities loaned		68,224			(19,824	)		(4,549	)
Payable to customers		(375,113	)		164,335			(21,692	)
Payable to brokers and dealers		612,038			(15,615	)		(52,949	)
Payable to clearing organizations		(29,751	)		34,155			46,349
Securities sold but not yet purchased		(8,469	)		9,468			5,240
Employee compensation and related taxes		69			94,472			(45,895	)
Deferred compensation		17,087			36,044			(14,309	)
Income taxes		(1,521	)		(1,582	)		9,409
Other liabilities		21,711			30,535			(3,483	)
Net cash from operating activities		526,801			214,960			346,368
Cash Flows From Investing Activities:
Purchase of property and equipment, net		(116,789	)		(99,615	)		(127,007	)
Purchase of other investments		(22,008	)		(27,004	)		(18,116	)
Proceeds from sale of a subsidiary		10,830			—			—
Proceeds from sale or maturity of other investments		22,620			8,626			10,433
Net cash from investing activities		(105,347	)		(117,993	)		(134,690	)
Cash Flows From Financing Activities:
Short-term bank loans		(11,900	)		(11,700	)		(67,300	)
Securities loaned		(92,650	)		23,906			(42,630	)
Employee stock transactions		84,648			57,323			60,967
Purchase of treasury stock		(250,123	)		(105,455	)		(114,500	)
Cash dividends paid		(49,955	)		(51,028	)		(51,088	)
Net cash from financing activities		(319,980	)		(86,954	)		(214,551	)
Net Increase (Decrease) in Cash and Cash Equivalents		101,474			10,013			(2,873	)
Cash and Cash Equivalents, at Beginning of Year		107,565			97,552			100,425
Cash and Cash Equivalents, at End of Year	$	209,039		$	107,565		$	97,552

 

Interest payments, net of amounts capitalized of $612, $925 and $2,565, totaled $4,083 in 2005, $2,616 in 2004 and $5,494 in 2003.

Income taxes paid totaled $75,006 in 2005, $87,668 in 2004 and $43,223 in 2003.

Supplemental disclosures of noncash financing activities: Restricted stock awards granted totaled $35,062 in 2005, $30,637 in 2004 and $21,738 in 2003.

See Notes to Consolidated Financial Statements.

31

A.G. Edwards, Inc.
Notes to Consolidated Financial Statements
(Three years ended February 28, 2005)
(Dollars in thousands, except per share amounts)

1.     Summary of Significant Accounting Policies

Business Description

A.G. Edwards, Inc. and its wholly owned subsidiaries (collectively referred to as the “Company”) operate and are managed as a single business segment providing investment services to its clients. The Company offers a wide range of services designed to meet clients’ individual investment needs, including securities and commodities brokerage, investment banking, trust, asset management, retirement and financial planning, insurance products, and other related financial services to individual, corporate, governmental, municipal and institutional clients through one of the industry’s largest retail branch distribution systems. These services are provided by 6,890 financial consultants in more than 700 locations of the Company’s principal operating subsidiary, A.G. Edwards & Sons, Inc. (“Edwards”). Because these services are provided using the same sales and distribution personnel, support services and facilities, and all are provided to meet the needs of its clients, the Company does not identify or manage assets, revenues or expenses resulting from any service, or class of services, as a separate business segment. With headquarters in St. Louis, the Company has offices in 49 states, the District of Columbia, London, England and Geneva, Switzerland.

Basis of Financial Information

The consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America. All material intercompany balances and transactions have been eliminated in consolidation. Where appropriate, prior years’ financial information has been reclassified to conform to the current-year presentation. The most significant reclassifications relate to certain service fees received from certain money funds, which were previously netted in other expenses and are now reflected in asset management and service fees, and to certain third-party advisory fees, which were previously netted in asset management and service fees and are now reflected in other expenses.

Included in other expenses in 2005 is a $7,875 credit recorded to correctly recognize state registration fees for Edwards’ financial consultants over the registration period.

Use of Estimates

In preparing these consolidated financial statements, management makes use of estimates concerning certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and certain revenues and expenses during the reporting period. Management considers its significant estimates, which are most susceptible to change, to be the fair value of certain investments, the allowance for doubtful accounts, and accruals for litigation, regulatory matters and income taxes. Actual results could differ from these estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquid investments with maturities of 90 days or less at the date of acquisition.

Securities Transactions

Securities purchased under agreements to resell (Resale Agreements) and securities sold under agreements to repurchase are recorded at the contractual amounts that the securities will be resold/repurchased, including accrued interest. The Company’s policy is to obtain possession or control of securities purchased under Resale Agreements and to obtain additional collateral when necessary to minimize the risk associated with this activity.

Securities borrowed and securities loaned are recorded at the amount of the cash collateral provided for securities borrowed transactions and received for securities loaned transactions, respectively. The adequacy of the collateral is continuously monitored and adjusted when considered necessary to minimize the risk associated with

32

A.G. Edwards, Inc.
Notes to Consolidated Financial Statements (Continued)
(Three years ended February 28, 2005)
(Dollars in thousands, except per share amounts)

1.    Summary of Significant Accounting Policies (Continued)

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.

Asset Management and Service Fees

Asset management and service fee revenues consist of fees based on the value of client assets under professional management by third parties as well as the Company’s asset management services, transaction-related service fees and fees related to the administration of custodial and other specialty accounts. These revenues are recognized over the periods for which services are rendered.

Investment Banking

Investment banking revenues, which include underwriting fees, selling concessions and management fees, are recorded when services for the transaction are substantially completed. Transaction-related expenses are deferred and later expensed to match revenue recognition. As a portion of the deferred transaction-related expenses are recoverable from other investment bankers participating in transactions, collectibility is assessed and write-offs are recorded, as appropriate.

Allowance for Doubtful Accounts

Receivables from customers, primarily consisting of floating rate loans collateralized by margin securities, are charged interest at rates similar to other such loans made throughout the industry. Management estimates an allowance for doubtful accounts to reserve for potential losses from unsecured and partially unsecured customer accounts deemed uncollectible. The facts and circumstances surrounding each receivable from customers and the number of shares, price and volatility of the underlying collateral are considered by management in determining the allowance. Management continually evaluates its receivables from customers for collectibility and possible write-off. The Company manages the credit risk associated with its receivables from customers through credit limits and continuous monitoring of collateral. The allowance for doubtful accounts may be susceptible to significant fluctuations in the near term.

Investments

Investments consist of private equity investments, mutual funds, U.S. government securities and other investments. Private equity investments are held by investment company subsidiaries, which are outside the scope of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and are carried at fair value. The Company classifies mutual fund investments and certain treasuries as trading securities in accordance with SFAS No. 115. Trading securities are recorded at fair value, based on quoted market or dealer prices. U.S. government securities are classified as held-to-maturity and are held at amortized cost as the Company has the intent and ability to hold the securities to maturity. The majority of other investments include securities held by Edwards and are recorded at fair value, based on quoted market or dealer prices. The unrealized gains and losses of investment securities are reflected in other revenue.

33

A.G. Edwards, Inc.
Notes to Consolidated Financial Statements (Continued)
(Three years ended February 28, 2005)
(Dollars in thousands, except per share amounts)

1.    Summary of Significant Accounting Policies (Continued)

The fair value of investments, for which a quoted market or dealer price is not available, is based on management’s estimate. Among the factors considered by management in determining the fair value of investments are the cost of the investment, terms and liquidity, developments since the acquisition of the investment, the sales price of recently issued securities, the financial condition and operating results of the issuer, earnings trends and consistency of operating cash flows, the long-term business potential of the issuer, the quoted market price of securities with similar quality and yield that are publicly traded, and other factors generally pertinent to the valuation of investments. The fair value of these investments is subject to a high degree of volatility and may be susceptible to significant fluctuations in the near term.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation and amortization; land is recorded at cost. Depreciation of buildings is provided using the straight-line method over estimated useful lives of 20 to 45 years. Leasehold improvements are amortized over the lesser of the life of the lease or estimated useful life of the improvement, generally five to 10 years. Equipment, primarily consisting of office equipment and building components, is depreciated over estimated useful lives of three to 15 years using straight-line and accelerated methods of depreciation. Computer hardware, including servers and mainframes, and satellite equipment are depreciated over estimated useful lives of three to five years using the straight-line method. Internally developed applications and purchased software meeting the criteria for capitalization are amortized over their estimated useful lives, generally not exceeding three years, using the straight-line method. The Company periodically evaluates and adjusts the carrying value of its property and equipment when impairment exists.

Stock-Based Compensation

The Company applies the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations to account for its employee stock plans. Based on the provisions of the plans, no compensation expense has been recognized for the fair value of the options issued under these plans. Restricted stock awards issued under these plans are expensed in the year awarded, which is the defined service period.

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. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company files a consolidated federal income tax return.

Comprehensive Earnings

Comprehensive earnings for each of the three years in the period ended February 28, 2005, was equal to the Company’s net earnings.

Sale of a Subsidiary

In March 2004, the Company sold CPI Qualified Plan Consultants, Inc. (“CPI”), a third-party administrator of employee benefit plans and a wholly owned subsidiary, to a group of investors headed by CPI’s management. The transaction price was $17,000 with $10,830 received immediately and the remainder to be received over a five-year period. CPI had approximately 350 employees at the date of sale.

34

A.G. Edwards, Inc.
Notes to Consolidated Financial Statements (Continued)
(Three years ended February 28, 2005)
(Dollars in thousands, except per share amounts)

1.    Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and measurement based on the grant-date fair value of the award. It also requires the cost to be recognized over the period during which an employee is required to provide service in exchange for the award (presumptively the vesting period). SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25 and its related interpretations. As modified by the SEC on April 21, 2005, SFAS No. 123R is effective for fiscal years beginning after June 15, 2005, and applies to all awards granted, modified, repurchased, or cancelled after that date. The Company elected early adoption of SFAS No. 123R on March 1, 2005, using the modified prospective method.

Under the modified prospective method of SFAS No. 123R, the Company is required to recognize compensation expense for the outstanding portion of any awards for which compensation expense had not previously been recognized or disclosed under SFAS No. 123. The Company currently recognizes the compensation expense of restricted stock awards and discloses the pro forma compensation expense of stock option awards in the year of the award. Under SFAS No. 123R, the Company will recognize compensation expense for restricted stock and stock option awards over the vesting period, generally three years following the award. As the Company will have recognized compensation expense or disclosed pro forma compensation expense related to all outstanding awards as of the adoption date, there will be no compensation expense recognized for these outstanding awards in future periods. In addition, as the awards related to fiscal year 2006 will not be issued until the end of fiscal year 2006, the compensation expense related to those awards will not be recognized in 2006 but over the subsequent vesting period. As restricted stock and stock option awards are determined each year, the impact to the Company’s consolidated financial statements of the adoption of SFAS No. 123R cannot be predicted with certainty. However, the fair value of restricted stock awards recognized in compensation expense ranged in value from $21,738 to $35,062 over the last three fiscal years and the fair value of stock option awards disclosed in the footnotes to the consolidated financial statements, but not included in compensation expense, over the last three fiscal years ranged from $5,440 to $8,412.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” which requires the consolidation by a business enterprise of variable interest entities if the business enterprise is the primary beneficiary. FIN 46 was effective January 31, 2003, for the Company with respect to interests in variable interest entities obtained after that date. With respect to interests in variable interest entities existing prior to February 1, 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) (“FIN 46R”), which extended the effective date to the period ended May 31, 2004. The Company’s adoption of FIN 46R did not have a material impact on the Company’s consolidated financial statements. The Company did not acquire any variable interest entities subsequent to February 1, 2003.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies that SFAS No. 143, “Accounting for Asset Retirement Obligations,” requires that an entity recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company has not yet determined the impact that the adoption of this interpretation will have on its consolidated financial statements.

35

A.G. Edwards, Inc.
Notes to Consolidated Financial Statements (Continued)
(Three years ended February 28, 2005)
(Dollars in thousands, except per share amounts)

2.     Employee Stock Plans

The Company applies the provisions of APB Opinion No. 25, to account for stock options granted under employee stock plans and accordingly does not reflect any associated compensation expense in its statement of earnings. The Company grants options to employees utilizing two shareholder-approved plans: the 2002 Employee Stock Purchase Plan is a qualified plan as defined under section 423 of the Internal Revenue Code and is used to grant options to purchase the Company’s stock at a discount from market to a broad base of employees; the Incentive Stock Plan is a non qualified plan and is used to grant options and restricted stock at market value to certain officers and key employees. Compensation expense related to restricted stock is reflected in net earnings. If compensation expense associated with these plans was determined in accordance with SFAS No. 123, the Company’s net earnings and earnings per share would have been as follows:

	2005			2004			2003
Net earnings, as reported	$	186,474		$	159,485		$	118,828
Add back compensation related to Incentive Stock Plan included in net earnings		21,720			19,560			14,756
Deduct effect of stock-based employee compensation, net of tax effects:
Employee Stock Purchase Plan		(8,776	)		(14,570	)		(16,074	)
Incentive Stock Plan		(25,125	)		(25,022	)		(18,889	)
Pro forma net earnings	$	174,293		$	139,453		$	98,621
Earnings per share, as reported:
Diluted	$	2.37		$	1.97		$	1.46
Basic	$	2.39		$	1.99		$	1.48
Pro forma net earnings per share
Diluted	$	2.20		$	1.72		$	1.21
Basic	$	2.24		$	1.74		$	1.23
Pro forma net earnings	$	174,293		$	139,453		$	98,621
Add back reduction in Incentive compensation funding formulas		3,349			5,117			5,212
Pro forma net earnings after reduction for incentive compensation plans	$	177,642		$	144,570		$	103,833
Pro forma earnings per share:
Diluted	$	2.24		$	1.79		$	1.27
Basic	$	2.28		$	1.81		$	1.30

 

The Black-Scholes option pricing model was used to calculate the estimated fair value of the options.

Employee Stock Purchase Plan

The Company amended the terms of its 2002 Employee Stock Purchase Plan effective October 1, 2004. The discount from the market under the plan was reduced to 5% from 15% and the one year look-back period for the options issued under the plan was eliminated. As a result of these changes, the options granted under this plan are no longer considered compensatory for purposes of the pro forma earnings calculation under SFAS No. 123.

The Company’s Board of Directors authorized up to 1,875,000 shares of common stock to be purchased by employees under the 2002 Employee Stock Purchase Plan, as amended. These shares are exercisable in monthly installments at 95 percent of the market price on the last business day of each month. Employees purchased an

36

A.G. Edwards, Inc.
Notes to Consolidated Financial Statements (Continued)
(Three years ended February 28, 2005)
(Dollars in thousands, except per share amounts)

2.    Employee Stock Plans (Continued)

aggregate of 359,555 shares at an average price of $38.78 per share of common stock on the last business days of October 2004 through February 2005. Treasury shares were utilized for all of the shares issued.

Under the 2002 Employee Stock Purchase Plan, prior to its most recent amendment, employees purchased 1,843,334 shares at $29.54 per share in 2005; 1,818,057 shares at $27.79 per share in 2004; and 1,850,030 shares at $27.13 per share in 2003 by exercising one-year options granted annually in October. The fair value of options granted in 2004, 2003 and 2002 was $9.26, $8.44 and $9.73 per option, respectively, estimated using the following assumptions: dividend yield of 1.83 percent, 1.79 percent and 1.56 percent; an expected life of one year; expected volatility of 29 percent, 36 percent and 39 percent; and risk-free interest rates of ..95 percent, 1.43 percent and 2.47 percent. Treasury shares were utilized for all of the shares issued. The pro forma disclosure in the preceding table reflects the fair values of the options over the period when the options from each grant date were outstanding.

Restricted Stock and Stock Options

Under the Company’s Incentive Stock Plan, three types of benefits may be awarded to officers and key employees: restricted stock, stock options and stock appreciation rights. Such awards are subject to forfeiture upon termination of employment during a restricted period, generally three years from the award date. Through February 28, 2005, no stock appreciation rights had been granted.

Restricted stock awards are made, and shares issued, without cash payment by the employee. Eligible employees at February 28, 2005, were awarded 792,544 shares with a market value of $35,062. At February 29, 2004, and February 28, 2003, the awards were 778,963 and 844,188 shares, respectively, with corresponding market values of $30,637 and $21,738. 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 the date of award and expire eight years from the date of award for awards granted prior to 2003 and 10 years for awards granted in 2003 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 2005, 2004 and 2003, respectively: dividend yield of 1.72 percent, 1.83 percent, and 1.79 percent; expected lives of seven years for 2005, 2004 and 2003; expected volatility of 37 percent, 43 percent and 34 percent; risk-free interest rates of 4.27 percent, 3.67 percent and 3.37 percent; and a forfeiture rate of 10 percent, 10 percent and 9 percent. The fair value of options granted under this plan in 2005, 2004 and 2003 was $17.08, $16.16 and $8.66, respectively.

A summary of the status of the Company’s stock options as of February 28, 2005, February 29, 2004, and February 28, 2003, and changes during the years ended on those dates is presented as follows:

	Shares (000)			2005 Weighted Average Exercise Price		Shares (000)			2004 Weighted Average Exercise Price		Shares (000)			2003 Weighted Average Exercise Price
Outstanding, beginning of year		5,041		$	34.96		4,911		$	33.61		4,730		$	29.49
Granted		354		$	44.24		578		$	39.33		756		$	25.75
Exercised		(605	)	$	27.83		(390	)	$	18.20		(519	)	$	21.36
Forfeited		(26	)	$	35.95		(58	)	$	33.94		(56	)	$	38.98
Outstanding, end of year		4,764		$	37.08		5,041		$	34.96		4,911		$	33.61
Treasury shares utilized for exercises		605					390					519

 

37

A.G. Edwards, Inc.
Notes to Consolidated Financial Statements (Continued)
(Three years ended February 28, 2005)
(Dollars in thousands, except per share amounts)

2.    Employee Stock Plans (Continued)

The following table summarizes information about outstanding stock options at February 28, 2005:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding (000)		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Number Exercisable (000)		Weighted Average Exercise Price
$26–$30		724		8.00	$	25.75		—		—
$31–$35		587		2.00	$	32.50		587	$	32.50
$36–$40		2,154		4.91	$	38.24		1,592	$	37.85
$41–$45		1,299		4.75	$	43.56		945	$	43.30
		4,764						3,124

 

3.     Employee Profit Sharing Plan

The Company has a defined contribution plan [401(k)] covering substantially all employees, whereby the Company is obligated to make contributions, in specified amounts as defined therein, based on the compensation of eligible employees. Prior to 2003, the Company was obligated to match, in specified amounts, portions of contributions made by eligible employees. Additional contributions may be made at the discretion of the Company and are generally based on the Company’s pre-tax earnings. The Company expensed $77,942 in 2005, $76,017 in 2004 and $60,658 in 2003, in connection with the 401(k).

The Company has an unfunded, nonqualified deferred compensation plan that provides benefits to participants whose contributions from the Company in the 401(k) are subject to plan limitations. The Company expensed $20,095 in 2005, $14,921 in 2004 and $13,883 in 2003 in connection with this plan. Participants may choose to base their return on the performance of one or more of a combination of mutual funds as designated by the Company, treasury securities, or in limited cases, the broker call rate. Included in Investments are $145,610 in 2005 and $134,476 in 2004 in mutual funds and treasury securities that were purchased by the Company to hedge its liability to the participants that choose to base their return on the performance of the mutual fund or treasury security options, with the exception of those who choose to base the performance of the return on money market mutual funds. Participants have no ownership in the mutual funds or treasury securities.

38

A.G. Edwards, Inc.
Notes to Consolidated Financial Statements (Continued)
(Three years ended February 28, 2005)
(Dollars in thousands, except per share amounts)

4.     Restructuring Charge

As a result of a number of actions taken to reduce costs, streamline headquarters operations and better position the Company for improved profitability, a restructuring charge of $82,462 was recorded in 2002.

The following table reflects changes in the restructuring reserves included in employee compensation and related taxes and other liabilities at February 28, 2005, February 29, 2004 and February 28, 2003:

	Technology Assets			Severance Cost			Real Estate Consolidation			Total
Balance at March 1, 2002	$	400		$	18,605		$	9,587		$	28,592
Utilized in Fiscal-Year 2003		(264	)		(10,987	)		(1,767	)		(13,018	)
Adjustments in 2003 to Initial Estimate		—			(640	)		1,505			865
Balance at February 28, 2003		136			6,978			9,325			16,439
Utilized in Fiscal-Year 2004		(136	)		(6,978	)		(3,955	)		(11,069	)
Adjustments in 2004 to Initial Estimate		—			—			1,820			1,820
Balance at February 29, 2004		—			—			7,190			7,190
Utilized in Fiscal-Year 2005		—			—			(5,192	)		(5,192	)
Balance at February 28, 2005	$	—		$	—		$	1,998		$	1,998

 

The real estate consolidation liability will be paid out over the remaining lives of the related leases, which end in fiscal year 2009. The adjustments to the initial estimates were recorded in other expenses.

5.     Property and Equipment

At February 28, 2005, and February 29, 2004, property and equipment consisted of:

	2005			2004
Land	$	20,163		$	20,248
Building and leasehold improvements		465,638			449,060
Equipment and computer hardware		531,461			519,193
Software and software applications		161,902			123,644
Software development in progress		38,329			26,064
Construction in progress		1,811			253
Total property and equipment		1,219,304			1,138,462
Less: Accumulated depreciation and amortization		(715,328	)		(639,756	)
Total property and equipment, net	$	503,976		$	498,706

 

6.     Short-Term Financing

The Company’s short-term financing is generally obtained through the use of securities-lending arrangements and bank loans. The interest rates on such short-term borrowings reflect market rates of interest or rebates at the time of the transactions. The average securities-lending arrangements outstanding that were utilized in financing activities were $196,000 in 2005, $181,000 in 2004 and $189,000 in 2003, at average effective interest rates of 1.4 percent in 2005, 1.0 percent in 2004 and 1.5 percent in 2003. Customer securities were utilized in these arrangements. Bank loans are short-term borrowings that are payable on demand and may be unsecured or collateralized by customer-owned securities held in margin accounts. The average of such bank loans was $32,000 in 2005, $75,000 in 2004 and $163,000 in 2003, at average effective interest rates of 1.7 percent, 1.3 percent and 2.1 percent, respectively. At February 28, 2005, and February 29, 2004, there were outstanding short-term bank

39

A.G. Edwards, Inc.
Notes to Consolidated Financial Statements (Continued)
(Three years ended February 28, 2005)
(Dollars in thousands, except per share amounts)

6.    Short-Term Financing (Continued)

loans of $16,400 and $28,300, respectively. At February 28, 2005, the Company, with certain limitations, had access to $1,300,000 in uncommitted lines of credit as well as the ability to increase its securities-lending activities.

7.     Net Capital Requirements

As a registered broker-dealer, Edwards is subject to net capital rules administered by the SEC and the New York Stock Exchange (“NYSE”). 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 Edwards to notify and sometimes obtain approval of the SEC and other regulatory organizations for substantial withdrawals of capital or loans to affiliates. At February 28, 2005, the subsidiary’s net capital of $666,347 was 30 percent of aggregate debit items and $622,644 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 the Company. These subsidiaries have consistently operated in excess of their capital adequacy requirements. The only restriction with regard to the payment of cash dividends by the Company is its ability to obtain cash through dividends and advances from its subsidiaries, if needed.

8.     Income Taxes

The provisions (benefits) for income taxes (net of the resolution of tax matters) consist of:

	2005		2004			2003
Current
Federal	$	65,402	$	81,531		$	54,747
State and local		8,073		4,082			(2,345	)
Non-U.S.		456		592			519
	$	73,931	$	86,205		$	52,921
Deferred		34,002		(416	)		(315	)
	$	107,933	$	85,789		$	52,606

 

The Company operates in multiple taxing jurisdictions, and as a result, accruals for tax contingencies require management to make estimates and judgments with respect to the ultimate tax liability in any given year. Actual results could vary from these estimates. In management’s opinion, adequate provisions for income taxes have been made for all years.

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.

As of February 28, 2005, the Company had approximately $4,100 of earnings attributable to its foreign subsidiary for which no provisions have been recorded for income tax that could occur upon repatriation. These earnings have been indefinitely invested in the foreign subsidiary.

40

A.G. Edwards, Inc.
Notes to Consolidated Financial Statements (Continued)
(Three years ended February 28, 2005)
(Dollars in thousands, except per share amounts)

8.    Income Taxes (Continued)

Significant components of deferred tax assets and liabilities at February 28, 2005, and February 29, 2004, are as follows:

	2005		2004
Deferred Tax Assets:
Employee benefits	$	126,149	$	126,002
Other		17,744		14,647
		143,893		140,649
Deferred Tax Liabilities:
Receivables		18,410		17,555
Investments		22,868		19,631
Property and equipment		20,600		9,272
Prepaid expenses		20,686		—
Other		1,140		—
		83,704		46,458
Net Deferred Tax Assets	$	60,189	$	94,191

 

The Company expects to fully realize these deferred tax assets given its historical level of earnings and related taxes paid; accordingly, no valuation allowance has been established.

A reconciliation of the effective tax rate and the federal statutory rate for February 28, 2005, February 29, 2004, and February 28, 2003, is as follows:

	2005			2004			2003
Federal statutory rate		35.0	%		35.0	%		35.0	%
State and local income taxes, net of federal tax benefit		2.5			2.0			2.0
Resolution of tax matters		(0.3	)		(1.2	)		(5.2	)
Municipal bond interest		(0.7	)		(0.8	)		(1.6	)
Meal and entertainment expense disallowance		0.5			0.6			0.9
Other		(0.3	)		(0.6	)		(0.4	)
		36.7	%		35.0	%		30.7	%

 

9.     Investments

Investments at February 28 (29) consist of:

	2005		2004
Private equity	$	140,864	$	117,339
Mutual funds		174,819		160,074
U.S. government securities		14,813		15,633
Other		6,898		5,395
Total Investments	$	337,394	$	298,441

 

Private equity consists of investments in a privately held investment management company and in Company-sponsored private equity funds. The Company committed $127,000 to various private equity partnerships, of which $43,454 remains unfunded at February 28, 2005. A portion of the Company’s mutual fund and treasury investments are utilized to hedge certain liabilities under its deferred compensation plan and also include qualified investments

41

A.G. Edwards, Inc.
Notes to Consolidated Financial Statements (Continued)
(Three years ended February 28, 2005)
(Dollars in thousands, except per share amounts)

9.    Investments (Continued)

by its trust company subsidiary. The Company primarily invests in U.S. government securities through its trust company subsidiary, and the majority of other investments include securities held by Edwards.

10.     Stockholders’ Equity

Earnings Per Share

The following table presents the computations of basic and diluted earnings per share:

	2005		2004		2003
Net earnings available to common stockholders	$	186,474	$	159,485	$	118,828
Shares (in thousands):
Weighted average shares outstanding		77,908		80,031		80,133
Effect of dilutive common shares:
Restricted shares		417		341		327
Stock purchase plan		163		287		355
Stock option plan		278		331		362
Dilutive common shares		858		959		1,044
Total weighted average diluted shares		78,766		80,990		81,177
Earnings per share:
Diluted	$	2.37	$	1.97	$	1.46
Basic	$	2.39	$	1.99	$	1.48

 

At year-end 2005, 2004 and 2003, there were 944,942; 1,865,277; and 966,570 options, respectively, that were considered antidilutive and thus were not included in the above calculations.

Stock Repurchase Program

In November 2004, the Company’s Board of Directors authorized the repurchase of up to 10,000,000 shares of the Company’s outstanding stock during the period November 19, 2004, through December 31, 2006. In November 2002, the Company’s Board of Directors authorized the repurchase of up to 10,000,000 shares of the Company’s outstanding common stock during the period of January 1, 2003, through December 31, 2004. The Company purchased 7,026,392 shares at an aggregate cost of $250,123 in 2005; 3,102,854 shares at an aggregate cost of $105,455 in 2004; and 3,145,319 shares at an aggregate cost of $114,500 in 2003 under these authorizations and other previously authorized 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 acquires no less than 20 percent of the Company’s outstanding common stock or commences a tender or exchange offer that would result in the third-party acquiring no less than 20 percent of the outstanding common stock. The Board of Directors may decrease the 20 percent thresholds to 10 percent of the outstanding stock. Each right, upon becoming exercisable, entitles the registered holder to purchase one share of common stock for $150 from the Company. If a person actually acquires no less than 20 percent, or 10 percent if applicable, of the Company’s common stock without the Board of Directors’ consent, then each right will entitle the holder, other than the acquiring third-party, to purchase for $150 the number of shares of the Company’s common stock (or in the event of a merger or other business

42

A.G. Edwards, Inc.
Notes to Consolidated Financial Statements (Continued)
(Three years ended February 28, 2005)
(Dollars in thousands, except per share amounts)

10.    Stockholders’ Equity (Continued)

combination, the number of shares of the acquirer’s stock) that has a market value of $300. The rights, which are redeemable by the Company at a price of $0.01 each prior to the person’s acquiring no less than 20 percent, or 10 percent if applicable, of the Company’s common stock are subject to adjustment to prevent dilution and expire June 25, 2005, unless the plan is amended by the Board of Directors to extend the expiration date of the rights.

11.     Commitments and Contingent Liabilities

The Company has long-term operating leases and commitments related to office space, equipment and service agreements. Minimum commitments under all such noncancelable leases and service agreements, some of which contain escalation clauses and renewal options, at February 28, 2005, are as follows:

Year ending February 28 (29),
2006	$	117,700
2007		120,700
2008		107,200
2009		94,900
2010		65,500
Later years		132,200
	$	638,200

 

Rental expense under all operating leases and service agreements was $128,706 in 2005, $125,177 in 2004 and $133,871 in 2003.

The Company accounts for operating leases in accordance with the provisions of SFAS No. 13 “Accounting for Leases,” FASB Technical Bulletin 85-3 “Accounting for Operating Leases with Scheduled Rent Increases” and FASB Technical Bulletin 88-1 “Issues Relating to Accounting for Leases.” As such, the costs of leasehold improvements, whether provided by the landlord or the Company, are amortized over the shorter of the lease term or the economic life of the improvement. In addition, rent escalations and lease incentives are included with the total commitment under each operating lease to calculate an average occupancy expense, which is recognized on a straight-line basis over the full lease term. Included in occupancy and equipment expenses in 2005 is a $10,064 charge representing the cumulative effect of correcting the recognition period for rent-escalation clauses and lease incentives in certain branch-office leases.

The Company is engaged in a major business process and technology transformation program, the Gateway Initiative, which, when fully developed and implemented, will update the Company’s technology infrastructure, streamline its back-office processing and strengthen its data management capabilities. The Company has currently designated up to $196,200, including internal development costs, to fund this program. Total costs through February 28, 2005, were $165,400, of which $48,200 was capitalized. Significant components of this program are expected to be completed in fiscal year 2006 including migration to an application service provider, which is scheduled to occur in May 2005. Thomson Financial, Inc. (“Thomson”), an application service provider, will provide the software and computer operations that support the Company’s securities processing functions. The Company entered into an 86-month Hosting and Services Agreement with Thomson in October 2004. Under this agreement, which starts upon conversion, minimum payments are $10,000 a year with an expected range of payments between $18,000 and $22,000 a year. While the Company’s migration of its back-office systems to Thomson is intended to better align trade-processing expenses with client transaction activity, the Company intends to maintain certain of its existing back-office systems for a transitional period of approximately 12 to 18 months.

In the normal course of business, Edwards enters into when-issued and underwriting commitments and delayed delivery transactions. Settlement of these transactions at February 28, 2005, would not have had a material effect on the consolidated financial statements.

43

A.G. Edwards, Inc.
Notes to Consolidated Financial Statements (Continued)
(Three years ended February 28, 2005)
(Dollars in thousands, except per share amounts)

11.    Commitments and Contingent Liabilities (Continued)

The Company had outstanding letters of credit of $58,156 at February 28, 2005, and $57,311 at February 29, 2004, principally to satisfy margin deposit requirements with the Options Clearing Corporation.

The Company also provides guarantees to securities clearing houses and exchanges under their standard membership agreements, which require members to guarantee the performance of other members. Under these agreements, if a member becomes unable to satisfy its obligations to the clearing houses and exchanges, all other members would be required to meet any shortfall. The Company’s liability under these agreements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, the potential requirement for the Company to make payments under these agreements is remote. Accordingly, no liability has been recognized for these transactions.

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. Management has determined that it is likely that ultimate resolution in favor of the plaintiffs will result in losses to the Company on certain of these claims and as a result, establishes accruals for potential litigation losses. The Company also is involved, from time to time, in investigations and proceedings by governmental and self-regulatory agencies, certain of which may result in adverse judgments, fines or penalties. Factors considered by management in estimating the Company’s reserves for these matters are the loss and damages sought by the plaintiffs, the merits of the claims, the total cost of defending the litigation, the likelihood of a successful defense against the claims, and the potential for fines and penalties from regulatory agencies. Management, based on its understanding of the facts, reasonably estimates a range of loss and accrues what it considers appropriate to reserve against probable loss for certain claims and regulatory matters. While results of litigation and investigations and proceedings by governmental and self-regulatory agencies or the resulting judgments, fines or penalties cannot be predicted with certainty, management, after consultation with counsel, believes that resolution of all such matters will not have a material adverse effect on the consolidated balance sheet, statement of earnings or statement of cash flows of the Company, except that the Company believes, based on current knowledge and after consulting with counsel, that the impact of the matters concerning mutual funds and related regulatory and litigation matters discussed in the following paragraphs will not be material to the consolidated financial condition of the Company, but could be material to the operating results in one or more periods.

The SEC, the National Association of Securities Dealers, Inc. (“NASD”), the NYSE and other regulators, including several states, have examined or are examining the manner in which mutual funds compensate broker-dealers in connection with the sale of mutual funds. The Company has provided information in connection with related examinations. The Company has received information requests or subpoenas from, been examined by or had employees questioned by the SEC, the NASD, the NYSE, several states and the United States Department of Justice with respect to mutual fund transactions that involve market timing, late trading or both. In addition, the Company has received requests for information concerning timing transactions in variable annuity subaccounts. The Commonwealth of Massachusetts has filed an administrative complaint against the Company alleging violations of securities laws by mutual fund market timing transactions and seeking a cease and desist order, an administrative fine in an unspecified amount, compensation to mutual fund holders for losses alleged to have resulted from market timing or other mutual fund activities.

The Company has been named as a defendant in a lawsuit that seeks class-action status in the state of Missouri that alleges, among other matters, that mutual fund transactions with certain customers were influenced by undisclosed revenue-sharing payments.

The NASD has advised the Company that it has made a preliminary determination to recommend a disciplinary action against the Company concerning the sale of mutual fund class-B shares and class-C shares based upon, it is believed, the grounds for recommending such sales, suitability violations and the Company’s supervisory procedures. The NASD orally proposed a settlement, including a fine, the offer to customers to switch to class-A

44

A.G. Edwards, Inc.
Notes to Consolidated Financial Statements (Continued)
(Three years ended February 28, 2005)
(Dollars in thousands, except per share amounts)

11.    Commitments and Contingent Liabilities (Continued)

shares and a reimbursement for any disadvantage based on actual performance and the retention of an independent consultant to review supervisory procedures.

The NASD has advised the Company that it has made a preliminary determination to recommend a disciplinary action against the Company concerning the sale of mutual funds to IRA accounts in 2001 and 2002 for which certain mutual fund companies made additional payouts to the Company for sales.

12.     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 consolidated balance sheets.

Customer financing and securities settlement activities generally require the Company to pledge customer securities as collateral in support of various financing sources. In addition, 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 on the consolidated balance sheets.

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 the ability of customers and other counterparties to satisfy their obligations to the Company.

The Company manages its risks associated with the aforementioned transactions through position and credit limits and the continuous monitoring of collateral. Additionally, collateral is requested from customers and other counterparties when appropriate.

The Company receives collateral in connection with resale agreements, securities borrowed transactions, customer margin loans and other loans. Under many agreements, the Company is permitted to sell or repledge these securities held as collateral and use these securities to enter into securities lending arrangements or to deliver to counterparties to cover short positions. At February 28, 2005, the fair value of securities received as collateral where the Company is permitted to sell or repledge the securities was $3,028,428, and the fair value of the collateral that had been sold or repledged was $314,276.

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

45

A.G. Edwards, Inc.
Notes to Consolidated Financial Statements (Continued)
(Three years ended February 28, 2005)
(Dollars in thousands, except per share amounts)

12.    Financial Instruments (Continued)

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 consolidated financial condition or results of operations.

Fair Value Consideration

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.

13.     Enterprise Wide Disclosure

The Company provides investment services to its clients through its financial consultants in its network of branch offices in the United States; London, England; and Geneva, Switzerland. Revenues from the Company’s non-U.S. operations are currently not material. 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, managed future funds, annuities and insurance contracts, and the Company’s in-house portfolio managers. The Company earns interest revenue principally from financing its customer margin accounts, debt securities carried for resale and short-term investments.

The following table presents the Company’s net revenues by type of service for the years ended February 28 (29):

	2005		2004		2003
Transaction services	$	1,559,718	$	1,726,560	$	1,472,348
Asset management services		821,795		613,678		562,523
Interest, net		124,629		93,273		100,813
Other		101,539		89,306		78,668
	$	2,607,681	$	2,522,817	$	2,214,352

 

*    *    *    *    *

46

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.

None.

ITEM 9A.     CONTROLS AND PROCEDURES.

As of the end of the period covered by this report, the Company evaluated the effectiveness of the design and operation of its “disclosure controls and procedures” (“Disclosure Controls”). This evaluation (the “Controls Evaluation”) was performed under the supervision and with the participation of management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).

Disclosure Controls are controls and other procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s (the “SEC”) rules and forms. Disclosure Controls are also designed to ensure that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. The Disclosure Controls include components of the Company’s internal control over financial reporting, which consist of control processes designed to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of financial statements in conformity with generally accepted accounting principles in the U.S. To the extent that components of the Company’s internal control over financial reporting are included within the Company’s Disclosure Controls, they are included in the scope of the Company’s quarterly Controls Evaluation.

The Company’s management, including the CEO and CFO, does not expect that the Disclosure Controls or the Company’s internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

The Controls Evaluation included a review of the controls’ objectives and design, the Company’s implementation of the controls, and the effect of the controls on the information generated for use in this Annual Report. In the course of the Controls Evaluation, management sought to identify data errors, controls problems or acts of fraud and confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning controls effectiveness can be reported in the Company’s Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. Many of the components of the Company’s Disclosure Controls are also evaluated on an ongoing basis by the Internal Audit Department and by other personnel of the Company who evaluate them in connection with determining their auditing procedures. The overall goals of these various evaluation activities are to monitor Disclosure Controls and to modify them as necessary. The Company intends to maintain the Disclosure Controls as dynamic systems that change as conditions warrant.

Based upon the Controls Evaluation, the CEO and CFO have concluded that, subject to the limitations noted above, as of the end of the period covered by this Annual Report, the Disclosure Controls were effective to ensure that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that material information relating to the Company and its consolidated subsidiaries required to be disclosed in such reports is

47

made known to management, including the CEO and CFO, particularly during the period when the periodic reports are being prepared.

The report called for by Item 308(a) of Regulation S-K is incorporated herein by reference to Management’s Report on Internal Control Over Financial Reporting, included in Item 8 of this Form 10-K.

The attestation report called for by Item 308(b) of Regulation S-K is incorporated herein by reference to the Report of Independent Registered Public Accounting Firm, included in Item 8 of this Form 10-K.

During the quarter ended February 28, 2005, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B.     OTHER INFORMATION

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” in the Company’s 2005 Proxy Statement and under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s 2005 Proxy Statement, and such information is hereby incorporated by reference, and in Part I of this Form’s 10-K under the caption “Executive Officers of the Company.”

Information relating to the Board of Directors’ determination regarding the service of an audit committee financial expert on the Board’s Audit Committee and the name and the determination by the Board of the independence of such expert are set forth under the captions “Committees and Meetings of the Board of Directors—Audit Committee,” and is hereby incorporated by reference. Information relating to the identity of the members of the Board’s Audit Committee is also set forth under this caption and is hereby incorporated by reference. The information regarding the procedures by which shareholders may recommend nominees to the Board of Directors is set forth in the Company’s Proxy Statement under the caption titled “Stockholder Proposals.” The “Nominating and Corporate Governance Committee Charter” is available on the Company’s Web site at www.agedwards.com and may be accessed by entering the Company’s Web site and clicking the “About A.G. Edwards” link, then the “Corporate Governance” link.

The Company’s Code of Ethical Conduct (“Code”) and Corporate Governance Guidelines (“Guidelines”) set forth the fundamental principles and key policies and procedures that govern the conduct of all of the Company’s directors, officers and employees. Additionally, the Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, Controller, Director of Regulatory Accounting and Director of Tax (“Senior Financial Officers”) are required to conduct their personal and professional affairs in a manner that is consistent with the ethical and professional standards set forth in the Company’s Financial Code of Ethical Conduct (“Financial Code”). In 2004, the Board of Directors adopted the Financial Code that was designated as the Company’s code of ethics for Senior Financial Officers in performing their duties. A copy of the Code and the Financial Code were filed as exhibits 14.1 and 14.2, respectively, in the Company’s Annual Report on Form 10-K for the 2004 fiscal year. The Company will post on its Web site any amendments to the Code, Financial Code and/or Guidelines and any waivers that are required to be disclosed by the rules of the SEC or NYSE.

The Company has included as exhibits to this Annual Report on Form 10-K for the 2005 fiscal year filed with the SEC certificates of its Chief Executive Officer and Chief Financial Officer certifying the quality of the Company’s public disclosure. The Company submitted to the New York Stock Exchange as of June 28, 2004, a certification made by its Chief Executive Officer that he is not aware of any violation by the Company of their corporate governance listing standards.

ITEM 11.     EXECUTIVE COMPENSATION

The information required by this item is included under the captions titled “Director Compensation,” and “Executive Compensation,“ in the Company’s 2005 Proxy Statement. Such information is hereby incorporated by reference.

48

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by this item is contained in the Company’s 2005 Proxy Statement under the caption “Ownership of the Company’s Common Stock.” Such information is hereby incorporated by reference.

The following table summarizes information about the equity compensation plans at February 28, 2005:

	(a)		(b)		(c)
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders (1):
Incentive Stock Plan		4,764,000	$	37.08		3,971,851
Employee Stock Purchase Plan						4,020,908	(*)
Equity compensation plans not approved by security holders:
Non Employee Director Stock Compensation Plan (2)		None		N/A		5,027
Total		4,764,000				7,997,786

 

(*) Includes 1,515,445 shares authorized to be purchased under the 2002 Employee Stock Purchase Plan.

(1) The 1988 Incentive Stock Plan and the 2002 Employee Stock Purchase Plan were approved by shareholders.

(2) The Company has one plan that was not submitted for approval by the shareholders, the Non Employee Director Stock Compensation Plan. This plan provides that one half of the estimated annual compensation, as defined, for each non employee director shall be awarded in Common Stock with the value of the stock based on the market price on July 1 of the fiscal year in which the compensation is earned. This plan is being submitted for shareholder approval at the Annual Meeting of Shareholders on June 23, 2005.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item is contained in the Company’s 2005 Proxy Statement under the caption titled “Certain Transactions.” Such information is hereby incorporated by reference.

ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by this item is contained in the Company’s 2005 Proxy Statement under the captions titled “Pre-Approval of Services Provided by the Company’s Independent Registered Public Accounting Firm” and “Principal Accounting Firm Fees.” Such information is hereby incorporated by reference.

49

PART IV

ITEM 15.     EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

	INDEX	PAGE NUMBER
(a)  1.	Financial Statements
	Management’s Report on Internal Control Over Financial Reporting		25
	Reports of Independent Registered Public Accounting Firm		26
	Consolidated balance sheets		28
	Consolidated statements of earnings		29
	Consolidated statements of stockholders’ equity		30
	Consolidated statements of cash flows		31
	Notes to consolidated financial statements		32
2.	Financial Statement Schedules
	Schedule II — Valuation and Qualifying Accounts		54

 

All other 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, as amended by the Certificate of Amendment of Certificate of Incorporation filed as Exhibit 3(i)(a) to the Registrant’s Form 10-Q for the quarter ended May 31, 1998.
3(ii)	By laws, as amended, 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 (the “Rights Agreement”) filed as Exhibit 4 to the Registrant’s Form 8-K Report dated December 30, 1988.
4(iv)	Amendment No. 1 to the Rights Agreement dated May 24, 1991, filed as Exhibit 4(iv) to Registrant’s Form 10-K for the fiscal year ended February 29, 1992.
4(v)	Amendment No. 2 to the Rights Agreement dated June 22, 1995, filed with the Registrant’s Form 8-A/A (Amendment No. 1) on July 12, 1995.
4(vi)	Amendment No. 3 to the Rights Agreement dated July 11, 1997, filed as Exhibit 4(vi) to Registrant’s Form 10-K for the fiscal year ended February 28, 1998.
4(vii)	Amendment No. 4 dated December 15, 2000, to the Rights Agreement filed as Exhibit 4(vii) to Registrant’s Form 8-A/A (Amendment No. 2) on December 19, 2000.
10.1	A.G. Edwards, Inc. 1988 Incentive Stock Plan (as amended and restated) filed as Exhibit 10.3 to Registrant’s Form 8-K dated March 1, 2005.**

50

10.2	A.G. Edwards, Inc. Non Employee Director Stock Compensation Plan (as amended and restated) filed as Exhibit 10 to Registrant’s Form 10-Q for the fiscal quarter ended November 30, 2003.**
10.3	A. G. Edwards, Inc. Retirement and Profit Sharing Plan filed as Exhibit 10.3 to this Form 10-K.**
10.4	A.G. Edwards, Inc. Corporate Executive Bonus Plan filed as Exhibit 10.4 to this Form 10-K.**
10.5	A.G. Edwards, Inc. 2004 Performance Plan for Executives filed as Exhibit 10.5 to Registrant’s Form 8-K dated March 1, 2005.**
10.6	A.G. Edwards, Inc. Excess Profit Sharing Plan filed as Exhibit 10.4 to Registrant’s Form 8-K dated March 1, 2005.**
11	Computation of per share earnings is set forth in Note 10 (Stockholders’ Equity) of the Notes to Consolidated Financial Statements under the caption “Earnings Per Share” in this Form 10-K.
14.1	A.G. Edwards, Inc. Code of Ethical Conduct filed as Exhibit 14.1 to Registrant’s Form 10-K for the fiscal year ended February 29, 2004.
14.2	A.G. Edwards, Inc. Financial Code of Ethical Conduct filed as Exhibit 14.2 to Registrant’s Form 10-K for the fiscal year ended February 29, 2004.
21	Registrant’s Subsidiaries.
23	Consent of Independent Registered Public Accounting Firm.
24	Power of Attorney (included on the signature page of this Form 10-K).
31(i)(a)	Principal Executive Officer Certification as required by Rule 13a-14(a)/15d-14(a).
31(i)(b)	Principal Financial Officer Certification as required by Rule 13a-14(a)/15d-14(a).
32(i)(a)	Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(i)(b)	Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Numbers correspond to document numbers in the Exhibit Table of Item 601 of Regulation S-K.

** Compensatory plan or arrangement under which executive officers or directors of the Company may participate.

51

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 4, 2005

By   /s/ Robert L. BagbyRobert L. Bagby
Chairman of the Board, President and
Chief Executive Officer

52

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert L. Bagby, and Douglas L. Kelly 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/ Robert L. Bagby Robert L. Bagby	Chairman of the Board, President and Chief Executive Officer	May 4, 2005
/s/ Ronald J. Kessler Ronald J. Kessler	Vice Chairman of the Board	May 4, 2005
/s/ Dr. E. Eugene Carter Dr. E. Eugene Carter	Director	May 4, 2005
/s/ Vicki B. Escarra Vicki B. Escarra	Director	May 4, 2005
/s/ Samuel C. Hutchinson Jr. Samuel C. Hutchinson Jr.	Director	May 4, 2005
/s/ Peter B. Madoff Peter B. Madoff	Director	May 4, 2005
/s/ Mark S. Wrighton Mark S. Wrighton	Director	May 4, 2005
/s/ Douglas L. Kelly Douglas L. Kelly	Treasurer, Chief Financial Officer and Secretary	May 4, 2005
/s/ Thomas H. Martin Jr. Thomas H. Martin Jr.	Controller	May 4, 2005
/s/ Joseph G. Porter Joseph G. Porter	Principal Accounting Officer	May 4, 2005

 

53

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

A.G. EDWARDS, INC.
(Dollars in thousands)

Description	Balance at Beginning of Period		Additions Charged to Costs and Expenses		Deductions*		Balance at End of Period
Year ended February 28, 2005, Deducted from asset account:
Allowance for doubtful accounts	$	45,593	$	2,262	$	39,810	$	8,045
Year ended February 29, 2004, Deducted from asset account:
Allowance for doubtful accounts	$	44,508	$	1,490	$	405	$	45,593
Year ended February 28, 2003, Deducted from asset account:
Allowance for doubtful accounts	$	38,214	$	9,661	$	3,367	$	44,508

 

(*) Write-offs net of recoveries.

54

EXHIBIT INDEX

Exhibit	Description
10.3	A. G. Edwards, Inc. 2002 Retirement and Profit Sharing Plan (available upon request)
10.4	A. G. Edwards, Inc. Corporate Executive Bonus Plan (as amended and restated) (available upon request)
21	Registrant’s Subsidiaries
23	Consent of Independent Registered Public Accounting Firm
24	Power of Attorney (included on signature page of this Form 10-K)
31(i)(a)	Principal Executive Officer Certification as required by Rule 13a-14(a)/15d-14(a)
31(i)(b)	Principal Financial Officer Certification as required by Rule 13a-14(a)/15d-14(a)
32(i)(a)	Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32(i)(b)	Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

55

EX-10.3

EXHIBIT 10.3

A.G. EDWARDS, INC.
RETIREMENT AND PROFIT SHARING PLAN
2002 Restatement

A.G. EDWARDS, INC.
RETIREMENT AND PROFIT SHARING PLAN
2002 Restatement

Table of Contents

	Page
HISTORY OF THE PLAN		1
ARTICLE I — STATEMENT OF PURPOSE		2
ARTICLE II — EFFECTIVE DATE		2
2.1  Effective Date of Plan		2
2.2  Effective Date of Amendment		2
2.3  Structure and Type of Plan		2
ARTICLE III — DEFINITIONS		2
3.1  Affiliate		2
3.2  Annuity Starting Date		2
3.3  Basic Compensation		2
3.4  Beneficiary		2
3.5  Code		2
3.6  Compensation		2
3.7  Controlled Group		2
3.8  Covered Compensation		3
3.9  Covered Service		3
3.10  Deductible Contributions		3
3.11  Eligible Spouse		3
3.12  Employee		3
3.13  Employer		3
3.14  Employer Contributions		3
3.15  Employer Stock Fund		3
3.16  ERISA		3
3.17  ESOP Stock Account		3
3.18  Excess Compensation		3
3.19  Fiscal Year		3
3.20  Highly Compensated Employee		3
3.21  Leased Employee		3
3.22  Named Fiduciary		4
3.23  Non-Resident Alien		4
3.24  Normal Retirement Age		4
3.25  Participant		4
3.26  Plan		4
3.27  Plan Administrator		4
3.28  Plan Year		4
3.29  Predecessor Plan		4
3.30  Sponsor		4
3.31  Termination of Employment		4

i

	Page
3.32  Trust Agreement		4
3.33  Trust or Fund		4
3.34  Trustee		4
3.35  Total Disability		4
ARTICLE IV — SERVICE		4
4.1  Period of Service		4
4.2  Service Definitions		5
4.3  Absence in Military Service		5
4.4  Maternity Absence		5
4.5  Creditation of Years of Service		5
4.6  Transitional Rule		5
ARTICLE V — PARTICIPATION		6
5.1  Eligibility Date: General Rule		6
5.2  Rehired Former Employee		6
5.3  Election Not to Participate		6
5.4  Transfer to Uncovered Service		6
ARTICLE VI — CONTRIBUTIONS		6
6.1  Deductible Employee Contributions		6
6.2  Limitation on Amount of Deferrals		6
6.3  Required Employer Non-matching Contributions		7
6.4  Discretionary Employer Non-matching Contributions		7
6.5  Form of Contributions		7
6.6  Limits on Contributions		8
6.7  Correction of Excess Contributions		8
6.8  Correction of Excess Matching Contributions		9
6.9  Exclusive Benefit of Participants		9
6.10  Return of Employer Contributions		9
6.11  Allocation of Contributions Among Employers		9
6.12  Rollover Contributions		10
6.13  Make-Up Allocations		10
ARTICLE VII — INDIVIDUAL ACCOUNTS		10
7.1  Employee Accounts		10
7.2  Firm Accounts		10
7.3  Rollover Accounts		10
7.4  Allocation of Required Employer Non-matching Contribution		10
7.5  Allocation of Discretionary Employer Non-matching Contribution		11
7.6  Limitation on Maximum Contributions		11
ARTICLE VIII — INVESTMENT OF FUNDS		12
8.1  Directed Accounts		12
8.2  Permissible Investments		12
8.3  Manner of Direction		12
8.4  Investment of Contributions		12
8.5  Change of Investments		13

ii

	Page
8.6  Charges to Accounts		13
8.7  Investment of Transferred Assets		13
8.8  Investment of Death Benefits		13
8.9  Investments in Treasury Zeros		13
8.10  Loans from Rollover Accounts		14
ARTICLE IX — VALUATION OF ACCOUNTS		15
9.1  Valuation of Fund		15
9.2  Value of Participants’ Benefits		15
ARTICLE X — VESTING		15
10.1  General Rule		15
10.2  Fully Vested Accounts		16
10.3  Change in Control		16
ARTICLE XI — FORFEITURES		16
11.1  Reduction of Employer Contribution		16
11.2  Allocation of Forfeitures		17
11.3  Forfeiture Restoration		17
ARTICLE XII — WITHDRAWALS DURING EMPLOYMENT		17
12.1  Right of Withdrawal—Employee Account		17
12.2  Senior Employee Withdrawal Option		17
12.3  Withdrawal of A.G. Edwards, Inc. Vested Dividends		17
ARTICLE XIII — WITHDRAWALS AFTER EMPLOYMENT		18
13.1  Withdrawals After Employment		18
ARTICLE XIV — PAYMENT OF BENEFITS		18
14.1  Disability and Fully Vested Over Age 59-1/2		18
14.2  Fully Vested Under Age 59-1/2		18
14.3  Partially Vested		18
14.4  Time of Payment		19
14.5  Form of Payment		19
14.6  Forfeitures		19
14.7  Accounts of Former Employees		19
14.8  Direct Rollover of Eligible Rollover Distributions		19
14.9  Protected Options		20
ARTICLE XV — PAYMENT OF DEATH BENEFITS		20
15.1  Death Benefits		20
15.2  Form of Payment		20
15.3  Designation of Beneficiary		21
15.4  Failure to Designate		21
15.5  Renunciation of Death Benefit		21
15.6  Minor Beneficiaries		21
15.7  Transitional Designation		21
15.8  Distribution of Annuity Contracts		22

iii

	Page
ARTICLE XVI — LATEST TIME OF PAYMENT		22
16.1  60 Day Rule		22
16.2  Latest Time for Payment		22
ARTICLE XVII — CLAIMS AND REVIEW PROCEDURE		23
17.1  Claims for Benefits		23
17.2  Written Denials of Claims		23
17.3  Time of Denial		23
17.4  Review of Denial		23
17.5  Review Decisions		24
ARTICLE XVIII — ADMINISTRATION		24
18.1  Plan Administrator		24
18.2  Allocation of Fiduciary Duties		24
18.3  Furnish Information		24
18.4  Appointment of Administrators		24
18.5  Compensation of Fiduciaries		24
18.6  Expenses of Administration		24
18.7  Delegation of Authority		25
18.8  Standard of Review		25
ARTICLE XIX — TRUST AGREEMENT		25
19.1  Trust Agreement		25
ARTICLE XX — AMENDMENT AND TERMINATION		25
20.1  Amendment		25
20.2  Termination		25
ARTICLE XXI — MISCELLANEOUS		25
21.1  Anti-Assignation		25
21.2  Rights of Employees		26
21.3  Source of Benefits		26
21.4  Actions by Corporation		26
21.5  Rules of Construction		26
21.6  Payments to Legal Incompetents		26
21.7  Plan Mergers		26
21.8  Missing Participants		26
21.9  Payments Under a Qualified Domestic Relations Order		27
21.10  Adoption of Plan by an Affiliate		28
21.11  Acceptance of Transfers		28
ARTICLE XXII — TOP-HEAVY REQUIREMENTS		28
22.1  Top-Heavy Determination		28
22.2  Determination Date		28
22.3  Valuation of Fund as of Determination Date		28
22.4  Key Employee		28
22.5  Vesting Requirements		28
22.6  Minimum Benefits		29
22.7  EGTRRA Amendments		29

iv

	Page
ARTICLE XXIII — SPECIAL ESOP PROVISIONS		30
23.1  Share Purchase Loans		30
23.2  Release from Loan Suspense Account		30
23.3  Use of Loan Proceeds and Dividends		30
23.4  Allocation of Shares Released From Suspense Account		31
23.5  Separate Accounting for Multiple Loans		31
23.6  Valuation		31
23.7  Nonallocation Provision		31
23.8  Latest Time of Payment for Company Stock		32

 

v

A.G. EDWARDS, INC.
RETIREMENT AND PROFIT SHARING PLAN

2002 Restatement

HISTORY OF THE PLAN

As of September 30, 1967, A.G. Edwards & Sons, Inc. and the limited partnership A.G. Edwards & Sons adopted an Amendment to the Trust Agreements which had established the Profit Sharing Plans “A” and “B” of the Partnership which provided, among other things, for the consolidation of such existing separate Profit Sharing Plans of the Partnership into a single Profit Sharing Plan of A.G. Edwards & Sons, Inc. as the successor to the Partnership. Under an Agreement dated July 5, 1972, A.G. Edwards & Sons, Inc. adopted the A.G. Edwards & Sons, Inc. Estate Accumulation Plan. A.G. Edwards & Sons, Inc. replaced the A.G. Edwards & Sons, Inc. Profit Sharing Plan and the A.G. Edwards & Sons, Inc. Estate Accumulation Plan by consolidating such plans as amended into a new Retirement and Profit Sharing Plan (the “Plan”) effective as of January 1, 1978.

The Plan was amended by a First Amendment adopted December 27, 1977, a Second Amendment adopted March 30, 1978, a Third Amendment adopted August 1, 1978, a Fourth Amendment adopted December 26, 1978, and a Fifth Amendment adopted November 27, 1979.

The Plan was amended and completely restated effective January 1, 1980, and was amended by a First Amendment dated June 18, 1981, and a Second Amendment dated October 18, 1983; and was amended and completely restated effective January 1, 1984.

The Plan was amended and completely restated effective January 1, 1985, and was amended by a First Amendment dated July 8, 1986, a Second Amendment dated November 21, 1986, a Special Amendment adopted September 24, 1987, and a Special Amendment adopted October 28, 1987.

The Plan was amended and completely restated effective January 1, 1987, and was later amended by the 1989 Withdrawal Amendment.

The Plan was amended and completely restated effective January 1, 1989, to comply with the Tax Reform Act of 1986.

The Plan was amended and completely restated effective January 1, 1990, to expand investment options.

The Plan was amended and completely restated effective January 1, 1991, and was amended by a First Amendment dated August 26, 1992.

The Plan was amended and completely restated effective January 1, 1993, to change investment provisions and update the Plan to conform to changes in the law. The 1993 Restatement was amended by a First Amendment dated December 24, 1994, and a Second Amendment dated November 20, 1995.

The Plan was amended and completely restated effective January 1, 1997, to make numerous changes related to the change to a daily valuation system and other plan design changes.

The Plan was amended and completely restated effective January 1, 1998 to provide for the conversion of the Plan from a profit sharing plan only to a money purchase pension plan and a profit sharing plan for purposes of Section 401(a) of the Internal Revenue Code of 1986 effective at a designated future date, and to make other technical changes. Because of a change in the tax law, the money purchase pension plan features were never implemented.

A.G. Edwards, Inc. now wishes to amend and completely restate the Plan to remove the inactivated money purchase plan features, to accelerate the eligibility waiting period, and to make design changes reflecting recent changes in the tax law.

NOW, THEREFORE, the A.G. Edwards, Inc. Retirement and Profit Sharing Plan is hereby amended and completely restated in the form of the following instrument, which is referred to as the “2002 Restatement.”

1

ARTICLE I — STATEMENT OF PURPOSE

The Plan set forth herein is intended to provide a means whereby the Employer, through a base contribution and sharing its profits with its qualified Employees on a deferred basis, may encourage them to establish a regular method of savings and thereby create a fund available for their use at retirement or in the event of disability. It is intended that the Plan shall qualify as a profit sharing plan with a cash or deferred 401(k) feature under Section 401 of the Code and as an Employee Stock Ownership Plan as defined in Section 4975(e)(7) of the Code.

ARTICLE II — EFFECTIVE DATE

2.1  Effective Date of Plan. Except as otherwise explicitly provided in the Plan, the rights and benefits, if any, of each Participant shall be determined pursuant to the provisions of the Plan or Predecessor Plan as in effect on the date of the applicable event.

2.2  Effective Date of Amendment. The amendments made by this 2002 Restatement generally are effective January 1, 2002, except as otherwise explicitly provided in the Plan.

2.3  Structure and Type of Plan. Effective on and after January 1, 2002, amounts invested in the Employer Stock Fund shall constitute an Employee Stock Ownership Plan as defined in Section 4975(e)(7) of the Code. The Employee Stock Ownership Plan is designed to invest primarily in the common stock of A.G. Edwards, Inc. Amounts invested in Treasury Zeros and all other funds, including the equity funds, shall constitute a profit sharing plan under Section 401 of the Code.

ARTICLE III — DEFINITIONS

3.1  Affiliate means (l) any corporation or other business entity that from time to time is, along with A.G. Edwards, Inc., a member of a controlled group of businesses (as defined in Section 414 of the Code) and (2) any other corporation that adopts this Plan with the approval of the Board of Directors of A.G. Edwards, Inc. and maintains this Plan for the benefit of its Employees. A business entity is an Affiliate only while a member of such group.

3.2  Annuity Starting Date means the first day on which payment of an account balance of a Participant is actually made.

3.3  Basic Compensation means the Compensation (as defined in Section 3.6) for Covered Service of an Employee for a Plan Year regardless of whether the Participant has an election in effect to make Deductible Employee Contributions when such Compensation is earned or paid, excluding the Excess Compensation of such Employee for such year.

3.4  Beneficiary means the person or persons designated as such by a Participant in accordance with the Plan.

3.5  Code means the Internal Revenue Code of 1986. Reference to a section of the Code shall include that section and any comparable section or sections of any future legislation that amends, supplements or supersedes said section.

3.6  Compensation means, except as provided in the following sentence, the total amount paid to an Employee during a Plan Year by an Employer in the form of salary, commissions, overtime pay, finder’s fees and bonuses (including corporate executive bonus, merit bonus, institutional bonus, branch manager’s bonus or total production bonus); plus the amount of salary reduction as a result of an election pursuant to a plan or plans governed by Section 401(k), Section 132(f)(4) or Section 125 of the Code. Notwithstanding the above, Compensation shall not include: (1) amounts attributable to other sources such as, for example, contest awards, reimbursement of moving expenses, life insurance premiums, tuition reimbursements, and amounts attributable to stock options or restricted stock; or (2) any payment characterized as deferred compensation for purposes of Section 404 of the Code (either when earned or when paid).

Compensation of each Participant taken into account under the Plan shall in no event exceed the amount specified in Section 401(a)(17) of the Code as adjusted by the Commissioner for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code ($200,000 for 2002).

3.7  Controlled Group means the Sponsor and each Affiliate.

2

3.8  Covered Compensation means Compensation paid for Covered Service to a Participant during such time period with respect to which the Participant has an election in effect to make Deductible Employee Contributions pursuant to Section 6.1, regardless of whether Deductible Employee Contributions have been discontinued during such period because of the dollar limitation in accordance with Section 6.2.

3.9  Covered Service means service performed by an Employee while classified by an Employer as an employee of the Employer for purposes of this Plan (regardless of classification for other purposes, such as a retroactive classification as an employee for payroll tax purposes), other than service as a temporary employee. A temporary Employee is any Employee hired by an Employer for a limited period of time and classified by the Employer as a temporary employee in accordance with the employment policies of the Employer. Service as a non-employee contract worker and service as a Leased Employee is not Covered Service. Service as a Non-Resident Alien is not Covered Service.

3.10  Deductible Employee Contributions means before-tax contributions made by the Employer on behalf of a Participant in accordance with Section 6.1 as a result of a salary reduction election.

3.11  Eligible Spouse means the person to whom a Participant is lawfully married at the Participant’s Annuity Starting Date. Eligible Surviving Spouse, in the case of a Participant who dies before such time, means the person to whom the Participant is lawfully married on the date of death of the Participant, provided that a former spouse shall be treated as the Eligible Spouse or the Eligible Surviving Spouse to the extent provided under a qualified domestic relations order, as defined in Section 414(p) of the Code.

3.12  Employee means any individual who is employed by a member of the Controlled Group. Any Leased Employee shall also be treated as an Employee, but service as a Leased Employee is not Covered Service.

3.13  Employer means A.G. Edwards, Inc., a Delaware corporation and any Affiliate that is not a “foreign” entity, as defined in Section 7701 of the Code. An Affiliate that makes contributions to the Plan on behalf of its eligible Employees shall be deemed to have adopted the Plan. An Affiliate that is an Employer consents to all future amendments to the Plan by the Sponsor, agrees to make contributions to the Plan for its Employees in Covered Service in accordance with the terms of the Plan, and agrees to all interpretations and actions of the Plan Administrator.

3.14  Employer Contributions means contributions to the Trust by an Employer from an Employer’s funds in accordance with the Plan, but shall not include Deductible Employee Contributions.

3.15  Employer Stock Fund means a fund the assets of which are invested primarily in the common stock of the Sponsor.

3.16  ERISA means the Employee Retirement Income Security Act of 1974, as amended. Reference to a section of ERISA shall include that section and any comparable section or sections of any future legislation that amends, supplements or supersedes said section.

3.17  ESOP Stock Account means the portion, if any, of the Accounts of a Participant, expressed in shares of common stock of A.G. Edwards, Inc., from time to time invested in the Employer Stock Fund.

3.18  Excess Compensation means, with respect to each Plan Year, the total Compensation for Covered Service of an Employee for a Plan Year, regardless of whether the Participant has an election in effect to make Deductible Employee Contributions when such Compensation is earned or paid, in excess of the maximum amount which, with respect to said year, may be considered wages under Section 3121(a)(1) of the Code (Social Security wage base) paid to an Employee during said Plan Year.

3.19  Fiscal Year means the accounting year of an Employer for federal income tax purposes.

3.20  Highly Compensated Employee means a Highly Compensated Employee as defined in Section 414(q) of the Code and the regulations thereunder, including the rules limiting Highly Compensated Employees to the top-paid twenty percent (20%).

3.21  Leased Employee means any individual other than a common law employee, who pursuant to an agreement between any member of the Controlled Group and any other person, has performed services for such member, or for any person related to the member, as defined in Section 414(n)(6) of the Code, on a substantially

3

full-time basis for a period of at least one year and such services are performed under the primary direction or control of such member. An individual who becomes a Leased Employee (determined without regard to the one year service requirement) shall be deemed to be an Employee for the purpose of eligibility to participate and vesting at the time the individual first begins performing services for a member of the Controlled Group. An individual covered by a money purchase pension plan providing a non-integrated employer contribution of at least ten percent (10%) of compensation, immediate participation and full and immediate vesting, as defined in Section 414(n)(5) of the Code shall not be treated as a Leased Employee, provided that Leased Employees (determined without regard to this sentence) do not constitute more than twenty percent (20%) of the recipient’s non-Highly Compensated work force.

3.22  Named Fiduciary means the Plan Administrator named in accordance with Article XVIII.

3.23  Non-Resident Alien means an individual who is neither a citizen of the United States nor a resident of the United States, as defined in Section 7701 of the Code.

3.24  Normal Retirement Age means sixty-five (65) years of age.

3.25  Participant means any Employee who has reached his Eligibility Date, as defined in Section 5.1, and any former Employee who has an amount credited to his account in accordance with the Plan. Except for purposes of eligibility for contributions in accordance with Article VI, such term also includes an individual who has an amount credited to his account on account of a rollover from another plan pursuant to Section 6.12 or on account of a transfer from another plan pursuant to Section 21.11.

3.26  Plan means the A.G. Edwards, Inc. Retirement and Profit Sharing Plan as set forth herein and effectuated by the Trust Agreement.

3.27  Plan Administrator means the person named by the Sponsor in accordance with Article XVIII.

3.28  Plan Year means any twelve (12) consecutive month period commencing January l and ending the next following December 31^st.

3.29  Predecessor Plan means the A.G. Edwards & Sons, Inc. Profit Sharing Plan as amended from time to time up to December 31, 1977, the A.G. Edwards & Sons, Inc. Estate Accumulation Plan, as amended from time to time up to December 31, 1977; or both.

3.30  Sponsor means A.G. Edwards, Inc.

3.31  Termination of Employment means severance from employment with the Controlled Group. Transfer from an Employer to an Affiliate or from an Affiliate to an Employer or from one Affiliate to another Affiliate shall not constitute a Termination of Employment.

3.32  Trust Agreement means the trust agreement or agreements entered into by and between A.G. Edwards & Sons, Inc. or A.G. Edwards, Inc. and the Trustee or Trustees in accordance herewith.

3.33  Trust or Fund means all of the assets held by the Trustee in accordance with the Trust Agreement.

3.34  Trustee means the person or persons from time to time acting as trustee under the Trust Agreement.

3.35  Total Disability means such permanent physical or mental disability as renders a person incapable of continuing to render satisfactory services to an Employer. Whether a person has incurred a Total Disability shall be determined upon the basis of competent medical advice.

ARTICLE IV — SERVICE

4.1  Period of Service. The Period of Service of an Employee means the period of time beginning on an Employment Commencement Date of an Employee and ending on the Severance from Service Date of the Employee that next follows such an Employment Commencement Date. Nonconsecutive Periods of Service shall be aggregated and three-hundred-sixty-five (365) days of service shall equal a whole year of service. If an Employee performs an Hour of Service within twelve (12) months of a Severance from Service Date, the Employee’s Period of Service shall include the time which elapsed between the Severance from Service Date and such date of re-employment.

4

4.2  Service Definitions.

(A) “Employment Commencement Date” shall mean the date the Employee first performs an Hour of Service; provided that, if an Employee incurs a Break in Service of at least one year, the new Employment Commencement Date of the Employee shall be the first day on which the Employee performs an Hour of Service after incurring such a Break in Service.

(B) “Break in Service” means the period following a Severance from Service Date extending until the Employee again completes an Hour of Service.

(C) “Hour of Service” means an hour for which an Employee is paid, or entitled to payment, for the performance of duties for a member of the Controlled Group.

(D) “Severance from Service Date” means the earlier of (1) the date the Employee retires, dies, resigns from or is discharged from a member of the Controlled Group, or (2) the first anniversary of the date on which the Employee begins a period of absence, with or without pay, with the Controlled Group. For purposes of the preceding sentence, the term discharge includes the cessation of membership in the Controlled Group of the employer of the Employee.

(E) “Year of Service” means a Period of Service of one year.

4.3  Absence in Military Service. Effective after December 12, 1994, notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to military service will be provided in accordance with Section 414(u) of Code.

4.4  Maternity Absence. In the event an Employee is absent from work beyond the first anniversary of the date on which the Employee began a period of absence on account of the pregnancy or birth of a child of the Employee, the placement of a child with the Employee in connection with the adoption of the child, or for purposes of caring for a child following such a birth or placement, solely for purposes of determining whether a Break in Service occurs, the Severance from Service Date shall mean the second anniversary of the date the Employee was first absent from work by reason of maternity or paternity as described above.

4.5  Creditation of Years of Service. A Participant shall be credited with all whole Years of Service for purposes of vesting, whether or not such Periods of Service were completed consecutively, except as follows:

(A) With respect to any determination made as of any date after December 31, 1984, which ascertains the Years of Service of a Participant for purposes of vesting, including determinations made with respect to a Participant who terminated employment before January 1, 1985, a Participant’s Years of Service completed after such Participant incurs a Break in Service of at least five consecutive years after a Termination of Employment shall be disregarded for purposes of determining the nonforfeitable percentage of the account balance of such Participant which accrued on or before the date upon which such break in service occurred; and

(B) The Period of Service completed by an Employee before such Employee attains eighteen (18) years of age shall be disregarded (the Employment Commencement Date of such an Employee shall be deemed to be the Employee’s eighteenth birthday).

(C) The Plan Administrator may determine the extent to which prior service with an entity acquired by A.G. Edwards, Inc. or an Affiliate is taken into account for purposes of vesting for Employees employed by such an entity before such an acquisition, on a uniform and nondiscriminatory basis with respect to all such employees of each such entity. Such a determination shall be in writing, and shall be part of this Plan.

4.6  Transitional Rule. An individual who was an Employee on December 31, 1996, (whose service was determined on the basis of completing a requisite number of hours of service, rather than on the basis of elapsed time) shall be credited with the service to which such Employee was entitled under the Plan on the basis of the Plan provisions in effect on December 31, 1996 for the period through December 31, 1996; and for the period beginning January 1, 1997 such Employee shall be credited with service pursuant to this Article as if the Employment Commencement Date of such Employee was January 1, 1997.

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The length of a Break in Service of a Participant who was not an Employee on January 1, 1997, for purposes of a Break in Service that began before such date, shall be determined on the basis of the Break in Service provisions of the Plan in effect at the time of the last Termination of Employment of the Participant prior to January 1, 1997.

An individual who was an Employee on December 31, 1996, shall be deemed to have completed a whole Year of Service in his or her final year of employment if such Employee incurs a Termination of Employment after May 31 of such Plan Year.

ARTICLE V — PARTICIPATION
This Article is effective on and after June 1, 2000

5.1  Eligibility Date: General Rule. The Eligibility Date of an Employee shall be the first day of the first payroll period beginning on or after such Employee completes at least one hour of Covered Service.

5.2  Rehired Former Employee. The Eligibility Date of a rehired former Employee shall be the first day of the first payroll period during which such Employee completes at least one hour of Covered Service.

5.3  Election Not to Participate. An Employee eligible to participate in the Plan pursuant to Article V may elect not to make, or to discontinue making, Deductible Employee Contributions in accordance with procedures established by the Plan Administrator. An Employee who makes such an election shall not be entitled to have Deductible Employee Contributions made on his behalf, nor shall the Employee be entitled to receive any Employer Matching Contributions, for the effective period of the election.

In addition, an Employee may elect not to receive any Employer Non-matching Contributions for a Plan Year by notifying the Plan Administrator in accordance with procedures established by the Plan Administrator.

5.4  Transfer to Uncovered Service. With respect to transfers before June 1, 1998, a Participant who is transferred from Covered Service to uncovered service during a Plan Year shall be eligible to contribute to the Plan for the remainder of that year. A Participant who is not in Covered Service on January 1, 1998 shall be ineligible to contribute to the Plan in accordance with Article VI through May 31, 1998.

With respect to transfers after May 31, 1998, a Participant who is transferred from Covered Service to uncovered service during a Plan Year shall be ineligible to contribute to the Plan beginning on the first day of the first payroll period after such a transfer.

ARTICLE VI — CONTRIBUTIONS

6.1  Deductible Employee Contributions. Subject to the provisions of Article VI and Article VII, each Participant may elect to reduce his or her compensation through uniform payroll deductions and have the Employer contribute to the Plan on his or her behalf an amount expressed in whole percentages up to fifty percent (50%) of his Covered Compensation.

An election to initiate, change or discontinue contributions must be made in accordance with the procedures established by the Plan Administrator. Such procedures shall prescribe the time or times, and the manner, of making such elections, and shall apply to similarly situated participants in a uniform and nondiscriminatory manner.

Effective on and after the date this paragraph is activated by prior written notice to the Participants by the Plan Administrator, a Participant who does not make an affirmative election to the contrary shall be deemed to have elected to make salary reduction contributions of three percent (3%) of his Covered Compensation.

The Employer shall remit all Deductible Employee Contributions withheld from the Compensation of Participants through payroll deductions to the Trustee as soon as practical.

6.2  Limitation on Amount of Deferrals. Subject to the age 50 catch-up contribution exception in the next paragraph, in no event may a Participant contribute more than the amount specified in Section 402(g) of the Code, as adjusted annually for any applicable increases in the cost of living in accordance with Section 415(d) of the Code ($11,000 for 2002). The Plan Administrator in its discretion may from time to time decrease or curtail the percentage of a Participant’s Deductible Employee Contributions in order to comply with the limits imposed by this paragraph

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and to assure that a Participant’s Deductible Employee Contributions shall be withheld approximately ratably throughout the Plan Year.

Participants who are eligible to make Deductible Employee Contributions under this Plan and who have attained age 50 before the close of the Plan Year shall be eligible to make catch-up contributions in accordance with, and subject to the limitations of, Section 414(v) of the Code. Such catch-up contributions shall not be taken into account for purposes of the provisions of the Plan implementing the required limitations of Sections 402(g) and 415 of the Code. The Plan shall not be treated as failing to satisfy the provisions of the Plan implementing the requirements of Section 401(k)(3), 401(k)(11), 401(k)(12), 410(b), or 416 of the Code, as applicable, by reason of the making of such catch-up contributions.

Should an amount in excess of the amounts specified in the first paragraph of this section be contributed to the Plan on behalf of a Participant, not later than the first April 15th following the close of the tax year of the Participant in which such excess amount was contributed, the Plan Administrator may distribute such excess amount (and any income attributable thereto) to the Participant. Any Matching Contribution that was in fact already made on behalf of such a Participant who was a Highly Compensated Employee for the Plan Year for which the Matching Contribution was made that is attributable to the distributed amount shall be forfeited.

6.3  Required Employer Non-matching Contributions. Each Employer shall contribute to the Trust for each Plan Year an amount equal to at least five percent (5%) of the Compensation for Covered Service for a Plan Year, regardless of whether the Participant has an election in effect to make Deductible Employee Contributions when such Compensation is earned or paid, of each Employee of the Employer who is a Participant and who did not incur a Termination of Employment before the last business day of that Plan Year.

Compensation of each Participant taken into account under this Section shall not exceed $170,000 for any Plan Year.

An Employer may pay the Required Employer Non-matching Contributions for a Plan Year to the Trustee after the end of the Plan Year. Amounts contributed for a Plan Year pursuant to this section shall be deemed paid as of the last day of the Plan Year. The Employer shall designate the Plan Year for which each such Required Employer Contribution is made.

6.4  Discretionary Employer Non-matching Contributions. An Employer may, but shall not be required to, contribute to the Trust for a Plan Year an amount, if any, as the Sponsor in its sole discretion shall determine, on behalf of each Participant who was in the employ of an Employer on the last business day of the Plan Year, in addition to the Required Employer Contributions, which the Sponsor shall designate as the “Basic Discretionary Employer Non-matching Contribution” (which shall be allocated solely with respect to Basic Compensation in accordance with Section 7.5). Such Basic Discretionary Employer Non-matching Contributions may be made for a Plan Year without regard to whether the Employer makes any FICA Discretionary Employer Non-matching Contributions for that year.

Subject to Section 7.5, an Employer may, but shall not be required to, contribute to the Trust for a Plan Year an amount, if any, in addition to the Required Employer Contributions, as the Sponsor in its sole discretion shall determine, which the Sponsor shall designate as the “FICA Discretionary Employer Non-matching Contribution” (which shall be allocated solely with respect to Excess Compensation in accordance with Section 7.5). Except as otherwise provided in Section 7.5, such FICA Discretionary Employer Non-matching Contributions may be made for a Plan Year without regard to whether the Employer makes any Basic Discretionary Employer Non-matching Contributions for that year.

Compensation of each Participant taken into account under this Section shall not exceed $170,000 for any Plan Year.

An Employer may pay the Discretionary Employer Non-matching Contributions for a Plan Year to the Trustee after the end of the Plan Year. Amounts contributed for a Plan Year pursuant to this section shall be deemed paid as of the last day of the Plan Year. The Employer shall designate the Plan Year for which each such Discretionary Employer Contribution is made.

6.5  Form of Contributions. Contributions generally shall be in the form of cash. The Sponsor, in its sole discretion, may direct that up to twenty-five percent (25%) of the Employer Non-matching Contributions for a Plan Year be in the form of common stock of A.G. Edwards, Inc.

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6.6  Limits on Contributions. The Deductible Employee Contributions must satisfy the actual deferral percentage test of Section 401(k)(3) of the Code, and the Employer Matching Contributions, if any, shall satisfy the actual contribution percentage test of Section 401(m) of the Code. For this purpose, catch-up contributions described in Section 6.2 are not treated as Deductible Employee Contributions. Sections 401(k)(3) and 401(m) of the Code and the regulations (including regulations issued in the future) thereunder are hereby incorporated by reference. Such tests shall be applied using the prior year testing method.

For purposes of explanation, the actual deferral percentage test (“ADP”) generally provides that the average percentage which the Deductible Employee Contribution constitutes of the testing compensation of highly-compensated Employees may not exceed such an average for the non-Highly Compensated Employees by a multiple of more than 1.25, or alternately, by a multiple of more than 2.0 with a maximum spread of two (2) percentage points. The actual contribution percentage test (“ACP”) of Section 401(m) of the Code provides a similar limitation on the Employer Matching Contributions allocable to the accounts of highly-compensated Employees.

The multiple use test described in Treas. Reg. §1.401(m)-2 shall not apply to Plan Years beginning after December 31, 2001.

Deductible Employee Contributions of Highly Compensated Employees in excess of the amount permitted by the actual deferral percentage test of Section 401(k)(3) of the Code are hereby referred to as “Excess Contributions”; and Employer Matching Contributions allocable to Highly Compensated Employees in excess of the actual contribution percentage test of Section 401(m) of the Code are hereby referred to as “Excess Matching Contributions.”

6.7  Correction of Excess Contributions. Deductible Employee Contributions otherwise classified as Excess Contributions shall be treated as catch-up contributions for Participants eligible to make catch-up contributions in accordance with Section 6.2, subject to the limits of such section.

The Plan Administrator may, in its sole discretion, reduce the amount of Deductible Employee Contributions that any Highly Compensated Employee may contribute for the Plan Year to avoid Excess Contributions.

Alternately, the Employer may, in its sole discretion, make an additional Matching Contribution on behalf of Participants who are non-Highly Compensated Employees up to such an amount that, when allocated to such Participants’ accounts, the resulting allocations will satisfy the actual deferral percentage test. Such additional Matching Contribution shall be allocated to the Participants’ Employee Account as of the last day of the Plan Year for which the contribution was made.

Alternately, the Plan Administrator may, in its sole discretion, specify that a portion of the Employer Matching Contribution allocated to the accounts of non-Highly Compensated Employees be designated as a qualified non-elective contribution to the extent required to satisfy the actual deferral percentage test of Section 401(k) of the Code pursuant to Treas. Reg. §1.401(k)-1(b)(3); provided that, such a designation satisfies the nondiscrimination requirements of Treas. Reg. §§1.401(k) and 1.401(m).

In the event the actual deferral percentage test of Section 401(k) of the Code is not satisfied after application of such correction devices for a Plan Year, the Plan Administrator may, in its sole discretion, direct a refund of the Excess Contributions and income attributable thereto at such times and in such manner as is permitted by the Code and Treasury Regulations. The aggregate dollar amount of such Excess Contributions shall be determined by reducing the percentage of Deductible Employee Contributions of Highly Compensated Employees beginning with the individuals with the highest compensation percentage, all only to the extent necessary to cause the actual deferral ratio to equal the highest permitted actual deferral ratio, in accordance with Treas. Reg. §1.401(k)(f)(2). The aggregate amount so determined shall be distributed to Highly Compensated Employees on the basis of the amount of Deductible Employee Contributions of each such Employee, reducing the highest dollar amount of the respective Highly Compensated Employee as necessary to refund such aggregate amount. After such refunds are made the Plan is treated as meeting the actual deferral percentage test regardless of whether the Plan would satisfy such ADP test if recalculated. Any Matching Contribution that was in fact already made on behalf of such a Participant that is attributable to such a refunded Excess Contribution shall be forfeited. Income attributable to any refund shall be determined in accordance with a method that satisfies Treas. Reg. §1.401(k)-1(f)(4)(ii).

The Plan Administrator, in its sole discretion, may apply the correction devices described in this section in any combination and in any order, except that the Plan must retain Deductible Employee Contributions treated as

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catch-up contributions because they exceed the average deferral percentage test of Section 410(k)(3) of the Code before Excess Contributions may be refunded.

6.8  Correction of Excess Matching Contributions. The Plan Administrator may, in its sole discretion, specify that all or a portion of the Deductible Employee Contributions of non-Highly-Compensated Employees may be treated as an Employer Matching Contribution in accordance with Treas. Reg. §1.401(m)-1(b)(5) to the extent required to satisfy the actual contribution percentage test of Section 401(m) of the Code. Such recharacterized amounts shall remain credited to the Employee Account.

Alternately, the Employer may, in its sole discretion, make an additional Employer Matching Contribution on behalf of Participants who are non-Highly Compensated Employees, which shall be allocated in proportion to their Deductible Employee Contributions, up to an amount necessary to satisfy the actual contribution percentage test of Section 401(m) of the Code.

In the event the actual contribution percentage test of Section 401(m) of the Code is not satisfied after application of such corrective devices for a Plan Year, the Plan Administrator may, in its sole discretion, distribute the Excess Matching Contributions and any income attributable thereto. The aggregate dollar amount of such Excess Matching Contributions shall be determined by reducing the percentage of Employer Matching Contributions, and recharacterized Deductible Employee Contributions, if any, of Highly Compensated Employees beginning with the individuals with the highest compensation percentage, all only to the extent necessary to cause the actual contribution ratio to equal the highest permitted actual contribution ratio, in accordance with Treas. Reg. §1.401(m)-1(e)(2). The aggregate amount so determined shall be distributed to Highly Compensated Employees on the basis of the amount of contribution by each such Employee, reducing the highest dollar amount of the respective Highly Compensated Employee as necessary to refund such aggregate amount. After such refunds are made the Plan is treated as meeting the actual contribution percentage test regardless of whether the Plan would satisfy such ACP test if recalculated. Income attributable to any distribution shall be determined in accordance with a method that satisfies Treas. Reg. §1.401(m)-1(e)(3). Such distributions shall be made within twelve (12) months after the close of the Plan Year for which such Excess Matching Contributions were made and shall be made on the basis of the respective portions of such amounts attributable to each Highly Compensated Participant.

The Plan Administrator, in its sole discretion, may apply the corrective devices described in this section in any combination and in any order.

6.9  Exclusive Benefit of Participants. All contributions under this Plan shall be paid to the Trustee and deposited in the Trust Fund. All assets of the Trust Fund, including investment income, shall be held for the exclusive benefit of Participants and Beneficiaries and shall be used to pay benefits to such persons or to pay administrative expenses of the Plan and Trust Fund and shall not be diverted to or used for any other purpose or revert to or inure to the benefit of any Employer except as provided in Section 6.10.

6.10  Return of Employer Contributions. In the event an Employer Contribution is made by reason of a mistake of fact, the excess of the amount contributed over the amount that would have been contributed had there not occurred a mistake of fact (without earnings attributable to such excess, but after reduction of losses attributable thereto) may be returned to the contributing Employer within one year of such a mistaken payment. For purposes of this section, a contribution which cannot be allocated to the account of a Participant pursuant to Section 7.6 shall be considered to be made because of a mistake of fact. Also, the excess of an amount contributed for a Plan Year over the amount that would have been contributed for such year had there not occurred a mistake in determining the amount deductible for such year under Section 404 of the Code (without earnings attributable to such excess, but after reduction of losses attributable thereto) may be returned to the contributing Employer within one year after disallowance of the deduction. Notwithstanding anything to the contrary in this section, if the return of the amount attributable to a mistaken contribution would cause the balance of an Account of any Participant to be reduced to less than the balance which would have been in the account had the mistaken amount not been contributed, the amount to be returned to the Employer shall be limited to the extent necessary to avoid such a reduction.

6.11  Allocation of Contributions Among Employers. Each of the respective Employers maintaining the Plan shall pay that portion of the total aggregate Employer Contribution (Required and Discretionary) for each Plan Year

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that is allocated to the accounts of the Participants for such year on the basis of the Compensation paid by such Employer. For purposes of this section, each Employer of an Employee concurrently employed by two or more Employers shall be deemed to have paid that portion of the Basic Compensation for a Plan Year and that portion of the Excess Compensation for a Plan Year which the total Compensation paid to such Employee for such year by such Employer bears to the total aggregate Compensation paid to such Employee for that year by all Employers.

The amount payable by each Employer shall be paid directly to the Trustee by such Employer or to the Sponsor as reimbursement to the Sponsor for contributions paid to the Trustee by the Sponsor on behalf of such Employer acting as agent for such Employer.

6.12  Rollover Contributions. The Trustee, in the sole discretion of the Plan Administrator in each case, may accept from an Employee rollover contributions or direct rollovers of distributions made after December 31, 2001, from the types of plans as follows: a qualified plan described in Section 401(a) or 403(a) of the Code; an annuity contract described in Section 403(b) of the Code; or an eligible plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state. The Trustee, in the sole discretion of the Plan Administrator in each case, also may accept a rollover contribution of the portion of a distribution from an individual retirement account or annuity described in Section 408(a) or 408(b) of the Code that is eligible to be rolled over and would otherwise be includible in gross income.

A separate Rollover Account shall be established for each such contribution, which shall be treated in accordance with the provisions of this Plan governing Employee Accounts; except that a Participant may, upon notice received by the Plan Administrator (in a form suitable to the Plan Administrator), withdraw all or any portion of the assets held in such a Rollover Account without incurring any penalty under the Plan. If a rollover contribution is made by an Employee who is not a Participant in this Plan, such Employee shall be treated as a Participant solely for purposes of such account. In the event an amount contributed to this Plan pursuant to this section shall be determined not to qualify as a rollover contribution as defined above, the balance credited to such Rollover Account shall be distributed to the Employee who made the contribution thereto.

6.13  Make-Up Allocations. In the event that a Participant who shall have been entitled under the terms of this Plan to an allocation of Deductible Employee Contributions or of Employer Contributions to his account for a prior Plan Year was denied or failed to receive such an allocation, and it is subsequently demonstrated or discovered that such Participant shall have been entitled to such an allocation, at the direction of the Plan Administrator, in addition to the regular contribution for the Plan Year, the Employer shall contribute an amount equal to the amount of the allocation to which Participant was otherwise entitled but failed to receive for the prior year and such amount shall be allocated to the appropriate account of such Participant.

ARTICLE VII — INDIVIDUAL ACCOUNTS

7.1  Employee Accounts. The Plan Administrator shall establish on the books of the Plan a separate account (“Employee Account”) for each Participant who prior to January 1, 1987, made an after-tax Employee Contribution and for each Participant who on or after January 1, 1987, made Deductible Employee Contributions, to which such contributions and any income, loss, appreciation and depreciation attributable thereto shall be credited.

7.2  Firm Accounts. The Plan Administrator shall also establish on the books of the Plan a separate account (“Firm Account”) for each Participant to which his share of an Employer’s Contributions and any income, loss, appreciation and depreciation attributable thereto shall be credited.

7.3  Rollover Accounts. The Plan Administrator shall also establish on the books of the Plan a separate account (“Rollover Account”) for each Participant who shall have made a rollover contribution to the Plan in accordance with Section 6.12, to which such contribution and all income, loss, appreciation and depreciation shall be credited.

7.4  Allocation of Required Employer Non-matching Contribution. Subject to the limitations of Section 7.6, as of the last day of each Plan Year, the Plan Administrator shall allocate to the Firm Account of each Participant who was an Employee on the last business day of such Plan Year that portion of the Required Employer Non-Matching Contributions for that Plan Year which the Compensation for Covered Service of such Participant for that Plan Year bears to the total such Compensation for Covered Service of all such Participants for that Plan Year.

Compensation of each Participant taken into account under this Section shall not exceed $170,000 for any Plan Year.

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For purposes of this section, Participant means any Employee who has reached his Eligibility Date, regardless of whether the Participant has an election in effect to make Deductible Employee contributions, but excluding Employees who have elected not to participate in Non-matching Contributions pursuant to Section 5.6.

7.5  Allocation of Discretionary Employer Non-matching Contribution. Subject to the limitations of Section 7.6, as of the last day of each Plan Year, the Plan Administrator shall allocate to the Firm Account of each Participant who was an Employee on the last business day of such Plan Year that portion of the Basic Discretionary Employer Non-Matching Contribution for that Plan Year which the Basic Compensation of such Participant for that Plan Year bears to the total Basic Compensation of all such Participants for that Plan Year.

Furthermore, subject to the limitations of Section 7.6, as of the last day of each Plan Year, the Plan Administrator shall allocate to the Firm Account of each Participant who was an Employee on the last business day of such Plan Year that portion of the FICA Discretionary Employer Non-Matching Contribution for that Plan Year which the Excess Compensation of such Participant for that Plan Year bears to the total Excess Compensation of all such Participants for that Plan Year.

Compensation of each Participant taken into account under this Section shall not exceed $170,000 for any Plan Year.

For purposes of this section, Participant means any Employee who has reached his Eligibility Date, regardless of whether the Participant has an election in effect to make Deductible Employee contributions, but excluding Employees who have elected not to participate in Non-matching Contributions pursuant to Section 5.6.

In no event shall the percentage of Excess Compensation allocated to the Retirement and Firm Accounts of a Participant for a Plan Year as a result of non-matching Employer Contributions exceed the lesser of: (1) twice the percentage of Basic Compensation allocated to the Retirement and Firm Accounts of a Participant for a Plan Year as a result of non-matching Employer Contributions and (2) the percentage of Basic Compensation allocated to the Retirement and Firm Accounts of a Participant for a Plan Year as a result of non-matching Employer Contributions plus the greater of (a) five and seven-tenths percent (5.7%) and (b) the percentage of the OASDI Rate in effect on the first day of the applicable Plan Year which is attributable to old-age insurance.

7.6  Limitation on Maximum Contributions. Subject to the age 50 catch-up contribution exception in Section 6.2, in no event shall the amount contributed by or on behalf of a Participant (other than Rollover Contributions) for a Plan Year under this Plan and all other defined contribution plans maintained by the Employer and any other business entity that is a member, along with the Employer, of a controlled group of corporations within the meaning of Section 414 of the Code, as modified by Section 415(h) of the Code, exceed the lesser of the following:

(A) The amount specified in Section 415(c)(l)(A) of the Code as adjusted for any applicable increases in the cost of living in accordance with Section 415(d) of the Code as in effect on the last day of the Plan Year ($40,000 for 2002); or

(B) One hundred percent (100%) of the compensation of such Participant for such Plan Year.

For purposes of this section, effective on and after January 1, 2001, compensation shall mean wages within the meaning of Section 3401(a) of the Code (for purposes of income tax withholding at the source) but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor and the exceptions for services performed outside the United States and services by a nonresident alien individual), plus the amount of salary reduction as a result of an election pursuant to a plan or plans governed by Section 125, Section 132(f)(4), Section 410(k) or Section 403(b) of the Code (inclusively).

For purposes of this section, Section 415 of the Code, which limits the benefits and contributions under qualified plans, is hereby incorporated by reference.

Employer Contributions and forfeitures under this Plan that cannot be credited to the account of a particular Participant for a Plan Year because of the limitations imposed by this section shall be disposed of as follows: first, unmatched Deductible Employee Contributions, if any, shall be returned to the respective Participants who made the contributions to the extent the distribution would reduce the excess in the Participant’s account; and secondly,

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any remaining excess Employer Contribution and forfeitures allocable to the Employee Accounts of the Participant shall be held in a separate account established and maintained by the Plan Administrator (the “Suspense Account”). Amounts credited to the Suspense Account shall be used to reduce Employer Contributions for the next Plan Year (and succeeding Plan Years, if necessary) on behalf of such Participant if such Participant is covered by the Plan as of the last day of the Plan Year. If such Participant is not covered by the Plan as of the end of the Plan Year, then such excess amounts must be held unallocated in the Suspense Account for the Plan Year and allocated and reallocated in the next Plan Year to the accounts of the remaining Participants as an Employer Contribution for such year. Amounts in Suspense Accounts must be used to reduce employer contributions for all remaining Participants and may not be distributed. Deductible Employee Contributions refunded in accordance with this paragraph shall include any income attributable thereto.

ARTICLE VIII — INVESTMENT OF FUNDS

8.1  Directed Accounts. The Trustee shall hold contributions made pursuant to the terms of this Plan in segregated accounts for the respective Participants. The Plan Administrator shall instruct the Trustee on the portion of each contribution to be allocated to each investment account of each respective Participant. Each Participant shall be entitled to direct the manner in which assets credited to his accounts shall be invested and reinvested at the times and in the manner provided by this Article.

8.2  Permissible Investments. A Participant may direct investment of amounts credited to his segregated accounts and reinvestment of assets held in his segregated accounts in any one or a combination of the securities (the “Funds”) designated from time to time by the Compensation Committee of A.G. Edwards & Sons, Inc. as available investments for the Plan and communicated in writing to Plan Participants.

The Compensation Committee of A.G. Edwards & Sons, Inc. in its sole discretion may from time to time add Funds or other investments to the list of investments available to Participants and delete any Fund or other investment from the list of such available investments.

8.3  Manner of Direction. Individual investment directions shall specify the particular securities in which the amount credited to each of the accounts of a Participant shall be invested. A Participant may direct investment of amounts held in a particular account in a manner different from assets held in some other account maintained for such Participant. For example, a Participant can direct investment of assets allocated to his Employee Account in a manner different from investment of assets allocated to his Firm Account, if any.

Such investment directions by a Participant shall cover the full amount allocated to each of his accounts. Assets initially will be invested in accordance with the investment directions made by the Participant upon enrollment in the Plan. Changes in the investment of any account balance of a Participant will be made only on the affirmative direction of the Participant. In the event a Participant fails to direct the manner in which assets allocated to his accounts shall be invested, the Trustee shall invest the assets for which no Participant investment direction is effective in the money-market fund.

Amounts credited to the Firm Account of the Participant may be invested in the Employer Stock Fund; provided that no more than twenty-five percent (25%) of the total amount allocated to all of the accounts of the Participant as of the investment date may be invested in the Employer Stock. Amounts credited to the other Accounts of the Participant may not be invested in the Employer Stock Fund.

Subject to the above, the Plan Administrator in its sole discretion may establish conditions, rules and procedures for directing investments by Participants. Such conditions, rules and procedures shall be disseminated in a manner reasonably determined to be available to all affected Plan Participants a reasonable time before the effective date of such condition, rule or procedure.

8.4  Investment of Contributions. Each Participant, at the time he elects to become a Participant, shall direct investment of contributions made to his respective accounts in one or more of the Funds. From time to time, at such times and upon such effective dates as the Plan Administrator may determine, a Participant may change his direction governing investment of contributions to be made to his respective accounts upon notice in the manner determined by the Plan Administrator.

Once given, an investment direction shall be deemed to be a continuing direction until explicitly changed by the Participant by a subsequent direction delivered in the manner determined by the Plan Administrator. The

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direction in effect at the time of receipt by the Trustee of contributions on behalf of a Participant shall govern the manner of investment of such contributions.

8.5  Change of Investments. In addition to directing the manner of the initial investment of contributions made to his respective accounts, a Participant may direct reinvestment of existing assets held in his respective accounts in accordance with the procedures established by the Plan Administrator.

The Plan Administrator in its sole discretion may establish “black-out” periods, when specified changes are not permitted, to facilitate changes in the available Funds or recordkeeping system.

8.6  Charges to Accounts. Brokerage commissions, transfer taxes and other charges and expenses in connection with the purchase or sale for each segregated account of the investments described in Section 8.2 shall be added to the cost of such securities or be deducted from the proceeds thereof, as the case may be; and expenses directly allocable to the execution of such transactions and administration with respect to such a segregated account, including charges of mutual fund managers and underwriters, shall be charged to such segregated account.

8.7  Investment of Transferred Assets. Unless specific directions governing such investment are given to the Trustee prior to the time the Trustee receives such transferred assets, assets transferred to the account of a Participant from another plan shall be invested in one or more of the Funds described in Section 8.2 in accordance with the directions governing investment of contributions to the respective accounts of such Participant to which such assets are credited which are in effect at the time the Trustee receives such transferred assets. Employees who do not contribute to this Plan but who are entitled to a transfer from another plan shall have the right to direct investment of such transferred assets at a reasonable time after the transfer. Assets for which no Participant investment direction is effective shall be invested in the money-market fund.

8.8  Investment of Death Benefits. Assets held in the accounts of a deceased Participant that are scheduled for distribution as soon as administratively feasible after the death of the Participant in a lump sum payment shall continue to be invested in the same manner in which such assets were invested at the time of the death of the Participant until such assets are distributed to the Beneficiary or Beneficiaries of the Participant in accordance with the Plan. The Beneficiary of all or a designated portion of an account of a deceased Participant that is scheduled for distribution in the form of installments pursuant to subsection 16.2(B) shall be treated as a Participant for purposes of this Article and thus may direct investment of such assets in the same manner as if such Beneficiary were a Participant.

8.9  Investments in Treasury Zeros. Effective March 1, 2001, in addition to the Funds described in Section 8.2, a Participant who has completed five (5) Years of Service for vesting or who has attained his Normal Retirement Age may direct reinvestment of funds credited to his Firm Account, and any Participant may direct reinvestment of funds credited to his Employee Account and his Rollover Account regardless of whether the Participant has completed five Years of Service for vesting, in United States Treasury Zero Coupon Bonds or Notes (Treasury Zeros) at the time, in the manner and subject to the conditions provided by this section.

(A) Treasury Zeros.  “Treasury Zeros” are selected Treasury Securities maintained by the Federal Reserve Banks, which represent direct ownership of future principal and interest payments on United States Treasury Bonds or Notes. The Treasury Zeros available for purchase shall be those obtainable from time to time through A.G. Edwards & Sons, Inc.

(B) Manner of Direction.  An eligible Participant shall deliver a direction to purchase or sell Treasury Zeros to A.G. Edwards & Sons, Inc. at the time, in the manner and on the form acceptable to the Plan Administrator. An eligible Participant who wishes to purchase Treasury Zeros shall specify the particular Zero or Zeros, including the maturity date or dates to be purchased, the quantity, the cusip number(s) of each such Treasury Zero to be purchased and the Fund or Funds to be sold to fund the purchase. The Plan Administrator may require that the proceeds from the Fund or Funds which are liquidated to fund the purchase be transferred to the money market fund prior to the Purchase Date; provided that such transfer need not be at the end of a month, nor shall it be considered a change of investment for purposes of Section 8.5. The minimum amount of any such investment shall be $1,000 principal.

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An eligible Participant who wishes to sell Treasury Zeros shall specify the particular Zero or Zeros, including maturity date or dates to be sold, the quantity and the cusip number(s) of each such Treasury Zero to be sold. The proceeds from the sale shall be reinvested in a Fund or Funds as directed by the Participant; or, in the absences of such a direction, in the money market fund.
 
The Plan Administrator in its sole discretion may establish conditions, rules and procedures for purchasing and selling Treasury Zeros by Participants. Such conditions, rules and procedures shall be disseminated in a manner reasonably determined to be available to all affected Participants in a reasonable time before the effective date of such condition, rule or procedure.

(C) Execution.  The Treasury Zero trustee shall execute purchase and sale directions made in accordance with this Section on, or as soon as practical after, the trade date, and a separate Account shall be maintained for the Participant. The Treasury Zero trustee shall purchase or sell a Treasury Zero at the price established on the actual day of purchase for that Treasury Zero by A.G. Edwards & Sons, Inc., or by a primary government bond dealer who reports to the Federal Reserve Board designated by the Treasury Zero trustee, whichever is less. The Treasury Zero shall be priced for one day settlement.

(D) Administrative Cost.  Administrative costs, transfer taxes and other expenses in connection with the purchase, sale, redemption or distribution of such Treasury Zeros may be added to the cost of such Treasury Zeros or be deducted from the proceeds thereof, as the case may be, and expenses directly allocable to the execution of such transactions may be charged to such separate Account.

(E) Proceeds at Maturity or Sale.  In the event that a Treasury Zero matures or is sold while it is held by the Treasury Zero Trustee for a Participant, notwithstanding anything to the contrary in this Article, the Participant shall be able to direct the reinvestment of the proceeds in any of the Funds available pursuant to Section 8.2 or the Participant shall be able to direct the reinvestment of the proceeds in Treasury Zeros.
In the event that the Participant does not direct reinvestment of such proceeds at maturity or the sale of the Treasury Zeros, the proceeds automatically shall be reinvested in the money market fund for the account of the Participant.

(F) Form of Distribution.  Should the Participant be entitled to a distribution of assets invested in a Treasury Zero, the Treasury Zero may be distributed in kind (which may be effected by a transfer to the Participant’s account), or in cash, at the election of the Participant.

8.10  Loans from Rollover Accounts. If a Participant rolled over a distribution from a qualified plan of a previous employer pursuant to Section 6.12, and there was a loan outstanding from such previous plan to the Participant at the time of the distribution from such previous plan, the Participant may apply for a loan from the Trust Fund in an amount no greater than the outstanding balance of such previous loan at the time of the distribution from the previous plan. No loan shall be made without the approval of the Plan Administrator, whose actions shall be final.

Each loan shall be evidenced by a promissory note executed by the Participant and delivered to the Plan Administrator and shall bear interest at a reasonable rate as determined by the Plan Administrator. Each loan shall be secured by the assets credited to the Participant’s Accounts and by such other security as the Plan Administrator may require.

The Participant shall designate which assets in which accounts shall be used to furnish funds for the loan.

The amount of each loan shall be allocated to a loan account established for the Participant, which shall reflect the outstanding loan balance. Repayment normally shall be accomplished through regular payroll deductions. The Participant shall execute all necessary documents to effectuate such withholding. In the event that a Participant with an outstanding loan is placed on layoff or is on authorized leave of absence for any reason, or is absent from work due to any disability, the Participant shall be required to make monthly installment payments equal to the normal monthly installment payments that would have been made through payroll withholding; provided that, a Participant on authorized leave of absence without pay for up to one year may make installment payments of interest

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only with all deferred principal payments to be due and payable in a lump sum as of the earlier of the Participant’s termination of employment or thirty (30) days following a return to active employment, or the expiration of the term of the note. Subject to the preceding sentence, each loan shall require substantially level amortization (with payments not less frequently than quarterly). Repayments shall be allocated to the Participant’s Rollover Account.

In the event the account balance of the Participant attributable to a loan becomes distributable, the note shall be distributed to the Participant, or his Beneficiary if applicable, as payment in full of his benefit attributable to the note.

ARTICLE IX — VALUATION OF ACCOUNTS

9.1  Valuation of Fund. The Plan Administrator shall determine the fair market value of the Trust Fund and of the respective Participant accounts as of the last day of each Plan Year and at such other times that the Plan Administrator in its discretion shall determine.

9.2  Value of Participants’ Benefits. The benefit of a Participant under this Plan as of any particular date shall be equal to the sum of (1) the fair market value of the assets held by the Trustees for a Participant in his respective, Employee, Firm and Rollover Accounts, if any, as of such date, plus (2) the amount of any Contribution (Employer and Employee), if any, payable to the Trustee for each such respective Account of such Participant in accordance with Article VI as of such date.

ARTICLE X — VESTING

10.1  General Rule. The vested percentage of the amount credited to the Firm Account of a Participant from time to time, shall be determined by the number of Years of Service then credited to such Participant under Section 4.5 in accordance with the following schedule:

Before Five Years of Service	0	%
After Five Years of Service	100	%

 

Notwithstanding the above, the vested percentage of the amount credited to the Firm Account of a grandfathered Participant from time to time, shall be determined by the number of Years of Service then credited to such Participant under Section 4.5 in accordance with the following schedule:

After One Year of Service	10	%
After Two Years of Service	20	%
After Three Years of Service	30	%
After Four Years of Service	40	%
After Five Years of Service	100	%

 

For purposes of this section, a grandfathered Participant means a Participant described in any of the following three categories:

(A) Participants who were actively employed on December 31, 1997;

(B) Participants who had an amount allocated to their account on December 31, 1997; and

(C) Former Participants who completed at least three Years of Service before 1998, received distribution of their vested account balance before 1998 (with a corresponding forfeiture of the unvested portion), and are rehired before incurring a Break in Service of five consecutive years.

In no event shall the vested percentage of a Participant on the date on which an amendment to this Plan is adopted or becomes effective, whichever is later, be less than the vested percentage immediately before such date.

Solely in the case of a grandfathered Participant whose vested percentage is determined by the pre-1998 graded vesting schedule, notwithstanding anything to the contrary in the Plan, no portion of the Firm Account of a Participant with less than five (5) Years of Service shall be vested if such Participant incurs a Termination for Aggravated Cause.

Furthermore, no portion of the Firm Account of a Participant shall be vested in the event such Participant shall incur a Termination of Employment because of a Voluntary Termination before completion of at least five (5) Years

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of Service and such Participant shall be determined by the Employer to have engaged in competition with the Employer before such amount becomes payable.

A Voluntary Termination shall mean a Termination of Employment resulting solely from the initiative of the Participant without undue influence, coercion or duress on the Participant caused by the Employer. A resignation by a Participant which, in the discretion of the Plan Administrator, is an alternative to immediate Termination for Aggravated Cause by the Employer is not, however, a Voluntary Termination.

A Participant shall be deemed to engage in competition with the Employer for purposes of this Section if the Plan Administrator determines that the Participant owns, manages, controls or participates in or becomes connected with, as an officer, employee, partner, stockholder, consultant or otherwise, any business, individual, partnership, or corporation that is engaged significantly, or is planning to become engaged significantly, in a business which, directly or indirectly, competes with a business of the Employer; provided that, acquiring or holding shares of any business entity which has its securities listed on a national securities exchange or quoted in the daily listing of over-the-counter market securities shall not constitute such competition so long as the Participant and members of the Participant’s family do not own more than one percent (1%) of the voting securities of such an entity.

Notwithstanding the above, a Participant who engages in competition as described in the immediately preceding paragraph shall not incur a forfeiture on account of such competition if the Participant is rehired by the Employer before the second January l following such a Separation from Service.

Termination for Aggravated Cause means a Termination of Employment (whether a discharge or quit) because of any of the following acts or events which the Plan Administrator in his discretion determines have occurred: any action or failure to act by the Employee that results in or is likely to result in a detriment to the Employer or any of its employees or customers, violation of any securities law, dishonesty whether or not resulting in a direct or indirect monetary loss, insubordination, drunkenness, use of harmful drugs, willful destruction of property, provocation or continuous agitation of Employer’s customers or employees, or conviction of a felony or a misdemeanor.

10.2  Fully Vested Accounts. The amount credited to the Firm Account of a Participant who has completed five (5) Years of Service or has attained Normal Retirement Age, whichever shall first occur, and the amount credited to the Employee Account and Rollover Account of any Participant shall be fully vested and nonforfeitable at all times and in all events.

10.3  Change in Control. Notwithstanding anything to the contrary in the Plan, the balance credited to the Firm Account of each Participant shall become fully vested and nonforfeitable immediately upon a Change in Control.

For purposes of this section, “Change in Control” means the occurrence of any of the following events without the prior approval of the Board of Directors: (a) a merger, consolidation or reorganization of A.G. Edwards, Inc. in which A.G. Edwards, Inc. does not survive as an independent entity; (b) a sale of all or substantially all of the assets of A.G. Edwards, Inc.; (c) the first purchase of shares of common stock of A.G. Edwards, Inc. pursuant to a tender or exchange offer for more than twenty percent (20%) of A.G. Edwards, Inc.’s outstanding shares of common stock; or (d) any change in control of a nature that, in the opinion of the Board of Directors, would be required to be reported under the federal securities laws; provided that such a change in control shall be deemed to have occurred if (i) any person is or becomes the beneficial owner, directly or indirectly, of securities of A.G. Edwards, Inc. representing forty percent (40%) or more of the combined voting power of A.G. Edwards, Inc.’s then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of A.G. Edwards, Inc. cease for any reason to constitute a majority thereof unless the election of any director, who was not a director at the beginning of the period, was approved by a vote of at least seventy percent (70%) of the directors then still in office who were directors at the beginning of the period.

ARTICLE XI — FORFEITURES

11.1  Reduction of Employer Contribution. The Employer Contribution for a Plan Year required under Section 6.3 shall be reduced by an amount equal to the lesser of (l) the forfeitures for that Plan Year or (2) the obligation of the Employer to contribute to the Plan for that Plan Year in accordance with Section 6.3.

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Notwithstanding the preceding sentence, the Plan Administrator in its sole discretion may segregate up to ten percent (10%) of the forfeitures for a Plan Year in an unallocated suspense account to meet obligations of the Plan, including but not limited to, those set forth in Sections 6.8 and 11.3.

11.2  Allocation of Forfeitures. Forfeitures for a Plan Year shall be applied in accordance with Section 11.1 as if such amounts were part of the Employer Contribution for that Plan Year.

11.3  Forfeiture Restoration. In the event the account of a Participant was reduced in accordance with Section 14.3, and the Participant is re-employed before such Participant incurs a Break in Service of five consecutive years, the amount previously so forfeited shall be restored to the Firm Account of the Participant as of the last day of the Plan Year in which such Participant first completes a Year of Service after re-employment. Such a restored forfeiture may be funded by an additional Employer Contribution or out of forfeitures for that Plan Year.

Notwithstanding anything to the contrary in Article X, if a grandfathered Participant (as defined in Section 10.1) receives a restoration of a previously forfeited amount in accordance with the preceding paragraph, and subsequently incurs a Termination of Employment before the Participant is fully vested, the vested portion of the amount credited to the Firm Account of the Participant shall be

P (AB + D) – D, where:
P is the vested percentage at the relevant time;
AB is the account balance at the relevant time; and
D is the amount of the previous distribution.

ARTICLE XII — WITHDRAWALS DURING EMPLOYMENT

12.1  Right of Withdrawal — Employee Account. A Participant may, upon notice received by the Plan Administrator or its delegate, withdraw without penalty all or a portion of the lesser of the two (2) amounts, as follows:

(A) The assets then held in the Employee Account of such Participant, or

(B) The aggregate amount of the after-tax Employee Contributions made by the Participant prior to January 1, 1987, reduced by any prior distributions charged against such contributions.

Assets so withdrawn shall be distributed to the withdrawing Participant as soon as practical after the effective date of the withdrawal.

12.2  Senior Employee Withdrawal Option. Subject to the restriction in the next paragraph, a Participant may elect to withdraw all or any portion of his Plan benefit while the Participant is still employed by the Employer (the “Withdrawal Date”) if on such date the Participant satisfied both of the following two conditions:

(A) The Participant was at least fifty-nine and one-half (59-1/2) years of age; and

(B) The Participant was fully vested in accordance with Section 10.1.

Such an election must be received by the Plan Administrator (in a form suitable to the Plan Administrator) prior to such Withdrawal Date.

The amount so withdrawn shall be distributed to the withdrawing Participant as soon as practical after the Withdrawal Date.

A Participant shall not be subject to penalty for a withdrawal made pursuant to this section.

12.3  Withdrawal of A.G. Edwards, Inc. Vested Dividends. Effective January 1, 2002, notwithstanding the preceding paragraph, a Participant shall have the right to elect to receive dividends with respect to shares credited to such Participant’s fully vested Employer Stock Fund account paid in cash directly to the Participant. An election to receive dividends in cash shall be made in accordance with procedures established by the Plan Administrator, and the Plan Administrator shall designate the times and effective dates for such elections. Any dividend payments to Participants will be paid, in the sole discretion of the Plan Administrator, by the Sponsor’s disbursing agent: (1) to the Trustee, and then distributed by the Trustee or by a disbursing agent for the Trustee, to Participants; or (2)

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to the Company’s Payroll Department as agent for the Participant. Such dividend payments shall be made not later than ninety (90) days following the close of the Plan Year in which such dividends are paid by the Company. This option to receive dividends directly in cash shall apply only to dividends on shares credited to an account that is fully vested.

ARTICLE XIII — WITHDRAWALS AFTER EMPLOYMENT

13.1  Withdrawals After Employment. In the event a Participant shall incur a Termination of Employment under circumstances such that the Participant is not entitled to receive payment of his benefits under the Plan immediately upon such Termination of Employment, such Participant may, upon notice in a manner suitable to the Plan Administrator, request withdrawal of an amount equal to (1) the fair market value of assets held in the Employee Account and Rollover Account of such Participant, plus (2) the amount, if any, of Employee contributions payable to the Trustee for each such account in accordance with Article VI. An amount so withdrawn shall be paid to the withdrawing Participant as soon as practical after the Plan Administrator receives the notice in a form suitable to the Plan Administrator.

ARTICLE XIV — PAYMENT OF BENEFITS

14.1 Disability and Fully Vested Over Age 59-1/2.  If a Participant incurs a Termination of Employment because of Total Disability, or if a Participant incurs a Termination of Employment when the account of such Participant is fully vested and after such Participant shall have attained the age of fifty-nine and one-half (59-1/2) years, the entire benefit of such Participant, if any, determined in accordance with Section 9.2, shall become distributable after the employment of such Participant with the Employers so terminated.

14.2 Fully Vested Under Age 59-1/2.  If a Participant incurs a Termination of Employment for reasons other than death or Total Disability before such Participant shall have attained the age of fifty-nine and one-half (59-1/2) years, and the Firm Account of such Participant is fully vested at the time of such termination, the entire benefit of such Participant, if any, determined in accordance with Section 9.2, shall become distributable as soon as practical after the second December 31^st which occurs after the date of such Termination of Employment; provided that the benefit of a Participant whose employment with the Employers is so terminated shall not become distributable on account of a Termination of Employment if such Participant is re-employed before such December 31^st, except that a Participant who is so re-employed only in uncovered Service may elect before (but not after) such December 31^st to receive such distribution; provided that, the entire benefit of a Participant who receives severance benefits in accordance with Appendix A or Appendix B of the A.G. Edwards Severance Benefit Plan in connection with the workforce reduction implemented in the first three months of the year 2002 shall be distributed as soon as practical after the Termination of Employment of the Participant.

14.3 Partially Vested.  If a Participant incurs a Termination of Employment for reasons other than death or Total Disability before the Firm Account of such Participant is fully vested, the benefit of such Participant shall be held in Trust until the second December 31^st which occurs after the date on which his employment with the Employers is so terminated. As soon as practical after such December 31^st the vested portion of such benefit, if any, shall become distributable; provided that the amount credited to the accounts of a Participant whose employment with the Employers is so terminated shall not become distributable on account of a Termination of Employment if such Participant is re-employed in Covered Service before such December 31^st; provided that, the entire benefit of a Participant who receives severance benefits in accordance with Appendix A or Appendix B of the A.G. Edwards Severance Benefit Plan in connection with the workforce reduction implemented in the first three months of the year 2002 shall be distributed as soon as practical after the Termination of Employment of the Participant.

As of the earlier of (A) the date as of which benefits are distributed to the Participant, or (B) the date on which the Participant incurs a Break in Service of at least five consecutive years, the unvested portion of the account balance of the Participant shall be forfeited. For this purpose, if the value of the vested portion of an Employee’s account balance is zero upon his Termination of Employment, the Employee shall be deemed to have received a distribution of such vested account as of the second December 31^st after the date of his or her Termination of Employment.

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14.4  Time of Payment. As soon as practicable after a benefit becomes distributable in accordance with Section 14.1, 14.2 or 14.3, such benefit shall be distributed to the Participant entitled thereto in the form specified by this Article.

Notwithstanding the above, if the vested portion of the balance credited to a Participant’s accounts exceeds $5,000 at the time of the distribution to the Participant (regardless of such value at any previous time), and the Participant has not attained his Normal Retirement Age, the Participant must consent in writing, or the functional equivalent of writing, before any portion of such accounts may be distributed to him. For this purpose, the value of a Participant’s vested account balance shall be determined without regard to that portion of the account balance that is attributable to rollover contributions (and earnings allocable thereto) within the meaning of Sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16) of the Code.

The Plan Administrator shall furnish to each such Participant entitled to receive a distribution a written explanation of the right to defer receipt of the distribution. Such a notice shall be provided to the Participant no less than thirty days and no more than ninety days before the date of the distribution.

Such distribution may commence less than thirty (30) days after the notice required by the preceding paragraph is provided, provided that:

(A) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least thirty days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and

(B) the Participant, after receiving the notice, affirmatively elects a distribution.

The written consent to the distribution may not be made before the Participant receives the notice and must not be made more than ninety days before the date of distribution.

14.5  Form of Payment. The amount credited to the Employee Account, Firm Account and Rollover Account, if any, of a Participant shall be made in cash; except that such account balances invested in Treasury Zeros may be distributed in kind at the direction of the Participant, and Firm account balances may be distributed in the form of shares of A.G. Edwards, Inc. at the direction of the Participant. Assets invested in mutual funds may be made in kind if the system established by the Plan Administrator or its agent for effecting distributions can reasonably accommodate distributions of mutual fund shares.

14.6  Forfeitures. The amount by which the account of a Participant is reduced in accordance with Section 14.3 shall be a forfeiture. Such amount shall be held in a temporary fund until such amount is allocated and credited to Participant accounts in accordance with Article XI.

14.7  Accounts of Former Employees. The assets held in the account of a Participant, if any, after Termination of Employment of such Participant shall be valued in accordance with Article IX as of each valuation date following such Termination of Employment until distribution of the entire benefit of such Participant under this Plan. Former Employees may direct investment of amounts credited to their accounts in accordance with Article VIII. Distribution of the balance of the benefit of a Participant determined in accordance with Section 9.2 shall constitute payment in full of the benefits of such Participant hereunder.

14.8  Direct Rollover of Eligible Rollover Distributions.

(A) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee’s election under this section, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover.

(B) Definitions.

(1) Eligible rollover distribution:  An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or

19

the joint lives (or joint life expectancies) of the distributee and the distributee’s designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities).

(2) Eligible retirement plan:  An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee’s eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an Individual Retirement Account or Individual Retirement Annuity.

(3) Distributee:  A distributee includes an employee or former employee. In addition, the employee’s or former employee’s surviving spouse and the employee’s or former employee’s spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse.

(4) Direct rollover:  A direct rollover is a payment by the plan to the eligible retirement plan specified by the distributee.

On and after January 1, 2002, for purposes of this section, an eligible retirement plan shall also mean an annuity contract described in Section 403(b) of the Code and an eligible plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this plan. The definition of eligible retirement plan shall also apply in the case of a distribution to a surviving spouse, or to a spouse or former spouse who is the alternate payee under a qualified domestic relation order, as defined in Section 414(p) of the Code. Any amount that is distributed on account of hardship shall not be an eligible rollover distribution and the distributee may not elect to have any portion of such a distribution paid directly to an eligible retirement plan. A portion of a distribution shall not fail to be an eligible rollover distribution merely because the portion consists of after-tax employee contributions which are not includible in gross income. However, such portion may be transferred only to an individual retirement account or annuity described in Section 408(a) or (b) of the Code, or to a qualified defined contribution plan described in Section 401(a) or 403(a) of the Code that agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible.

14.9  Protected Options. In addition to any form of benefits specified in this Article, a Participant who has not received a distribution of the entire amount credited to his Accounts as of an Amendment Date shall be entitled to a distribution of the amount credited to his account as of such Amendment Date paid in any optional form of payment available to such Participant under the Plan as in effect immediately before such Amendment Date. Amendment Date means the date on which an amendment to this Plan is adopted or becomes effective, whichever is later.

ARTICLE XV — PAYMENT OF DEATH BENEFITS

15.1  Death Benefits. The amount credited to the Accounts of a deceased Participant shall be distributed to the Beneficiary of the Participant in the form provided in this Article, with payments commencing as soon as administratively feasible after the death of the Participant (but never later than the time prescribed in Article XVI).

15.2  Form of Payment. Effective on and after March 1, 2002, the balance of the Accounts, if any, of a deceased Participant shall be paid to the Beneficiary of the deceased Participant in any one or a combination of the following forms as the Beneficiary may elect:

(A) In one lump-sum payment (which may represent either all of such Participant’s benefit or only the portion remaining after distribution of a portion thereof pursuant to subsection (B) hereof and which may take the form of lump-sum payments to multiple beneficiaries);

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(B) In substantially equal annual installments over a period not exceeding five years. A Beneficiary receiving such an installment payout of an account may elect to accelerate distribution of all or any portion of the balance of such account at any time and from time to time, but may not elect to defer distributions beyond the scheduled time of payment initially elected by the Beneficiary; or

(C) An annuity contract that satisfies the requirements of Section 15.8.

Notwithstanding the above, the entire balance credited to the accounts of a deceased Participant shall be distributed, or applied to purchase an annuity contract that is distributed, no later than the end of the fifth calendar year beginning after the date of death of the Participant.

The remaining balance of an account being paid in installment payments may be paid in a lump sum in the event of the termination of the Plan, a spin-off of a portion of the Plan that includes such account, or any other structural change to the Plan.

15.3  Designation of Beneficiary

Each Participant from time to time on a form acceptable to the Plan Administrator may designate any person or persons, including a trust or trusts, (including a trust or an Individual Retirement Account of which the Participant’s spouse is treated as the depositor) (concurrently, contingently or successively) to whom the Participant’s benefits under the Plan are to be paid if he dies before receiving all of such benefits. A beneficiary designation form shall be effective only when the form is filed in writing with the Plan Administrator by the Participant while the Participant is alive, and shall cancel all beneficiary designation forms previously signed and filed by the Participant.

The designation of a nonspouse beneficiary shall be valid only if: the Eligible Surviving Spouse of the Participant shall have consented in writing to such designation; the consent specifies the non-spouse Beneficiary designated by the Participant, the consent acknowledges the effect of the designation; and the consent is witnessed by a Plan representative or a notary public.

Any designation of a non-spouse Beneficiary may be revoked or changed by the Participant by a subsequent designation made in accordance with this section prior to the Participant’s Annuity Starting Date. The designation may be revoked, but not changed, without the consent of the Eligible Spouse. The Eligible Spouse may not revoke a consent to a valid Beneficiary designation.

15.4  Failure to Designate. If a Participant shall not have designated a Beneficiary, or no Beneficiary or Beneficiaries entitled to receive distribution of all of the amount payable under this Plan survives the Participant, then that portion of the amount payable as to which there is no surviving qualified Beneficiary shall be paid to the Eligible Surviving Spouse of the Participant, and if the Participant leaves no Eligible Surviving Spouse, to the beneficiary of the Participant under the A.G. Edwards Basic Group Insurance Plan, and if no such beneficiary, to the estate of the Participant or the distributees thereof. In the event the Plan Administrator shall be in doubt with respect to the right to distribution of a spouse or Beneficiary, the Plan Administrator may cause the entire account of a Participant or any portion thereof to be distributed to the estate of the Participant, and the Trustee or Plan Administrator shall have no further responsibility or liability with respect to such amount.

15.5  Renunciation of Death Benefit. A Beneficiary of a Participant entitled to a benefit under this Plan may disclaim his right to all or any portion of such benefit by filing a written irrevocable and unqualified refusal to accept such a benefit with the Plan Administrator before payment to him of any such benefit but no later than nine (9) months after the death of such Participant. Any benefit so disclaimed shall be distributable to the person or persons (and in the proportions) to which such benefit would have been distributable if the Beneficiary who so disclaims such benefit had predeceased such Participant.

15.6  Minor Beneficiaries. In the event a Beneficiary has not attained the age of majority under the applicable state law, the Plan Administrator shall in his sole discretion pay such benefits to or on behalf of the minor individual or to the guardian of the person of such individual. Such payment shall constitute a full and adequate distribution, and the Plan Administrator need not see to the proper application or use of such proceeds by such recipient.

15.7  Transitional Designation. In the event of the death of a Participant who shall not have designated a Beneficiary under this Plan, but who shall have designated a Beneficiary under the A.G. Edwards & Sons, Inc. Profit

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Sharing Plan effective as of December 31, 1977, the Beneficiary so designated under the A.G. Edwards & Sons, Inc. Profit Sharing Plan shall be deemed to be the Beneficiary designated under this Plan.

15.8  Distribution of Annuity Contracts. A Beneficiary entitled to a distribution from the Plan on account of the death of a Participant may elect to receive the distribution in the form of an annuity contract.

In the event a Beneficiary shall elect to receive distribution in the form of an annuity, at the direction of the Plan Administrator, the Trustee shall purchase a nontransferable annuity contract from an insurance company with the amount credited to the Account of such Beneficiary. Selection of such an annuity contract shall be made by the Beneficiary for whom such an annuity contract is to be purchased.

An annuity contract is nontransferable if the owner cannot sell, assign, discount or pledge as collateral for any loan or as security for the performance of an obligation or for any other purposes his interest in the contract to any person other than the issuer thereof.

Any annuity contract purchased by the Trustee shall satisfy all of the terms and conditions of this Plan. Such an annuity contract shall provide payment options that conform to those provided by the terms of this Plan, so that payment pursuant to the contract satisfies the terms of the Plan as if paid directly by the Plan.

The Plan Administrator shall direct the Trustee to transfer such an annuity contract to the Beneficiary if annuity payments under the contract have commenced, or, in the case of a deferred annuity, if the contract by its terms provides that the insurance company that issued the contract will administer the notice and election provisions relating to optional forms of payment. The insurance company that issues such a contract is hereby designated as the Plan Administrator with respect to administering notice and election requirements of a deferred annuity contract.

Neither the Trustee, the Plan Administrator nor any Employer shall be responsible for the failure on the part of an insurance company issuing such an annuity contract to pay annuities if and when the payments shall become due and payable. When the Trustee shall have purchased an annuity contract for a Beneficiary and distributed the contract to such person, the Beneficiary shall have no further right or claim to receive payments from the Trust Fund to the extent that the balance in his account was applied to the purchase of an annuity contract.

ARTICLE XVI — LATEST TIME OF PAYMENT

This Article does not contain the general rules of the Plan governing the time and form of distributions. In particular, this Article in and of itself does not give any right to a Participant to defer distributions beyond the time of distribution provided in the preceding Articles. The provisions of this Article, which are included to comply with the Code, in certain limited circumstances as specifically provided in this Article, merely may accelerate the time of distribution provided by the preceding Articles.

16.1  60 Day Rule. Unless the Participant elects otherwise in writing, the latest date on which payment of benefits must commence shall be the sixtieth day after the close of the Plan Year in which the latest of the following events occurs:

(A) The Participant attains Normal Retirement Age;

(B) The Participant incurs a Termination of Employment; or

(C) Ten years have elapsed from the time the Participant commenced participation in the Plan.

If payment in full is not feasible within the time limits prescribed by the preceding paragraph, the Plan Administration may direct interim payments from Accounts of such Participant.

16.2  Latest Time for Payment

Notwithstanding anything to the contrary in this Plan, and notwithstanding any election of the Participant, payment of benefits shall commence no later than the Participant’s required beginning date.

The required beginning date of a Participant who is not a five percent (5%) owner is the April 1 of the calendar year following the later of: (A) the calendar year in which the Participant attains seventy and one-half years of age; and (B) the calendar year in which the Participant actually retires. The required beginning date of a Participant

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who is a five percent (5%) owner is the April 1 of the calendar year following the calendar year in which the Participant attains seventy and one-half years of age.

With respect to distributions under the Plan made for calendar years beginning on or after January 1, 2002, the Plan will apply the minimum distribution requirements of Section 401(a)(9) of the Internal Revenue Code in accordance with the regulations under Section 401(a)(9) that were proposed on January 17, 2001 (the “2001 Proposed Regulations”), notwithstanding any provision of the Plan to the contrary. If the total amount of required minimum distributions made to a participant for 2001 prior to January 1, 2002 are equal to or greater than the amount of required minimum distributions determined under the 2001 Proposed Regulations, then no additional distributions are required for such participant for 2001 on or after such date. If the total amount of required minimum distributions made to a participant for 2001 prior to January 1, 2002 are less than the amount determined under the 2001 Proposed Regulations, then the amount of required minimum distributions for 2001 on or after such date will be determined so that the total amount of required minimum distributions for 2001 is the amount determined under the 2001 Proposed Regulations. This amendment shall continue in effect until the last calendar year beginning before the effective date of the final regulations under Section 401(a)(9) or such other date as may be published by the Internal Revenue Service.

Section 401(a)(9) of the Code is hereby incorporated by reference, and distributions under this Plan shall be made in accordance with such section and the regulations issued by the Secretary of the Treasury interpreting such section. Plan provisions reflecting Section 401(a)(9) of the Code shall override any other distribution options that may be inconsistent with such Code section and this subsection. Any distribution required under the incidental death benefit requirements of Section 401(a) of the Code shall be treated as a distribution required under Section 401(a)(9) of the Code and this subsection.

Minimum distributions are not required to be made pursuant to this section on and after January 1, 1997, to Participants who attained seventy and one half (70-1/2) years of age before 1997 and who have not yet Terminated Employment and who are not five percent (5%) owners.

ARTICLE XVII — CLAIMS AND REVIEW PROCEDURE

17.1  Claims for Benefits. A Participant or Beneficiary who believes that he is being denied or will be denied benefits to which he is entitled under the Plan may file a written request for such benefits with the Plan Administrator or its delegate setting forth his claim.

17.2  Written Denials of Claims. Within a reasonable time after receipt of a written request for benefits, the Plan Administrator or its delegate shall provide to every claimant who is denied a claim for benefits written notice of denial setting forth in a manner calculated to be understood by the claimant:

(A) The specific reason or reasons for the denial;

(B) Specific reference to pertinent Plan provisions on which the denial is based;

(C) A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and

(D) An explanation of the claim review procedure.

17.3  Time of Denial. If such a denial is not furnished within sixty (60) days from the time the claim is filed, the claim shall be deemed denied for purposes of Section 17.4.

17.4  Review of Denial. Within sixty (60) days after a claim is denied, the claimant or his duly authorized representative may appeal such denial to the Plan Administrator by filing a written notice of appeal of the claim denial with the Plan Administrator. The notice of appeal shall reasonably apprise the Plan Administrator of the reasons and grounds for such appeal and shall specify the scope and method of review desired by requesting any or all of the procedures as follows:

(A) A review of documents pertinent to the claim;

(B) Submission of issues and comments in writing; and

(C) Written response to particular questions submitted in writing.

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17.5 Review Decisions. The Plan Administrator shall furnish a written decision on review not later than sixty (60) days after the notice of appeal is filed, written in a manner calculated to be understood by the claimant with specific references to the pertinent Plan provisions on which the decision is based; provided that, in the event special circumstances require an extension of time for processing, a decision shall be rendered as soon as possible, but not later that one hundred and twenty (120) days after receipt of the request for review.

ARTICLE XVIII — ADMINISTRATION

18.1  Plan Administrator. The Plan shall be administered by a Plan Administrator. The Plan Administrator may participate in benefits under the Plan; provided he is otherwise eligible to do so.

18.2  Allocation of Fiduciary Duties. The Plan Administrator shall have the duty and power to administer this Plan in all its details, except the duty and power to invest and reinvest Trust assets, which is assigned to the Trustee under Article XIX. The duties and powers of the Plan Administrator shall include, but not be limited to, the following:

(A) To establish and maintain a separate account for each Participant and allocate benefits thereto in accordance with Article VII;

(B) To keep accurate and detailed records of the administration of the Plan, which records shall be open to inspection by the Employer at all reasonable times, and, with respect to records pertaining to his accounts, open to inspection by each Participant;

(C) To interpret the Plan provisions and to decide all questions concerning the Plan and the eligibility of any Employee to participate in the Plan;

(D) To authorize the payment of benefits;

(E) To establish and enforce such rules, regulations and procedures as it shall deem necessary or proper for the efficient administration of the Plan;

(F) To furnish the reports and Plan descriptions to the Secretary of Labor and to each Participant as required by Part I of Title I of the Employee Retirement Income Security Act of 1974; and

(G) To delegate to any agents such duties and powers, both ministerial and discretionary as it deems appropriate by an instrument in writing which specifies which such duties are so delegated and to whom each duty is so delegated.

18.3  Furnish Information. Each Participant shall furnish the Plan Administrator any requested information, as needed to administer the Plan. The Employers and the Trustee also shall furnish the Plan Administrator with the information needed to administer the Plan.

18.4  Appointment of Administrators. The Sponsor shall appoint a Plan Administrator to serve at its pleasure. The Plan Administrator may be a corporation (including the Employer) or corporations, an individual or individuals or any combination of the above. One such person may serve as Plan Administrator. The Sponsor may change such appointments from time to time provided that such changes are published to the extent of enabling interested parties to ascertain the person or persons responsible for operating the Plan. In absence of such an appointment, the Compensation Committee of A.G. Edwards & Sons, Inc. shall serve as Plan Administrator provided that, if such Compensation Committee serves as Plan Administrator, it may designate specified individuals or other persons to carry out specified fiduciary responsibilities under the Plan in such a manner and to such an extent that Employees and other interested parties are able to ascertain the person or persons responsible for operating the Plan.

18.5  Compensation of Fiduciaries. Any Trustee or Plan Administrator may receive reasonable compensation for services rendered on behalf of the Plan or Trust.

18.6  Expenses of Administration. All expenses of administering the Plan that are owed to third parties, such as compensation to a Trustee and compensation to a third party recordkeeper for plan accounting and reporting services, as may be determined from time to time by agreement between the Sponsor and such a third party, and all other expenses of administration and taxes of this Plan including the compensation of any employee or counsel

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employed by the Trustee or the Employers, shall be paid out of the Trust and charged ratably to Participant’s accounts, unless voluntarily paid by the Employer, except expenses incurred in connection with the purchase or sale of investments shall be charged against Accounts in accordance with Section 8.6.

18.7  Delegation of Authority. The Plan Administrator may delegate to an agent or agents any or all of the duties and responsibilities assigned by the Plan to the Plan Administrator. Such a delegation shall be made by an instrument in writing that specifies which duties and powers are so delegated and to whom each such duty or power is so delegated.

In the event the Plan Administrator shall consist of more than one person, the Plan Administrator may appoint one or more of the persons acting as Plan Administrator to carry out any particular duty or duties or to execute any and all documents on behalf of the Plan Administrator. Any document so executed shall have the same effect as though executed by all such persons. Such appointment shall be made by an instrument in writing that specifies which duties and powers are so allocated and to whom each such duty or power is so allocated.

18.8  Standard of Review. The Plan Administrator shall perform its duties as the Plan Administrator in its sole discretion shall determine is appropriate in light of the reason and purpose for which the Plan is established and maintained. In particular, the interpretation of all plan provisions, and the determination of whether a Participant or Beneficiary is entitled to any benefit pursuant to the terms of the Plan, shall be exercised by the Plan Administrator in its sole discretion. Any construction of the terms of the Plan for which there is a rational basis shall be final and legally binding on all parties.

Any interpretation of the Plan or other action of the Plan Administrator made in its sole discretion shall be subject to review only if such an interpretation or other action is without a rational basis. Any review of a final decision or action of the Plan Administrator shall be based only on such evidence presented to or considered by the Plan Administrator at the time it made the decision that is the subject of the review. Any Employer that adopts and maintains this Plan, and any Employee who performs services for an Employer that are or may be compensated for in part by benefits payable pursuant to this Plan, hereby consents to actions of the Plan Administrator made in its sole discretion and agrees to the narrow standard of review prescribed in this section.

ARTICLE XIX — TRUST AGREEMENT

19.1  Trust Agreement. The funds accumulated under the Plan shall be held in trust for the exclusive benefit of the Participants of the Plan and their Beneficiaries under a trust agreement or agreements between the Sponsor and one or more Trustees appointed by the Sponsor which separate agreement or agreements together constitute one Trust Agreement and which form a part of the Plan.

ARTICLE XX — AMENDMENT AND TERMINATION

20.1  Amendment. The Sponsor reserves the right at any time and from time to time to modify or amend the Plan in whole or in part by adopting a written amendment; provided that, no such modification or amendment shall operate to modify, amend or diminish any rights of Participants accrued to the date of such modification or amendment, and, further, that no amendment shall increase or materially change the duties of the Trustee without the specific agreement of the Trustee.

20.2  Termination. The Sponsor reserves the right at any time to terminate the Plan in its entirety by delivering to the Trustee a copy of the notice of termination. All rights shall vest as of the effective date of the termination or a complete discontinuance of contributions by the Employers, and there shall be no forfeitures thereafter. In the event of a partial termination, all rights to benefits with respect to which the Plan terminated shall be fully vested and nonforfeitable as of the date of such partial termination.

ARTICLE XXI — MISCELLANEOUS

21.1  Anti-Assignation. The payments, benefits or interest provided for under the Plan shall not be subject to any claim of any creditor of any Participant in law or in equity and shall not be subject to attachment, garnishment, execution or other legal process by any such creditor; nor shall the Participant have any right to assign, transfer, encumber, anticipate or otherwise dispose of any such payments, benefits or interest.

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Notwithstanding anything in this section to the contrary, the Administrator may:

(A) Comply with a “qualified domestic relations order,” as defined in Section 414(p) of the Code, to the extent it does not alter the amount or form of benefit specified under the Plan except as required by law; and

(B) Surrender to the government of the United States of America any portion of the Trust Fund which is subject to a federal tax levy made pursuant to Section 6331 of the Code.

If any portion of the Trust Fund which is attributable to the benefits, rights or interest of any Participant is transferred to any other entity pursuant to subsection (A) or (B) to satisfy a debt or other obligation of such Participant, the amount credited to the account of such Participant shall be reduced by the amount so transferred.

21.2  Rights of Employees. Neither the action of an Employer in establishing the Plan, nor any action taken by an Employer or the Trustee nor any provision of the Plan, shall be construed as giving to any Employee the right to be retained in its employ, or the right to any payments other than those expressly provided for in the Plan to be paid from the Fund. Each Employer expressly reserves the right at any time to dismiss any Employee without any liability for any claim against the Employer or against the Fund other than with respect to the benefits provided for by the Plan.

21.3  Source of Benefits. All benefits to be paid under the Plan shall be paid solely out of the Fund, and the Employers assume no liability or responsibility therefor.

21.4  Actions by Corporation. Whenever under the terms of this Plan a corporation is permitted or required to take some action, such action may be taken by an instrument in writing executed by the President of the corporation, or by any other method by an officer of the corporation as duly authorized by the Board of Directors of the corporation.

21.5  Rules of Construction. The terms and provisions of this Plan shall be construed according to the principles, and in the priority, as follows: first, in accordance with the meaning under, and which will bring the Plan into conformity with the Internal Revenue Code of 1986, as amended, and the Employee Retirement Income Security Act of 1974; and secondly, in accordance with the laws of the State of Missouri. The Plan shall be deemed to contain the provisions necessary to comply with such laws. If any provision of this Plan shall be held illegal or invalid, the remaining provisions of this Plan shall be construed as if such provision had never been included. Wherever applicable, the masculine pronoun as used herein shall mean the feminine, and the singular the plural.

21.6  Payments to Legal Incompetents. In the event any person entitled to receive any distribution hereunder of a benefit or installment thereof shall, in the opinion of the Plan Administrator, be legally incapable of giving a valid receipt and discharge for distribution of such benefit, and another person or institution is then maintaining or has custody of such person, and no guardian or other representative of the estate of such person shall have been duly appointed, then such benefit or installment thereof may, at the option of the Plan Administrator, be distributed to such other person or institution. Distribution to such other person or institution shall be in complete discharge of liability under the Plan for the distribution of such benefit or installment thereof and there shall be no responsibility on the Trustee, any Employer, or anyone else to see to the application of such benefit or installment thereof distributed to such person or institution.

21.7  Plan Mergers. In the event of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each Participant in the Plan shall be entitled to a benefit immediately after the merger, consolidation, or transfer if the Plan then terminated which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer if the Plan had then been terminated.

21.8  Missing Participants. If the Plan Administrator is unable to make a payment to a Participant or a Beneficiary because the whereabouts or the identity of the Participant or the Beneficiary cannot be ascertained by mailing to the last known address shown on the records of the Employer or the Trustee, the Plan Administrator shall dispose of the benefit otherwise payable to the Participant as follows:

(A) If the amount payable to the Participant or Beneficiary does not exceed the sum of One Thousand Dollars ($1,000), the benefit of such Participant shall be forfeited as of the last day of the Plan Year

26

in which the Plan Administrator determines that the identity or location of such person cannot be ascertained, and shall be disposed of in accordance with Section 11.2; and

(B) If the amount payable to the Participant or Beneficiary exceeds the sum of One Thousand Dollars ($1,000), the amount payable to the Participant or Beneficiary shall be invested in the existing investments and held until the identity or the location of the Participant or the Beneficiary is ascertained by the Plan Administrator; provided that, if the identity or location of the Participant or Beneficiary is not determined before the end of the Plan Year in which the Participant would have attained sixty-five (65) years of age, the amount credited to the account of the Participant at the end of such year shall be forfeited as of the end of such year and shall be disposed of in accordance with Section 11.2.

In the event a Participant or Beneficiary whose benefit was forfeited pursuant to the provisions of this section shall later validly claim the benefits so forfeited, the amount so forfeited shall be paid to such person by the Employer.

21.9  Payments Under a Qualified Domestic Relations Order.

(A) Early Payment Option.  In addition to the payment options otherwise available in the Plan, pursuant to a domestic relations order, distribution of all or any portion of the account balance of a Participant may be paid to an Alternate Payee (as defined in Section 414(p) of the Code) in an amount specified in such domestic relations order in a lump-sum payment as soon as practical after the Plan Administrator determines that the domestic relations order is a Qualified Domestic Relations Order (as defined in Section 414(p) of the Code) (a “QDRO”); provided that, the full amount allocated to the Firm Account of the Participant is fully vested and not subject to forfeiture by the Participant in any event.
In accordance with the QDRO, the Plan Administrator shall make a lump-sum payment to the Alternate Payee in the amount specified in the QDRO to the extent that the Participant named in the QDRO has assets allocated to his account; provided that, the Alternate Payee consents to such distribution.

(B) Delayed Payment: Segregated Accounts.  To the extent that the QDRO or the Plan requires payment of a portion of the account of a Participant to an Alternate Payee at a later time, such amount shall be segregated into a separate account for such Alternate Payee and such amount shall be invested as directed by the Alternate Payee in accordance with Article VIII.

(C) Allocation of Basis and Risk of Forfeiture.  If the Alternate Payee is the spouse or former spouse of the Participant, the Participant’s basis in his account, if any, shall be apportioned between the Participant and the Alternate Payee based on the percentage of the Participant’s account to which each is entitled pursuant to the QDRO. If the Alternate Payee is not the spouse or former spouse of the Participant, the Participant’s basis in his account, if any, need not be apportioned.

(D) Reduction of Participant’s Accounts.  With respect to any amount paid to an Alternate Payee pursuant to subsection 22.9(A) or any amount allocated to a segregated account for an Alternate Payee pursuant to subsection 22.9(B), the Participant’s accounts shall be debited so that the risk of forfeiture, if any, and the Participant’s basis in his account, if any, shall be apportioned between the Participant and the Alternate Payee based on the percentage of the Participant’s account to which each is entitled pursuant to the QDRO. Alternately, if the Alternate Payee is not the spouse or former spouse of the Participant, the Participant may direct the Plan Administrator as to which of his accounts, if any, that are fully vested and not subject to forfeiture in any event shall be debited.

(E) Liquidation of Investments.  The Participant’s investments in the mutual funds and the A.G. Edwards Stock fund shall be liquidated pro rata, and the Treasury Zeros will be liquidated only if there is an insufficient amount in the mutual funds and the A.G. Edwards Stock fund.

(F) Suspension Penalties.  Notwithstanding anything to the contrary in the Plan, a Participant who is actively employed at the time a QDRO payment or allocation is made on his behalf, shall not be subject to any suspension penalties merely because of such early QDRO payment or allocation.

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21.10  Adoption of Plan by an Affiliate. With the consent of the Sponsor, any Affiliate legally eligible to do so may adopt this Plan and thereby become an Employer and become bound as an Employer by all of the terms of the Plan as herein provided with respect to such of its Employees who are eligible to participate in this Plan. Any such Affiliate may adopt the Plan by executing and filing with the Sponsor an adoption agreement. An Affiliate will be deemed to have adopted the Plan by making contributions to the Plan.

21.11  Acceptance of Transfers. The Plan Administrator may accept, but is not required to accept, a transfer on behalf of a Participant from the trustee of a plan which meets the requirements of Section 401(a). For purposes of this section a rollover contribution is not considered a transfer.

In the event any optional form of benefit under this Plan permits a distribution prior to the Participant’s retirement, death, disability, or Termination of Employment, and prior to plan termination, the optional form of benefit is not available with respect to benefits attributable to assets (including any post-transaction earnings thereon) that are transferred to this Plan from a money purchase pension plan qualified under Section 401(a) of the Code (other than any portion of those assets attributable to voluntary employee contributions).

ARTICLE XXII — TOP-HEAVY REQUIREMENTS

22.1  Top-Heavy Determination. For purposes of this Article, the Plan will be determined to be Top-Heavy for a Plan Year if, as of the Determination Date, the aggregate value of the accounts of Key Employees under the Plan exceeds sixty percent (60%) of the aggregate value of the accounts of all Participants under the Plan as determined in accordance with Section 416(g) of the Code.

Payments made within the five Plan Years immediately preceding such Plan Year shall be added to the account balances or the present value of the cumulative accrued benefits with respect to a defined benefit plan in determining whether this Plan is Top-Heavy. The preceding sentence shall also apply to payments from a terminated plan which would have been included in this Plan if it had not been terminated. The account balance or present value of the cumulative accrued benefits with respect to a defined benefit plan of a Participant who is not a Key Employee with respect to the Plan Year but who was a Key Employee in a prior year shall be disregarded. The account balance or present value of the cumulative accrued benefits with respect to a defined benefit plan of a Participant who has not performed services for an Employer during the five Plan Years immediately preceding such Plan Year shall be disregarded.

All plans qualified under Section 401(a) of the Code and adopted by any member of the Controlled Group shall be aggregated and treated as one plan (the “Plan”) for purposes of this Article.

22.2  Determination Date. The Determination Date, with respect to any Plan Year, shall be the last day of the immediately preceding Plan Year.

22.3  Valuation of Fund as of Determination Date. The value of the Fund, and of the respective Participant accounts which together constitute the Fund, shall be determined as of the Determination Date in accordance with Article IX.

22.4  Key Employee. “Key Employee” means an Employee, former employee or Employee’s Beneficiary who, at any time during the Plan Year or any of the four preceding Plan Years, is:

(A) An officer of an Employer having an annual compensation greater than $130,000;

(B) One of the ten (10) Employees having annual compensation from an Employer of more than the limitation in effect under Section 415(c)(1)(A) of the Code and owning (or considered as owning within the meaning of Section 318 of the Code) the largest interests in the Employer;

(C) A five percent (5%) owner of an Employer; or

A one percent (1%) owner of an Employer having an annual compensation from the Employer of more than One Hundred Fifty Thousand Dollars ($150,000); as defined in accordance with Section 416(i)(1) of the Code.

22.5  Vesting Requirements. If the Plan is determined to be Top-Heavy for a Plan Year in accordance with Section 22.1, the vested percentage of the amount credited to the Firm Account of a Participant as of such Plan

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Year and all subsequent Plan Years in accordance with Section 10.1 and Section 10.3 shall be redetermined in accordance with the following schedule:

After Two Years of Service	20	%
After Three Years of Service	40	%
After Four Years of Service	60	%
After Five Years of Service	100	%

 

22.6  Minimum Benefits. If the Plan is determined to be Top-Heavy for a Plan Year in accordance with Section 22.1, the Employers shall contribute on behalf of each Participant who is not a Key Employee the lesser of three percent (3%) of such Participant’s Compensation for such Plan Year and the highest percentage of Compensation allocated to the account of a Key Employee for that year.

For Plan Years commencing before January 1, 1989, any amount required to be contributed on behalf of a Participant under this Article, shall be reduced by the amount, if any, of the Deductible Employee Contributions made by or on behalf of the Participant for the year.

22.7  EGTRRA Amendments. This section shall apply for purposes of determining whether the plan is a top-heavy plan under Section 416(g) of the Code for Plan Years beginning after December 31, 2001, and whether the plan satisfies the minimum benefits requirements of Section 416(c) of the Code for such years. This section amends the preceding sections of this Article.

(A) Determination of top-heavy status.

Key employee means any employee or former employee (including any deceased employee) who at any time during the Plan Year that includes the determination date was an officer of the employer having annual compensation greater than $130,000 (as adjusted under Section 416(i)(1) of the Code for Plan Years beginning after December 31, 2002), a five percent (5%) owner of the employer, or a one percent (1%) owner of the employer having annual compensation of more than $150,000. For this purpose, annual compensation means compensation within the meaning of Section 415(c)(3) of the Code. The determination of who is a key employee will be made in accordance with Section 416(i)(1) of the Code and the applicable regulations and other guidance of general applicability issued thereunder.

The present values of accrued benefits and the amounts of account balances of an employee as of the determination date shall be increased by the distributions made with respect to the employee under the plan and any plan aggregated with the plan under Section 416(g)(2) of the Code during the one-year period ending on the determination date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the plan under Section 416(g)(2)(A)(i) of the Code. In the case of a distribution made for a reason other than Termination of Employment, death, or disability, this provision shall be applied by substituting “five-year period” for “one-year period.”

The accrued benefits and accounts of any individual who has not performed services for the employer during the one-year period ending on the determination date shall not be taken into account.

(B) Minimum benefits.  Employer matching contributions shall be taken into account for purposes of satisfying the minimum contribution requirements of Section 416(c)(2) of the Code and the plan. The preceding sentence shall apply with respect to matching contributions under the plan or, if the plan provides that the minimum contribution requirement shall be met in another plan, such other plan. Employer matching contributions that are used to satisfy the minimum contribution requirements shall be treated as matching contributions for purposes of the actual contribution percentage test and other requirements of Section 401(m) of the Code.

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ARTICLE XXIII — SPECIAL ESOP PROVISIONS¹

This Article contains provisions required to qualify the Employee Stock Ownership Plan as a plan described in Section 4975(e)(7) of the Code. So long as (a) the Company does not extend credit to the Plan, (b) there is no sale of employer securities to the Plan in a tax-free rollover transaction described in Section 1042 of the Code (which does not apply to publicly-traded stock), and (c) Participants are entitled to receive distribution of their ESOP accounts as soon as administratively feasible after termination of employment, the provisions of this Article will not have any operative effect.

23.1  Share Purchase Loans. At the direction of the Plan Administrator, the Trustee may from time to time enter into a loan (a “Share Purchase Loan”) for the purpose of acquiring shares of A.G. Edwards, Inc. (“Shares”) that constitute “employer securities” within the meaning of Section 409(l) of the Code or for the purpose of repaying all or any portion of any outstanding Share Purchase Loan. The terms of any Share Purchase Loan shall be subject to the conditions and restrictions set forth herein. Shares acquired with the proceeds of a Share Purchase Loan shall be credited to a “Loan Suspense Account” until released in accordance with the following section. All loans that are incurred as part of an integrated transaction shall be treated as a single Share Purchase Loan for all purposes of the Plan.

23.2  Release from Loan Suspense Account. Subject to the following provisions of this section, for each Plan Year throughout the duration of a Share Purchase Loan, a portion of the Shares acquired with the proceeds of such Share Purchase Loan shall be withdrawn from the Loan Suspense Account and allocated to Participants’ ESOP Stock Accounts in accordance with the provisions of this Article.

As of the last day of each Plan Year, the number of Shares that shall be released from the Loan Suspense Account shall be equal to the product of the number of Shares that are then held in the Loan Suspense Account multiplied by a fraction, the numerator of which is the amount of principal and interest paid on the related Share Purchase Loan for that Plan Year and the denominator of which is the amount of principal and interest paid or payable on the related Share Purchase Loan for that Plan Year and for all future years. For purposes of determining the denominator of the fraction described in the preceding sentence for any Plan Year, if the interest rate under the Share Purchase Loan is variable, the interest rate to be paid in future years shall be assumed to be equal to the interest rate applicable as of the last day of that Plan Year. Notwithstanding the foregoing provisions of this section, the number of Shares attributable to a Share Purchase Loan that are withdrawn from the Loan Suspense Account shall be proportionate to principal payments only, if:

(A) Such release is consistent with the provisions of the Share Purchase Loan with respect to the release of Shares as collateral, if any, for such loan;

(B) The Share Purchase Loan provides for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for ten (10) years;

(C) Interest is disregarded for purposes of determining such release only to the extent that it would be determined to be interest under standard loan amortization tables; and

(D) The term of the Share Purchase Loan, together with any renewal, extension or refinancing thereof, does not exceed ten (10) years.
In the event that more than one (1) Share Purchase Loan is outstanding at any time, the number of Shares that is released from encumbrance at any time under this paragraph shall be based solely on the repayment of the Share Purchase Loan to which such Shares are attributable.

23.3  Use of Loan Proceeds and Dividends. The proceeds of a Share Purchase Loan shall be used within a reasonable time after receipt to acquire Shares or to repay all or any portion of such Share Purchase Loan or any outstanding Share Purchase Loan. Cash dividends with respect to Shares acquired with the proceeds of a Share Purchase Loan that are not allocated to Participants’ Stock Accounts, and earnings thereon, shall, at the direction of the Plan Administrator, be used to make payments on such Share Purchase Loan. Such cash dividends, and

¹   Article XVIII effective 1/1/01

30

earnings thereon, that are not applied to make payments on Share Purchase Loans in accordance with the foregoing provisions of this section shall be invested in the Company Stock Fund.

23.4  Allocation of Shares Released From Suspense Account. Participants’ accounts shall be adjusted for dividends paid on Company Stock, as follows:

(A) Dividends Used to Repay Share Purchase Loans and Attributable to Allocated Shares — As of the last day of the Plan Year, Shares released from the Loan Suspense Account that year by reason of dividends paid with respect to Shares allocated to Participants’ Stock Accounts, if any, shall be allocated among and credited to the accounts of Participants, pro rata, according to the number of Shares held in such accounts on the date the dividends are paid. The Shares so allocated shall have a fair market value as of the date allocated equal to such dividends (the “Dividend Replacement Value”), and if the shares initially allocated in accordance with the immediately preceding sentence do not have a fair market value at least equal to the Dividend Replacement Value, then additional Shares shall be allocated to Participants’ Stock Accounts until the fair market value of the total number of shares allocated under this subsection (a) equals the Dividend Replacement Value. Shares released from the Loan Suspense Account during the Plan Year by reason of the use of dividends on unallocated Shares to make payments of principal and interest on a Share Purchase Loan shall be used first for this purpose and, to the extent that additional Shares are required, Shares contributed by the Employer or acquired with employer contributions (other than employer contributions used to make payments of principal and interest on Share Purchase Loans) during such Plan Year shall be applied for such purpose. Dividends paid with respect to Shares allocated to Participants’ accounts that are used to repay a Share Purchase Loan shall be charged to the accounts pro rata, according to the number of Shares held in the accounts of such Participants on the date the dividends are paid.

(B) Dividends Used to Repay Share Purchase Loans and Attributable to Unallocated Shares — Shares released from the Loan Suspense Account during the Plan Year by reason of the use of dividends on unallocated Shares to make payments of principal and interest on a Share Purchase Loan (reduced by any such Shares required to be allocated under subsection (a) above) shall be allocated to the accounts in proportion to the subaccounts attributable to dividends on unallocated shares, employer contributions and earnings thereon; and such subaccounts shall be debited in the same proportion.

(C) Other Amounts Used to Repay Share Purchase Loans — Shares released from the Loan Suspense Account during the Plan Year by reason of the use of contributions and earnings thereon to make payments of principal and interest on a Share Purchase Loan (reduced by any such shares required to be allocated under subsection (a) above) shall be allocated to the Participants’ accounts in proportion to the subaccounts attributable to dividends on unallocated shares, employer contributions and earnings thereon; and such subaccounts shall be debited in the same proportion. For this purpose, Shares released from the Loan Suspense Account after the end of a Plan Year on account of payments on a Share Purchase Loan with contributions for such Plan Year, but that were made after the end of such Plan Year, shall be deemed to have been released on the last day of such Plan Year.

23.5  Separate Accounting for Multiple Loans. The Plan Administrator shall establish recordkeeping procedures and maintain such Participant subaccounts or other records as are necessary to determine which Shares were acquired with the proceeds of each Share Purchase Loan or were acquired other than with the proceeds of a Share Purchase Loan for purposes of complying with the terms of the Plan, including its terms relating to the use of dividends on Shares, the release of Shares from the Loan Suspense Account and the distribution of Shares acquired with the proceeds of a Share Purchase Loan.

23.6  Valuation. The fair market value of Shares and all other Plan assets shall be determined as of each valuation date. If the Shares are not readily tradable on an established securities market, the fair market value shall be determined by an independent appraiser within the meaning of Section 401(a)(28)(C) of the Code.

23.7  Nonallocation Provision. Notwithstanding any other provision of this Plan, no portion of the assets of the Plan attributable to Shares acquired by the Plan in a sale to which Section 1042 of the Code applies may accrue or be allocated directly or indirectly during a Nonallocation Period to:

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(A) Any Employee who sells Shares to the Plan in a transaction to which Section 1042 of the Code applies;

(B) Any individual who is related to such an Employee within the meaning of Section 267(b) of the Code, except as otherwise provided by Section 409(n)(3)(A) of the Code; and

(C) Any other individual owning (either directly or indirectly) more than twenty-five percent (25%) of (i) any class of outstanding stock of the Employer, or any corporation which is a member of the same controlled group of corporations within the meaning of Section 409(l)(4) of the Code, or (ii) the total value of any class of outstanding stock of such corporation. For purposes of the preceding sentence, an individual shall be treated as twenty-five percent (25%) shareholder (1) at any time during the one (1) year period ending on the date of the sale to which Section 1042 of the Code applies or (2) on the dates as of which any Shares sold to the Plan on a transaction to which Section 1042 of the Code applies are allocated to the accounts of Participants. In the event the individual’s situation is described in number (1) of the preceding sentence, such individual shall continue to be treated as a twenty-five percent (25%) shareholder until all of the Shares acquired by the Plan in a transaction to which Section 1042 of the Code applies have been allocated. If, however, an individual first becomes a twenty-five percent (25%) shareholder at such time as described in number (2) above, such an individual shall only be treated as a twenty-five percent (25%) shareholder with respect to those Shares acquired in a transaction to which Section 1042 of the Code applies which are allocated as of the date or dates on which an individual is a twenty-five percent (25%) shareholder.
The Nonallocation Period is the period beginning on the date of the sale and ending on the date that is ten (10) years after the later of (1) the date of the sale of the Shares to the Plan in a transaction to which Section 1042 of the Code applies, or (2) the date of the Plan allocation attributable to the final payment of acquisition indebtedness incurred in connection with such a sale.

23.8  Latest Time of Payment for Company Stock. Any contrary provision of this Plan notwithstanding, unless a Participant elects that the special distribution provisions of this section not apply, the portion of his vested account attributable to Shares credited to his account shall be distributed no later than as follows:

(A) Such portion shall be paid in substantially equal periodic payments (not less frequently than annually) over a period not longer than five (5) years, or, if the value of such accounts exceeds five hundred thousand dollars ($500,000) (or such greater amount as may be in effect under Section 409(o)(1)(C)) of the Code, five (5) years plus one (1) additional year (but not more than five (5) additional years) for each one hundred thousand dollars ($100,000) (or such greater amount as may be in effect under Section 409(o)(1)(C)) of the Code or fraction thereof by which the value of such accounts exceeds five hundred thousand dollars ($500,000) (or such greater amount as may be in effect under Section 409(o)(1)(C)) of the Code.

(B) Except as provided below, payments under (a) shall commence not later than one (1) year after the end of the following:

(1) In the case of a Participant whose employment terminates after he attains age sixty-five (65), or at any age by reason of Death or permanent disability, the Plan Year in which his employment terminates.

(2) In the case of a Participant whose employment terminates under circumstances not described in (i), the fifth (5^th) Plan Year following the year in which his employment terminates, provided that, this subsection shall not apply if the Participant is reemployed before the end of such fifth (5^th) Plan Year.

Commencement prior to the date on which a Participant attains Normal Retirement Age shall be subject to the Participant’s consent in accordance with Article XIV, and, if a Participant does not consent, commencement shall occur as soon as practicable after the Participant attains age sixty-five (65).

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IN WITNESS WHEREOF, the undersigned hereby adopts the foregoing amendment this day of February, 2002 pursuant to authority delegated by the Board of Directors of A.G. Edwards, Inc.

By:  

Title:  

33

FIRST AMENDMENT
A.G. EDWARDS, INC.
RETIREMENT AND PROFIT SHARING PLAN
2002 RESTATEMENT

The A.G. Edwards, Inc. Retirement and Profit Sharing Plan (the “Plan”) originally was adopted September 30, 1967. The Plan has been amended from time to time, most recently in the form of a restated plan document dated February 24, 2002 (the “2002 Restatement”).

A.G. Edwards, Inc., now wishes to amend the plan to permit Participants to take loans against their vested plan balances, add additional withdrawal provisions for participants between the ages of 55 to 59-1/2 and adopt the model amendment for the final regulations under Section 401(a)(9) of the IRS Code.

NOW THEREFORE, the Plan is hereby amended as follows:

1.    Effective December 3, 2002, a new Section 12.4 is added to the Plan to read in its entirety as follows:

12.4  Availability of Loans. A Participant who is an Employee may apply to the Plan Administrator to borrow from the Trust Fund. If the application is approved, the Plan Administrator shall direct the Trustee to make the loan in a lump sum cash payment to the Participant. Loans shall be granted in a uniform and nondiscriminatory manner without regard to the level of compensation, race, color, religion, age, sex or national origin of the Participant. The Plan Administrator shall determine the terms of such loans, and shall adopt rules for administering loans hereunder, including prescribing processing fees, and may revise such rules from time to time; provided such terms and rules apply to Participants in a uniform and nondiscriminatory manner. Loan rules shall be set forth in such documents, including electronic format, as the Plan Administrator may determine.

2.    Effective March 1, 2002, an additional paragraph is added to Section 14.2 as follows:

If a Participant incurs a Termination of Employment for reasons other than death or Total Disability during or after the calendar year in which such Participant attains the age of fifty-five (55) and before the Participant attains the age of fifty-nine and one-half (59-1/2) years, and the Firm Account of such Participant is fully vested at the time of such termination, the Participant may elect to withdraw all or any portion of his or her Plan benefit prior to the Participant reaching the age of fifty-nine and one-half (59-1/2) years. Such an election must be received by the Plan Administrator in a form suitable to the Plan Administrator. The amount so withdrawn shall be distributed to the withdrawing Participant in the form specified by this Article as soon as practical after such election is received.

3.    Effective March 1, 2002, an additional paragraph is added to Section 14.3 as follows:

If a Participant incurs a Termination of Employment for reasons other than death or Total Disability during or after the calendar year in which such Participant attains the age of fifty-five (55) and before the Participant attains the age of fifty-nine and one-half (59-1/2) years, before the Firm Account of such Participant is fully vested, the Participant may elect to withdraw all or any portion of his or her vested Plan benefit prior to the Participant reaching the age of fifty-nine and one-half (59-1/2) years. Such an election must be received by the Plan Administrator in a form suitable to the Plan Administrator. The amount so withdrawn shall be distributed to the withdrawing Participant in the form specified by this Article as soon as practical after such election is received.

4.    Effective March 1, 2002, the first paragraph of Section 14.4 of the Plan is hereby amended to read in its entirety as follows:

14.4  Time of Payment. As soon as practicable after a benefit becomes distributable in accordance with Section 14.1, the first paragraph of Section 14.2 or the first paragraph of Section 14.3, such benefit shall be distributed to the Participant entitled thereto in the form specified by this Article.

5.    Effective January 1, 2003, Section 16.2 of the Plan is hereby amended to read in its entirety as follows:

16.2  Latest Time for Payment. The following provisions of this Section 16.2 will apply for purposes of determining required minimum distributions under Section 401(a)(9) of the Code. The requirements of this

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Section will take precedence over any inconsistent provisions of the Plan. All distributions required under this Section will be determined and made in accordance with the Treasury Regulations under Section 401(a)(9) of the Code. Notwithstanding the other provisions of this Section, distributions may be made under a designation made before January 1, 1984 in accordance with Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act (TEFRA) and the provisions of the Plan that relate to Section 242(b)(2) of TEFRA.

(A) Required Beginning Date.  The Participant’s entire interest will be distributed, or will begin to be distributed, to the Participant no later than the Participant’s Required Beginning Date.

(B) Death of Participant Before Distributions Begin.  If the Participant dies before distributions begin, the Participant’s entire interest will be distributed, or begin to be distributed, no later than as follows:

(1) If the Participant’s surviving spouse is the Participant’s sole designated Beneficiary, and if the Participant or Beneficiary elects the life expectancy rule in accordance with Section 16.2(G), then distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70-1/2, if later.

(2) If the Participant’s surviving spouse is not the Participant’s sole designated Beneficiary, and if the Participant or Beneficiary elects the life expectancy rule in accordance with Section 16.2(G), then distributions to the designated Beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died.

(3) If there is no designated Beneficiary as of September 30 of the year following the year of the Participant’s death, or if the Participant or Beneficiary does not elect the life expectancy rule in accordance with Section 16.2(G), the Participant’s entire interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.

(4) If the Participant’s surviving spouse is the Participant’s sole designated Beneficiary and the surviving spouse dies after the Participant but before distributions to the surviving spouse begin, this Section 16.2(B), other than Section 16.2(B)(1), will apply as if the surviving spouse were the Participant.

For purposes of Sections 16.2(B), 16.2(D) and 16.2(E), unless Section 16.2(B)(4) applies, distributions are considered to begin on the Participant’s Required Beginning Date. If Section 16.2(B)(4) applies, distributions are considered to begin on the date distributions are required to begin to the surviving spouse under Section 16.2(B)(1). If distributions under an annuity purchased from an insurance company irrevocably commence to the Participant before the Participant’s Required Beginning Date (or to the Participant’s surviving spouse before the date distributions are required to begin to the surviving spouse under Section 16.2(B)(1)), the date distributions are considered to begin is the date distributions actually commence.

Unless the Participant’s interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the Required Beginning Date, as of the first distribution calendar year distributions will be made in accordance with Sections 16.2(C), 16.2(D) and 16.2(E). If the Participant’s interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of Section 401(a)(9) of the Code and the Treasury Regulations.

(C) Required Minimum Distributions During Participant’s Lifetime.  During the Participant’s lifetime, the minimum amount that will be distributed for each distribution calendar year is the lesser of:

(1) the quotient obtained by dividing the Participant’s account balance by the distribution period in the Uniform Lifetime Table set forth in Section 1.401(a)(9)-9 of the Treasury

35

Regulations, using the Participant’s age as of the Participant’s birthday in the distribution calendar year; or

(2) if the Participant’s sole designated Beneficiary for the distribution calendar year is the Participant’s spouse, the quotient obtained by dividing the Participant’s account balance by the number in the Joint and Last Survivor Table set forth in Section 1.401(a)(9)-9 of the Treasury Regulations, using the Participant’s and spouse’s attained ages as of the Participant’s and spouse’s birthdays in the distribution calendar year.

Required minimum distributions will be determined under this Section 16.2(C) beginning with the first distribution calendar year and up to and including the distribution calendar year that includes the Participant’s date of death.

(D) Required Minimum Distributions After Participant’s Death on or After Date Distributions Begin.

(1) Participant Survived by Designated Beneficiary.  If the Participant dies on or after the date distributions begin and there is a designated Beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s account balance by the longer of the remaining life expectancy of the Participant or the remaining life expectancy of the Participant’s designated Beneficiary, determined as follows:

(a) The Participant’s remaining life expectancy is calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.

(b) If the Participant’s surviving spouse is the Participant’s sole designated Beneficiary, the remaining life expectancy of the surviving spouse is calculated for each distribution calendar year after the year of the Participant’s death using the surviving spouse’s age as of the spouse’s birthday in that year. For distribution calendar years after the year of the surviving spouse’s death, the remaining life expectancy of the surviving spouse is calculated using the age of the surviving spouse as of the spouse’s birthday in the calendar year of the spouse’s death, reduced by one for each subsequent calendar year.

(c) If the Participant’s surviving spouse is not the Participant’s sole designated Beneficiary, the designated Beneficiary’s remaining life expectancy is calculated using the age of the Beneficiary in the year following the year of the Participant’s death, reduced by one for each subsequent year.

(2) No Designated Beneficiary.  If the Participant dies on or after the date distributions begin and there is no designated Beneficiary as of September 30 of the year after the year of the Participant’s death, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s account balance by the Participant’s remaining life expectancy calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.

(E) Required Minimum Distributions After Participant’s Death Before Date Distributions Begin.

(1) Participant Survived by Designated Beneficiary.  If the Participant dies before the date distributions begin and there is a designated Beneficiary, and if the Participant or Beneficiary elects the life expectancy rule in accordance with Section 16.2(G), the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s account balance by the remaining life expectancy of the Participant’s designated Beneficiary, determined as provided in Section 16.2(D). If the Participant dies before the date distributions begin and there is a designated Beneficiary, and if neither the Participant nor Beneficiary elects the life expectancy rule in accordance with Section 16.2(G), distribution

36

of the Participant’s entire interest will be completed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.

(2) No Designated Beneficiary.  If the Participant dies before the date distributions begin and there is no designated Beneficiary as of September 30 of the year following the year of the Participant’s death, distribution of the Participant’s entire interest will be completed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.

(3) Death of Surviving Spouse Before Distributions to Surviving Spouse Are Required to Begin.  If the Participant dies before the date distributions begin, the Participant’s surviving spouse is the Participant’s sole designated Beneficiary, and the surviving spouse dies before distributions are required to begin to the surviving spouse under Section 16.2(B)(1), this Section 16.2(E)(3) will apply as if the surviving spouse were the Participant.

(F) Definitions.

(1) Designated Beneficiary:  The individual who is designated as the Beneficiary under Section 3.4 of the Plan and is the designated Beneficiary under Section 401(a)(9) of the Code and Section 1.401(a)(9)-1, Q&A-4, of the Treasury Regulations.

(2) Distribution calendar year:  A calendar year for which a minimum distribution is required. For distributions beginning before the Participant’s death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant’s Required Beginning Date. For distributions beginning after the Participant’s death, the first distribution calendar year is the calendar year in which distributions are required to begin under Section 16.2(B). The required minimum distribution for the Participant’s first distribution calendar year will be made on or before the Participant’s Required Beginning Date. The required minimum distribution for other distribution calendar years, including the required minimum distribution for the distribution calendar year in which the Participant’s Required Beginning Date occurs, will be made on or before December 31 of that distribution calendar year.

(3) Life expectancy:  Life expectancy as computed by use of the Single Life Table in Section 1.401(a)(9)-9 of the Treasury Regulations.

(4) Participant’s account balance:  The Participant’s account balance as of the last Valuation Date in the calendar year immediately preceding the distribution calendar year (valuation calendar year) increased by the amount of any contributions made and allocated or forfeitures allocated to the account balance as of dates in the valuation calendar year after the Valuation Date and decreased by distributions made in the valuation calendar year after the Valuation Date. The account balance for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the distribution calendar year if distributed or transferred in the valuation calendar year.

(5) Required Beginning Date:  April 1 of the calendar year following the later of (a) the calendar year in which the Participant attains 70-1/2 years of age; and (b) if the Participant is not a five percent (5%) owner, as defined in Section 416(i) of the Code, the calendar year in which the Participant incurs a Termination of Employment.

(G) Election of Life Expectancy Rule.  If the Plan permits distribution of death benefits in the form of an annuity contract or installment payments over a period longer than five years, a Participant or Beneficiary who has elected distribution in the form of an annuity contract or installment payments, may elect the life expectancy rule in Sections 16.2(B) and 16.2(E) to apply to distributions after the death of a Participant who has a designated Beneficiary. The election must be made no later than the earlier of September 30 of the calendar year in which distribution would be required to begin under Section 16.2(B), or by September 30 of the calendar year which contains the fifth anniversary of the Participant’s (or, if applicable, surviving spouse’s) death.

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IN WITNESS WHEREOF, the undersigned as Secretary of A.G. Edwards, Inc. hereby certifies that this First Amendment was duly adopted by A.G. Edwards, Inc.

By:  

Title:  

38

SECOND AMENDMENT
A.G. EDWARDS, INC.
RETIREMENT AND PROFIT SHARING PLAN
2002 RESTATEMENT

The A.G. Edwards, Inc. Retirement and Profit Sharing Plan (the “Plan”) originally was adopted September 30, 1967. The Plan has been amended from time to time, most recently in the form of a restated plan document dated February 24, 2002 (the “2002 Restatement”) and a First Amendment to such Restatement.

A.G. Edwards, Inc., now wishes to amend the plan to make technical changes requested by the Internal Revenue Service.

Except as otherwise explicitly provided, the amendments made by this Second Amendment are effective as of January 1, 1997 or such later date as the amended Section became effective.

NOW THEREFORE, the Plan is hereby amended as follows:

6.    Effective January 1, 1998, Section 3.6 is amended to read in its entirety as follows:

3.6  Compensation means, except as provided in the following sentence, the total amount paid to an Employee during a Plan Year by an Employer in the form of salary, commissions, overtime pay, finder’s fees and bonuses (including corporate executive bonus, merit bonus, institutional bonus, branch manager’s bonus or total production bonus); plus the amount of salary reduction as a result of an election pursuant to a plan or plans governed by Section 401(k), Section 403(b), Section 457, Section 132(f)(4) or Section 125 of the Code. Notwithstanding the above, Compensation shall not include: (1) amounts attributable to other sources such as, for example, contest awards, reimbursement of moving expenses, life insurance premiums, tuition reimbursements, and amounts attributable to stock options or restricted stock; or (2) any payment characterized as deferred compensation for purposes of Section 404 of the Code (either when earned or when paid).

Compensation of each Participant taken into account under the Plan shall in no event exceed the amount specified in Section 401(a)(17) of the Code as adjusted by the Commissioner for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code ($200,000 for 2002).

7.    Section 3.20 is amended to read in its entirety as follows:

3.20  Highly Compensated Employee for a Plan Year means a Highly Compensated active Employee or a Highly Compensated former Employee.

A Highly Compensated active Employee includes any Employee who (a) performs services for the Sponsor or an Affiliate during the Plan Year and who had Compensation in excess of the amount specified in Section 414(q)(1)(B) of the Code, as adjusted by the Secretary for increases in the cost of living ($90,000 for 2003) for the preceding Plan Year, or (b) is a five (5%) percent owner, as defined in Section 416(i) of the Code, at any time during the Plan Year or the preceding Plan Year.

Highly Compensated Employees shall be limited to Employees in the group consisting of the top twenty (20%) percent of Employees when ranked on the basis of compensation paid in such prior Plan Year.

A Highly Compensated former Employee includes any Employee who separated from service (or was deemed to have separated prior to the Plan Year), performs no service for the Sponsor or an Affiliate during the Plan Year, and was a Highly Compensated active Employee for either the year of separation or any Plan Year ending on or after the Employee’s fifty-fifth (55^th) birthday.

The determination of who is a Highly Compensated Employee will be made in accordance with Section 414(q) of the Code and the regulations thereunder.

8.    The following sentence is added at the end of Section 6.7:

For purpose of this Section, Excess Contributions for a Plan Year shall first be reduced by amounts previously distributed in accordance with Section 6.2 to correct Excess Deferrals for the Plan Year.

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4.    Section 7.6 is amended to read in its entirety as follows:

Effective January 1, 2002, subject to the age 50 catch-up contribution exception in Section 6.2, in no event shall the sum of the Employer Contributions, employee contributions (other than Rollover contributions) and forfeitures allocated to the account of a Participant for the Plan Year exceed the lesser of:

(A) The amount specified in Section 415(c)(1)(A) of the Code, as adjusted annually for any applicable increases in the cost of living in accordance with Section 415(d) of the Code, as in effect as of the last day of the Plan Year ($40,000 for 2002); and

(B) One hundred percent (100%) of the Participant’s compensation for such year.

Effective January 1, 1998, for purposes of this Section, compensation shall mean wages within the meaning of Section 3401(a) of the Code (for purposes of income tax withholding at the source) but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exceptions for agricultural labor and services performed outside the United States), plus the amount of salary reduction as a result of an election pursuant to a plan or plans governed by Section 125, Section 401(k) or Section 403(b) of the Code (inclusively) and, on and after January 1, 1998, Section 457 and Section 132(f)(4) of the Code.

Section 415 of the Code, which limits the benefits and contributions under qualified plans, is hereby incorporated by reference. The limitation year shall be the Plan Year.

Employer Contributions and forfeitures under this Plan that cannot be credited to the account of a particular Participant for a Plan Year because of the limitations imposed by this section shall be disposed of as follows: first, unmatched Deductible Employee Contributions, if any, shall be returned to the respective Participants who made the contributions to the extent the distribution would reduce the excess in the Participant’s account; and secondly, any remaining excess Employer Contribution and forfeitures allocable to the Employee Accounts of the Participant shall be held in a separate account established and maintained by the Plan Administrator (the “Suspense Account”). Amounts credited to the Suspense Account shall be used to reduce Employer Contributions for the next Plan Year (and succeeding Plan Years, if necessary) on behalf of such Participant if such Participant is covered by the Plan as of the last day of the Plan Year. If such Participant is not covered by the Plan as of the end of the Plan Year, then such excess amounts must be held unallocated in the Suspense Account for the Plan Year and allocated and reallocated in the next Plan Year to the accounts of the remaining Participants as an Employer Contribution for such year. Amounts in Suspense Accounts must be used to reduce employer contributions for all remaining Participants and may not be distributed. Deductible Employee Contributions refunded in accordance with this paragraph shall include any income attributable thereto.

5.    Effective December 3, 2002, Section 8.10 is hereby deleted in its entirely.

6.    Section 11.1 is amended to read in its entirety as follows:

11.1  Reduction of Employer Contribution. The forfeitures for a Plan Year (to the extent not previously applied to reduce Employer Contributions) shall be applied as part of the Employer Contribution required under Section 6.3 for the Plan Year. In addition, at the discretion of the Plan Administrator, forfeitures that occur in a Plan Year before the Employer Contribution for the preceding Plan Year is actually made may be applied as part of the Employer Contribution required under Section 6.3 for such preceding Plan Year.

7.    Section 12.4 is hereby amended to read in its entirety as follows:

12.4  Availability of Loans. Effective December 3, 2002, a Participant who is an Employee may apply in writing to the Plan Administrator to borrow from the Trust Fund up to the vested portion of their accounts. If the application is approved, the Plan Administrator shall direct the Trustee to make the loan in a lump sum cash payment to the Participant. Loans shall be granted in a uniform and nondiscriminatory manner without regard to the level of compensation, race, color, religion, age, sex or national origin of the Participant. The Plan Administrator shall determine the terms of such loans, and shall adopt rules for administering loans hereunder, including prescribing processing fees, and may revise such rules from time to time; provided such terms and rules apply to Participants in a uniform and nondiscriminatory manner. Loan rules shall be set forth in such documents, including electronic format, as the Plan Administrator may determine.

40

A loan made in accordance with this Section in excess of (when added to the outstanding balance of all other loans from the Plan to such Participant) the lesser of:

(A) $50,000 or such lower amount determined by the Plan Administrator (reduced by the excess of the highest outstanding loan balance from the Plan during the one (1) year period ending on the day before the date on which the loan is made over the outstanding loan balance from the Plan on the date the loan is made); and

(B) One-half (1/2) of the vested portion of the account balance of the Participant immediately preceding the application for the loan (adjusted for any distributions or contributions made after such Valuation Date)

shall be treated as taxable income to the Participant.

8.    Section 14.1 is amended to read in its entirety as follows:

14.1  Disability and Fully Vested Over Age 59-1/2. If a Participant incurs a Termination of Employment because of Total Disability, or if a Participant incurs a Termination of Employment after such Participant shall have attained the age of fifty-nine and one-half (59-1/2) years, the entire vested benefit of such Participant, if any, determined in accordance with Section 9.2, shall become distributable after the employment of such Participant with the Employers so terminated.

9.    Section 14.3 is amended to read in its entirety as follows:

14.3  Partially Vested. If a Participant incurs a Termination of Employment for reasons other than death or Total Disability before the Firm Account of such Participant is fully vested, the benefit of such Participant shall be held in Trust until the second December 31^st which occurs after the date on which his employment with the Employers is so terminated. As soon as practical after such December 31^st the vested portion of such benefit, if any, shall become distributable; provided that the amount credited to the accounts of a Participant whose employment with the Employers is so terminated shall not become distributable on account of a Termination of Employment if such Participant is re-employed in Covered Service before such December 31^st; provided that, the entire benefit of a Participant who receives severance benefits in accordance with Appendix A or Appendix B of the A.G. Edwards Severance Benefit Plan in connection with the workforce reduction implemented in the first three months of the year 2002 shall be distributed as soon as practical after the Termination of Employment of the Participant.

As of the earlier of (A) the date as of which benefits are distributed to the Participant, or (B) the date on which the Participant incurs a Break in Service of at least five consecutive years, the unvested portion of the account balance of the Participant shall be forfeited. For this purpose, if the value of the vested portion of an Employee’s account balance is zero upon his Termination of Employment, the Employee shall be deemed to have received a distribution of such vested account as of his or her Termination of Employment.

If a Participant incurs a Termination of Employment for reasons other than death or Total Disability during or after the calendar year in which such Participant attains the age of fifty-five (55) and before the Participant attains the age of fifty-nine and one-half (59-1/2) years, before the Firm Account of such Participant is fully vested, the Participant may elect to withdraw all or any portion of his or her vested Plan benefit prior to the Participant reaching the age of fifty-nine and one-half (59-1/2) years. Such an election must be received by the Plan Administrator in a form suitable to the Plan Administrator. The amount so withdrawn shall be distributed to the withdrawing Participant in the form specified by this Article as soon as practical after such election is received.

10.    Section 14.8 is amended to read in its entirety as follows:

14.8  Direct Rollover of Eligible Rollover Distributions.

(A) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee’s election under this section, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover.

41

(B) Definitions.

(1) Eligible rollover distribution:  An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee’s designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); and, effective January 1, 1999, any hardship distribution described in Section 401(k)(2)(B)(i)(IV).

(2) Eligible retirement plan:  An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee’s eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an Individual Retirement Account or Individual Retirement Annuity.

(3) Distributee:  A distributee includes an employee or former employee. In addition, the employee’s or former employee’s surviving spouse and the employee’s or former employee’s spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse.

(4) Direct rollover:  A direct rollover is a payment by the plan to the eligible retirement plan specified by the distributee.

On and after January 1, 2002, for purposes of this section, an eligible retirement plan shall also mean an annuity contract described in Section 403(b) of the Code and an eligible plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this plan. The definition of eligible retirement plan shall also apply in the case of a distribution to a surviving spouse, or to a spouse or former spouse who is the alternate payee under a qualified domestic relation order, as defined in Section 414(p) of the Code. Any amount that is distributed on account of hardship shall not be an eligible rollover distribution and the distributee may not elect to have any portion of such a distribution paid directly to an eligible retirement plan. A portion of a distribution shall not fail to be an eligible rollover distribution merely because the portion consists of after-tax employee contributions which are not includible in gross income. However, such portion may be transferred only to an individual retirement account or annuity described in Section 408(a) or (b) of the Code, or to a qualified defined contribution plan described in Section 401(a) or 403(a) of the Code that agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible.

11.    Section 22.6 is amended to read in its entirety as follows:

22.6  Minimum Benefits. If the Plan is determined to be Top-Heavy for a Plan Year in accordance with Section 22.1, the Employers shall contribute on behalf of each Participant who is not a Key Employee (in addition to the Employee’s Deductible Contribution) the lesser of three percent (3%) of such Participant’s Compensation for such Plan Year and the highest percentage of Compensation allocated to the account of a Key Employee for that year (including Deductible Contributions).

42

On and after January 1, 2002, Employer matching contributions shall be taken into account for purposes of satisfying the minimum contribution requirements of section 416(c)(2) of the Code and the plan. Employer matching contributions that are used to satisfy the minimum contribution requirements shall be treated as matching contributions for purposes of the actual contribution percentage test and other requirements of section 401(m) of the Code.

IN WITNESS WHEREOF, the undersigned as Secretary of A.G. Edwards, Inc. hereby certifies that this Second Amendment was duly adopted by A.G. Edwards, Inc.

By:  

Title:  

Date:  

43

THIRD AMENDMENT
A.G. EDWARDS, INC.
RETIREMENT AND PROFIT SHARING PLAN
2002 RESTATEMENT

The A.G. Edwards, Inc. Retirement and Profit Sharing Plan (the “Plan”) originally was adopted September 30, 1967. The Plan has been amended from time to time, most recently in the form of a restated plan document dated February 24, 2002 (the “2002 Restatement”) and a First and Second Amendment to such Restatement.

A.G. Edwards, Inc., now wishes to amend the Plan to accelerated vesting and payment of benefits for certain Participants in conjunction with the sale of CPI Qualified Plan Consultants, Inc. by A.G. Edwards, Inc. and to add certain severance payment provisions.

Except as otherwise explicitly provided, the amendments made by this Third Amendment are effective as of February 20, 2004 or such later date as the amended Section became effective.

NOW THEREFORE, the Plan is hereby amended as follows:

9.    Subparagraph (D) is added to Section 4.5 to read in its entirety as follows:

(D)Any Participant whose participation in the Plan is terminated because of the sale of CPI Qualified Plan Consultants, Inc. by A.G. Edwards, Inc., shall be granted immediate vesting of their Firm Account.

10.    Section 14.2 is amended to read in its entirety as follows:

14.2  Fully Vested Under Age 59-1/2. If a Participant incurs a Termination of Employment for reasons other than death or Total Disability before such Participant shall have attained the age of fifty-nine and one-half (59-1/2) years, and the Firm Account of such Participant is fully vested at the time of such termination, the entire benefit of such Participant, if any, determined in accordance with Section 9.2, shall become distributable as soon as practical after the second December 31^st which occurs after the date of such Termination of Employment; provided that the benefit of a Participant whose employment with the Employers is so terminated shall not become distributable on account of a Termination of Employment if such Participant is re-employed before such December 31^st, except that a Participant who is re-employed only in uncovered Service may elect before (but not after) such December 31^st to receive such distribution; provided that, the entire benefit of (A) a Participant who receives severance benefits or an alternate payment in accordance with Appendix A or Appendix B of the A.G. Edwards Severance Benefit Plan in connection with the workforce reduction implemented in the first three months of the year 2002 and (B) a Participant who receives severance benefits or a departure bonus in accordance with Appendix D of the A.G. Edwards Severance Benefit Plan in connection with the workforce reduction implemented in the first three months of the year 2004 and (C) a Participant whose participation in the Plan is terminated because or the sale of CPI Qualified Plan Consultants, Inc. by A.G. Edwards, Inc. shall become distributable as soon as practical after the Termination of Employment of the Participant.

3.    Section 14.3 is amended to read in its entirety as follows:

14.3  Partially Vested. If a Participant incurs a Termination of Employment for reasons other than death or Total Disability before the Firm Account of such Participant is fully vested, the benefit of such Participant shall be held in Trust until the second December 31^st which occurs after the date on which his employment with the Employers is so terminated. As soon as practical after such December 31^st the vested portion of such benefit, if any, shall become distributable; provided that the amount credited to the accounts of a Participant whose employment with the Employers is so terminated shall not become distributable on account of a Termination of Employment if such Participant is re-employed in Covered Service before such December 31^st; provided that, the entire benefit of (A) a Participant who receives severance benefits in accordance with Appendix A or Appendix B of the A.G. Edwards Severance Benefit Plan in connection with the workforce reduction implemented in the first three months of the year 2002 and (B) a Participant who receives severance benefits or an alternative payment in accordance with Appendix D of the A.G. Edwards Severance Benefit Plan in connection with the workforce reduction implemented in the first three months of the year 2004 and (C) a Participant whose participation in the Plan is terminated because or the sale of CPI Qualified Plan

44

Consultants, Inc. by A.G. Edwards, Inc. shall become distributable as soon as practical after the Termination of Employment of the Participant.

As of the earlier of (A) the date as of which benefits are distributed to the Participant, or (B) the date on which the Participant incurs a Break in Service of at least five consecutive years, the unvested portion of the account balance of the Participant shall be forfeited. For this purpose, if the value of the vested portion of an Employee’s account balance is zero upon his Termination of Employment, the Employee shall be deemed to have received a distribution of such vested account as of his or her Termination of Employment.

If a Participant incurs a Termination of Employment for reasons other than death or Total Disability during or after the calendar year in which such Participant attains the age of fifty-five (55) and before the Participant attains the age of fifty-nine and one-half (59-1/2) years, before the Firm Account of such Participant is fully vested, the Participant may elect to withdraw all or any portion of his or her vested Plan benefit prior to the Participant reaching the age of fifty-nine and one-half (59-1/2) years. Such an election must be received by the Plan Administrator in a form suitable to the Plan Administrator. The amount so withdrawn shall be distributed to the withdrawing Participant in the form specified by this Article as soon as practical after such election is received.

IN WITNESS WHEREOF, the undersigned as Secretary of A.G. Edwards, Inc. hereby certifies that this Third Amendment was duly adopted by A.G. Edwards, Inc.

By:  

Title:  

Date:  

45

FOURTH AMENDMENT
A.G. EDWARDS, INC.
RETIREMENT AND PROFIT SHARING PLAN
2002 RESTATEMENT

The A.G. Edwards, Inc. Retirement and Profit Sharing Plan (the “Plan”) originally was adopted September 30, 1967. The Plan has been amended from time to time, most recently in the form of a restated plan document dated February 24, 2002 (the “2002 Restatement”) and a First, Second and Third Amendment to such Restatement.

A.G. Edwards, Inc., now wishes to amend the Plan to change the force-out amount from $5,000 to $1,000.

NOW THEREFORE, effective March 28, 2005, the Plan is hereby amended to provide in Section 14.4, second paragraph, first sentence that the current amount of $5,000 shall be $1,000 so that the paragraph reads as follows:

Notwithstanding the above, if the vested portion of the balance credited to a Participant’s accounts exceeds $1,000 at the time of the distribution to the Participant (regardless of such value at any previous time), and the Participant has not attained his Normal Retirement Age, the Participant must consent in writing, or the functional equivalent of writing, before any portion of such accounts may be distributed to him. For this purpose, the value of the Participant’s vested account balance shall be determined without regard to that portion of the account balance that is attributable to rollover contributions (and earnings allocable thereto) within the meaning of Sections 402(c), 403(a), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16) of the Code.

IN WITNESS WHEREOF, the undersigned as Secretary of A.G. Edwards, Inc. hereby certifies that this Fourth Amendment was duly adopted by A.G. Edwards, Inc.

By:   Douglas L. Kelly
Corporate Secretary

Date:  

46

EX-10.4

EXHIBIT 10.4

A.G. EDWARDS, INC.
CORPORATE EXECUTIVE BONUS PLAN
2005 RESTATEMENT

1.     Description of the Plan.

The Corporate Executive Bonus Plan is designed to provide certain officers of A.G. Edwards, Inc. and its subsidiaries with a direct participation in the profitability of the Company. A bonus pool is accrued for each fiscal year based on formulas relating to the Company’s Pre-tax Earnings and the net revenues of certain departments. The formulas are determined by the Board of Directors of the Holding Company. The bonus pool is distributed among the participants in the Plan based on their Shares and salary.

2.     Definitions.

“Branch Manager’s Share of Branch Office Profits” means the amount of bonus to which a branch office manager is entitled based on the profits of the branch office that he or she manages, after distributions by such branch officer manager to other personnel, determined consistently in the normal course of business for all branch office managers.

“Company” means the Holding Company and its direct and indirect subsidiaries, individually or collectively, as the context may require.

“Eligible Employee” for a fiscal year means an individual employed by the Company who has satisfied the requirements of Section 3 for such fiscal year.

“Executive Bonus Pool” for a fiscal year means the amount determined pursuant to the formula prescribed in Section 4.

“Executive Bonus First Officer Pool” for a fiscal year means the percentage of the Company’s Pre-tax Earnings designated for such pool by the Board of Directors of the Holding Company for the fiscal year.

“Holding Company” means A.G. Edwards, Inc.

“Merit Bonus First Officer Pool” for a fiscal year means the percentage of the Company’s Pre-tax Earnings designated for such pool by the Board of Directors of the Holding Company for the fiscal year.

“Participant” means an Eligible Employee for a fiscal year who is assigned Shares for such fiscal year in accordance with Section 5, and who has not lost his or her right to receive a bonus for such fiscal year in accordance with Section 6.

“Plan” means the A.G. Edwards, Inc. Corporate Executive Bonus Plan as set forth herein.

“Plan Administrator” means the Compensation Committee of A.G. Edwards & Sons, Inc. or any existing or newly created committee appointed or designated by the Board of Directors of A.G. Edwards & Sons, Inc. or by the Board of Directors of the Holding Company, which may have limited, joint or exclusive authority with respect to this Plan.

“Pre-tax Earnings” for a fiscal year means the earnings reported by the Company on its audited consolidated financial statements for the fiscal year less provision for income taxes, employee bonuses and the Company’s discretionary profit sharing plan contributions.

“Second Officer Pool” for a fiscal year means the percentage of the Company’s Pre-tax Earnings designated for such pool by the Board of Directors of the Holding Company for the fiscal year.

“Senior Executive” means an Eligible Employee designated, from time to time, as a Senior Executive by the Board of Directors of the Holding Company.

“Senior Executive Shares” means the number of shares assigned to a Senior Executive for the purpose of determining a Senior Executive Bonus payable pursuant to this Plan.

1

“Senior Executive Bonus” for a fiscal year means the value of one Year-End Share for a Senior Executive as determined pursuant to Section 7 of this Plan multiplied by the number of Senior Executive Shares assigned to the Senior Executive.

“Senior Executive Bonus Pool” for a fiscal year shall equal the aggregation of the amount of all Senior Executive Bonus.

“Shares” means the number of units assigned to a Participant for the purpose of determining the portion of the Executive Bonus Pool payable pursuant to this Plan to such Participant for a fiscal year.

“Third Bonus Pool” for a fiscal year means a percentage of the revenues (net of direct expenses) of the departments identified on Exhibit I hereto, as reflected in the monthly profit and loss statements generated by the Company’s general ledger system, which are designated for such pool by the Board of Directors of the Holding Company for the fiscal year determined as provided in Exhibit I.

“Weighted Year-end Shares” means, with respect to any Participant in a fiscal year, the amount determined by multiplying the Year-end Salary of the Participant for the fiscal year by the Participant’s Year-end Shares; dividing such product by 1,000 and rounding the result to the nearest whole integer.

“Year-end Salary” means, with respect to any Participant for a fiscal year, the average rate of salary for the Participant in effect as of each day during the fiscal year while the Participant is employed as an Eligible Employee.

“Year-end Shares” means, with respect to any Participant for a fiscal year, the average of the number of Shares assigned to the Participant as of each day during the fiscal year; provided, a Participant shall be considered as having no Shares on each day that the Participant is not actively employed by the Company.

3.     Eligibility.

Subject to Section 6, officers of the Company who are not otherwise eligible for variable compensation or bonus (such as commissions, sales bonuses or a Branch Manager’s Share of Branch Office Profits) are eligible to participate in the Plan, including regional managers of the Company who are not eligible to receive a Branch Manager’s Share of Branch Office Profits because of a waiver of the right to receive such amount.

Officers of the Company who are eligible to participate in the Plan are not entitled to an assignment of Shares but only receive Shares in the discretion of the Plan Administrator (except the Chief Executive Officer of the Holding Company and officers designated as Senior Executives), and consequently are not necessarily entitled to any payment pursuant to the Plan. The Compensation Committee of the Holding Company will in its discretion determine the number of shares assigned to the Chief Executive Officer of the Holding Company and recommend to the Holding Company Board of Directors the number of Shares for Senior Executives, which the Holding Company determines in its own discretion.

4.    Executive Bonus Pool Accrual Formula.

Unless increased or decreased as provided below, the Executive Bonus Pool for a fiscal year shall be the sum of the following five amounts less the other amounts stated below, all determined as of the last day of such fiscal year (even though actual amounts may not be known and actual distributions may not occur until after such time):

(a) the Executive Bonus First Officer Pool for the fiscal year;

(b) the Merit Bonus First Officer Pool for the fiscal year;

(c) the Second Officer Pool for the fiscal year;

(d) the Third Bonus Pool for the fiscal year; and

(e) the total unallocated Branch Manager’s Share of Branch Office Profits that is not paid to regional branch managers because they are Participants in this Plan;

less amounts paid out of the Merit Bonus First Officer Pool as merit bonuses for the fiscal year; and

less amounts paid out of the Second Officer Pool as discretionary bonuses for the fiscal year.

2

In addition to the accrual formula described above, there will be an accrual for each fiscal year for an amount equal to the Senior Executive Bonus Pool.

The Board of Directors of the Holding Company in its discretion may increase or decrease the Executive Bonus Pool and the Senior Executive Bonus Pool for any fiscal year at any time and in any manner before it is distributed to Participants.

5.     Shares and Salary of Participants.

The Plan Administrator shall assign a number of Shares (which may be zero) to each Eligible Employee (except the Chief Executive Officer of the Holding Company and others designated as Senior Executives) before the beginning of a fiscal year. The Compensation Committee of the Board of Directors of the Holding Company shall assign a number of Shares (which may be zero) to the Chief Executive Officer of the Holding Company and recommend to the Holding Company Board of Directors the number of Shares for Senior Executives before the beginning of a fiscal year. The Holding Company Board of Directors shall assign a number of Shares (which may be zero) to the Senior Executives other than the Chief Executive Officer.

The Plan Administrator in its discretion may adjust the Shares, the salary or both of each Participant (other than the Chief Executive Officer of the Holding Company and others designated as Senior Executives) from time to time during a fiscal year, including, but not limited to, assigning Shares to an individual who becomes an Eligible Employee during the fiscal year. The Compensation Committee of the Board of Directors of the Holding Company in its discretion may adjust the Shares, the salary or both of the Chief Executive Officer of the Holding Company and recommend to the Holding Company Board of Directors adjustment of Shares, the salary or both for Senior Executives from time to time during any fiscal year. The Holding Company Board of Directors in its discretion may adjust the Shares, the salary or both of Senior Executives other than the Chief Executive Officer.

6.     Terminations During the Fiscal Year.

Generally, an individual must be employed by the Company as an Eligible Employee on the last day of a fiscal year to be a Participant entitled to receive a bonus under the Plan for that fiscal year; however, the Plan Administrator may in its discretion permit any Eligible Employee (except the Chief Executive Officer of the Holding Company and other Senior Executives) to receive a bonus under this Plan for such fiscal year if (i) the Eligible Employee retires or dies during any such fiscal year or (ii) the Eligible Employee’s employment is terminated by the Company for any reason after the third month of such fiscal year. The Compensation Committee of the Board of Directors of the Holding Company may in its discretion permit the Chief Executive Officers of the Holding Company and recommend to the Holding Company Board of Directors for other Senior Executives to receive a bonus under this Plan for such fiscal year and the Holding Company Board of Directors may in its discretion permit Senior Executives other than the Chief Executive Officer to receive a bonus under this Plan for such fiscal year if (i) said Participant retires or dies during any such fiscal year or (ii) the Participant’s employment is terminated by the Company for any reason after the third month of such fiscal year.

An Eligible Employee who resigns or is terminated for any reason whatsoever prior to the end of the third month of any fiscal year shall not be entitled to receive a bonus under the Plan for that fiscal year. Further, except as provided above for retirement or death, an Eligible Employee who voluntarily leaves the employment of the Company after the third month of any fiscal year shall not be entitled to receive a bonus under the Plan for that fiscal year.

7.     Bonus Pool Distribution Formula.

The Executive Bonus Pool for a fiscal year shall be distributed on such date or dates as may be specified by the Board of Directors of the Holding Company as follows:

(a) The Executive Bonus Pool shall be mathematically divided into two portions consisting of two-thirds and one-third, respectively, of the total amount of the Executive Bonus Pool.

(b) Each Participant who is not a Senior Executiveshall receive an amount equal to the two-thirds portion of the Executive Bonus Pool multiplied by the ratio of such Participant’s Year-end Shares to the total Year-end Shares of all Participants.

3

(c) Each Participant who is not a Senior Executive shall receive an amount equal to the one-third portion of the Executive Bonus Pool multiplied by the ratio of such Participant’s Weighted Year-end Shares to the total Weighted Year-end Shares of all Participants.

(d) Each Senior Executive shall receive an amount equal to their Senior Executive Bonus.

Before the actual amount of the Executive Bonus Pool is determined for a fiscal year, the Company may distribute a portion of such Executive Bonus Pool to Participants based on the Company’s estimate of the amount of such Executive Bonus Pool, with the remainder distributed after the actual amount is determined and on such date or dates as may be specified by the Board of Directors of the Holding Company.

8.     Limitation on Bonus Amount For Certain Executive Officers.

Notwithstanding anything contained herein to the contrary, if a Participant’s compensation that is payable by the Company is subject to the deduction limitation of Section 162(m) of the Internal Revenue Code of 1986 in a fiscal year, then the total amount otherwise payable to such Participant for such fiscal year under this Plan shall be reduced (but not below zero) by the amount necessary, if any, so that the aggregate amount of (i) all compensation paid for such fiscal year to such Participant under this Plan and (ii) all other compensation of such Participant from the Company for such fiscal year does not exceed such deduction limitation. The amount that is not paid to Participants because of the limitation of this Section 8 shall not increase the portion of the Executive Bonus Pool or Senior Executive Pool payable to other Participants but shall be retained by the Company, so that such limitation on the bonus paid to a particular Participant shall not affect the bonus amount payable to any other Participant.

9.     General Administration.

The Plan Administrator shall have the authority to interpret and administer the Plan, to delegate its authority and duties under the Plan, and to take all such steps and make all such rules or determinations in connection with the Plan as it may deem necessary or advisable, including, without limitation, the construction of any ambiguities that may arise in the administration of the Plan and the exclusion of items from the definition of “Pre-tax Earnings,” such as effects of changes in accounting principles, discontinued operations, extraordinary items and similar items. By their participation in the Plan, all Plan Participants agree that such interpretations and determinations made by the Plan Administrator shall be final, conclusive and binding on all Participants if there is any rational basis for such interpretations or determinations.

The Secretary of the Company shall develop procedures and keep detailed records as may be required to implement and document decisions made under the Plan.

4

EX-21

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 that are not significant are omitted from the listing), all of which are included in the consolidated financial statements:

Name of Company	State of Incorporation/ Organization	Subsidiary of
A.G. Edwards & Sons, Inc.	Delaware	Registrant
A.G. Edwards Technology Group, Inc.	Missouri	A.G. Edwards & Sons, Inc.
A.G. Edwards Hedging Services, Inc.	Nevada	Registrant
A.G. Edwards Trust Company FSB	Federal Charter	Registrant
A.G.E. Properties, Inc.	Missouri	Registrant
AGE Investments, Inc.	Delaware	Registrant
Beaumont Insurance Company	Vermont	AGE Investments, Inc.
A.G. Edwards Capital, Inc.	Delaware	Registrant
AGE Capital Holding, Inc.	Delaware	Registrant
AGE International, Inc.	Delaware	Registrant
A.G. Edwards & Sons (UK) Limited	United Kingdom	AGE International, Inc.

 

EX-23

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements Nos. 333-98669, 333-87507, 33-61949, 33-52786, 33-36609, and 33-23837 of A.G. Edwards, Inc. on Form S-8 of our reports dated May 3, 2005, relating to the consolidated financial statements and financial statement schedule of A.G. Edwards, Inc. and subsidiaries and management’s report on the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of A.G. Edwards, Inc. for the year ended February 28, 2005.

/s/ Deloitte & Touche LLP
 
St. Louis, Missouri
May 5, 2005

EX-31.I.A

CERTIFICATIONS

EXHIBIT 31(i)(a)

I, Robert L. Bagby, certify that:

1. I have reviewed this annual report on Form 10-K of A.G. Edwards, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 4, 2005

/s/ Robert L. BagbyRobert L. Bagby
Chairman of the Board and
Chief Executive Officer

EX-31.I.B

CERTIFICATIONS

EXHIBIT 31(i)(b)

I, Douglas L. Kelly, certify that:

1. I have reviewed this annual report on Form 10-K of A.G. Edwards, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 4, 2005

/s/ Douglas L. KellyDouglas L. Kelly
Chief Financial Officer

EX-32.I.A

EXHIBIT 32(i)(a)

CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002*

In connection with the Annual Report of A.G. Edwards, Inc. (the “Registrant”) on Form 10-K for the period ended February 28, 2005, as filed with the Securities and Exchange Commission on May 6, 2005, hereof (the “Report”), I, Robert L. Bagby, Chairman of the Board and Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

A.G. EDWARDS, INC.

Date: May 4, 2005

By:   /s/ Robert L. BagbyRobert L. Bagby
Chairman of the Board and Chief Executive Officer

* A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.I.B

EXHIBIT 32(i)(b)

CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002*

In connection with the Annual Report of A.G. Edwards, Inc. (the “Registrant”) on Form 10-K for the period ended February 28, 2005 as filed with the Securities and Exchange Commission on May 6, 2005, hereof (the “Report”), I, Douglas L. Kelly, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

A.G. EDWARDS, INC.

Date: May 4, 2005

By:   /s/ Douglas L. KellyDouglas L. Kelly
Chief Financial Officer

* A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.