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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 Commission file number 0-16633
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THE JONES FINANCIAL COMPANIES, L.L.L.P.
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(Exact name of registrant as specified in its Partnership Agreement)
MISSOURI 43-1450818
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12555 Manchester Road
Des Peres, Missouri 63131
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (314) 515-2000
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Securities registered pursuant to Section 12(b) of the act:
Name of each exchange
Title of each class on which registered
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NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
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(Title of Class)
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 [ ]
As of March 27, 2003 there were no voting securities held by non-affiliates
of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None
1
PART I
ITEM 1. BUSINESS
The Jones Financial Companies, L.L.L.P. (the "Registrant" and also referred
to herein as the "Partnership") is organized under the Revised Uniform
Limited Partnership Act of the State of Missouri. The terms "Registrant" and
"Partnership" used throughout, refer to The Jones Financial Companies,
L.L.L.P. and any or all of its consolidated subsidiaries. The Partnership is
the successor to Whitaker & Co., which was established in 1871 and dissolved
on October 1, 1943, said date representing the organization date of Edward
D. Jones & Co., L.P. ("EDJ"), the Partnership's principal subsidiary. EDJ
was reorganized on August 28, 1987, which date represents the organization
date of The Jones Financial Companies, L.L.L.P.
The Partnership's principal operating subsidiary, EDJ, is a registered
broker/dealer primarily serving individual investors. EDJ derives its
revenues from the sale of listed and unlisted securities and insurance
products, investment banking, principal transactions and is a distributor of
mutual fund shares. EDJ conducts business throughout the United States of
America, Canada and the United Kingdom with its customers, various brokers
and dealers, clearing organizations, depositories and banks.
The Partnership is a member firm of the New York, Chicago, Toronto, Montreal
and London exchanges, and is a registered broker/dealer with the National
Association of Securities Dealers, Inc. ("NASD").
As of January 31, 2003, the Partnership was comprised of 235 general
partners, 5,217 limited partners and 134 subordinated limited partners.
At December 31, 2002, the Partnership is organized as follows: The
Partnership owns 100% of the outstanding common stock of EDJ Holding
Company, Inc., a Missouri corporation and 100% of the outstanding common
stock of LHC, Inc. ("LHC"), a Missouri corporation. The Partnership also
holds all of the partnership equity of Edward D. Jones & Co., L.P., a
Missouri limited partnership and EDJ Leasing Co., L.P., a Missouri limited
partnership. EDJ Holding Company, Inc. and LHC, Inc. are the general
partners of Edward D. Jones & Co., L.P. and EDJ Leasing Co., L.P.,
respectively. In addition, the Partnership owns 100% of the outstanding
common stock of Conestoga Securities, Inc., a Missouri corporation and also
owns, as a limited partner, 49.5% of Passport Research Ltd., a Pennsylvania
limited partnership, which acts as an investment advisor to a money market
mutual fund. The Partnership owns 100% of the partnership equity of Edward
Jones, an Ontario, Canada limited partnership and all of the common stock of
Edward D. Jones & Co. Canada Holding Co., Inc., an Ontario, Canada
corporation, its general partner. Through its Canadian entities, the
Partnership owns all of the partnership equity of Edward Jones Insurance
Agency, an Ontario, Canada limited partnership, all of the common stock of
Edward D. Jones & Co. Agency Holding Co., Inc., an Ontario, Canada
corporation, its general partner, and 100% of the common stock of Edward
Jones Insurance Agency (Quebec) Inc., a Canada corporation. The Partnership
also owns 100% of the equity of Edward Jones Limited, a U.K. private limited
company, which owns 100% of the equity of Edward Jones Nominees Limited. The
Partnership owns 100% of the equity of Boone National Savings and Loan
Association, F.A., ("Association"), a federally chartered stock savings and
loan association. The Partnership also owns 100% of the equity of EJ
Mortgage L.L.C., a Missouri limited liability company. EJ Mortgage L.L.C.
owns 50% of Edward Jones Mortgage, a joint venture. The Partnership holds
all of the partnership equity in a Missouri limited partnership, EDJ
Ventures, Ltd. Conestoga Securities, Inc., is the general partner of EDJ
Ventures, Ltd.
The Partnership is the sole member of Edward Jones Insurance Agency Holding,
L.L.C., a Missouri limited liability company; California Agency Holding,
L.L.C., a California limited liability company and Edward Jones Insurance
Agency of New Mexico, L.L.C., a New Mexico limited liability company. Edward
Jones Insurance Agency Holding, L.L.C. is the sole member of Edward Jones
Insurance Agency of Wyoming, L.L.C., a Wyoming limited liability company and
Edward Jones Insurance Agency of Michigan, L.L.C., a Michigan limited
liability company. The Partnership and Edward Jones Insurance Agency
Holding, L.L.C. are members of Edward Jones Insurance Agency of
Massachusetts, L.L.C., a
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PART I
Massachusetts limited liability company; and Edward Jones Insurance Agency
of Montana, L.L.C., a Montana limited liability company. Edward Jones
Insurance Agency Holding, L.L.C. and California Agency Holding, L.L.C. are
members of Edward Jones Insurance Agency of California, L.L.C., a California
limited liability company. All of the insurance agencies engage in general
insurance brokerage activities.
The Partnership holds all of the partnership equity of Unison Investment
Trusts, L.P., d/b/a Unison Investment Trusts, Ltd., a Missouri limited
partnership, which has sponsored unit investment trusts. The general partner
of Unison Investment Trusts, L.P., Unison Capital Corp., Inc., a Missouri
corporation, is wholly owned by LHC. EDJ owns 100% of the outstanding common
stock of Cornerstone Mortgage Investment Group II, Inc., a Delaware limited
purpose corporation which has structured and sold secured mortgage bonds.
EDJ also owns 50% of issued common stock of S-J Capital Corp., a Missouri
corporation. Conestoga owns 100% of the outstanding stock of CIP Management,
Inc., which is the managing general partner of CIP Management, L.P. CIP
Management, L.P. is the managing general partner of Community Investment
Partners II, L.P., Community Investment Partners III, L.P., L.L.L.P., and
Community Investment Partners IV, L.P., L.L.L.P., business development
companies.
During 2002, the Partnership's affiliates Edward Jones Insurance Agency of
Nevada, Inc., Edward Jones Insurance Agency of Alabama, LLC, EJ Insurance
Agency of Ohio, and EDJ Insurance Agency of Texas, Inc. were dissolved. The
Partnership's affiliates Edward Jones Nominees PEP Limited and Edward Jones
Nominees ISA Limited, both 100% owned by Edward Jones Limited, a U.K.
private limited company, were also dissolved in 2002. None of these had
conducted active businesses.
Within the past five years, the Registrant has added several new legal
entities. During 1998, the Registrant began brokerage operations in the
United Kingdom under its subsidiary entity, Edward Jones Limited. During
1998, EJ Mortgage L.L.C. was established. EJ Mortgage L.L.C., a wholly owned
subsidiary of EDJ, owns 50% of Edward Jones Mortgage, a joint venture
offering residential mortgage lending services to EDJ's customers. Due to
state laws and regulations, certain states require separate legal entities
to transact insurance business. During 1998, changes were made to certain
insurance entities as a result of changes in state laws and regulations. The
following entity was added: Edward Jones Insurance Agency of Michigan,
L.L.C., a limited liability company. During 2000, Edward Jones Nominees
Limited, Edward Jones Nominees PEP Limited, and Edward Jones Nominee ISA
Limited, all three of which are U.K. private limited companies, were
organized and subsequently dissolved in 2002. During 2002, Edward Jones
Insurance Agency (Quebec) Inc., a Canada corporation, was organized.
3
PART I
REVENUES BY SOURCE. The following table sets forth, for the past three
years, the sources of the Partnership's revenues by dollar amounts (all
amounts in thousands):
2002 2001 2000
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Commissions
Listed $ 214,247 $ 219,359 $ 272,260
Mutual Funds 831,652 740,209 749,144
O-T-C 50,429 77,618 170,058
Insurance 213,496 216,009 222,175
Other 753 667 837
Principal Transactions 403,329 370,327 264,361
Investment Banking 41,055 24,676 29,545
Interest and Dividends 137,029 176,277 224,497
Sub-Transfer Agent Revenue 119,307 95,022 69,874
Mutual Fund & Insurance Revenue 87,298 79,107 89,993
Money Market Revenue 75,707 73,594 60,604
IRA Custodial Service Fees 48,695 38,554 30,591
Other Revenue 38,842 30,578 28,021
Gain on Investments 8,186 - -
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Total Revenue $ 2,270,025 $ 2,141,997 $ 2,211,960
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Because of the interdependence of the activities and departments of the
Partnership's investment business and the arbitrary assumptions involved in
allocating overhead, it is impractical to identify and specify expenses
applicable to each aspect of the Partnership's operations. Furthermore, the
net income of firms principally engaged in the securities business,
including the Partnership's, is affected by interest savings as a result of
customer and other credit balances and interest earned on customer margin
accounts.
LISTED BROKERAGE TRANSACTIONS. A portion of the Partnership's revenue is
derived from customer transactions in which the Partnership acts as agent in
the purchase and sale of listed corporate securities. These securities
include common and preferred stocks and corporate debt securities traded on
and off the securities exchanges. Revenue from brokerage transactions is
highly influenced by the volume of business and securities prices.
Customer transactions in securities are effected on either a cash or a
margin basis. In a margin account, the Partnership lends the customer a
portion of the purchase price up to the limits imposed by the margin
regulations of the Federal Reserve Board ("Regulation T"), New York Stock
Exchange ("NYSE") margin requirements, or the Partnership's internal
policies, which may be more stringent than the regulatory minimum
requirements. Such loans are secured by the securities held in customer
margin accounts. These loans provide a source of income to the Partnership
since it is able to lend to customers at rates which are higher than the
rates at which it is able to borrow on a secured basis. The Partnership is
permitted to use as collateral for the borrowings, securities owned by
margin customers having an aggregate market value generally up to 140% of
the debit balance in margin accounts. The Partnership may also use funds
provided by free credit balances in customer accounts to finance customer
margin account borrowings.
In permitting customers to purchase securities on margin, the Partnership
assumes the risk of a market decline which could reduce the value of its
collateral below a customer's indebtedness before the collateral is sold.
Under the NYSE rules, the Partnership requires in the event of a decline in
the market value of the securities in a margin account, the customer to
deposit additional securities or cash so that, at all times, the loan to the
customer is no greater than 75% of the value of the securities in the
account (or to
4
PART I
sell a sufficient amount of securities in order to maintain this
percentage). The Partnership, however, imposes a more stringent maintenance
requirement.
Variations in revenues from listed brokerage commissions between periods is
largely a function of market conditions.
MUTUAL FUNDS. The Partnership distributes mutual fund shares in continuous
offerings and new underwritings. As a dealer in mutual fund shares, the
Partnership receives a dealers' discount which generally ranges from 1% to
5 3/4% of the purchase price of the shares, depending on the terms of the
dealer agreement and the amount of the purchase. The Partnership also earns
service fees which are generally based on 15 to 25 basis points of its
customer assets which are held by the mutual funds. The Partnership does not
manage any mutual fund, although it is a limited partner of Passport
Research, Ltd., an advisor to a money market mutual fund.
OVER-THE-COUNTER TRANSACTIONS. Partnership activities in unlisted
(over-the-counter) transactions are essentially similar to its activities as
a broker in listed securities. In connection with customer orders to buy or
sell securities, the Partnership charges a commission for both principal and
agency transactions.
INSURANCE. The Partnership has executed agency agreements with various
national insurance companies. EDJ is able to offer life insurance, long term
care insurance, fixed and variable annuities and other types of insurance to
its customers through substantially all of its investment representatives
who hold insurance sales licenses. As an agent for the insurance company,
the Partnership receives commission on the purchase price of the policy. The
Partnership also earns service fees which are generally based on its
customer assets held by the insurance companies.
PRINCIPAL TRANSACTIONS. The Partnership makes a market in over-the-counter
corporate securities, municipal obligations, U.S. Government obligations,
including general obligations and revenue bonds, unit investment trusts and
mortgage-backed securities. The Partnership's market-making activities are
conducted with other dealers in the "wholesale" market and "retail" market
wherein the Partnership acts as a dealer buying from and selling to its
customers. In making markets in principal and over-the-counter securities,
the Partnership exposes its capital to the risk of fluctuation in the market
value of its security positions. It is the Partnership's policy not to trade
for its own account.
As in the case of listed brokerage transactions, revenue from
over-the-counter and principal transactions is highly influenced by the
volume of business and securities prices, as well as by the increasing
number of investment representatives employed by the Partnership over the
periods indicated.
INVESTMENT BANKING. The Partnership's investment banking activities are
performed by its Syndicate and Underwriting Departments. The principal
service which the Partnership renders as an investment banker is the
underwriting and distribution of securities either in a primary distribution
on behalf of the issuer of such securities, or in a secondary distribution
on behalf of a holder of such securities. The distributions of corporate and
municipal securities are, in most cases, underwritten by a group or
syndicate of underwriters. Each underwriter has a participation in the
offering.
Unlike many larger firms against which the Partnership competes, the
Partnership does not presently engage in other investment banking activities
such as assisting in mergers and acquisitions, arranging private placement
of securities issues with institutions or providing consulting and financial
advisory services to corporations.
The Syndicate and Underwriting Departments are responsible for the largest
portion of the Partnership's investment banking business. In the case of an
underwritten offering managed by the Partnership, these departments may form
underwriting syndicates and work closely with the branch office system for
sales of the Partnership's own participation and with other members of the
syndicate in the pricing and
5
PART I
negotiation of other terms. In offerings managed by others in which the
Partnership participates as a syndicate member, these departments serve as
active coordinators between the managing underwriter and the Partnership's
branch office system.
The underwriting activity of the Partnership involves substantial risks. An
underwriter may incur losses if it is unable to resell the securities it is
committed to purchase or if it is forced to liquidate all or part of its
commitment at less than the agreed upon purchase price. Furthermore, the
commitment of capital to an underwriting may adversely affect the
Partnership's capital position and, as such, its participation in an
underwriting may be limited by the requirement that it must at all times be
in compliance with the Securities and Exchange Commission's uniform Net
Capital Rule.
The Securities Act of 1933 and other applicable laws and regulations impose
substantial potential liabilities on underwriters for material misstatements
or omissions in the prospectus used to describe the offered securities. In
addition, there exists a potential for possible conflict of interest between
an underwriter's desire to sell its securities and its obligation to its
customers not to recommend unsuitable securities. In recent years there has
been an increasing incidence of litigation in these areas. These lawsuits
are frequently brought for the benefit of large classes of purchasers of
underwritten securities. Such lawsuits often name underwriters as defendants
and typically seek substantial amounts in damages.
INTEREST AND DIVIDENDS. Interest and dividend income is earned primarily on
margin account balances, inventory securities and investment securities.
Interest is also earned by the Association on its loan portfolio. The
Partnership is exposed to market risk for changes in interest rates.
MONEY MARKET FEES, IRA CUSTODIAL SERVICE FEES AND OTHER REVENUES. Other
revenue sources include money market fees, IRA custodial services fees,
sub-transfer agent accounting services, revenue sharing, gains from sales of
certain assets, and other product and service fees.
The Partnership charges a fee to certain mutual funds for sub-accounting
services. Additionally, under certain agreements, non-commission revenue is
received from companies whose mutual funds and insurance products the
Partnership distributes. The Partnership has a minority partnership interest
in the investment advisor to the Edward Jones Money Market Fund. The
Partnership does not have management responsibility for the advisor. Revenue
from this source has increased over the periods due to growth in the fund,
both in dollars invested and number of accounts. EDJ is also the custodian
for its IRA accounts and charges customers an annual fee for its services.
The Partnership has registered an investment advisory program with the
Securities and Exchange Commission ("SEC") under the Investment Advisors Act
of 1940. This service is offered firmwide and involves income and estate tax
planning and analysis for clients. Revenues from this source are
insignificant and are included under "Other Revenues."
The Partnership offers trust services to its customers through the Edward
Jones Trust Company, a division of the Association. The Partnership offers a
co-branded credit card with a major credit card company and receives revenue
from this service. The Partnership offers mortgage loans to its customers
through a joint venture.
RESEARCH DEPARTMENT. The Partnership maintains a Research Department to
provide specific investment recommendations and market information for
retail customers. The Department supplements its own research with the
services of various independent research services.
CUSTOMER ACCOUNT ADMINISTRATION AND OPERATIONS. Operations associates are
responsible for activities relating to customer securities and the
processing of transactions with other broker/dealers. These activities
include receipt, identification, and delivery of funds and securities,
internal financial controls, accounting and personnel functions, office
services, storage of customer securities and the handling of
6
PART I
margin accounts. The Partnership processes substantially all of its own
transactions for its United States and United Kingdom entities. In Canada,
the Partnership has entered into an introducing/carrying arrangement with
National Bank of Canada. It is important that the Partnership maintain
current and accurate books and records from both a profit viewpoint as well
as for regulatory compliance. To expedite the processing of orders, the
Partnership's branch office system is linked to the St. Louis headquarters
office through an extensive communications network. Orders for all
securities are captured at the branch electronically, routed to St. Louis
and forwarded to the appropriate market for execution. The Partnership's
processing of paperwork following the execution of a security transaction is
automated, and operations are generally on a current basis.
There is considerable fluctuation during any one year and from year to year
in the volume of transactions the Partnership processes. The Partnership
records transactions and posts its books on a daily basis. Operations
personnel monitor day-to-day operations to determine compliance with
applicable laws, rules and regulations. Failure to keep current and accurate
books and records can render the Partnership liable to disciplinary action
by governmental and self-regulatory organizations.
The Partnership has a computerized branch office communication system which
is principally utilized for entry of security orders, quotations, messages
between offices, research of various customer account information, and cash
and security receipts functions.
The Partnership clears and settles virtually all of its listed transactions
through the National Securities Clearing Corporation ("NSCC"), New York, New
York. NSCC effects clearing of securities on the New York, American and
Chicago Stock Exchanges.
In conjunction with clearing and settling transactions with NSCC, the
Partnership holds customer securities on deposit with the Depository Trust
Company ("DTC") in lieu of maintaining physical custody of the certificates.
The Partnership also uses Participants Trust Company for custody of
Government National Mortgage Association ("GNMA") securities and a major
bank for custody of treasury securities.
The Partnership's United Kingdom operation clears and settles virtually all
of its listed transactions through CREST. CREST effects clearing of
securities on the London Stock Exchange. In conjunction with clearing and
settling transactions with CREST, the Partnership's United Kingdom operation
holds customer securities on deposit with CREST in lieu of maintaining
physical custody of the certificates. The Partnership's United Kingdom
operation also uses DTC for custody of United States securities, a major
independent brokerage firm for custody of non-United Kingdom and non-United
States securities, and individual unit trust vendors for custody of unit
trust holdings.
In Canada, the Partnership has entered into an introducing/carrying
arrangement with National Bank of Canada. As the carrying broker, National
Bank of Canada ("NBF") handles the routing and settlement of customer
transactions. Transactions are settled through the Canadian Depository for
Securities ("CDS"), of which National Bank of Canada is a member. CDS
effects clearing of securities on the Toronto, Montreal and TSX Venture
stock exchanges. Customer securities on deposit are also held with CDS.
The Partnership is substantially dependent upon the operational capacity and
ability of NSCC/DTC/CREST/NBF. Any serious delays in the processing of
securities transactions encountered by NSCC/DTC/CREST/NBF may result in
delays of delivery of cash or securities to the Partnership's customers.
These services are performed for the Partnership under contracts which may
be changed or terminated at will by either party.
Automated Data Processing, Inc., ("ADP"), ADP Wilco (a subsidiary of ADP)
and National Bank of Canada provide automated data processing services for
customer account activity and related records for the United States, United
Kingdom and Canada, respectively.
7
PART I
The Partnership does not employ its own floor broker for transactions on
exchanges. The Partnership has arrangements with other brokers to execute
the Partnership's transactions in return for a commission based on the size
and type of trade. If, for any reason, any of the Partnership's clearing,
settling or executing agents were to fail, the Partnership and its customers
would be subject to possible loss. To the extent that the Partnership would
not be able to meet the obligations of the customers, such customers might
experience delays in obtaining the protections afforded them.
Customers are protected from firm insolvency by the Securities Investors
Protection Corporation ("SIPC") in the United States, Investors Compensation
Scheme ("ICS") in the United Kingdom and Canadian Investor Protection Fund
("CIPF") in Canada, and through excess insurance coverage maintained by the
Partnership in The United States and the United Kingdom. In Canada, excess
insurance coverage is maintained by National Bank of Canada. SIPC provides
protection for customer accounts for up to $500,000, including up to
$100,000 for cash claims. ICS covers 100% of the first (pounds) 30,000 and
90% for the next (pounds) 20,000, for a maximum protection of (pounds)
48,000 for all investment business. CIPF limits coverage to $1,000,000
total, which can be any combination of securities and cash. The coverage
provided by SIPC, ICS and CIPF, and protection in excess limits thereof,
would be available to customers of the Partnership in the event of
insolvency.
The Partnership believes that its internal controls and safeguards
concerning the risks of securities thefts are adequate. Although the
possibility of securities thefts is a risk of the industry, the Partnership
has not had, to date, a significant problem with such thefts. The
Partnership maintains fidelity bonding insurance which, in the opinion of
management, provides adequate coverage.
EMPLOYEES. Including its 235 general partners, the Partnership has
approximately 28,469 full and part-time employees. This includes 9,198
registered salespeople as of January 31, 2003. The Partnership's
salespersons are compensated on a commission basis and may, in addition, be
entitled to bonus compensation based on their respective branch office
profitability and the profitability of the Partnership. The Partnership has
no formal bonus plan for its non-registered employees. The Partnership has,
however, in the past paid bonuses to its non-registered employees on an
informal basis, but there can be no assurance that such bonuses will be paid
for any given period or will be within any specific range of amounts.
Employees of the Partnership are bonded under a blanket policy as required
by NYSE rules. The annual aggregate amount of coverage is $50,000,000
subject to a $2,000,000 deductible provision, per occurrence.
The Partnership maintains a training program for prospective salespeople
which includes nine weeks of concentrated instruction and on-the-job
training in a branch office. During the first phase the trainee spends 60
days studying Series 7 examination materials and taking the examination.
Also during this study period, the trainees spend up to 20 hours a week in a
branch office to learn the mechanics of running a branch office. After
passing the examination, trainees spend one week in a comprehensive training
program in St. Louis followed by three weeks at a designated location to
conduct market research and prepare for opening the office. The trainee then
spends three weeks of on-the-job training in a branch location reviewing
investments, office procedures and sales techniques. Next, the trainee
returns to his or her designated location for one week to continue building
a prospect base. One final week is then spent in a central location to
complete the initial training program. Two and four months later, the
investment representative attends additional training classes in St. Louis,
and subsequently, EDJ offers periodic continuing training to its experienced
sales force. EDJ's basic brokerage payout is similar to its competitors.
The Partnership considers its employee relations to be good and believes
that its compensation and employee benefits which include medical, life,
disability insurance plans, profit sharing and deferred
8
PART I
compensation retirement plans, are competitive with those offered by other
firms principally engaged in the securities business.
BRANCH OFFICE NETWORK. The Partnership operates 8,835 branch offices as of
January 31, 2003, primarily staffed by a single investment representative.
The Partnership operates 8,131 offices in the United States located in all
50 states, predominantly in communities with populations of under 50,000 and
metropolitan suburbs. The Partnership also operates in Canada (through 584
offices as of January 31, 2003) and the United Kingdom (through 120 offices
as of January 31, 2003).
COMPETITION. The Partnership is subject to intensive competition in all
phases of its business from other securities firms, many of which are
substantially larger than the Partnership in terms of capital, brokerage
volume and underwriting activities. In addition, the Partnership encounters
competition from other organizations such as banks, insurance companies, and
others offering financial services and advice. The Partnership also competes
with a number of firms offering discount brokerage services, usually with
lower levels of service to individual customers. In recent periods, many
regulatory requirements prohibiting non-securities firms from engaging in
certain aspects of brokerage firms' business have been eliminated and
further removal of such prohibitions is anticipated. With minor exceptions,
customers are free to transfer their business to competing organizations at
any time. There is intense competition among securities firms for
salespeople with good sales production records. In recent periods, the
Partnership has experienced increasing efforts by competing firms to hire
away its registered representatives although the Partnership believes that
its rate of turnover of investment representatives is not higher than that
of other firms comparable to the Partnership.
REGULATION. The securities industry in the United States is subject to
extensive regulation under both federal and state laws. The SEC is the
federal agency responsible for the administration of the federal securities
laws. The Partnership's principal subsidiary is registered as a
broker-dealer and investment advisor with the SEC. Much of the regulation of
broker-dealers has been delegated to self-regulatory organizations,
principally the NASD and national securities exchanges such as the NYSE,
which has been designated by the SEC as the Partnership's primary regulator.
These self-regulatory organizations adopt rules (which are subject to
approval by the SEC) that govern the industry and conduct periodic
examinations of the Partnership's operations. Securities firms are also
subject to regulation by state securities administrators in those states in
which they conduct business. EDJ or an affiliate is registered as a
broker-dealer in 50 states, Puerto Rico, Canada and the United Kingdom.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customer funds and securities,
capital structure of securities firms, record-keeping and the conduct of
directors, officers and employees. Additional legislation, changes in rules
promulgated by the SEC and self-regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules, may directly
affect the mode of operation and profitability of broker-dealers. The SEC,
self-regulatory organizations and state securities commissions may conduct
administrative proceedings which can result in censure, fine, suspension or
expulsion of a broker-dealer, its officers or employees. The principal
purpose of regulation and discipline of broker-dealers is the protection of
customers and the securities markets, rather than protection of the
creditors and stockholders of broker-dealers. In addition, EDJ conducts
business in Canada, through a subsidiary partnership which is regulated by
the Investment Dealers Association of Canada and in the United Kingdom,
through a subsidiary which is regulated by The Financial Services Authority.
As a federally chartered savings and loan, the Association is subject to
regulation by the Office of Thrift Supervision ("OTS").
UNIFORM NET CAPITAL RULE. As a broker-dealer and a member firm of the NYSE,
the Partnership is subject to the Uniform Net Capital Rule ("Rule")
promulgated by the SEC. The Rule is designed to measure the general
financial integrity and liquidity of a broker-dealer and the minimum Net
Capital deemed necessary to meet the broker-dealer's continuing commitments
to its customers. The Rule provides for
9
PART I
two methods of computing Net Capital and the Partnership has adopted what is
generally referred to as the alternative method. Minimum required Net
Capital under the alternative method is equal to 2% of the customer debit
balances, as defined. The Rule prohibits withdrawal of equity capital
whether by payment of dividends, repurchase of stock or other means, if Net
Capital would thereafter be less than 5% of customer debit balances.
Additionally, certain withdrawals require the consent of the SEC to the
extent they exceed defined levels even though such withdrawals would not
cause Net Capital to be less than 5% of aggregate debit items. In computing
Net Capital, various adjustments are made to exclude assets which are not
readily convertible into cash and to provide a conservative statement of
other assets such as a company's securities owned. Failure to maintain the
required Net Capital may subject a firm to suspension or expulsion by the
NYSE, the SEC and other regulatory bodies and may ultimately require its
liquidation. The Partnership has, at all times, been in compliance with the
Net Capital Rule.
The firm has other operating subsidiaries, including the Association and
broker-dealer subsidiaries in Canada and the United Kingdom. These wholly
owned subsidiaries are required to maintain specified levels of liquidity
and capital standards. Each subsidiary is in compliance with the applicable
regulations as of December 31, 2002.
ITEM 2. PROPERTIES
The Partnership conducts its headquarters operations from three locations in
St. Louis County, Missouri, and one location in Tempe, Arizona, comprising
twenty-five separate buildings. Nineteen buildings are owned by the
Partnership and six buildings are leased through long-term operating leases.
In addition, the Partnership leases its Canadian home office facility in
Mississauga, Ontario through an operating lease and has a long-term
operating lease for its United Kingdom home office located in London,
England. The Partnership also maintains facilities in 8,845 branch locations
(as of January 31, 2003) which are located in the United States, Canada and
the United Kingdom and are rented under predominantly cancelable leases. The
Partnership believes that its properties are both suitable and adequate to
meet the current and future growth projections of the organization.
ITEM 3. LEGAL PROCEEDINGS
In recent years, there has been an increasing incidence of litigation
involving the securities industry. Such suits often seek to benefit large
classes of industry customers; many name securities dealers as defendants
along with exchanges in which they hold membership and seek large sums as
damages under federal and state securities laws, anti-trust laws and common
law.
Various legal actions are pending against the Partnership, with certain
cases claiming substantial damages. These actions are in various stages and
the results of such actions cannot be predicted with certainty. In the
opinion of management, after consultation with legal counsel, the ultimate
resolution of these actions is not expected to have a material adverse
impact on the Partnership's operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Limited or
Subordinated Limited Partnership interests and their assignment is
prohibited.
ITEM 6. SELECTED FINANCIAL DATA
The following information sets forth, for the past five years, selected
financial data. (All amounts in thousands, except per unit information.)
Summary Consolidated Income Statement Data:
2002* 2001 2000 1999 1998**
- --------------------------------------------------------------------------------------------------------------------
Revenue $ 2,270,025 $ 2,141,997 $ 2,211,960 $ 1,786,834 $ 1,449,963
Net income $ 148,915 $ 149,186 $ 229,823 $ 187,331 $ 199,209
Net income per
weighted average
$1,000 equivalent
limited partnership
unit outstanding $ 87.44 $ 96.89 $ 179.21 $ 173.81 $ 274.30
Weighted average
$1,000 equivalent
limited partnership
units outstanding 230,970 236,696 175,436 150,670 103,747
Net income per
weighted average
$1,000 equivalent
subordinated limited
partnership unit
outstanding $ 167.16 $ 181.70 $ 333.92 $ 325.21 $ 448.17
Weighted average
$1,000 equivalent
subordinated limited
partnership units
outstanding 95,053 82,273 63,770 51,741 44,026
- --------------------------------------------------------------------------------------------------------------------
11
PART II
Item 6. Selected Financial Data
Summary Consolidated Balance Sheet Data:
2002* 2001 2000 1999 1998**
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 3,258,245 $ 3,158,408 $ 3,170,385 $ 2,693,241 $ 2,118,844
============= ============= ============= ============= =============
Long-term debt $ 49,363 $ 46,285 $ 29,618 $ 34,540 $ 41,825
Other liabilities,
exclusive of
subordinated
liabilities 2,070,062 2,231,807 2,252,961 1,908,117 1,434,020
Subordinated liabilities 428,875 205,600 232,325 259,050 200,275
Total partnership capital 709,945 674,716 655,481 491,534 442,724
------------- ------------- ------------- ------------- -------------
Total liabilities and
partnership capital $ 3,258,245 $ 3,158,408 $ 3,170,385 $ 2,693,241 $ 2,118,844
============= ============= ============= ============= ==============
====================================================================================================================
* Net income for 2002 included $8.2 million of gain on the sale of shares
that the Partnership received from its memberships in the London Stock
Exchange and Toronto Stock Exchange when they demutualized.
** Net income for 1998 included a $41.0 million gain on investment in
Federated Investors. The Partnership acquired a small interest in Federated
in 1989 for $1.0 million as a strategic investment. During 1998, the
Partnership sold a significant portion of its investment in Federated's
initial public offering.
12
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table summarizes the increase (decrease) in major categories
of revenues and expenses for the last two years (dollar amounts in
thousands).
2002 vs. 2001 2001 vs. 2000
------------------------- -------------------------
Amount Percentage Amount Percentage
- ------------------------------------------------------------------------------------------------------------------
Revenue:
Commissions $ 56,715 5% $ (160,612) (11)%
Principal transactions 33,002 9 105,966 40
Investment banking 16,379 66 (4,869) (16)
Interest and dividends (39,248) (22) (48,220) (21)
Gain on investments 8,186 - - -
Other 52,994 17 37,772 14
----------- -----------
Total revenue 128,028 6 (69,963) (3)
Interest expense (6,186) (9) (21,194) (24)
----------- -----------
Net revenue 134,214 6 (48,769) (2)
----------- -----------
Operating Expenses:
Compensation and benefits 85,059 7 (37,233) (3)
Communications and data
processing 29,527 13 21,969 10
Occupancy and equipment 7,151 3 28,726 16
Payroll and other taxes 8,413 11 6,584 10
Floor brokerage and
clearance fees (383) (3) (3,208) (18)
Advertising 321 1 5,723 15
Other operating expenses 4,397 3 9,307 7
----------- -----------
Total operating expenses 134,485 7 31,868 2
----------- -----------
Net Income $ (271) -% $ (80,637) (35)%
==================================================================================================================
13
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations
The Partnership broadly categorizes its revenues as trade revenue (revenue
from buy or sell transactions on securities) or net fee revenue (sources
other than trade revenue including service fees, management fees, retirement
fees, account fees and net interest income). On the Partnership's
Consolidated Statements of Income, trade revenue is included in commissions,
principal transactions and investment banking. Net fee revenue comprises the
service fee component of commissions, interest and dividends net of interest
expenses, and other revenues.
The following table reconciles the components of net revenue reported here
in the Results of Operations to the components reported on the Consolidated
Statements of Income.
2002: Trade Service Mgmt., Retire, Net Interest & Gain on Net
Revenue Fees & Other Dividend Income Investments Revenue
----------- ----------- -------------- --------------- ----------- -----------
Commissions $ 1,034,719 $ 275,858 $ - $ - $ - $ 1,310,577
Principal Transactions 402,182 - 1,147 - - 403,329
Investment Banking 41,055 - - - - 41,055
Interest and Dividends - - - 137,029 - 137,029
Gain on Investments - - - - 8,186 8,186
Other - - 369,849 - - 369,849
Interest Expense - - - (60,282) - (60,282)
----------- ----------- ----------- ----------- ----------- -----------
Net Revenue $ 1,477,956 $ 275,858 $ 370,996 $ 76,747 $ 8,186 $ 2,209,743
=========== =========== =========== =========== =========== ===========
2001: Trade Service Mgmt., Retire, Net Interest & Gain on Net
Revenue Fees & Other Dividend Income Investments Revenue
----------- ----------- -------------- --------------- ----------- -----------
Commissions $ 975,625 $ 278,237 $ - $ - $ - $ 1,253,862
Principal Transactions 371,558 - (1,231) - - 370,327
Investment Banking 24,676 - - - - 24,676
Interest and Dividends - - - 176,277 - 176,277
Other - - 316,855 - - 316,855
Interest Expense - - - (66,468) - (66,468)
----------- ----------- ----------- ----------- ----------- -----------
Net Revenue $ 1,371,859 $ 278,237 $ 315,624 $ 109,809 $ - $ 2,075,529
=========== =========== =========== =========== =========== ===========
2000: Trade Service Mgmt., Retire, Net Interest & Gain on Net
Revenue Fees & Other Dividend Income Investments Revenue
----------- ----------- -------------- --------------- ----------- -----------
Commissions $ 1,124,309 $ 290,165 $ - $ - $ - $ 1,414,474
Principal Transactions 263,816 - 545 - - 264,361
Investment Banking 29,545 - - - - 29,545
Interest and Dividends - - - 224,497 - 224,497
Other - - 279,083 - - 279,083
Interest Expense - - - (87,662) - (87,662)
----------- ----------- ----------- ----------- ----------- -----------
Net Revenue $ 1,417,670 $ 290,165 $ 279,628 $ 136,835 $ - $ 2,124,298
=========== =========== =========== =========== =========== ===========
14
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS (2002 VERSUS 2001)
For 2002, net revenue increased 6% ($134.2 million) to $2.210 billion, while
net income decreased $0.3 million and the profit margin decreased to 6.6%
from 7.0%. Excluding an $8.2 million investment gain from the sale of the
Partnership's London Stock Exchange and Toronto Stock Exchange holdings, net
revenue increased 6% ($126.0 million), net income decreased 5% ($7.0
million), and the profit margin decreased to 6.3%. Year over year, the
Partnership's net revenue increased due primarily to growth in trade
revenue. Net fee revenue increased over last year, but has been negatively
impacted by lower customer asset values and lower interest rates. Net income
decreased as the growth in net revenue was exceeded by the increase in
operating expenses. Operating expenses have increased as the Partnership
continues to expand its branch office network. The Partnership added 656
Investment Representatives ("IRs") during 2002, ending the year with 9,172
IRs, an increase of 8%.
Trade revenue comprised 67% of net revenue for 2002, up from 66% for 2001.
Conversely net fee revenue comprised 33% for 2002, down from 34% in the
corresponding period.
Trade revenue increased 8% ($160.1 million) during 2002 due primarily to an
increase in customer dollars invested (customers' buy and sell transactions
generating trade revenue), and to a higher gross margin earned on customer
dollars invested compared to the prior year. Total customer dollars invested
were $53.8 billion during 2002, representing a 6% ($3.0 billion) increase
from 2001. The firm's margin earned on each $1,000 invested increased to
$26.60 in 2002 from $26.30 in 2001 due primarily to a shift in product mix.
Year over year, customer purchases shifted to higher margin fixed income and
mutual fund products, from individual equities.
Commissions revenue, excluding the service fee component, increased 6%
($59.1 million) during 2002. Commissions revenue increased year over year
due primarily to an 18% increase in customer dollars invested in mutual
funds. Year to date, mutual fund commissions increased 18% ($93.6 million),
while insurance commissions decreased 2% ($2.5 million) and individual
equity agency commissions decreased 11% ($32.3 million).
Principal transactions revenue increased 9% ($33.0 million) during 2002 due
to a 14% increase in customer dollars invested in bonds. Customers invested
$22.6 billion in fixed income products in 2002 compared to $19.7 billion in
2001. Revenue from government bonds increased 75% ($25.0 million), municipal
bonds increased 12% ($17.9 million), while corporate bonds decreased 14%
($14.8 million).
Net fee revenue increased 3% ($19.9 million) during 2002. Service fees
decreased 1% ($2.4 million) due to the impact of market conditions on the
value of customer assets. Average customer assets related to service fees
were $114.6 billion in 2002 compared to $115.0 billion 2001. Management,
retirement and other fee revenue increased 18% ($55.4 million) during 2002.
Revenue received from money market and subtransfer agent services increased
16% ($26.4 million). The number of retirement accounts increased, resulting
in custodial fee revenue growth of 26% ($10.1 million). Fees from revenue
sharing agreements with mutual funds and insurance companies increased 10%
($8.2 million).
Net interest and dividend income decreased 30% ($33.1 million) during 2002
due primarily to the impact of lower interest rates charged on customers'
margin loans, and to a shift in source of funds borrowed. Interest income
from customer loans outstanding decreased 27% ($39.8 million). The average
rate earned on customer loan balances decreased to approximately 5.62% in
2002 from approximately 7.70% in 2001. Average customer margin loan balances
increased 2% to $1.911 billion in 2002. Interest expense from bank loans
decreased 82% ($10.6 million), due to lower bank loans outstanding and lower
interest rates. Average bank loans decreased 65% to $102.7 million in 2002.
Partially offsetting the decrease in bank loan interest was an $7.8 million
increase in subordinated debt interest due to issuance of $250 million
subordinated debt in June 2002.
15
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations
Operating expenses increased 7% ($134.5 million) during 2002. Compensation
and benefits costs increased 7% ($85.1 million). Within compensation and
benefits costs, sales compensation increased 6% ($43.9 million) due to
increased revenue, and payroll expense increased 15% ($54.7 million) due to
existing personnel and additional support at both the headquarters and in
the branches as the firm grows its sales force. On a full time equivalent
basis, the Partnership had 3,938 headquarters associates and 9,510 branch
staff associates as of December 31, 2002, compared to 3,748 headquarters
associates and 8,632 branch staff associates as of December 31, 2001.
Variable compensation, including bonuses and profit sharing paid to IRs,
branch office assistants and headquarters associates, which expands and
contracts in relation to revenues, net income and the firm's profit margin,
decreased 14% ($12.2 million) due to the decrease in the partnership's net
income and profit margin.
Communications and data processing expenses increased 13% ($29.5 million) in
2002. Occupancy and equipment expenses increased 3% ($7.2 million).
Underlying the increased expenses is the opening in November 2001 of the
Partnership's Southwest campus in Tempe, Arizona, which contains a second
data center. Additionally, the Partnership added facilities in Tempe for
branch training and in St. Louis for headquarters support. Payroll and other
taxes increased 11% ($8.4 million) due to growth in the sales force,
headquarters associates and branch staff.
RESULTS OF OPERATIONS (2001 VERSUS 2000)
The Partnership's net revenue and net income for the year ended December 31,
2001 decreased from the prior year due primarily to the impact of market
conditions which resulted in lower customer activity, lower customer asset
values and lower net interest income. Net revenue decreased 2% ($48.8
million) to $2.076 billion and net income decreased 35% ($80.6 million) to
$149.2 million.
Trade revenue of $1.372 billion and $1.418 billion comprised 66% and 67% of
net revenue for 2001 and 2000. Conversely, net fee revenue sources of $703.7
million and $706.6 million were 34% and 33% of net revenue for 2001 and
2000.
Trade revenue decreased 3% ($45.8 million) during 2001 due primarily to a
decrease in customer dollars invested. Total customer dollars underlying buy
or sell transactions were $50.8 billion during 2001, a 17% ($10.5 billion)
decrease from 2000. The impact of lower customer activity was partially
offset by an increase in the margin earned on each $1,000 invested, to
$26.30 in 2001 from $22.60 in 2000. Year over year, the composition of the
product mix, based on customer dollars invested, has shifted from individual
equities and CDs, which have lower margins, to higher margin fixed income,
mutual funds, and insurance products. Based on customer dollars invested,
individual equities decreased to 28% from 44%, and CD's decreased to 6% from
11%. Fixed income increased to 33% from 18%, mutual funds increased to 26%
from 22%, and insurance increased to 7% from 5%. The Partnership added 1,082
IRs since December 31, 2000, ending 2001 with 8,516 IRs in the United
States, Canada and the United Kingdom, an increase of 15%. The increase in
IRs partially mitigated the impact of the market downturn on trade revenues.
Net fee revenues decreased $3.0 million during 2001. Net interest income
decreased 20% ($27.0 million) in 2001 due primarily to the impact of rate
reductions during the year narrowing the interest margins combined with a
small decrease in customer loans outstanding. Customer loans were $1.9
billion at December 31, 2001 compared to $2.0 billion at December 31, 2000.
Service fees decreased 4% ($11.9 million) during 2001 as the underlying
value of customer assets was impacted by market conditions. The average of
the aggregate customer assets related to service fees decreased from $117.6
billion at December 31, 2000, to $114.6 billion at December 31, 2001.
Management, retirement and other fee revenue received from money market and
subtransfer agent services increased 13% ($26.7 million). Additionally, the
number of IRA accounts increased, resulting in custodial fee revenue growth
of 26% ($8.0 million).
16
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations
Commissions revenue excluding the service fee component decreased 13%
($147.6 million) during 2001. Equity commissions decreased 33% ($145.3
million) due to the shift in product mix away from individual equities.
Insurance commissions decreased 1% ($1.5 million) and mutual fund
commissions decreased $0.5 million, even though customer dollars invested in
insurance and mutual fund products increased as a percentage of the product
mix.
Principal transactions revenue increased 40% ($106.0 million) during 2001.
The increase was primarily attributable to an increase in corporate, US
government and municipal bonds, and mortgage-backed securities, offset by a
decrease in CD sales.
Interest expense decreased 24% ($21.2 million) during 2001, due to a
decrease in bank loans outstanding and lower interest rates. The average of
the aggregate short-term bank loans outstanding was $272,000 during 2001,
compared to $413,000 during 2000.
Operating expenses increased 2% ($31.9 million) to $1.9 billion during 2001.
Occupancy and equipment expenses increased 16% ($28.7 million) and
communications and data processing expenses increased 10% ($22.0 million)
during 2001. The Partnership continued to expand its headquarters, branch
locations and communications systems to enable it to continue to increase
its number of IRs, locations and customers.
Compensation costs decreased 3% ($37.2 million). Variable compensation,
including bonuses and profit sharing paid to investment representatives,
branch office associates and headquarters associates, which expands and
contracts in relation to revenues, net income and profit margin, decreased
54% ($105.9 million) due to the lower revenue and earning levels. Sales
compensation decreased 1% ($6.5 million) due to the decrease in trade
revenue and service fees. Offsetting these decreases in compensation expense
was a 21% ($81.4 million) increase in compensation expense for existing
personnel and additional support personnel at both the headquarters and in
the branches due to growth in the sales force. On a full time equivalent
basis, the firm had 3,748 headquarters associates and 8,632 branch staff
associates as of December 31, 2001, compared to 3,547 headquarters
associates and 7,625 branch staff associates as of December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's equity capital at December 31, 2002, excluding the reserve
for anticipated withdrawals, was $681.4 million, compared to $638.9 million
at December 31, 2001. Equity capital has increased primarily due to the
retention of General Partner earnings ($34.1 million) and the issuance, net
of redemptions, of Subordinated Limited Partner interests ($12.8 million),
offset by redemption of Limited Partner interests ($4.6 million).
At December 31, 2002, the Partnership had $176.0 million in cash and cash
equivalents. Lines of credit are in place aggregating $1.19 billion ($1.14
billion of which is through uncommitted lines of credit). Actual borrowing
availability is based on securities owned and customers' margin securities
which serve as collateral for the loans. No amounts were outstanding under
these lines at December 31, 2002. The Association had loans from The Federal
Home Loan Bank of $13.8 million as of December 31, 2002, which are secured
by mortgage loans. The Partnership also participates in securities loaned
transactions, under which it receives collateral in the form of cash or
other collateral in an amount in excess of the market value of securities
loaned. Securities loaned outstanding were $10.1 million at December 31,
2002, for which the Partnership received cash collateral.
The Partnership believes that the liquidity provided by existing cash
balances, other highly liquid assets, and borrowing arrangements will be
sufficient to meet the Partnership's capital and liquidity requirements.
Depending on conditions in the capital markets and other factors, the
Partnership will, from
17
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations
time to time, consider the issuance of debt, the proceeds of which could be
used to meet growth needs or for other purposes.
The Partnership's growth in recent years has been financed through sales of
limited partnership interests to its employees, retention of earnings,
private placements of long-term and subordinated debt, long-term secured
debt and operating leases under which the firm rents facilities, furniture,
fixtures, computers and communication equipment. During June 2002, the
Partnership privately placed $250 million of subordinated debt with
institutional investors. The debt bears interest at 7.33% and has an average
maturity of ten years, with annual payments of $50 million per year
commencing in year eight. The proceeds of the placement will be used for
general partnership purposes.
Included in the Partnership's operating lease commitments and contingent
residual payments are synthetic leasing agreements for two buildings, one in
Tempe, Arizona, and one in St. Louis, Missouri. The lessor of the buildings,
along with a group of financial institutions, funded the construction of the
facilities. The total cost of the facilities covered by these leases was
$60.4 million. The synthetic leases have initial terms of five years, with
renewal options for two additional terms of up to five years by either the
lessor or the Partnership, subject to the approval of the other party. The
Partnership may, at its option, purchase the buildings during or at the end
of the terms of the leases at approximately the amount expended to construct
the facilities. If the Partnership does not exercise the purchase option by
or at the end of the lease, the Partnership could be obligated to pay up to
$27.5 million for the Tempe, Arizona, facility and up to $23.8 million for
the St. Louis, Missouri, facility.
The following table summarizes the Partnership's financing commitments and
obligations, excluding customer accounts due on demand.
Payments Due by Period
----------------------
Total 2003 2004 2005 2006 2007 Thereafter
--------- --------- --------- --------- --------- --------- ----------
Bank loans $ 13,828 $ - $ 2,100 $ - $ - $ 450 $ 11,278
Securities loaned 10,149 10,149 - - - - -
Long-term debt 49,363 9,673 7,857 8,080 9,321 3,581 10,851
Liabilities subordinated to claims
of general creditors 428,875 20,725 20,725 43,225 45,700 23,200 275,300
Rental commitments 444,200 122,500 77,800 52,500 37,000 24,400 130,000
Contingent residual payments 51,300 - - - - 51,300 -
--------- --------- --------- --------- --------- --------- ---------
Total financing commitments
and obligations $ 997,715 $ 163,047 $ 108,482 $ 103,805 $ 92,021 $ 102,931 $ 427,429
========= ========= ========= ========= ========= ========= =========
For the year ended December 31, 2002, cash and cash equivalents decreased
$20.6 million. Cash used in operating activities was $52.1 million. Cash
used for operating activities includes lower securities loaned and higher
inventory as of December 31, 2002. Securities loaned decreased $122.1
million due to a shift in borrowing to subordinated debt. Securities owned,
net, increased $100.3 million year over year. The primary source of cash
from operating activities is net income of $148.9 million. Cash used in
investing activities was $81.1 million consisting primarily of capital
expenditures ($89.4 million) attributable to the firm's expansion of its
headquarters and branch facilities required as the firm grows its sales
force. Cash provided by financing activities was $112.7 million consisting
primarily of the issuance of subordinated debt ($250.0 million) partially
offset by partnership withdrawals ($122.0 million).
For the year ended December 31, 2001, cash and cash equivalents increased
$20.2 million. Cash provided by operating activities was $287.2 million.
Sources include net income ($149.2 million) and net receivable from
customers ($348.1 million). These sources were partially offset by a
decrease in bank loans ($204.6 million). Cash used in investing activities
consisted of $127.0 million in capital expenditures primarily attributable
to the firm's expansion of its headquarters and branch facilities due to
growth in the sales force, and to investment in information technology
hardware and software. Cash used
18
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations
in financing activities was $140.0 million, primarily for partnership
withdrawals ($135.1 million) and repayment of subordinated debt ($26.7
million), partially offset by issuance of long-term debt ($25.0 million) and
issuance of Subordinated Limited Partner interests ($12.5 million).
For the year ended December 31, 2000, cash and cash equivalents increased
$33.8 million. Cash provided by operating activities was $221.5 million.
Sources include net income ($229.8 million), increased bank loans ($108.4
million) and securities loaned ($94.4 million) and proceeds from disposition
of securities purchased under agreements to resell ($75.0 million). These
sources were partially offset by a decrease in securities sold under
agreements to repurchase ($163.9 million), and an increase in net receivable
from customers ($120.0 million) due primarily to increased customer loan
balances. Cash used for investing activities consisted of $90.1 million in
capital expenditures primarily attributable to the Partnership's expansion
of its headquarters and branch facilities required as the Partnership grows
its sales force. Cash used in financing activities was $97.5 million
consisting of partnership withdrawals and distributions ($175.0 million) and
repayment of subordinated debt ($26.7 million), partially offset by the
issuance of Limited Partner and Subordinated Limited Partner interests
($114.0 million).
As a result of its activities as a broker/dealer, EDJ, the Partnership's
principal subsidiary, is subject to the Net Capital provisions of Rule
15c3-1 of the Securities Exchange Act of 1934 and the capital rules of the
New York Stock Exchange. Under the alternative method permitted by the
rules, EDJ must maintain minimum Net Capital, as defined, equal to the
greater of $250 or 2% of aggregate debit items arising from customer
transactions. The Net Capital rule also provides that partnership capital
may not be withdrawn if resulting Net Capital would be less than 5% of
aggregate debit items. Additionally, certain withdrawals require the consent
of the SEC to the extent they exceed defined levels even though such
withdrawals would not cause Net Capital to be less than 5% of aggregate
debit items. At December 31, 2002, EDJ's Net Capital of $636.1 million was
34% of aggregate debit items and its Net Capital in excess of the minimum
required was $598.9 million. Net Capital as a percentage of aggregate debits
after anticipated withdrawals was 34%. Net capital and the related capital
percentage may fluctuate on a daily basis.
CRITICAL ACCOUNTING POLICIES
The Partnership's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America,
which may require judgement and involve estimation processes to determine
its assets, liabilities, revenues and expenses which affect its results of
operations. The Partnership believes that of its significant accounting
policies, the following critical policies, estimates and assumptions may
involve a higher degree of judgement and complexity.
Customers' transactions are recorded on a settlement date basis with the
related revenue and expenses recorded on a trade date basis. The Partnership
may be exposed to risk of loss in the event customers, other brokers and
dealers, banks, depositories or clearing organizations are unable to fulfill
contractual obligations. For transactions in which it extends credit to
customers, the Partnership seeks to control the risks associated with these
activities by requiring customers to maintain margin collateral in
compliance with various regulatory and internal guidelines.
Securities owned and sold, not yet purchased, including inventory securities
and investment securities, are valued at market value which is determined by
using quoted market or dealer prices.
Included in management's discussion and analysis of financial condition and
results of operations, and in the quantitative and qualitative disclosures
about market risk, and in the notes to the financial statements (See Note 1
to the consolidated financial statements), are additional discussions of the
Partnership's accounting policies.
19
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations
THE EFFECTS OF INFLATION
The Partnership's net assets are primarily monetary, consisting of cash,
securities inventories and receivables less liabilities. Monetary net assets
are primarily liquid in nature and would not be significantly affected by
inflation. Inflation and future expectations of inflation influence
securities prices, as well as activity levels in the securities markets. As
a result, profitability and capital may be impacted by inflation and
inflationary expectations. Additionally, inflation's impact on the
Partnership's operating expenses may affect profitability to the extent that
additional costs are not recoverable through increased prices of services
offered by the Partnership.
NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities -
Interpretation of ARB No. 51" ("FIN 46"), which would become effective for
the Partnership for periods beginning after June 27, 2003. The lessor for
the Partnership's synthetic leases, an entity unrelated to JFC or its
affiliates, is currently being evaluated under FIN 46. It is unclear at this
time if the lessor will be considered a variable interest entity. If the
lessor is deemed to be a variable interest entity, the Partnership will be
required to record the synthetic leases as if they were capital leases
rather than operating leases. The amount capitalized, currently estimated at
$60,400, would be a deduction from the Partnership's Net Capital.
Additionally, the Partnership would record a capital lease obligation for
approximately the same amount. Currently, the Partnership's Net Capital is
$636,100 and its Net Capital in excess of the minimum required is $598,900.
The Partnership does not expect FIN 46 to have a significant impact on its
consolidated financial condition, results of operations, or cash flows.
Also, the FASB has issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others - an Interpretation of FASB Statements
No. 5, 57, and 107 and rescission of FASB Interpretation No. 34" ("FIN45"),
effective for the partnership in 2002. FIN 45 elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements
about its obligations under certain guarantees that it has issued. The
Partnership does not expect FIN 45 to have a significant effect on its
consolidated financial position, results of operations or cash flows.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations 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 Partnership and those specific to the
industry which could cause results to differ materially from those
contemplated. The risks and uncertainties include, but are not limited to,
general economic conditions, actions of competitors, regulatory actions,
changes in legislation and technology changes. Undue reliance should not be
placed on the forward-looking statements, which speak only as of the date of
this Annual Report on Form 10-K. The Partnership does not undertake any
obligation to publicly update any forward-looking statements.
20
PART II
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The SEC issued market risk disclosure requirements to enhance disclosures of
accounting policies for derivatives and other financial instruments and to
provide quantitative and qualitative disclosures about market risk inherent
in derivatives and other financial instruments. Various levels of management
within the Partnership manage the firm's risk exposure. Position limits in
trading and inventory accounts are established and monitored on an ongoing
basis. Credit risk related to various financing activities is reduced by the
industry practice of obtaining and maintaining collateral. The Partnership
monitors its exposure to counterparty risk through the use of credit
exposure information, the monitoring of collateral values and the
establishment of credit limits.
The Partnership is exposed to market risk from changes in interest rates.
Such changes in interest rates impact the income from interest earning
assets, primarily receivables from customers on margin balances, and may
have an impact on the expense from liabilities that finance these assets. At
December 31, 2002, amounts receivable from customers were $1.909 billion.
Liabilities include amounts payable to customers and other interest and
non-interest bearing liabilities. Depending on business conditions and the
mix of assets and liabilities, there can be an impact on net interest
earned. The Partnership performed an analysis of its financial instruments
and assessed the related interest rate risk and materiality in accordance
with the rules. Based on this analysis, in the opinion of management, the
risk associated with the Partnership's financial instruments at December 31,
2002 will not have a material adverse effect on the consolidated financial
position or results of operations of the Partnership.
21
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements Included in this Item
Page No.
Report of Independent Accountants............................................. 23
Consolidated Statements of Financial Condition as of
December 31, 2002 and 2001 ................................................... 24
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000 ............................................. 26
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000.............................................. 27
Consolidated Statements of Changes in Partnership Capital
for the years ended December 31, 2002, 2001 and 2000.......................... 28
Notes to Consolidated Financial Statements.................................... 29
22
PART II
Item 8. Financial Statements And Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To The Jones Financial Companies, L.L.L.P.
In our opinion, the accompanying consolidated statement of financial
condition and the related consolidated statements of income, cash flows and
changes in partnership capital present fairly, in all material respects, the
consolidated financial position of The Jones Financial Companies, L.L.L.P.
and subsidiaries (the "Partnership") at December 31, 2002, and the results
of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United
States of America. These consolidated financial statements are the
responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing
standards generally accepted in the United States of America which require
that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. The consolidated financial statements of
the Partnership as of December 31, 2001 and for each of the two years then
ended were audited by other independent accountants who have ceased
operations. Those independent accountants expressed an unqualified opinion
on those statements in their report dated February 22, 2002.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 27, 2003
23
PART II
Item 8. Financial Statements And Supplementary Data
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
December 31, December 31,
(Amounts in thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 175,953 $ 196,508
Securities purchased under agreements to resell 65,000 80,000
Receivable from:
Customers 1,909,376 1,881,021
Brokers, dealers and clearing organizations 99,848 80,088
Mortgages and loans 112,959 100,782
Securities owned, at market value
Inventory securities 204,970 118,872
Investment securities 175,249 180,719
Equipment, property and improvements, at cost,
net of accumulated depreciation 298,129 298,072
Other assets 216,761 222,346
------------- -------------
TOTAL ASSETS $ 3,258,245 $ 3,158,408
==============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
24
PART II
Item 8. Financial Statements And Supplementary Data
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES AND PARTNERSHIP CAPITAL
December 31, December 31,
(Amounts in thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------
Bank loans $ 13,828 $ 13,679
Payable to:
Customers 1,622,595 1,602,726
Brokers, dealers and clearing organizations 20,334 41,990
Depositors 109,724 103,950
Securities loaned 10,149 132,231
Securities sold, not yet purchased,
at market value 15,536 35,251
Accounts payable and accrued expenses 120,846 121,558
Accrued compensation and employee benefits 157,050 180,422
Long-term debt 49,363 46,285
------------- -------------
2,119,425 2,278,092
------------- -------------
Liabilities subordinated to claims
of general creditors 428,875 205,600
------------- -------------
Commitments and contingencies
Partnership capital net of reserve for anticipated withdrawals:
Limited partners 228,666 233,228
Subordinated limited partners 95,299 82,455
General partners 357,406 323,261
------------- -------------
681,371 638,944
Reserve for anticipated withdrawals 28,574 35,772
------------- -------------
TOTAL PARTNERSHIP CAPITAL 709,945 674,716
------------- -------------
TOTAL LIABILITIES AND PARTNERSHIP
CAPITAL $ 3,258,245 $ 3,158,408
==============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
25
PART II
Item 8. Financial Statements And Supplementary Data
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended
----------------------------------------------------
(Amounts in thousands, December 31, December 31, December 31,
except per unit information) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Revenue:
Commissions $ 1,310,577 $ 1,253,862 $ 1,414,474
Principal transactions 403,329 370,327 264,361
Investment banking 41,055 24,676 29,545
Interest and dividends 137,029 176,277 224,497
Gain on investments 8,186 - -
Other 369,849 316,855 279,083
------------- ------------- -------------
Total revenue 2,270,025 2,141,997 2,211,960
Interest expense 60,282 66,468 87,662
------------- ------------- -------------
Net revenue 2,209,743 2,075,529 2,124,298
------------- ------------- -------------
Operating expenses:
Compensation and benefits 1,285,284 1,200,225 1,237,458
Communications and data processing 262,751 233,224 211,255
Occupancy and equipment 218,538 211,387 182,661
Payroll and other taxes 82,518 74,105 67,521
Floor brokerage and clearance fees 13,993 14,376 17,584
Advertising 43,971 43,650 37,927
Other operating expenses 153,773 149,376 140,069
------------- ------------- -------------
Total operating expenses 2,060,828 1,926,343 1,894,475
------------- ------------- -------------
Net income $ 148,915 $ 149,186 $ 229,823
============= ============= =============
Net income allocated to:
Limited partners $ 20,196 $ 22,935 $ 31,440
Subordinated limited partners 15,889 14,949 21,294
General partners 112,830 111,302 177,089
------------- ------------- -------------
$ 148,915 $ 149,186 $ 229,823
============= ============= =============
Net income per weighted average $1,000
equivalent partnership unit outstanding:
Limited partners $ 87.44 $ 96.89 $ 179.21
============= ============= =============
Subordinated limited partners $ 167.16 $ 181.70 $ 333.92
============= ============= =============
Weighted average $1,000 equivalent
partnership units outstanding:
Limited partners 230,970 236,696 175,436
============= ============= =============
Subordinated limited partners 95,053 82,273 63,770
============= ============= =============
==================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
26
PART II
Item 8. Financial Statements And Supplementary Data
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
-------------------------------------------------------
December 31, December 31, December 31,
(Amounts in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 148,915 $ 149,186 $ 229,823
Adjustments to reconcile net income to net
cash (used in)/provided by operating activities -
Depreciation and amortization 89,295 77,237 66,643
Gain on sales of investments (8,186) - -
Changes in assets and liabilities:
Securities purchased under agreements to resell 15,000 (80,000) 75,000
Securities sold under agreements to repurchase - (24,969) (163,911)
Net receivable from customers (8,486) 348,086 (120,008)
Net receivable from brokers, dealers and
clearing organizations (41,416) 20,260 (43,848)
Receivable from mortgages and loans (12,177) (1,836) (16,222)
Securities owned, net (100,343) 39,597 9,985
Other assets 5,514 13,351 (87,879)
Bank loans 149 (204,635) 108,417
Securities loaned (122,082) (8,365) 94,385
Payable to depositors 5,774 16,400 10,298
Accounts payable and accrued expenses (712) (4,561) 42,733
Accrued compensation and employee benefits (23,372) (52,571) 16,059
------------- ------------- -------------
Net cash (used in)/provided by operating activities (52,127) 287,180 221,475
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, property and improvements, net (89,352) (127,019) (90,141)
Proceeds from sales of investments 8,257 - -
------------- ------------- -------------
Net cash used in investing activities (81,095) (127,019) (90,141)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 13,100 25,000 -
Repayment of long-term debt (10,022) (8,333) (4,922)
Issuance of subordinated liabilities 250,000 - -
Repayment of subordinated liabilities (26,725) (26,725) (26,725)
Issuance of partnership interests 13,709 12,450 114,014
Redemption of partnership interests (5,427) (7,316) (4,937)
Withdrawals and distributions from partnership capital (121,968) (135,085) (174,953)
------------- ------------- -------------
Net cash provided by/(used in) financing activities 112,667 (140,009) (97,523)
------------- ------------- -------------
Net (decrease)/increase in cash and cash equivalents (20,555) 20,152 33,811
CASH AND CASH EQUIVALENTS,
Beginning of year 196,508 176,356 142,545
End of year $ 175,953 $ 196,508 $ 176,356
============= ============= =============
Cash paid for interest $ 60,201 $ 67,523 $ 87,479
The accompanying notes are an integral part of these consolidated financial
statements.
27
PART II
Item 8. Financial Statements And Supplementary Data
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Amounts in thousands) Capital Capital Capital Total
- ----------------------------------------------------------------------------------------------------------------
Partnership capital net of reserve for
anticipated withdrawals,
December 31, 1999 149,009 52,463 243,665 445,137
Issuance of partnership interests 95,572 18,442 - 114,014
Redemption of partnership interests (4,437) (500) - (4,937)
Net Income 31,440 21,294 177,089 229,823
Withdrawals and distributions (10,867) (15,496) (102,193) (128,556)
------------- ------------- ------------- -------------
TOTAL PARTNERSHIP CAPITAL 260,717 76,203 318,561 655,481
Reserve for anticipated withdrawals (20,573) (5,798) (26,020) (52,391)
------------- ------------- ------------- -------------
Partnership capital net of reserve for
anticipated withdrawals,
December 31, 2000 240,144 70,405 292,541 603,090
Issuance of partnership interests - 12,450 - 12,450
Redemption of partnership interests (6,916) (400) - (7,316)
Net Income 22,935 14,949 111,302 149,186
Withdrawals and distributions (8,445) (10,750) (63,499) (82,694)
------------- ------------- ------------- -------------
TOTAL PARTNERSHIP CAPITAL 247,718 86,654 340,344 674,716
Reserve for anticipated withdrawals (14,490) (4,199) (17,083) (35,772)
------------- ------------- ------------- -------------
Partnership capital net of reserve for
anticipated withdrawals,
December 31, 2001 233,228 82,455 323,261 638,944
Issuance of partnership interests - 13,709 - 13,709
Redemption of partnership interests (4,562) (865) - (5,427)
Net Income 20,196 15,889 112,830 148,915
Withdrawals and distributions (9,023) (12,766) (64,407) (86,196)
------------- ------------- ------------- -------------
TOTAL PARTNERSHIP CAPITAL 239,839 98,422 371,684 709,945
Reserve for anticipated withdrawals (11,173) (3,123) (14,278) (28,574)
------------- ------------- ------------- -------------
Partnership capital net of reserve for
anticipated withdrawals,
December 31, 2002 $ 228,666 $ 95,299 $ 357,406 $ 681,371
Included in Total Partnership Capital as of December 31, 2002, 2001, and
2000 is a Reserve for Anticipated Withdrawals, which the Partnership
distributed to its General and Limited Partners subsequent to year end.
The accompanying notes are an integral part of these consolidated financial
statements.
28
PART II
Item 8. Financial Statements And Supplementary Data
THE JONES FINANCIAL COMPANIES, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per unit information)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE PARTNERSHIP'S BUSINESS AND BASIS OF ACCOUNTING. The accompanying
consolidated financial statements include the accounts of The Jones
Financial Companies, L.L.L.P. and all wholly owned subsidiaries
(collectively, the "Partnership"). All material intercompany balances and
transactions have been eliminated in consolidation. Investments in
nonconsolidated companies which are at least 20% owned are accounted for
using the equity method.
The Partnership's principal operating subsidiary, Edward D. Jones & Co.,
L.P. ("EDJ"), is engaged in business as a registered broker-dealer primarily
serving individual investors. EDJ derives its revenues from the sale of
listed and unlisted securities and insurance products, investment banking
and principal transactions and as a distributor of mutual fund shares. EDJ
conducts business throughout the United States of America, Canada and the
United Kingdom with its customers, various brokers, dealers, clearing
organizations, depositories and banks. Boone National Savings and Loan
Association, F.A. (the "Association"), a wholly owned subsidiary of the
Partnership, makes commercial, real estate, and other loans to individuals
primarily to customers in Central Missouri. Additionally, the Association
offers trust services to EDJ customers through its division, the Edward
Jones Trust Co.
The financial statements have been prepared using the accrual basis of
accounting in conformity with accounting principles generally accepted in
the United States of America which requires the use of certain estimates by
management in determining the Partnership's assets, liabilities, revenues
and expenses. Actual results could differ from these estimates.
Substantially all of the Partnership's short-term financial assets and
liabilities are carried at fair value or contracted amounts which
approximate fair value. Assets which are recorded at contracted amounts
approximating fair value consist largely of short-term receivables.
Similarly, the Partnership's short-term liabilities are recorded at
contracted amounts approximating fair value.
TRANSACTIONS. The Partnership's securities activities involve execution,
settlement and financing of various securities transactions for customers.
Customers' transactions are recorded on a settlement date basis with the
related revenue and expenses recorded on a trade date basis. The Partnership
may be exposed to risk of loss in the event customers, other brokers and
dealers, banks, depositories or clearing organizations are unable to fulfill
contractual obligations. For transactions in which it extends credit to
customers, the Partnership seeks to control the risks associated with these
activities by requiring customers to maintain margin collateral in
compliance with various regulatory and internal guidelines.
CASH AND CASH EQUIVALENTS. The Partnership considers all highly liquid
investments, including money market securities, with original maturities of
three months or less, to be cash equivalents.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE. The Partnership participates in short-term resale
agreements and repurchase agreements collateralized by U.S. government and
agency securities. The market value of the underlying collateral as
determined daily, plus accrued interest thereon, must equal or exceed 102%
of the carrying amount of the transaction. It is the Partnership's policy to
have such underlying resale agreement collateral deposited in its accounts
at its custodian banks. Repurchase transactions require the Partnership to
deposit collateral
29
PART II
Item 8. Financial Statements And Supplementary Data
with the lender. Resale and repurchase agreements are carried at the amount
at which the securities will be subsequently resold/repurchased as specified
in the agreements.
SECURITIES-LENDING ACTIVITIES. Securities borrowed and securities loaned
transactions are reported as collateralized financings. Securities borrowed
transactions require the Partnership to deposit cash or other collateral
with the lender. With respect to securities loaned, the Partnership receives
collateral in the form of cash or other collateral of 102% the market value
of securities loaned. The Partnership monitors the market value of
securities borrowed and loaned on a daily basis, with additional collateral
obtained or refunded as necessary.
COLLATERAL. The Partnership reports as assets collateral it has pledged in
secured borrowings and other arrangements when the secured party cannot sell
or repledge the assets or the Partnership can substitute collateral or
otherwise redeem it on short notice. The Partnership does not report as an
asset collateral it has received in secured lending and other arrangements
because the debtor typically has the right to redeem or substitute the
collateral on short notice.
SECURITIES OWNED AND SOLD, NOT YET PURCHASED. Securities owned and sold, not
yet purchased, including inventory securities and investment securities, are
valued at market value which is determined by using quoted market or dealer
prices.
EQUIPMENT, PROPERTY AND IMPROVEMENTS. Equipment, including furniture and
fixtures, is recorded at cost and depreciated using straight-line and
accelerated methods over estimated useful lives of two to twelve years.
Buildings are depreciated using the straight-line method over their useful
lives, which are estimated at thirty years. Property improvements are
amortized based on the remaining life of the property or economic useful
life of the improvement, whichever is less. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation or
amortization are removed from the accounts. The cost of maintenance and
repairs is charged against income as incurred, whereas significant
enhancements are capitalized. Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the book value of
the asset may not be fully recoverable. If impairment is indicated, the
asset value is written down to its fair market value.
SEGREGATED CASH. Cash of $53 and $51, respectively, was segregated in a
special reserve bank account for the benefit of customers, and is included
in Cash and Cash Equivalents as of December 31, 2002 and 2001 under rule
15c3-3 of the Securities and Exchange Commission.
INCOME TAXES. Income taxes have not been provided for in the consolidated
financial statements since The Jones Financial Companies, L.L.L.P. is
organized as a partnership, and each partner is liable for their own tax
payments.
NOTE 2 - RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
Accounts receivable from and payable to customers include margin balances
and amounts due on cash transactions. The value of securities owned by
customers and held as collateral for these receivables is not reflected in
the financial statements. Substantially all amounts payable to customers are
subject to withdrawal upon customer request. The Partnership pays interest
on certain credit balances in customer accounts.
30
PART II
Item 8. Financial Statements And Supplementary Data
NOTE 3 - RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS
AND CLEARING ORGANIZATIONS
The components of receivable from and payable to brokers, dealers and
clearing organizations are as follows:
2002 2001
----------- -----------
Receivable from clearing organizations $ 74,805 $ 50,849
Securities failed to deliver 15,601 17,385
Dividends receivable 6,303 7,843
Deposits paid for securities borrowed 1,601 2,331
Other 1,538 1,680
----------- -----------
Total receivable from brokers, dealers
and clearing organizations $ 99,848 $ 80,088
=========== ===========
Securities failed to receive $ 18,067 $ 32,071
Other 2,267 9,919
----------- -----------
Total payable to brokers, dealers and
clearing organizations $ 20,334 $ 41,990
=========== ===========
Receivable from clearing organizations represents balances and deposits with
clearing organizations and the Partnership's Canadian carrying broker.
Securities failed to deliver/receive represent the contract value of
securities which have not been received or delivered by settlement date.
NOTE 4 - RECEIVABLE FROM MORTGAGES AND LOANS
Receivable from mortgages and loans is comprised of the Association's
primarily adjustable rate mortgage loans, commercial and other loans, net of
discounts, deferred origination fees and the allowance for loan losses. The
carrying amounts of the receivables approximate their fair values.
31
PART II
Item 8. Financial Statements And Supplementary Data
NOTE 5 - SECURITIES OWNED AND SOLD, NOT YET PURCHASED
Securities owned and sold, not yet purchased, are summarized as follows (at
market value):
2002 2001
------------------------------ -------------------------------
Securities Securities
Sold, Sold,
Securities not yet Securities not yet
Owned Purchased Owned Purchased
------------- ------------- ------------- --------------
Inventory securities:
Certificates of deposit $ 3,340 $ 730 $ 4,515 $ 1,553
U.S. and Canadian government
and U.S. agency obligations 68,571 2,899 16,849 866
State and municipal obligations 124,299 383 58,935 24,577
Corporate bonds and notes 5,585 9,238 24,540 2,308
Equities 1,545 250 2,833 2,810
Collateralized mortgage obligations 480 - 7,368 -
Other 1,150 2,036 3,832 3,137
------------- ------------- ------------- --------------
$ 204,970 $ 15,536 $ 118,872 $ 35,251
============= ============= ============= ==============
Investment securities:
U.S. government and agency
obligations $ 175,249 $ 180,719
============= =============
The Partnership attempts to reduce its exposure to market price fluctuations
of its inventory securities through the sale of U.S. government securities
and, to a limited extent, the sale of fixed income futures contracts. The
amount of the securities purchased or sold will fluctuate on a daily basis
due to changes in inventory securities owned, interest rates and market
conditions. The futures contracts are settled daily, and any gain or loss
is recognized in principal transactions revenue. The notional amount of
futures contracts sold was $10,000 and $12,000 at December 31, 2002 and
2001, respectively.
NOTE 6 - EQUIPMENT, PROPERTY AND IMPROVEMENTS
Equipment, property and improvements are summarized as follows:
2002 2001
----------- -----------
Land $ 12,915 $ 12,749
Buildings and improvements 238,641 211,522
Equipment, furniture and fixtures 539,038 487,957
----------- -----------
Total equipment, property and improvements 790,594 712,228
Accumulated depreciation and amortization (492,465) (414,156)
----------- -----------
Equipment, property and improvements, net $ 298,129 $ 298,072
=========== ===========
32
PART II
Item 8. Financial Statements And Supplementary Data
Depreciation expense on equipment, property and improvements is included in
the income statement under Communications and Data Processing and Occupancy
and Equipment.
NOTE 7 - BANK LOANS
The Partnership borrows from banks on a short-term basis primarily to
finance customer margin balances and inventory securities. As of December
31, 2002, the Partnership had bank lines of credit aggregating $1,190,000 of
which $1,140,000 were through uncommitted facilities. Actual borrowing
availability is primarily based on the value of securities owned and
customers' margin securities. At December 31, 2002, collateral with a market
value $1,666,000 was available to support bank loans of EDJ. There were no
bank loans outstanding under these lines as of December 31, 2002 or 2001.
Additionally, the Association had loans from The Federal Home Loan Bank of
$13,828 and $13,679 as of December 31, 2002 and 2001, respectively, which
are collateralized by mortgage loans. Bank loans outstanding approximate
their fair value.
Interest is at a fluctuating rate based on short-term lending rates. The
average of the aggregate short-term bank loans outstanding was $179,000,
$272,000 and $413,000 and the average interest rate was 2.7%, 4.6%, and 7.0%
for the years ended December 31, 2002, 2001 and 2000, respectively.
NOTE 8 - PAYABLE TO DEPOSITORS
Amounts payable to depositors are comprised of the Association's various
savings instruments offered to its customers, which include transaction
accounts and certificates of deposit with maturities ranging from 90 days to
72 months. The carrying amounts of the deposits approximate their fair
values.
NOTE 9 - LONG-TERM DEBT
Long-term debt is comprised of the following:
2002 2001
----------- -----------
Note payable, secured by equipment, interest paid quarterly at a variable
rate (3.53% at December 31, 2002) based on LIBOR plus applicable
margin, due in annual installments of $5,000, with a final
installment of $6,000 on September 30, 2006. $ 21,000 $ 25,000
Notes payable, secured by real estate, fixed rates of 8.23% and 6.82%,
principal and interest due in monthly installments,
with a final installment on April 5, 2008. 13,486 15,461
Note payable, secured by real estate, fixed rate of 7.28%, principal and
interest due in monthly installments, with a final installment
on June 1, 2017. 12,854 -
Notes payable, secured by real estate, fixed rates of 8.72% and 6.52%,
principal and interest due in monthly installments,
with a final installment on June 5, 2003. 2,023 5,824
----------- -----------
$ 49,363 $ 46,285
=========== ===========
33
PART II
Item 8. Financial Statements And Supplementary Data
Scheduled annual principal payments, as of December 31, 2002, are as
follows:
Principal
Year Payment
-------- -----------
2003 $ 9,673
2004 7,857
2005 8,080
2006 9,321
2007 3,581
Thereafter 10,851
-----------
$ 49,363
===========
The real estate debt of $28,400 at December 31, 2002 is collateralized by
land and buildings with a cost basis of $69,500 and a carrying value of
$48,400 at December 31, 2002. The $21,000 equipment debt as of December 31,
2002 is collateralized by equipment with a cost basis of $26,300 and a
carrying value of $13,800 at December 31, 2002. Certain agreements contain
restrictions that among other things, require maintenance of a fixed charge
coverage ratio and minimum net capital. The Partnership is in compliance
with all debt covenants and restrictions as of December 31, 2002 and 2001.
The carrying amounts of the long-term debt approximate their fair value
as of December 31, 2002 and 2001.
NOTE 10 - LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Liabilities subordinated to the claims of general creditors consist of:
2002 2001
----------- -----------
Capital notes, 7.33%, due in annual installments of $50,000 commencing on
June 12, 2010, with a final installment on June 12, 2014. $ 250,000 $ -
Capital notes, with rates ranging from 7.51% to 7.79%, due in annual
installments ranging from $3,700 to $25,000, commencing on August 15,
2005, with a final installment of $3,700 on August 15, 2011. 75,000 75,000
Capital notes, 8.18%, due in annual installments of $10,500,
with a final installment on September 1, 2008. 63,000 73,500
Capital notes, 7.95%, due in annual installments of $10,225, with a final
installment of of $10,200 on April 15, 2006. 40,875 51,100
Capital notes, 8.96%, due in annual installments of $6,000, with a final
installment on May 1, 2002. - 6,000
----------- -----------
$ 428,875 $ 205,600
=========== ===========
34
PART II
Item 8. Financial Statements And Supplementary Data
Required annual principal payments, as of December 31, 2002, are as follows:
Principal
Year Payment
-------- -----------
2003 $ 20,725
2004 20,725
2005 43,225
2006 45,700
2007 23,200
Thereafter 275,300
-----------
$ 428,875
===========
The capital note agreements contain restrictions which, among other things,
require maintenance of certain financial ratios, restrict encumbrance of
assets and creation of indebtedness and limit the withdrawal of partnership
capital. As of December 31, 2002, the Partnership was required, under the
note agreements, to maintain minimum partnership capital of $400,000 and Net
Capital as computed in accordance with the Uniform Net Capital rule of 7.5%
of aggregate debit items, or $139,638 (see Note 12).
The subordinated liabilities are subject to cash subordination agreements
approved by the New York Stock Exchange and, therefore, are included in the
Partnership's computation of Net Capital under the Securities and Exchange
Commission's Uniform Net Capital rule. The Partnership has estimated the
fair value of the subordinated capital notes to be approximately $466,000
and $213,000 as of December 31, 2002 and 2001, respectively.
NOTE 11 - PARTNERSHIP CAPITAL
The limited partnership capital, consisting of 228,666 and 233,228 $1,000
units at December 31, 2002 and 2001, respectively, is held by current and
former employees and general partners of the Partnership. Each limited
partner receives interest at seven and one-half percent on the principal
amount of capital contributed and a varying percentage of the net income of
the Partnership. Interest expense includes $17,307, $17,754 and $13,423, for
the years ended December 31, 2002, 2001 and 2000, respectively, paid to
limited partners on capital contributed.
The subordinated limited partnership capital, consisting of 95,299 and
82,455 $1,000 units at December 31, 2002 and 2001, respectively, is held by
current and former general partners of the Partnership. Each subordinated
limited partner receives a varying percentage of the net income of the
Partnership. The subordinated limited partner capital is subordinated to the
limited partnership capital.
Under the Partnership agreement, a withdrawing limited partner's capital is
payable in three equal annual installments; a withdrawing subordinated
limited or general partner's capital is payable in four equal annual
installments. The repayments of withdrawing limited, subordinated limited
and general partners' capital commence at their withdrawal dates.
NOTE 12 - NET CAPITAL REQUIREMENTS
As a result of its activities as a broker/dealer, EDJ is subject to the Net
Capital provisions of Rule 15c3-1 of the Securities Exchange Act of 1934 and
the capital rules of the New York Stock Exchange. Under the alternative
method permitted by the rules, EDJ must maintain minimum Net Capital equal
to the greater of $250 or 2% of aggregate debit items arising from customer
transactions. The Net Capital rule also
35
PART II
Item 8. Financial Statements And Supplementary Data
provides that partnership capital may not be withdrawn if resulting Net
Capital would be less than 5% of aggregate debit items. Additionally,
certain withdrawals require the consent of the SEC to the extent they exceed
defined levels even though such withdrawals would not cause Net Capital to
be less than 5% of aggregate debit items.
At December 31, 2002, EDJ's Net Capital of $636,100 was 34% of aggregate
debit items and its Net Capital in excess of the minimum required was
$598,900. Net Capital as a percentage of aggregate debits after anticipated
withdrawals was also 34%. Net Capital and the related capital percentage may
fluctuate on a daily basis.
NOTE 13 - GAIN ON INVESTMENTS
During the year, the Partnership sold all of the shares it received from its
memberships in the London Stock Exchange and Toronto Stock Exchange when
they demutualized. The Partnership realized an $8,186 gain on the sale of
these shares.
NOTE 14 - EMPLOYEE BENEFIT PLAN
The Partnership maintains a profit sharing plan covering all eligible
employees. Contributions to the plan are at the discretion of the
Partnership. Additionally, participants may contribute on a voluntary basis.
Approximately $35,600, $36,000 and $58,000 were provided by the Partnership
for its contributions to the plan for the years ended December 31, 2002,
2001 and 2000, respectively.
NOTE 15 - COMMITMENTS
The Partnership leases headquarters office space, furniture, computers and
communication equipment under various operating leases. Additionally, branch
offices are leased generally for terms of three to five years. Rent expense
was $179,400, $162,200 and $136,500 for the years ended December 31, 2002,
2001 and 2000, respectively.
The Partnership's noncancelable lease commitments greater than one year and
its contingent residual payments, as of December 31, 2002, are summarized
below:
Contingent
Rental Residual
Year Commitments Payments
-------- ------------- ------------
2003 $ 122,500 $ -
2004 77,800 -
2005 52,500 -
2006 37,000 -
2007 24,400 51,300
Thereafter 130,000 -
Included in the Partnership's operating lease commitments and contingent
residual payments are synthetic lease agreements for two buildings: one in
Tempe, Arizona and another one in St. Louis, Missouri. The lessor of the
buildings, along with a group of financial institutions, funded the
construction of the facilities. The total cost of the facilities covered by
these leases was $60,400. The synthetic leases have initial terms of five
years, with renewal options for two additional terms up to five years by
either the lessor or the Partnership, subject to the approval of the other
party. The Partnership may, at its option, purchase the buildings during or
at the end of the terms of the leases at approximately the amount expended
to construct the facilities. If the Partnership does not exercise the
purchase option by or at the
36
PART II
Item 8. Financial Statements And Supplementary Data
end of the leases, the Partnership would be responsible for contingent
residual payments of up to $27,500 for the Tempe, Arizona facility and up to
$23,800 for the St. Louis, Missouri facility, which would be reduced based
on the proceeds from the sale of the buildings.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities -
Interpretation of ARB No. 51" ("FIN 46"), which would become effective for
the Partnership for periods beginning after June 27, 2003. The lessor for
the Partnership's synthetic leases, an entity unrelated to JFC or its
affiliates, is currently being evaluated under FIN 46. It is unclear at this
time if the lessor will be considered a variable interest entity. If the
lessor is deemed to be a variable interest entity, the Partnership will be
required to record the synthetic leases as if they were capital leases
rather than operating leases. The amount capitalized, currently estimated at
$60,400, would be a deduction from EDJ's Net Capital. Additionally, the
Partnership would record a capital lease obligation for approximately the
same amount. Currently, EDJ's Net Capital is $636,100 and its Net Capital in
excess of the minimum required is $598,900. The Partnership does not expect
FIN 46 to have a significant impact on its consolidated financial condition,
results of operations, or cash flows.
EDJ has an equipment acquisition agreement with a financial institution.
Under terms of the agreement, equipment is purchased by the financial
institution as lessor and EDJ is obligated to lease the equipment. Equipment
acquired by the financial institution but not yet leased by the Partnership
at December 31, 2002, amounted to $3,300, which is not included in the
operating lease commitment table above. Should the equipment acquisition
agreement be terminated, EDJ has a commitment to pay the financial
institution for the equipment acquired under the equipment acquisition
agreement.
NOTE 16 - CONTINGENCIES
Various legal actions are pending against the Partnership with certain cases
claiming substantial damages. These actions are in various stages and the
results of such actions cannot be predicted with certainty. In the opinion
of management, after consultation with legal counsel, the ultimate
resolution of these actions is not expected to have a material adverse
impact on the Partnership's results of operations or financial condition.
NOTE 17 - RELATED PARTIES
EDJ has a minority partnership interest in the investment advisor to the
Edward Jones Money Market Fund (the "Money Market Fund"). The Partnership
does not have management responsibility for the advisor. Other than the
Money Market Fund, the Partnership does not distribute any other proprietary
funds. Approximately 3% of the Partnership's revenues were derived from the
advisor and the Money Market Fund during 2002, 2001 and 2000.
37
PART II
Item 8. Financial Statements And Supplementary Data
NOTE 18 - QUARTERLY INFORMATION
(Unaudited)
Quarters Ended
------------------------
March 30, June 29, September 28, December 31,
------------- ------------- ------------- --------------
2001
Total revenue $ 529,032 $ 538,817 $ 528,467 $ 545,681
Net income 37,786 40,703 33,938 36,759
Net income per weighted average
$1,000 equivalent partnership
unit outstanding:
Limited partners $ 24.54 $ 26.44 $ 22.04 $ 23.87
Subordinated limited partners 47.51 50.03 40.79 43.37
March 29, June 28, September 27, December 31,
------------- ------------- ------------- --------------
2002
Total revenue $ 573,861 $ 614,468 $ 547,927 $ 533,769
Net income 41,629 50,095 31,357 25,834
Net income per weighted average
$1,000 equivalent partnership
unit outstanding:
Limited partners $ 24.46 $ 29.45 $ 18.43 $ 15.10
Subordinated limited partners 48.16 56.53 34.60 27.87
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On July 11, 2002, the Partnership dismissed Arthur Andersen LLP ("Arthur
Andersen") as its independent accountants. The reports of Arthur Andersen on
the financial statements for the past two years contained no adverse opinion
or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principle. In connection with its
audits for the two most recent years and through July 11, 2002 there have
been no disagreements with Arthur Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or procedure, which disagreements if not resolved to the satisfaction of
Arthur Andersen would have caused them to make reference thereto in their
report on the financial statements for such years. During the two most
recent years and through July 11, 2002, there have been no reportable events
(as defined in Regulation S-K Item 304(a)(1)(v)). The Partnership has
provided Arthur Andersen a copy of the foregoing disclosure.
The Partnership requested that Arthur Andersen furnish it with a letter
addressed to the Securities and Exchange Commission stating whether or not
it agrees with the foregoing statements as reported in the Partnership's
July 11, 2002 Form 8-K. The Partnership was notified by Arthur Andersen that
they are no longer issuing such acknowledgments.
38
PART II
Item 9. Change In and Disagreements with Accountants on Accounting and
Financial Disclosure
The Partnership engaged PricewaterhouseCoopers LLP ("PwC") as its new
independent accountants as of July 11, 2002. During the two most recent
fiscal years and through July 11, 2002, the Partnership had not consulted
with PwC regarding either (i) the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Registrant's financial statements, and
either a written report was provided to the Partnership or oral advice was
provided that PwC concluded was an important factor considered by the
Partnership in reaching a decision as to the accounting, auditing or
financial reporting issue; or (ii) any matter that was either the subject of
a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation
S-K, or a reportable event, as that term is defined in Item 304(a)(1)(v) of
Regulation S-K.
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Jones Financial Companies, L.L.L.P., organized as a partnership, does
not have individuals associated with it designated as officers or directors.
As of January 31, 2003, the Partnership was comprised of 235 general
partners, 5,217 limited partners and 134 subordinated limited partners.
Under the terms of the Partnership Agreement, John W. Bachmann is designated
Managing Partner and in said capacity has primary responsibility for
administering the Partnership's business, determining its policies,
controlling the management and conduct of the Partnership's business and has
the power to appoint and dismiss general partners of the Partnership and to
fix the proportion of their respective interests in the Partnership. Subject
to the foregoing, the Partnership is managed by its 235 general partners.
The Executive Committee of the Partnership is comprised of John W. Bachmann,
Douglas E. Hill, Michael R. Holmes, Richie L. Malone, Steven Novik, Darryl
L. Pope and Robert Virgil, Jr. The purpose of the Executive Committee is to
provide counsel and advice to the Managing Partner in discharging his
functions. Furthermore, in the event the position of Managing Partner is
vacant, the Executive Committee shall succeed to all of the powers and
duties of the Managing Partner.
None of the general partners are appointed for any specific term nor are
there any special arrangements or understandings pursuant to their
appointment other than as contained in the Partnership Agreement.
No general partner is or has been individually, nor in association with any
prior business, the subject of any action under any insolvency law or
criminal proceeding or has ever been enjoined temporarily or permanently
from engaging in any business or business practice.
Following is a listing of the names of the Executive Committee, ages, dates
of becoming a general partner and area of responsibility for each as of
January 31, 2003:
Name Age Partner Area of Responsibility
- -------------------------------------------------------------------------------------------------------
John W. Bachmann 64 1970 Managing Partner
Douglas E. Hill 58 1974 Product & Sales Division
Michael R. Holmes 44 1996 Human Resources
Richie L. Malone 54 1979 Information Systems
Steven Novik 53 1983 Finance & Accounting
Darryl L. Pope 63 1971 Service Division
Robert Virgil, Jr. 68 1993 Headquarters Administration
- -------------------------------------------------------------------------------------------------------
Each member of the Executive Committee has been a general partner of the
Partnership for more than five preceding years, except for Robert Virgil,
Jr. As of December 31, 2000, Robert Virgil, Jr. was no longer a general
partner. He is a subordinated limited partner and is still a member of the
Executive Committee.
John W. Bachmann is a director of AMR Corporation, Fort Worth, Texas. Robert
Virgil, Jr. is a director of CPI Corp., St. Louis, Missouri.
40
PART III
ITEM 11. EXECUTIVE COMPENSATION
The following table identifies the compensation of the firm's Managing
Partner and the four highest compensated individuals of the Partnership
during the three most recent years (including respective shares of profit
participation).
(1) (2) (3)
Net Income
Deferred Allocated
Compen- to General Total
Year Salaries sation Partners (1) (2) (3)
- ----------------------------------------------------------------------------------------------------------------
John W. Bachmann 2002 $ 206,250 $ 5,620 $ 1,043,042 $ 1,254,912
2001 200,000 5,202 1,449,260 1,654,462
2000 200,000 8,789 3,131,881 3,340,670
Doug Hill 2002 181,250 5,620 3,119,026 3,305,896
2001 175,000 5,202 3,097,686 3,277,888
2000 175,000 8,789 5,516,789 5,700,578
Richie L. Malone 2002 163,750 5,620 3,012,976 3,182,346
2001 160,000 5,202 2,995,288 3,160,490
2000 160,000 8,789 5,109,485 5,278,274
Gary D. Reamey 2002 138,750 5,620 2,998,277 3,142,647
2001 135,000 5,202 2,969,546 3,109,748
2000 135,000 8,789 4,724,726 4,868,515
James D. Weddle 2002 163,750 5,620 2,795,363 2,964,733
2001 160,000 5,202 2,764,750 2,929,952
2000 160,000 8,789 4,657,091 4,825,880
================================================================================================================
(1) Each non-selling general partner receives a salary generally ranging
from $90,000 - $225,000 annually. Selling general partners do not
receive a specified salary, rather, they receive the net sales
commissions earned by them (none of the five individuals listed above
earned any such commissions). Additionally, general partners who are
principally engaged in sales are entitled to office bonuses based on
the profitability of their respective branch office, on the same
basis as the office bonus program established for all investment
representative employees.
(2) Each general partner is a participant in the Partnership's profit
sharing plan which covers all eligible employees. Contributions to
the plan, which are within the discretion of the Partnership, are
made annually and have historically been determined based on
approximately twenty-four percent of the Partnership's net income.
Allocation of the Partnership's contribution among participants is
determined by each participant's relative level of eligible earnings,
including in the case of general partners, their net income
participation.
(3) Each general partner is entitled to participate in the annual net
income of the Partnership based upon the respective percentage
interest in the Partnership of each partner. Interests in the
Partnership held
41
PART III
by each general partner ranged from .03% to 3.1% in 2002, 0.03% to
3.1% in 2001, and 0.05% to 3.4% in 2000. At the discretion of the
Managing Partner, the partnership agreement provides that, generally,
the first eight percent of net income allocable to general partners
be distributed on the basis of individual merit or otherwise as
determined by the Managing Partner. Thereafter, the remaining net
income allocable to general partners is distributed based upon each
individual's percentage interest in the Partnership. Net income
allocated to general partners excludes income required to be
reinvested under the Partnership Agreement.
Net income allocable to general partners is the amount remaining
after payment of interest and earnings on capital invested to limited
partners and subordinated limited partners.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Being organized as a limited partnership, management is vested in the
general partners thereof and there are no other outstanding "voting" or
"equity" securities. It is the opinion of the Partnership that the general
partnership interests are not securities within the meaning of federal and
state securities laws primarily because each of the general partners
participates in the management and conduct of the business.
In connection with outstanding limited and subordinated limited partnership
interests (non-voting securities), 183 of the general partners also own
limited partnership interests and 52 of the general partners also own
subordinated limited partnership interests, as noted in the table below.
As of January 31, 2003:
Name of Amount of
Beneficial Beneficial % of
Title of Class Owner Ownership Class
- ------------------------------------------------------------------------------------------------------
Limited Partnership All General
Interests Partners as
a Group $ 22,948,200 10%
Subordinated All General
Limited Partnership Partners as
Interests a Group $ 52,514,711 51%
- ------------------------------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the ordinary course of its business the Partnership has extended credit
to certain of its partners and employees in connection with their purchase
of securities. Such extensions of credit have been made on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with non-affiliated persons, and did
not involve more than the normal risk of collectibility or present other
unfavorable features. The Partnership also, from time to time and in the
ordinary course of business, enters into transactions involving the purchase
or sale of securities from or to partners or employees and members of their
immediate families, as principal. Such purchases and sales of securities on
a principal basis are effected on substantially the same terms as similar
transactions with unaffiliated third parties.
42
PART III
ITEM 14. CONTROLS AND PROCEDURES
Based upon an evaluation performed within 90 days of the date of this
report, the Partnership's certifying officers, the Chief Executive Officer
and the Chief Financial Officer, have concluded that the Partnership's
disclosure controls and procedures were effective.
There have been no significant changes in internal controls or other factors
that significantly affect these controls subsequent to the date of the
evaluation.
43
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
Page No.
INDEX
(a) (1) The following financial statements are included in Part II, Item 8:
Report of Independent Accountants................................................23
Consolidated Statements of Financial Condition as of
December 31, 2002 and 2001.......................................................24
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000.................................................26
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000.................................................27
Consolidated Statements of Changes in Partnership Capital
for the years ended December 31, 2002, 2001 and 2000.............................28
Notes to Consolidated Financial Statements ......................................29
(2) The following financial statements are included in Schedule I:
Parent Company Only Condensed Statements of Financial Condition as
of December 31, 2002 and 2001....................................................52
Parent Company Only Condensed Statements of Income for the years
ended December 31, 2002, 2001 and 2000...........................................53
Parent Company Only Condensed Statements of Cash Flows for the
years ended December 31, 2002, 2001 and 2000.....................................54
Report of Independent Accountants................................................55
Schedules are omitted because they are not required,
inapplicable, or the information is otherwise shown in the
consolidated financial statements or notes thereto.
(b) Report on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 2002.
(c) Exhibits
Reference is made to the Exhibit Index hereinafter contained.
44
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:
(Registrant) THE JONES FINANCIAL COMPANIES, L.L.L.P.
---------------------------------------------------
By (Signature and Title) /s/ John W. Bachmann
---------------------------------------------------
John W. Bachmann, Chief Executive Officer
Date March 27, 2003
---------------------------------------------------
By (Signature and Title) /s/ Steven Novik
---------------------------------------------------
Steven Novik, Chief Financial Officer
Date March 27, 2003
---------------------------------------------------
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
There have been no annual reports sent to security holders covering the
registrant's last fiscal year nor have there been any proxy statements, form
of proxy or other proxy soliciting material sent to any of registrant's
security holders.
45
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, John W. Bachmann, certify that:
1. I have reviewed this annual report on Form 10-K of The Jones
Financial Companies, L.L.L.P.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order 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 annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition and results of operations
and cash flows of the Partnership as of, and for, the periods
presented in this annual report.
4. The Partnership's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Partnership
and have;
a) designed such disclosure controls and procedures to ensure that
material information relating to the Partnership including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is prepared;
b) evaluated the effectiveness of the Partnership's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of our disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The Partnership's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Partnership's auditors
and the Executive Committee:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Partnership's
ability to record, process, summarize, and report financial data
and have identified for the Partnership's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other associates who have a significant role in the Partnership's
internal controls.
6. The Partnership's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ John W. Bachmann
-------------------------------------------
Chief Executive Officer
The Jones Financial Companies, L.L.L.P.
March 27, 2003
46
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Steven Novik, certify that:
1. I have reviewed this annual report on Form 10-K of The Jones
Financial Companies, L.L.L.P.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order 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 annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition and results of operations
and cash flows of the Partnership as of, and for, the periods
presented in this annual report.
4. The Partnership's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Partnership
and have;
a) designed such disclosure controls and procedures to ensure that
material information relating to the Partnership including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is prepared;
b) evaluated the effectiveness of the Partnership's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of our disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The Partnership's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Partnership's auditors
and the Executive Committee:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Partnership's
ability to record, process, summarize, and report financial data
and have identified for the Partnership's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other associates who have a significant role in the Partnership's
internal controls.
6. The Partnership's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Steven Novik
--------------------------------------------
Chief Financial Officer
The Jones Financial Companies, L.L.L.P.
March 27, 2003
47
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002
Exhibit
Number Page Description
3.1 Thirteenth Amended and Restated Agreement of Registered
Limited Liability Limited Partnership of The Jones
Financial Companies, L.L.L.P., dated as of February 11,
2003.
3.2 * Form of Limited Partnership Agreement of Edward D. Jones
& Co., L.P.
10.1 * Form of Cash Subordination Agreement between the Registrant
and Edward D. Jones & Co., incorporated herein by reference
to Exhibit 10.1 to the Company's registration statement of
Form S-1 (Reg. No. 33-14955).
10.2 * Agreements of Lease between EDJ Leasing Company and Edward
D. Jones & Co., L.P., dated August 1, 1991, incorporated
herein by reference to Exhibit 10.18 to the Company's Annual
Report or Form 10-K for the year ended September 27, 1991.
10.3 * Edward D. Jones & Co., L.P. Note Purchase Agreement dated
as of May 8, 1992, incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 26, 1992.
10.4 * Purchase and Sale Agreement by and between EDJ Leasing Co.,
L.P. and the Resolution Trust Corporation incorporated herein
by reference to Exhibit 10.21 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1992.
10.5 * Master Lease Agreement between EDJ Leasing Company and
Edward D. Jones & Co., L.P., dated March 9, 1993, and First
Amendment to Lease dated March 9, 1994, incorporated herein
by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 25, 1994.
10.6 * Mortgage Note and Amendment to Deed of Trust between EDJ
Leasing Co., L.P. and Nationwide Insurance Company dated
March 9, 1994, incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 25, 1994.
10.7 * Mortgage Note; Deed of Trust and Security Agreement;
Assignment of Leases, Rents and Profits; and Subordination
and Attornment Agreement between EDJ Leasing Co., L.P. and
Nationwide Insurance Company dated April 6, 1994,
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 25,
1994.
48
10.8 * Note Purchase Agreement by Edward D. Jones & Co., L.P., for
$92,000,000 aggregate principal amount of 7.95% subordinated
capital notes due April 15, 2006, incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 24, 1994.
10.9 * Master Lease Agreement and Addendum by and between Edward
D. Jones & Co., L.P. and General Electric Capital Corporated
dated April 21, 1994, incorporated herein by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 24, 1994.
10.10 * Agreement and Plan of Acquisition between The Jones
Financial Companies and Boone National Savings and Loan
Association, F.A., incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994.
10.11 * Mortgage Note; South Second Deed of Trust and Security
Agreement between EDJ Leasing Co., L.P. and Nationwide Life
Insurance Company dated August 31, 1995, incorporated herein
by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 29, 1995.
10.12 * Mortgage Note; North Second Deed of Trust and Security
Agreement between EDJ Leasing Co., L.P. and Nationwide Life
Insurance Company dated August 31, 1995, incorporated herein
by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 29, 1995.
10.13 * Note Purchase Agreement by Edward D. Jones & Co., L.P. for
$94,500,000 aggregate principal amount of 8.18% subordinated
capital notes due September 1, 2008, incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 27, 1996.
10.14 * Note Purchase Agreement by Edward D. Jones & Co., L.P. for
$75,000,000 aggregate principal amount of subordinated
capital notes with rates ranging from 7.51% to 7.79% due
September 15, 2011, incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 24, 1999.
10.15 * Lease between Eckelkamp Office Center South, L.L.C., a
Missouri Limited Liability Company, as Landlord and Edward D.
Jones & Co., L.P., a Missouri Limited Partnership, as Tenant,
dated February 3, 2000, incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
10.16 * Master Agreement dated as of November 30, 2000 among Edward
D. Jones & Co., L.P., as Lessee, Construction Agent and
49
Guarantor, Atlantic Financial Group, Ltd., (registered to do
business in Arizona as AFG Equity, Limited Partnership) as
Lessor, Suntrust Bank and Certain Financial Institutions
Parties Hereto, as Lenders, and Suntrust Bank as agent, and
joined in by the The Jones Financial Companies, L.L.L.P.,
incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
10.17 * Master Lease Agreement dated as of November 30, 2000
between Atlantic Financial Group, Ltd. (registered to do
business in Arizona as AFG Equity, Limited Partnership), as
Lessor, and Edward D. Jones & Co., L.P., as Lessee,
incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
10.18 * Master Lease Agreement between Edward D. Jones & Co., L.P.
and Fleet Capital Corporation dated as of August 22, 2001,
incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
10.19 * Credit Agreement dated as of August 27, 2001 between EDJ
Leasing Co., L.P. and Southtrust Bank, incorporated herein by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
10.20 * Master Lease Agreement between EDJ Leasing Co., L.P. and
Edward D. Jones & Co., L.P. dated August 27, 2001,
incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
10.21 * Master Agreement dated as of September 18, 2001 among
Edward D. Jones & Co., L.P., as Lessee, Construction Agent
and Guarantor, Atlantic Financial Group, Ltd., (registered to
do business in Missouri as Atlantic Financial Group, L.P.) as
Lessor, Suntrust Bank and Certain Financial Institutions
Parties Hereto, as Lenders, and Suntrust Bank, as Agent and
joined in by The Jones Financial Companies, L.L.L.P,
incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
10.22 * Master Lease Agreement dated as of September 18, 2001
between Atlantic Financial Group, Ltd. (registered to do
business in Missouri as Atlantic Financial Group, L.P.), as
Lessor, and Edward D. Jones & Co., L.P., as Lessee,
incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
10.23 * Note Purchase Agreement by Edward D. Jones & Co., L.P., for
$250,000,000 aggregate principal amount of 7.33% subordinated
capital notes due June 12, 2014, incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 28, 2002.
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23.1 Consent of Independent Accountants, filed herewith.
24 * Delegation of Power of Attorney to Managing Partner
contained within Exhibit 3.1
99.1 Certification pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference to previously filed exhibits.
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Schedule I
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31, December 31,
(Amounts in thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 3,420 $ 3,678
Investment in subsidiaries 701,748 667,352
Other assets 5,907 5,256
-------------- -------------
TOTAL ASSETS $ 711,075 $ 676,286
============== =============
LIABILITIES AND PARTNERSHIP CAPITAL:
Payable to limited partners, accounts payable
and accrued expenses $ 1,130 $ 1,570
-------------- -------------
TOTAL LIABILITIES 1,130 1,570
TOTAL PARTNERSHIP CAPITAL 709,945 674,716
-------------- -------------
TOTAL LIABILITIES AND PARTNERSHIP
CAPITAL $ 711,075 $ 676,286
==================================================================================================================
These financial statements should be read in conjunction with the notes to
the consolidated financial statements of The Jones Financial Companies,
L.L.L.P.
52
Schedule I (continued)
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
Years Ended
------------------------------------------------------
December 31, December 31, December 31,
(Amounts in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
NET REVENUE:
Subsidiary earnings $ 148,066 $ 147,835 $ 226,225
Management fee income 35,661 32,876 27,905
Other (280) 495 2,032
------------- ------------- -------------
Total revenue 183,447 181,206 256,162
------------- ------------- -------------
Interest expense 17,325 17,800 13,501
------------- ------------- -------------
Net revenue 166,122 163,406 242,661
------------- ------------- -------------
OPERATING EXPENSES:
Compensation and benefits 17,065 14,099 12,584
Payroll and other taxes 115 73 84
Other operating expenses 27 48 170
------------- ------------- -------------
Total operating expenses 17,207 14,220 12,838
------------- ------------- -------------
NET INCOME $ 148,915 $ 149,186 $ 229,823
==================================================================================================================
These financial statements should be read in conjunction with the notes to
the consolidated financial statements of The Jones Financial Companies,
L.L.L.P.
53
Schedule I (continued)
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended
--------------------------------------------------
December 31, December 31, December 31,
(Amounts in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 148,915 $ 149,186 $ 229,823
Adjustments to reconcile net income to net cash
provided by operating activities -
Increase in investment in subsidiaries (34,396) (12,760) (168,753)
Increase in other assets and liabilities, net (1,091) (2,934) 4,356
------------- ------------- -------------
Net cash provided by operating activities 113,428 133,492 65,426
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of partnership interests 13,709 12,450 114,014
Redemption of partnership interests (5,427) (7,316) (4,937)
Withdrawals and distributions from
partnership capital (121,968) (135,085) (174,953)
------------- ------------- -------------
Net cash used in financing activities (113,686) (129,951) (65,876)
------------- ------------- -------------
Net (decrease) increase in cash and
cash equivalents (258) 3,541 (450)
CASH AND CASH EQUIVALENTS,
Beginning of year 3,678 137 587
------------- ------------- -------------
End of year $ 3,420 $ 3,678 $ 137
==================================================================================================================
These financial statements should be read in conjunction with the notes to
the consolidated financial statements of The Jones Financial Companies,
L.L.L.P.
54
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To The Jones Financial Companies, L.L.L.P.:
Our audit of the consolidated financial statements referred to in our report
dated March 27, 2003 appearing in the Form 10-K of The Jones Financial
Companies, L.L.L.P. also included an audit of the financial statement
schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these
financial statement schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 27, 2003
55
The following is a copy of a report previously issued by Arthur Andersen LLP and
has not been reissued by Arthur Andersen LLP.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Jones Financial Companies, L.L.L.P.
We have audited in accordance with auditing standards generally accepted in the
United States, the financial statements included in The Jones Financial
Companies, L.L.L.P. Form 10-K for the year ended December 31, 2001, and have
issued our report thereon dated February 22, 2002. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. Schedule I
listed in the index to Item 14 on Form 10-K for the year ended December 31,
2001, is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. Schedule I
has been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
St. Louis, Missouri,
February 22, 2002
56