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1
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, 1997 Commission file number 0-16633
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THE JONES FINANCIAL COMPANIES, L.P., LLP
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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 and 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 17, 1998 there were no voting securities held by non-affiliates
of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None
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2
PART I
ITEM 1. BUSINESS
The Jones Financial Companies, L.P., LLP (the "Registrant" and also referred
to herein as the "Partnership") is organized under the Revised Uniform
Limited Partnership Act of the State of Missouri. On February 26, 1998, the
registrant changed its name to The Jones Financial Companies, L.L.L.P., a
Missouri Limited Liability Partnership. The terms "Registrant" and
"Partnership" used throughout, refer to The Jones Financial Companies, L.P.,
LLP 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.P., LLP.
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 and in
Canada with its customers, various brokers and dealers, clearing
organizations, depositories and banks.
The Partnership is a member firm of the New York, American, Midwest, Toronto
and Montreal exchanges, and is a registered broker/dealer with the National
Association of Securities Dealers, Inc., ("NASD").
As of February 28, 1998, the Partnership was comprised of 154 general
partners, 2,541 limited partners and 76 subordinated limited partners.
At December 31, 1997, the Partnership is organized as follows: The
Partnership owns 100 percent of the outstanding common stock of EDJ Holding
Company, Inc., a Missouri corporation and 100 percent of the outstanding
common stock of LHC, Inc., 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 percent of the outstanding common stock of Conestoga
Securities, Inc., a Missouri corporation and also owns, as a limited partner,
49.5 percent 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 equity of Edward D. Jones & Co., an Ontario
limited partnership and its general partner, Edward D. Jones & Co. Canada
Holding Co. Inc.. The Partnership also owns 100% of Edward Jones Limited, a
U.K. limited partnership. 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 has an equity
position in several entities formed to act as general partners of various
direct participation programs sponsored by the Nooney Corporation as follows:
Nooney Income Investments Inc. (a Missouri corporation), 100% of outstanding
Class B non-voting stock; Nooney Income Investments Two, Inc. (a Missouri
corporation), 100% of outstanding Class B non-voting stock. The Partnership
holds all of the partnership equity in a Missouri limited partnership, EDJ
Ventures, Ltd.. Conestoga Securities, Inc., also a wholly owned subsidiary,
is the general partner of EDJ Ventures, Ltd.
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PART I
ITEM 1. Business
The Partnership is a limited partner of Edward Jones Insurance Agency of
Idaho, L.L.C., an Idaho limited liability corporation; Edward Jones Insurance
Agency of Oklahoma, L.L.C., an Oklahoma limited liability corporation; EDJ
Insurance Agency of Montana, a Montana limited partnership; EDJ Insurance
Agency of New Mexico, L.L.C., a New Mexico limited liability corporation; and
is a general partner in EDJ Insurance Agency of California, L.L.C., a
California limited liability corporation; each of which engage in general
insurance brokerage activities. Affiliates of the Partnership include EDJ
Insurance Agency of Nevada, EDJ Insurance Agency of Texas, Inc., EDJ
Insurance Agency of Alabama, EDJ Insurance Agency of Ohio, Inc., EDJ
Insurance Agency of Florida, EDJ Insurance Agency of Wyoming, and EDJ
Insurance Agency of Massachusetts. 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 trust programs. 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, Inc., a Delaware limited purpose corporation which has
issued and sold collateralized mortgage obligation bonds, and Cornerstone
Mortgage Investment Group II, Inc., a Delaware limited purpose corporation
which has structured and sold secured mortgage bonds. 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, L.L.P. Community Investment
Partners II, L.L.P. and Community Investment Partners III, L.L.P., business
development companies.
Other affiliates of the Partnership include Patronus, Inc. and EDJ Investment
Advisory Services. Neither has conducted an active business.
Within the past five years, the Registrant has added several new legal
entities. In 1994, Edward D. Jones & Co., an Ontario limited partnership and
its general partner Edward D. Jones & Co. Canada Holding Co., Inc. were
established as subsidiaries of EDJ. These Canadian subsidiaries allowed
expansion of the Registrant into Canada. In 1995, Boone National Savings and
Loan Association, F.A. was purchased. This purchase has allowed EDJ to offer
trust services to its customers in all 50 states. During 1997, Edward Jones
Limited, a UK Limited Partnership, was organized. During 1998, the Registrant
anticipates beginning brokerage operations in the United Kingdom under this
entity.
Due to state laws and regulations, certain states require separate legal
entities to transact insurance business in these states. During 1997, several
changes were made to these insurance entities as a result of changes in state
laws and regulations. The following entities were added: Edward Jones
Insurance Agency of Idaho, L.L.C., an Idaho limited liability corporation and
Edward Jones Insurance Agency of Oklahoma, L.L.C., an Oklahoma limited
liability corporation. The following entities were dissolved due to states no
longer requiring a separate entity to transact insurance in the state: EDJ
Insurance Agency of Arizona, an Arizona limited partnership, EDJ Insurance
Agency of Utah, a Utah limited partnership, EDJ Insurance Agency of Arkansas,
an Arkansas limited partnership, EDJ Insurance Agency of New Jersey, a New
Jersey limited partnership. The following entities were reorganized as
limited liability corporations: Edward Jones Insurance Agency of Alabama,
L.L.C., an Alabama limited liability corporation, Edward Jones Insurance
Agency Holding, L.L.C., a Florida limited liability corporation, Edward Jones
Insurance Agency of Wyoming, L.L.C., a Wyoming limited liability corporation,
Edward Jones Insurance Agency of California, L.L.C., a California limited
liability corporation, Edward Jones Insurance Agency of New Mexico, L.L.C., a
New Mexico limited liability corporation, and Edward Jones Insurance Agency
of Massachusetts, L.L.C., a Massachusetts limited liability corporation.
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4
PART I
ITEM 1. Business
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):
1997 1996 1995
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Commissions
Listed $ 138,199 $102,905 $ 86,589
Mutual Funds 407,430 319,091 227,832
O-T-C 64,488 49,728 30,929
Insurance 161,800 139,860 105,497
Other 110 1,986 1,105
Principal Transactions 166,209 171,903 142,916
Investment Banking 13,865 15,719 18,324
Interest & Dividends 92,938 72,726 62,246
Money Market Fees 35,831 30,187 17,437
IRA Custodial Service Fees 12,200 8,927 7,247
Other Revenues 42,209 39,036 22,663
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Total Revenues $1,135,279 $952,068 $722,785
================================================================================================================
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 effected 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 customers' 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.
Customers' 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 customers'
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 percent of the
debit balance in margin accounts. The Partnership may also use funds provided
by free credit balances in customers' accounts to finance customers' 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 is required in the event of a decline
in the market value of the securities in a margin account to require the
customer to deposit additional securities or cash so that at all times the
loan to the customer is no greater than 75 percent of the value of the
securities in the account (or to sell a sufficient amount of securities in
order to maintain this percentage). The Partnership, however, imposes a more
stringent maintenance requirement.
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5
PART I
ITEM 1. Business
Variations in revenues from listed brokerage commissions between periods is
largely a function of market conditions; however, some portion of the overall
increases in recent years is due to the growth in the number of registered
representatives over these periods.
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
percent to 5 3/4 percent 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 customers' 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 customers' orders to buy or
sell securities, the Partnership charges a commission for both principal and
agency transactions.
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 varying number of
registered representatives employed by the Partnership over the periods
indicated.
INSURANCE. The Partnership has executed agency agreements with various
national insurance companies. EDJ is able to offer life insurance, long term
care insurance, and fixed and variable annuities 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.
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 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.
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6
PART I
ITEM 1. Business
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 purchase price. Furthermore, the
commitment of capital to 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 and securities held. Interest is also earned by
the Association on its loan portfolio.
MONEY MARKET FEES, IRA CUSTODIAL SERVICE FEES AND OTHER REVENUES.
Other revenue sources include money market management fees, IRA custodial
services fees, gains from sales of certain assets, and other product and
service fees. Also included is non-commission revenue received from mutual
funds the Partnership distributes. The Partnership has an interest in the
investment advisor to its money market fund, Daily Passport Cash Trust.
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 service fee
for its services.
The Partnership has registered an investment advisory program with the 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 included under "Other
Revenues."
The Partnership also offers trust services to its customers through the
Edward Jones Trust company, a division of the Association. In 1997, an Edward
Jones credit card was developed for use by customers of the Partnership. The
Partnership has entered into a co-bonded partnership with a major credit card
processing company and receives revenue on new card openings, card renewals,
and a portion of sales transactions on the credit card. In 1998, the
partnership plans to offer mortgage loans to its customers through a joint
venture program with a large super regional bank. The Partnership also plans
to offer loans to small businesses through a joint venture with another
regional bank.
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. The Partnership competes with many
other securities firms with substantially larger research staffs in its
research activities.
CUSTOMER ACCOUNT ADMINISTRATION AND OPERATIONS. Operations associates
are responsible for activities relating to customers' 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 margin accounts.
The Partnership processes substantially all of its own transactions. It is
important that the Partnership maintain current and accurate books and
records from both a profit viewpoint as well as for regulatory compliance.
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7
PART I
ITEM 1. Business
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
Midwest Stock Exchanges.
In conjunction with clearing and settling transactions with NSCC, the
Partnership holds customers' securities on deposit with the Depository Trust
Company ("DTC") in lieu of maintaining physical custody of the certificates.
The Partnership also uses Participant Trust Company for custody of GNMA
securities and a major bank for custody of treasury securities.
The Partnership is substantially dependent upon the operational capacity and
ability of NSCC/DTC. Any serious delays in the processing of securities
transactions encountered by NSCC/DTC 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") and First Marathon Securities,
Limited provide automated data processing services for customer account
activity and records for U.S. and Canadian subsidiaries, respectively.
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. While the coverages provided by the Securities
Investors Protection Corporation ("SIPC") and protection in excess of SIPC
limits would be available to customers of the Partnership, 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 by the SIPC and the Partnership's insurance carrier.
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.
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8
PART I
ITEM 1. Business
EMPLOYEES. Including its general partners, the Partnership has
approximately 13,691 full and part-time employees. This also includes 4,016
registered salespeople as of February 28, 1998. 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. The first phase of training is spent studying Series 7
examination materials and preparing for and taking the examination. The first
week of training after passing the examination is spent in a comprehensive
training program in St. Louis. The next three weeks include on-the-job
training in branch locations reviewing investments, office procedures and
sales techniques. The salesperson is then sent to a designated location, for
four weeks, to establish the EDJ office, conduct market research and prepare
for opening the office. After the salesperson has opened a branch office, one
final week is 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, and
disability insurance plans and profit sharing and deferred compensation
retirement plans, are competitive with those offered by other firms
principally engaged in the securities business.
BRANCH OFFICE NETWORK. The Partnership operates 3,790 branch offices as
of February 28, 1998, primarily staffed by a single registered
representative. The offices are located in all 50 states, predominantly in
communities with populations of under 50,000 and metropolitan suburbs. The
partnership is currently exploring branch office operations in foreign
countries with current operations in Canada (through 106 offices as of
February 28, 1998) and expects to commence operations in the UK in 1998.
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.
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9
PART I
ITEM 1. Business
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
and Canada.
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 customers' 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. 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 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 inventories. 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.
ITEM 2. PROPERTIES
The Partnership conducts its headquarters operations from three locations in
St. Louis County, Missouri, comprising 19 separate buildings. Two of the
locations are owned by the Partnership and are used to secure loans of the
Partnership. The third location is leased through a long-term operating
lease. In addition, the Partnership leases its Canadian headquarters facility
in Mississauga, Ontario through an operating lease. In 1997, the Partnership
entered into a long-term operating lease for its United Kingdom headquarters
located in London, England. The Partnership also maintains facilities in
3,840 branch locations (as of December 31, 1997) which are located in the
United States and Canada 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.
9
10
PART II
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.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no market for the Limited or Subordinated Limited Partnership
interests and their assignment is prohibited.
10
11
PART II
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 Income Statement Data:
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
Revenues $1,135,279 $ 952,068 $ 722,785 $ 661,258 $643,315
Net income $ 114,184 $ 92,888 $ 58,186 $ 53,857 $ 66,211
Net income per
weighted average
$1,000 equivalent
limited partnership
unit outstanding $ 176.06 $ 170.63 $ 125.01 $ 127.59 $ 194.62
Weighted average
$1,000 equivalent
limited partnership
units outstanding 93,962 96,879 67,345 63,165 50,381
Net income per
weighted average
$1,000 equivalent
subordinated limited
partnership unit
outstanding $ 320.61 $ 301.44 $ 225.00 $ 237.83 $ 350.32
Weighted average
$1,000 equivalent
subordinated limited
partnership units
outstanding 37,332 30,543 27,720 21,789 16,936
- ----------------------------------------------------------------------------------------------------------------------------
11
12
Item 6. Selected Financial Data
Summary Balance Sheet Data:
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $1,554,798 $1,380,416 $1,045,501 $ 953,359 $800,478
========== ========== ========== ========== ========
Long-term debt $ 53,350 $ 67,190 $ 70,127 $ 41,779 $ 33,317
Other liabilities,
exclusive of
subordinated
liabilities 979,797 826,609 605,080 585,057 514,386
Subordinated liabilities 216,500 216,500 122,000 136,000 73,000
Total partnership capital 305,151 270,117 248,294 190,523 179,775
---------- ---------- ---------- ---------- --------
Total liabilities and
partnership capital $1,554,798 $1,380,416 $1,045,501 $ 953,359 $800,478
========== ========== ========== ========== ========
12
13
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the changes in major categories of revenues
and expenses for the last two years (dollar amounts in thousands).
1997 vs. 1996 1996 vs. 1995
Increase - (Decrease)
Amount Percentage Amount Percentage
- ------------------------------------------------------------------------------------------------------------------------
Revenues
Commissions $158,457 26% $161,618 36%
Principal transactions (5,694) (3) 28,987 20
Investment banking (1,854) (12) (2,605) (14)
Interest and dividends 20,212 28 10,480 17
Other 12,090 15 30,803 65
-------- --- -------- ---
183,211 19 229,283 32
-------- --- -------- ---
Expenses
Compensation and benefits 99,300 18 137,713 34
Occupancy and equipment 28,617 27 20,621 24
Communications and data
processing 6,085 9 15,763 29
Interest 7,665 21 4,316 13
Payroll and other taxes 5,407 18 5,896 25
Floor brokerage and
clearance fees 1,021 14 1,334 23
Other operating expenses 13,820 21 8,938 15
-------- --- -------- ---
161,915 19 194,581 29
-------- --- -------- ---
Net income $ 21,296 23% $ 34,702 60%
========================================================================================================================
RESULTS OF OPERATIONS (1997 VERSUS 1996)
The Partnership experienced a record year in 1997 in terms of both revenue
and net income. Revenue exceeded $1 billion and net income exceeded $100
million for the first time in the Partnership's history. Revenues of $1.135
billion increased by 19% ($183.2 million) and expenses of $1.021 billion
increased by 19% ($161.9 million) compared to 1996. As a result, net income
increased 23% ($21.3 million) over 1996 to $114.2 million.
13
14
PART II
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Partnership also progressed on other significant objectives in 1997,
which include growth of its sales force, expansion of the products and
services offered to customers, and implementation of new technology. During
1997, the Partnership added 428 (12%) Investment Representatives ("IRs") to
its sales force, ending the year with 3,954 IRs in the United States and
Canada. The Partnership is awaiting regulatory approval to expand into the
United Kingdom. The Partnership continued to expand its offering of products
and services through the co-issuance of a credit card. Additionally, its
trust services, which commenced in 1996, were expanded to all 50 states The
Partnership plans to offer additional financial services in 1998. The
Partnership completed its conversion to client server technology in all of its
branch offices during mid-1997. This conversion marked the beginning of a new
technological infrastructure for the Partnership which will support growth in
the number of offices and the ability to offer more products and services to
meet the needs of the individual investor.
Looking at the financial results of 1997, strong securities markets, coupled
with growth in the number of IRs and continued maturity of existing IRs,
helped to increase revenues 19% in 1997. The Partnership segments its
revenues between Trade Revenues (revenues resulting from a customer trade)
and Fee Revenue (revenue sources which are not transaction oriented). Trade
Revenue accounted for 72% of total revenues versus 74% of total revenues in
1996. Fee Revenue sources, such as Service Fees, management fees, IRA fees,
and interest income, accounted for the remaining 28% of revenue in 1997.
Trade Revenues increased 16% ($111.7 million) to $818.2 million in 1997. This
increase is a result of increased IRs, and increased customer dollars
invested, offset by a decrease in the commission earned on every dollar
invested and one less selling day in 1997 compared to 1996. Total customer
dollars invested of $32.6 billion increased 19% ($5.3 billion) over 1996 due
to the strong financial markets and the continued maturity and growth of the
sales force. These positive factors were offset slightly by a shift in the
product mix sold. The shift in customer demand to lower commission equity
products resulted in a 3% decrease in the revenue earned per $1,000 dollars
invested from $25.90 in 1996 to $25.10 in 1997.
Fee Revenue sources, which include service fees, revenue sharing agreements
with mutual funds and insurance companies, interest income, and IRA custodial
fees and other fees, increased 30% ($72.2 million) to $317.1 million. These
revenues are directly related to the value of Customers' Assets. New Customer
Assets were accumulated through securities transactions in 1997 and strong
markets continued to help increase existing assets. Total Customers' Assets
increased 29% to $144 billion in 1997. Loans to EDJ customers, which is the
base for a significant portion of interest income, increased 46% to $878
million at the end of 1997.
Focusing on changes in major revenue categories, Commissions increased 26%
($158.5 million) for the period. Mutual fund commissions increased 28% ($88.3
million) due to increased transaction revenue (67% of the increase) and
increased service fees paid on Customers' Assets (33% of the increase).
Listed and Over-the-Counter (OTC) agency commissions increased 33% ($50.1
million) due to increased transactions resulting from a shift in the overall
product mix to equities throughout 1997. Insurance and Annuity commissions
increased 16% ($21.9 million) due to increased transaction revenue (62% of
overall increase) and increased service fees (38% of increase).
Principal Transaction revenues decreased 3% ($5.7 million) as customers
invested more in equities and mutual fund products in 1997. CD revenue
declined 37% ($15.8 million) and was the primary reason for the decreased
revenue. This decline was offset by increases in Equity Unit Investment
Trusts of 109% ($5.4 million) and Municipal Bonds of 7% ($3.4 million).
14
15
PART II
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Interest and dividend income increased 28% ($20.2 million) to $92.9 million
primarily due to increased loans to customers. Interest from customer loans
increased 37% ($18.0 million) due to growth in the loan base throughout 1997.
The remaining increase is due to interest earned on product inventories held
for sale to the Partnership's customers.
Other Revenues increased 15% (12.1 million) over 1996; however, 1996 included
a $7.0 million gain from the sale of the Partnership's minority interest in a
mutual fund company. Excluding this gain, Other Revenues increased 27% ($19.1
million) over 1996. Revenues from money market management fees and fee
revenue received from mutual fund and insurance products increased 20% ($5.9
million) and 37% ($8.8 million), respectively. These increases are
attributable to increased Customers' Assets. Custodial fees from IRA accounts
increased 37% ($3.3 million) due to the result of increased numbers of
accounts. The remaining increase is due to increased services offered to
customers of the Partnership.
Expenses increased 19% ($161.9 million) to $1.021 billion in 1997. Increased
compensation costs account for 61% ($99.3 million) of the expense increases.
Sales Compensation increased 18% ($58.2 million) due to increased revenues
and IRs. The Partnership also has a variable compensation structure which
expands and contracts in relation to revenues, net income, and profit margin.
Since revenues and net income increased significantly over 1996, the variable
compensation increased as well. Bonuses paid to IRs increased 21% ($9.7
million) as a result of the strong revenues and profits compared to 1996.
Profit Sharing increased 22% ($5.3 million) as a result of increased net
income over 1996. The remaining increase in Compensation costs is
attributable to increased payroll costs of existing and additional support
personnel in both the Headquarters and individual branch offices.
The Partnership continued to build the infrastructure necessary to support a
larger sales force which included investments in technology and expansion of
the branch network. Occupancy and equipment and Communications and data
processing costs increased 27% ($28.6 million) and 9% ($6.1 million),
respectively over 1996 levels. These increases are due to growth in the
branch office network and the implementation of client server technology. The
addition of client server and other equipment added $20.0 million in lease
and depreciation expense (70% of the increased Occupancy and Communications
increase). The remaining increase is due to growth in the number of offices
and other client server related expenditures not captured in depreciation or
lease expenses.
Interest expense increased 21% ($7.7 million) to $44.0 million. In late 1996,
the Partnership issued $94.5 million in Subordinated Debt. Also, the
Partnership pays interest on certain customer balances of EDJ. The additional
debt and growth in the average customer balances resulted in the increased
interest expense in 1997.
Of the remaining expenses, increases were primarily related to costs
necessary to support a larger organization.
RESULTS OF OPERATIONS (1996 VERSUS 1995)
In 1996, favorable conditions in the securities markets produced record
revenues and net income for the Partnership. Revenues of $952.1 million
increased 32% ($229.3 million) compared to 1995 with expenses increasing to
$859.2 million or 29% ($194.6 million). Net income increased 60% to $92.9
million.
15
16
PART II
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Partnership segments its revenues between securities transaction revenues
(revenues resulting from customers' trades) and non-transaction or other
revenues. Securities transaction revenues of $706.4 million increased 31%
over 1995. The primary factors influencing securities transaction revenues
were increased customer dollars handled, either buy or sell dollars for which
a commission was charged; the growth in the number of IRs; and, the product
mix which affects the gross commission percentage. The total buy and sell
dollars generating revenues were $27.4 billion, up 33% from $20.6 million in
1995. An increase of 11% in the number of IRs coupled with the favorable
trend in securities prices in 1996 contributed to the growth in customer buy
and sell dollars. A shift in the product mix from fixed income to mutual fund
and CDs resulted in reducing the gross revenue realized on each $1,000
handled from $26.20 per thousand in 1995 to $25.80 in 1996.
The other major segment of the Partnership's revenues, non-securities
transaction revenues, includes revenues from service fees, management fees,
IRA fees and interest income. The Partnership's non-transaction revenues
increased $61.3 million or 33% over 1995. The primary drivers of
non-transaction revenues are customers' assets under control, loans to
customers (margin loans), the number of IRA accounts, and other fees.
Customers' Assets increased 24% to $112 billion at the end of the year. These
assets provide the base for fees, including service fees and other management
fee revenues received from mutual fund and insurance companies. Loans to
customers increased to $603 million at year end, an increase of 27% compared
to 1995's year end balances. Early in 1996, the Partnership undertook efforts
to increase the awareness of the sales force and customers of margin loans to
meet customers' borrowing needs for a variety of purposes. The program to
increase awareness was coordinated with a 25 basis point interest rate
reduction.
Expenses increased 29% in 1996. Compensation of IRs increased due to
increased revenue and an increased number of IRs. The Partnership has a
variable compensation program for IRs which expands and contracts as a result
of changes in revenues, net income and profit margin. Similarly, a portion of
non-sales personnel compensation may be paid in the form of bonuses and
profit sharing which expands and contracts based on net income. Revenues, net
income and the profit margin increased significantly compared to 1995,
increasing compensation for IRs and non-sales personnel. Also, the
Partnership continued to build the infrastructure to support an increased
number of IRs. Migrating from the Partnership's mainframe technology to a new
client server platform began in 1996. To implement new technology, the
Partnership incurred expenses for the addition of headquarters personnel,
computer hardware, software, and network infrastructure. The Partnership
expects to complete this conversion in 1997.
Focusing on changes in major revenue categories, Commission revenues
increased 36% ($161.6 million) for the period. Mutual fund commissions rose
40% ($91.2 million) and insurance and annuity commissions increased 35%
($36.7 million). Listed and Over-The-Counter (O-T-C) agency commission
revenues increased 30% ($35.1 million). Commission revenues benefited from
rising securities prices in 1996.
Principal transaction revenues increased 20% ($29.0 million) to $171.9
million for the year. This increase was reflected in certificate of deposit
revenues (149% or $25.5 million), municipal bond principal revenues (10% or
$4.8 million) and corporate bond principal revenues (23% or $4.5 million).
Government bond principal revenues decreased 35% ($5.9 million) and mortgage
backed product revenues declined 8% ($2.2 million).
Investment banking revenues decreased 14% ($2.6 million). Municipal bond
origination revenues declined 46% ($2.0 million). Syndicate equity
origination revenues also decreased 16% ($.5 million).
16
17
PART II
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Interest and dividend income increased 17% ($10.4 million) to $72.7 million
primarily from interest income earned on investments, margin loans, and loans
at the Association. During 1996, the Partnership's short-term investments
increased, which resulted in $4.3 million in additional interest income.
Also, the Association, which was purchased in mid-1995, earned $4.0 million
more in revenue, primarily as a result of a full year of activity.
Additionally, the Partnership increased its customer loan base which resulted
in a $2.2 million increase in interest income from customer loans.
Other Revenues increased 65% ($30.8 million) for the year. Other revenue
includes money market management fees, IRA custodial fees, and non-commission
revenue received from mutual fund and insurance products. Revenues generated
from money market management fees and fee revenue received from mutual fund
and insurance products increased 73% ($12.7 million) and 71% ($9.0 million),
respectively. These increases are due primarily to increased customer assets.
The number of non-bank custodian IRA accounts continued to increase, which
resulted in a 23% ($1.7 million) increase in revenue. Additionally in 1996,
the Partnership realized a $7.0 million gain from the sale of the
Partnership's minority investment in a mutual fund company.
Expenses increased 29% ($194.6 million). Compensation costs increased 34%
($137.7 million) and account for the majority of the increased expenses. IR
compensation increased 37.4% ($101.0 million), which is attributable to the
variable compensation program and an increased number of IRs. The remaining
increase in compensation relates to additional personnel necessary to support
the systems conversion and expansion of the sales force, both in the
headquarters and the branch offices.
Occupancy and equipment expense and communications and data processing
expenses increased 24% ($20.6 million) and 29% ($15.8 million), respectively.
The Partnership continues to make an investment in the infrastructure and
technology necessary to support the planned expansion of its sales force in
future years.
Interest expense increased $4.3 million (13%). This resulted from the
subordinated debt offering and the Association's full year of activity.
Other operating expenses increased $9.0 million (15%) and were primarily
related to increased headquarters and branch expenses necessary to support a
growing sales force.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's equity capital at December 31, 1997, was $305.2 million
compared to $270.1 million at December 31, 1996. Equity capital increased
13%, primarily due to the retention of earnings. Capital reserved for
anticipated withdrawals increased $6.0 million or 27%. These amounts were
withdrawn subsequent to year end.
At December 31, 1997, the Partnership had a $61.7 million balance of cash and
cash equivalents. Lines of credit are in place at ten banks aggregating $575
million ($500 million through uncommitted facilities). Actual borrowing
availability is primarily based on securities owned and customers' margin
securities. The Partnership believes that the liquidity provided by existing
cash balances and borrowing arrangements will be sufficient to meet the
Partnership capital and liquidity requirements.
A substantial portion of the Partnership's assets are primarily liquid,
consisting mainly of cash and assets readily convertible into cash. These
assets are financed primarily by customer credit balances, equity capital,
bank lines of credit and other payables.
17
18
PART II
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
For the year ended December 31, 1997, cash and cash equivalents decreased
$3.1 million. Cash flows from operating activities provided $127.2 million,
primarily attributable to net income adjusted for depreciation and
amortization and a decrease in securities purchased under agreements to resell.
The primary use of operating funds was increased net receivables from
customers, related to more loans to customers. Investing activities used $53.6
million for the purchase of fixed assets primarily related to the purchase of
client server equipment. Cash flows from financing activities used $76.7
million primarily for withdrawals and distributions from partnership capital,
to decrease bank loans and to repay long-term debt.
For the year ended December 31, 1996, cash and cash equivalents increased
$20.7 million. Cash flows from operating activities provided $137.6 million,
primarily attributable to net income adjusted for depreciation and
amortization, decreased net receivables from customers, decreased securities
owned, and increased accounts payable and other accrued expenses. Investing
activities used $107.6 million primarily for the purchase of fixed assets and
investment securities. Financing activities which provided cash were the
issuance of long-term debt, subordinated liabilities and partnership
interests. Cash flows from financing activities used $9.3 million primarily
for withdrawals and distributions from partnership capital, to decrease bank
loans and to repay long-term debt.
For the year ended December 31, 1995, cash and cash equivalents increased
$7.4 million. Cash flows from operating activities provided $161 million,
primarily attributable to net income, adjusted for depreciation and
amortization, decreased securities owned, decreased net receivables from
customers and increased accounts payable. Investing activities used $28.3
million primarily for the purchase of fixed assets. Cash flows from financing
activities used $125.2 million primarily to decrease bank loans, repay
subordinated liabilities and fund withdrawals and distributions from
partnership capital. Financing activities providing cash were the issuance of
long-term debt and partnership capital.
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 $250,000 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, 1997, EDJ's Net Capital of $258.9 million was 30% of aggregate debit
items and its net capital in excess of the minimum required was $241.4
million. Net Capital as a percentage of aggregate debits after anticipated
withdrawals was 28%. Net Capital and the related capital percentage may
fluctuate on a daily basis.
There were no material changes in the Partnership's overall financial
condition during the year ended December 31, 1997, compared with the year
ended December 31, 1996. The Partnership's consolidated statement of
financial condition is comprised primarily of cash and assets readily
convertible into cash. Securities inventories are carried at market value and
are readily marketable. Customer margin accounts are collateralized by
marketable securities. Other customer receivables and receivables and
payables with other broker/dealers normally settle on a current basis.
Liabilities, including amounts payable to customers, checks and accounts
payable and accrued expenses are sources of funds to the Partnership. These
liabilities, to the extent not utilized to finance assets, are available to
meet liquidity needs and provide funds for short-term investments, which
favorably impacts profitability.
The Partnership's growth in recent years has been financed through sales of
limited partnership interests to its employees, retention of earnings and
private placements of long-term and subordinated debt.
18
19
PART II
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
YEAR 2000 SYSTEM ISSUES
In 1996, the Partnership began the process of identifying the many software
applications and hardware devices expected to be impacted by the Year 2000
system issue. Certain systems are in the process of being replaced to not
only comply with the Year 2000 issue, but to also update current
functionality. Also, modifications are being made to certain existing systems
and all program changes are being reviewed to ensure compliance with the Year
2000. In addition, the Partnership outsources many of its customer record
keeping activities and relies on outside vendors for many sources of
information. The Partnership believes that its vendors are actively
addressing the problems associated with the Year 2000 issues. The Partnership
does not believe the costs of addressing these issues will have a material
impact on the Partnership's results of operations or its financial position.
ITEM 7A . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable until 1998 Form 10-K.
19
20
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements Included in this Item
Page No.
Report of Independent Public Accountants 21
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996 22
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995 24
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 25
Consolidated Statements of Changes in Partnership Capital
for the years ended December 31, 1997, 1996 and 1995 26
Notes to Consolidated Financial Statements 27
20
21
PART II
ITEM 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Jones Financial Companies, L.P., LLP:
We have audited the accompanying consolidated statements of financial
condition of The Jones Financial Companies, L.P., LLP (a Missouri Limited
Partnership and a Missouri Registered Limited Liability Partnership) and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, cash flows and changes in partnership capital for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Jones Financial
Companies, L.P., LLP and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations, their cash flows and the changes in their
partnership capital for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 20, 1998
21
22
PART II
ITEM 8. Financial Statements and Supplementary Data
THE JONES FINANCIAL COMPANIES, L.P., LLP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
December 31, December 31,
(Amounts in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 61,738 $ 64,858
Securities purchased under agreements to resell 1,450 145,000
Receivable from:
Customers (Note 2) 894,509 615,399
Brokers or dealers and clearing organizations (Note 3) 26,449 21,699
Mortgages and loans (Note 4) 70,545 66,116
Securities owned, at market value (Note 5):
Inventory securities 63,407 58,373
Investment securities 171,087 171,177
Equipment, property and improvements (Note 6) 187,540 173,719
Other assets 78,073 64,075
---------- ----------
TOTAL ASSETS $1,554,798 $1,380,416
=================================================================================================================
The accompanying notes are an integral part of these statements.
22
23
PART II
ITEM 8. Financial Statements and Supplementary Data
THE JONES FINANCIAL COMPANIES, L.P., LLP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES AND PARTNERSHIP CAPITAL
December 31, December 31,
(Amounts in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Bank loans (Note 7) $ 19,000 $ 2,750
Payable to:
Customers (Note 2) 664,874 594,737
Brokers or dealers and clearing organizations (Note 3) 34,100 12,999
Depositors (Note 8) 67,588 63,125
Securities sold but not yet purchased,
at market value (Note 5) 17,198 13,215
Accounts payable and accrued expenses 59,472 51,309
Accrued compensation and employee benefits 117,565 88,474
Long-term debt (Note 9) 53,350 67,190
---------- ----------
1,033,147 893,799
---------- ----------
Liabilities subordinated to claims
of general creditors (Note 10) 216,500 216,500
Partnership capital (Notes 11 and 13):
Limited partners 92,965 95,807
Subordinated limited partners 37,446 29,178
General partners 146,817 123,172
---------- ----------
277,228 248,157
Partners' capital reserved for anticipated withdrawals 27,923 21,960
---------- ----------
TOTAL PARTNERS' CAPITAL 305,151 270,117
---------- ----------
TOTAL LIABILITIES AND CAPITAL $1,554,798 $1,380,416
=================================================================================================================
The accompanying notes are an integral part of these statements.
23
24
PART II
ITEM 8. Financial Statements and Supplementary Data
THE JONES FINANCIAL COMPANIES, L.P., LLP
CONSOLIDATED STATEMENTS OF INCOME
Years Ended
---------------------------------------------------
(Amounts in thousands, December 31, December 31, December 31,
except per unit information) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Revenues:
Commissions $ 772,027 $613,570 $451,952
Principal transactions 166,209 171,903 142,916
Investment banking 13,865 15,719 18,324
Interest and dividends 92,938 72,726 62,246
Other 90,240 78,150 47,347
---------- -------- --------
Total Revenues 1,135,279 952,068 722,785
---------- -------- --------
Expenses:
Compensation and benefits (Note 14) 643,025 543,725 406,012
Occupancy and equipment (Notes 6 and 15) 134,133 105,516 84,895
Communications and data processing 76,403 70,318 54,555
Interest (Notes 2, 7, 8, 9, 10 and 11) 43,974 36,309 31,993
Payroll and other taxes 34,964 29,557 23,661
Floor brokerage and clearance fees 8,105 7,084 5,750
Other operating expenses 80,491 66,671 57,733
---------- -------- --------
Total Expenses 1,021,095 859,180 664,599
---------- -------- --------
Net income $ 114,184 $ 92,888 $ 58,186
========== ======== ========
Net income allocated to:
Limited partners $ 16,543 $ 16,530 $ 8,419
Subordinated limited partners 11,969 9,207 6,237
General partners 85,672 67,151 43,530
---------- -------- --------
$ 114,184 $ 92,888 $ 58,186
========== ======== ========
Net income per weighted average $1,000
equivalent partnership units outstanding:
Limited partners $ 176.06 $ 170.63 $ 125.01
========== ======== ========
Subordinated limited partners $ 320.61 $ 301.44 $ 225.00
========== ======== ========
Weighted average $1,000 equivalent
partnership units outstanding:
Limited partners 93,962 96,879 67,345
========== ======== ========
Subordinated limited partners 37,332 30,543 27,720
========== ======== ========
================================================================================================================
The accompanying notes are an integral part of these statements.
24
25
PART II
ITEM 8. Financial Statements and Supplementary Data
THE JONES FINANCIAL COMPANIES, L.P., LLP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
---------------------------------------------------
December 31, December 31, December 31,
(Amounts in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 114,184 $ 92,888 $ 58,186
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 39,741 30,880 22,340
Decrease (increase) in securities purchased under
agreements to resell 143,550 (145,000) --
(Increase) decrease in net receivable from customers (208,973) 102,799 80,342
Decrease (increase) in net receivable from/payable to
brokers or dealers and clearing organizations 16,351 11,437 (9,084)
Increase in receivable from mortgages and loans (4,429) (7,280) (3,011)
(Increase) decrease in securities owned, net (961) 24,709 287
Increase in payable to depositors 4,463 1,936 2,464
Increase in accounts payable
and other accrued expenses 37,254 25,429 17,390
Other assets (13,998) (176) (7,988)
--------- --------- ---------
Net cash provided by operating activities 127,182 137,622 160,926
--------- --------- ---------
CASH FLOWS USED BY INVESTING ACTIVITIES:
Purchase of equipment, property and improvements (53,562) (59,504) (40,199)
(Purchase) maturity of investment securities -- (48,117) 14,006
Purchase of Boone National Savings and
Loan Association, F.A., net of cash acquired (Note 12) -- -- (2,103)
--------- --------- ---------
Net cash used by investing activities (53,562) (107,621) (28,296)
--------- --------- ---------
CASH FLOWS USED BY FINANCING ACTIVITIES:
Increase (decrease) in bank loans 16,250 (29,753) (135,505)
Issuance of long-term debt -- 7,993 30,512
Repayment of long-term debt (13,840) (10,930) (5,792)
Issuance of subordinated liabilities -- 94,500 --
Repayment of subordinated liabilities -- -- (14,000)
Issuance of partnership interests 8,833 3,365 50,523
Redemption of partnership interests (3,407) (5,733) (7,565)
Withdrawals and distributions from partnership capital (84,576) (68,697) (43,373)
--------- --------- ---------
Net cash used by financing activities (76,740) (9,255) (125,200)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (3,120) 20,746 7,430
CASH AND CASH EQUIVALENTS,
beginning of year 64,858 44,112 36,682
--------- --------- ---------
end of year $ 61,738 $ 64,858 $ 44,112
========= ========= =========
Cash paid for interest $ 43,823 $ 33,982 $ 32,892
============================================================================================================================
The accompanying notes are an integral part of these statements.
25
26
PART II
Item 8. Financial Statements and Supplementary Data
THE JONES FINANCIAL COMPANIES, L.P., LLP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Amounts in thousands) Capital Capital Capital Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ 62,374 $ 22,020 $ 91,450 $175,844
Issuance of partnership interests 39,681 10,842 -- 50,523
Redemption of partnership interests (3,646) (3,919) -- (7,565)
Net income 8,419 6,237 43,530 58,186
Withdrawals and distributions (2,856) (3,656) (22,182) (28,694)
Reserved for anticipated withdrawals (5,562) (2,581) (9,333) (17,476)
-------- -------- -------- --------
Balance, December 31, 1995 98,410 28,943 103,465 230,818
Issuance of partnership interests -- 3,365 -- 3,365
Redemption of partnership interests (2,603) (3,130) -- (5,733)
Net income 16,530 9,207 67,151 92,888
Withdrawals and distributions (5,337) (6,713) (39,171) (51,221)
Reserved for anticipated withdrawals (11,193) (2,494) (8,273) (21,960)
-------- -------- -------- --------
Balance, December 31, 1996 95,807 29,178 123,172 248,157
Issuance of partnership interests -- 8,833 -- 8,833
Redemption of partnership interests (2,842) (565) -- (3,407)
Net income 16,543 11,969 85,672 114,184
Withdrawals and distributions (6,388) (8,262) (47,966) (62,616)
Reserved for anticipated withdrawals (10,155) (3,707) (14,061) (27,923)
-------- -------- -------- --------
Balance, December 31, 1997 $ 92,965 $ 37,446 $146,817 $277,228
====================================================================================================================================
The accompanying notes are an integral part of these statements.
26
27
PART II
Item 8. Financial Statements and Supplementary Data
THE JONES FINANCIAL COMPANIES, L.P., LLP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Amounts in thousands)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
THE PARTNERSHIP'S BUSINESS AND BASIS OF ACCOUNTING. The accompanying
consolidated financial statements include the accounts of The Jones Financial
Companies, L.P., LLP, and all wholly owned subsidiaries (the "Partnership").
All material intercompany balances and transactions have been eliminated.
Investments in nonconsolidated companies which are at least 20% owned are
accounted for under 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. The Partnership derives its revenues from the
sale of listed and unlisted securities and insurance products, investment
banking and principal transactions, and is a distributor of mutual fund
shares. The Partnership conducts business throughout the United States and in
Canada with its customers, various brokers and dealers, clearing
organizations, depositories and banks.
The Partnership acquired Boone National Savings and Loan Association, F.A.
("Association") on July 21, 1995 (Note 12). The Association operates
primarily in Central Missouri and provides trust services to EDJ customers.
The financial statements have been prepared under the accrual basis of
accounting which requires the use of certain estimates by management in
determining the Partnership's assets, liabilities, revenues and expenses.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL. The Partnership invests in
short-term resale 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
collateral deposited in its accounts at its custodian banks. Resale agreements
are carried at the amount at which the securities will be subsequently resold
as specified in the agreements.
TRANSACTIONS. The Partnership's securities activities involve execution,
settlement and financing of various securities transactions for customers.
These transactions (and related revenue and expense) are recorded on a
settlement-date basis, generally representing the third business day
following the transaction date, which is not materially different than 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. The Association makes commercial, real estate, and other loans to
individuals primarily to customers in Central Missouri.
SECURITIES OWNED. Securities owned are valued at current market prices.
Unrealized gains or losses are reflected in principal transactions revenue.
27
28
PART II
Item 8. Financial Statements and Supplementary Data
EQUIPMENT, PROPERTY AND IMPROVEMENTS. Equipment, including furniture
and fixtures, is depreciated using straight-line and accelerated methods over
estimated useful lives of five to ten years. Buildings are depreciated using
the straight-line method over their useful lives, which are estimated between
thirty and thirty-two 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, and any resulting gain or loss is reflected in income for the
period. The cost of maintenance and repairs is charged against income as
incurred, whereas significant renewals and betterments are capitalized.
SEGREGATED CASH AND SECURITIES OWNED. Cash and securities of $43,474
and $36,063 were segregated in a special bank account for the benefit of
customers as of December 31, 1997 and 1996, respectively, 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.P., LLP, is
organized as a partnership, and partners are 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 uncompleted transactions. Values of securities owned by
customers and held as collateral for these receivables are 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.
NOTE 3 - RECEIVABLE FROM AND PAYABLE TO BROKERS OR DEALERS
AND CLEARING ORGANIZATIONS
The components of receivable from and payable to brokers or dealers and
clearing organizations are as follows:
1997 1996
- ------------------------------------------------------------------------------------
Securities failed to deliver $ 4,851 $ 4,835
Deposits paid for securities borrowed 10,985 7,231
Deposits with clearing organizations 2,318 2,320
Other 8,295 7,313
------- -------
Total receivable from brokers or dealers
and clearing organizations $26,449 $21,699
======= =======
Securities failed to receive $10,873 $ 6,156
Deposits received for securities loaned 23,207 6,820
Other 20 23
------- -------
Total payable to brokers or dealers and
clearing organizations $34,100 $12,999
====================================================================================
"Fails" represent the contract value of securities that have not been
received or delivered by settlement date.
28
29
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 4 - RECEIVABLE FROM MORTGAGES AND LOANS
Receivable from mortgages and loans is comprised of the Association's
mortgage loans, which are primarily adjustable rate, 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.
NOTE 5 - SECURITIES OWNED
Securities owned are summarized as follows (at market value):
1997 1996
----------------------- ------------------------
Securities Securities
Sold but Sold but
Securities not yet Securities not yet
Owned Purchased Owned Purchased
- -------------------------------------------------------------------------------------------------------------------
Inventory Securities:
Certificates of deposit $ 7,921 $ 1,392 $ 3,783 $ --
U.S. and Canadian government
and U.S. agency obligations 9,338 8,599 9,796 7,450
State and municipal obligations 32,319 190 31,765 72
Corporate bonds and notes 8,689 4,881 8,140 3,299
Corporate stocks 5,140 2,136 4,889 2,394
-------- ------- -------- -------
$ 63,407 $17,198 $ 58,373 $13,215
======== ======= ======== =======
Investment Securities:
U.S. government and agency
obligations $171,087 $171,177
======== ========
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 futures contracts. The amount of the
securities purchased or sold will fluctuate on a daily basis due to changes
in interest rates and market conditions. Any gain or loss on the hedging
activities is recognized in Principal transaction revenue.
NOTE 6 - EQUIPMENT, PROPERTY AND IMPROVEMENTS
Equipment, property and improvements are summarized as follows:
1997 1996
- ------------------------------------------------------------------------------------
Land $ 13,671 $ 13,671
Buildings and improvements 94,561 93,726
Equipment 173,614 139,085
Furniture and fixtures 86,502 72,322
--------- ---------
Total equipment, property and improvements 368,348 318,804
Accumulated depreciation and amortization (180,808) (145,085)
--------- ---------
Equipment, property and improvements, net $ 187,540 $ 173,719
========= =========
29
30
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 7 - BANK LOANS
EDJ borrowed $15,000 as of December 31, 1997 from banks on a short-term basis
primarily to finance customer margin balances and inventory securities. As of
December 31, 1997, the Partnership had bank lines of credit aggregating
$575,000 of which $500,000 were through uncommitted facilities. Actual
borrowing availability is primarily based on securities owned and customers'
margin securities. At December 31, 1997 and 1996, collateral with a market
value of $766,264 and $584,636, respectively, was available to support
secured bank loans of EDJ. The Association had loans from The Federal Home
Loan Bank of $4,000 and $2,750 as of December 31, 1997 and 1996, respectively,
which are secured by mortgage loans. All loans outstanding approximate their
fair value.
Interest is at a fluctuating rate (weighted average rate of 6.6% and 5.5% at
December 31, 1997 and 1996, respectively) based on short-term lending rates.
The average of the aggregate short-term bank loans outstanding was $10,424,
$3,025 and $97,527 and the average interest rate (computed on the basis of
the average aggregate loans outstanding) was 6.0%, 6.7%, and 6.8% for the
years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 8 - PAYABLE TO DEPOSITORS
Amounts payable to depositors is 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:
1997 1996
- --------------------------------------------------------------------------------------------------------------
Notes payable, secured by equipment, interest at
variable rates ranging from 6.95% to 8.5% at
December 31, 1997, due in installments
of principal plus interest, maturing from July 30,
2000 through December 6, 2000. $ 9,250 $17,062
Notes payable, secured by property, interest
rates ranging from 7.59% to 8.72% at
December 31, 1997, principal and interest
due in monthly installments, maturing from
June 5, 2003 through April 5, 2008. 40,403 44,227
Notes payable, secured by the Association's
capital and a letter of credit, interest at variable
rates ranging from 5.97% to 7.6% at
December 31, 1997, annual principal due plus
interest, maturing from July 24, 1998 through
June 30, 2000. 3,697 5,901
------- -------
$53,350 $67,190
======== =======
30
31
PART II
Item 8. Financial Statements and Supplementary Data
Required annual principal payments, as of December 31, 1997, are as follows:
Year Principal Payment
---------- -----------------
1998 $ 8,944
1999 7,967
2000 9,610
2001 5,329
2002 5,791
Thereafter 15,709
-------
$53,350
=======
The Partnership has land, buildings and equipment and the Associaton's
capital, with carrying values at December 31, 1997 of $62,283 and $10,086,
respectively, which are subject to security agreements which collateralize
various notes payable. Certain agreements contain restrictions that among
other things, require maintenance of certain financial ratios, levels of
indebtedness and limit the withdrawal of partnership capital. The Partnership
has estimated the fair value of the long-term debt to be approximately
$51,407 and $68,057 as of December 31, 1997 and 1996, respectively.
NOTE 10 - LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Liabilities subordinated to the claims of general creditors consist of:
1997 1996
-------------------------------
Capital notes, 8.18%, due in annual installments of $10,500
commencing on September 1, 2000, with a final
installment on September 1, 2008. $ 94,500 $ 94,500
Capital notes, 7.95%, due in annual
installments of $10,225 commencing on
April 15, 1998, with a final installment
of $10,200 due on April 15, 2006. 92,000 92,000
Capital notes, 8.96%, due in annual
installments of $6,000 commencing on
May 1, 1998, with a final installment on
May 1, 2002 30,000 30,000
-------- --------
$216,500 $216,500
======== ========
31
32
PART II
Item 8. Financial Statements and Supplementary Data
Required annual principal payments, as of December 31, 1996, are as follows:
1998 $ 16,225
1999 16,225
2000 26,725
2001 26,725
2002 26,725
Thereafter 103,875
--------
$216,500
========
The capital note agreements contain restrictions that 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, 1997, the Partnership was required, under the
note agreements, to maintain minimum partnership capital of $165,000 and Net
Capital as computed in accordance with the uniform Net Capital Rule of 7.5%
of aggregate debit items, or $65,439 (See Note 13).
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 $226,655 and
$222,396 as of December 31, 1997 and 1996, respectively.
NOTE 11 - PARTNERSHIP CAPITAL
The limited partnership capital, consisting of 92,965 and 95,807 $1,000 units
at December 31, 1997 and 1996, 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 $7,054, $7,271 and $5,055, for the
years ended December 31, 1997, 1996 and 1995, respectively, paid to limited
partners on capital contributed.
The subordinated limited partnership capital, consisting of 37,446 and 29,178
$1,000 units at December 31, 1997 and 1996, 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 terms of the Partnership Agreement, general
and subordinated limit partner capital withdrawals are paid out in four equal
installments over a three year period.
NOTE 12 - ACQUISITION
The Partnership purchased Boone National Savings and Loan Association, F.A.,
in a stock purchase transaction for approximately $8.6 million in July, 1995.
The acquisition was accounted for as a purchase, and accordingly, the
operating results of the Association have been included in the Partnership's
consolidated results since the effective acquisition date. The acquisition
was funded with $5 million of long-term debt and a $3.6 million note held by
the sellers. As of December 31, 1997, the total assets of the Association
were approximately $83.1 million.
32
33
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 13 - 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, 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, 1997, EDJ's Net Capital of $258,865 was 30% of aggregate
debit items and its Net Capital in excess of the minimum required was
$241,415. Net Capital and the related capital percentage may fluctuate on a
daily basis. The Association is required under federal regulation to maintain
specified levels of liquidity and capital standards. The Association has been
in compliance with these regulations at all times.
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 $29,014, $23,634, and $14,951 were provided by the Partnership
for its contributions to the plan for the years ended December 31, 1997, 1996
and 1995, respectively. No post retirement benefits are provided.
NOTE 15 - COMMITMENTS
Furniture, fixtures, computer and communication equipment are rented under
various operating leases. Additionally, branch offices are leased on a three
to five year basis and are cancellable at the option of the Partnership. Rent
expense was $73,146, $55,959, and $43,923 for the years ended December 31,
1997, 1996 and 1995, respectively. The Partnership's non-cancelable lease
commitments greater than one year are summarized below:
1998 $40,919
1999 37,590
2000 29,480
2001 26,943
2002 16,203
Thereafter 15,220
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.
33
34
PART II
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Jones Financial Companies, L.P., LLP, being organized as a partnership,
does not have individuals associated with it designated as officers or
directors. As of February 28, 1998, the Partnership was comprised of 154
general partners, 2,541 limited partners and 76 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 154 general partners.
The Management Committee of the Partnership is comprised of John W. Bachmann,
Douglas E. Hill, Michael R. Holmes, Richie L. Malone, Steven Novik, Darryl
L. Pope, Gary D. Reamey, Connie M. Silverstein, Robert Virgil, Jr., and James
D. Weddle. The purpose of the Management 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 Management
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.
A listing of the names of the management committee, ages, dates of becoming a
general partner and area of responsibility for each as of February 28, 1998:
Name Age Partner Area of Responsibility
- ------------------------------------------------------------------------------------
John W. Bachmann 59 1970 Managing Partner
Douglas E. Hill 53 1974 Marketing
Michael R. Holmes 39 1996 Human Resources
Richie L. Malone 49 1979 Information Systems
Steven Novik 48 1983 Finance & Accounting
Darryl L. Pope 58 1971 Operations
Gary D. Reamey 42 1984 Canada Division
Connie M. Silverstein 42 1988 Banking Services
Robert Virgil, Jr. 63 1993 Headquarters Administration
James D. Weddle 44 1984 Sales Management
- ------------------------------------------------------------------------------------
Each member of the management committee has been a general partner of the
Partnership for more than five preceding years, except for Robert Virgil, Jr.
and Michael R. Holmes. Prior to 1993, Robert Virgil, Jr. served as dean of the
John M. Olin school of Business at Washington University. Prior to 1996,
Michael R. Holmes served as the Human Resource Officer for Automatic Data
Processing.
John W. Bachmann is a director of Trans World Airlines, St. Louis, Missouri.
Robert Virgil, Jr. is a director of CPI Corp., St. Louis, Missouri, General
American Life Insurance Company, St. Louis, Missouri, and OmniQuip
International, Inc., Port Washington, Wisconsin.
34
35
PART III
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid by the Partnership
during the three most recent years to the five general partners receiving the
greatest compensation (including respective shares of profit participation).
Returns to General
Partner Capital
------------------------------
Net income General Partner
Deferred allocated invested
Compen- to General Capital at Total
Year Salaries sation Partners 12/31
- -----------------------------------------------------------------------------------------------------
John W. Bachmann 1997 175,000 7,976 2,528,085 4,894,502 2,711,061
1996 120,000 7,104 2,356,162 4,719,726 2,483,266
1995 120,000 6,077 1,721,341 4,500,612 1,847,418
Douglas E. Hill 1997 135,000 7,976 2,843,359 5,506,315 2,986,335
1996 118,000 7,104 2,426,261 4,978,341 2,551,365
1995 118,000 6,077 1,631,400 4,241,956 1,755,477
Ron Larimore 1997 135,000 7,976 2,403,970 4,665,072 2,546,946
1996 118,000 7,104 2,414,599 4,978,341 2,539,703
1995 118,000 6,077 1,641,246 4,293,687 1,765,323
Richie L. Malone 1997 135,000 7,976 2,764,542 5,353,361 2,907,518
1996 118,000 7,104 2,426,261 4,978,341 2,551,365
1995 118,000 6,077 1,610,391 4,293,687 1,734,468
Darryl L. Pope 1997 135,000 7,976 2,488,675 4,818,025 2,631,651
1996 118,000 7,104 2,182,717 4,525,765 2,307,821
1995 118,000 6,077 1,629,819 4,241,956 1,753,896
=====================================================================================================
Each non-selling general partner receives a salary generally ranging
from $90,000 - $175,000 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.
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.
35
36
PART III
Item 11. Executive Compensation
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. These interests in the
Partnership held by each general partner currently range from .05% to
3.60% in 1997 (.05% to 3.85% in 1996 and .1% to 4.65% in 1995). 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 allocable to general partners is the amount remaining after
payment of interest and earnings on capital invested to limited
partners and subordinated limited partners.
Ron Larimore resigned as a general partner effective January 1, 1998.
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), 111 of the general partners also own
limited partnership interests and 36 of the general partners also own
subordinated limited partnership interests, as noted in the table below.
As of February 28, 1998:
Name of Amount of
Beneficial Beneficial Percent of
Title of Class Owner Ownership Class
- -------------------------------------------------------------------------------
Limited Partnership All General
Interests Partners as
a Group $ 9,792,000 11%
Subordinated All General
Limited Partnership Partners as
Interests a Group $17,074,000 39%
- -------------------------------------------------------------------------------
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.
36
37
PART III
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
INDEX
(a) (1) The following financial statements are included in
Part II, Item 8:
Page No.
Report of Independent Public Accountants 21
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996 22
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995 24
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 25
Consolidated Statements of Changes in Partnership Capital
for the years ended December 31, 1997, 1996 and 1995 26
Notes to Consolidated Financial Statements 27
All schedules are omitted because they are not required,
inapplicable, or the information is otherwise shown in the
financial statements or notes thereto.
(b) Report on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 1997.
(c) Exhibits
Reference is made to the Exhibit Index hereinafter contained.
37
38
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.P., LLP
--------------------------------------------------
By (Signature and Title) /s/ John W. Bachmann
--------------------------------------------------
John W. Bachmann, Managing Partner
Date March 17, 1998
--------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the
registrant and in the capacity and on the date indicated.
By (Signature and Title) /s/ John W. Bachmann
--------------------------------------------------
John W. Bachmann, Managing Partner
Date March 17, 1998
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By (Signature and Title) /s/ Steven Novik
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Steven Novik, Chief Financial Officer
Date March 17, 1998
--------------------------------------------------
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.
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EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
Exhibit
Number Page Description
3.1 Eighth Amended and Restated Limited Partnership
Agreement of The Jones Financial Companies, L.P.,
LLP, dated November 1, 1996, incorporated herein by
reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
September 27, 1996.
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 Master Lease Agreement dated as of October 17, 1988,
between Edward D. Jones & Co., L.P., and BancBoston
Leasing, incorporated herein by reference to Exhibit
10.1 to the Company's Annual Report on Form 10-K for
the year ended September 30, 1988.
10.3 Satellite Communications Agreement dated as of
September 12, 1988, between Hughes Network Systems
and Edward D. Jones & Co., L.P., incorporated
herein by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the year
ended September 30, 1988.
10.4 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.
10.5 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.
10.6 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.
Incorporated by reference to previously filed exhibits.
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10.7 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.
10.8 Purchase Agreement by and between Edward D. Jones &
Co., L.P. and Genicom Corporation dated November 25,
1992, incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1992.
10.9 Mortgage Note and Deed of Trust and Security
Agreement between EDJ Leasing Co., L.P. and
Nationwide Insurance Company dated March 9, 1993,
incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 24, 1993.
10.10 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.
10.11 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.
10.12 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.
10.13 Equipment Lease Agreement between IFA Incorporated
and Edward D. Jones & Company, L.P., dated
June 8, 1994, incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 24, 1994.
10.14 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.
10.15 Equipment Lease by and between Edward D. Jones &
Co., L.P., and EDJ Leasing Co., L.P. dated April 1,
1994, incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 24, 1994.
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10.16 $8,200,000 Promissory Note to Commerce Bank
National Association by EDJ Leasing Co., L.P.,
dated April 5, 1994, incorporated herein by
reference to Exhibit 10.5 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 24,
1994.
10.17 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.
10.18 Credit Agreement between EDJ Leasing Co., L.P. and
Southtrust Bank of Alabama, N.A. dated October 26,
1994 incorporated herein by reference to the
company's Annual Report on Form 10-K for the year
ended December 31, 1994.
10.19 Master Lease Agreement between EDJ Leasing Company
and Edward D. Jones & Co., L.P. dated October 26,
1994.
10.20 Lease Financing Line of Credit Agreement and Term
Note Agreement between EDJ Leasing Co., L.P. and
Enterprise Bank dated December 6, 1994 incorporated
herein by reference to the company's Annual Report
on Form 10-K for the year ended December 31, 1994.
10.21 Master Lease Agreement between EDJ Leasing Co. and
Edward D. Jones & Co., L.P., dated December 6, 1994
incorporated herein by reference to the company's
Annual Report on Form 10-K for the year ended
December 31, 1994.
10.22 Purchase Agreement by and between Edward D. Jones &
Co., L.P. and Tektronix, Inc. dated February 28,
1995 incorporated herein by reference to the
company's Annual Report on Form 10-K for the year
ended December 31, 1994.
10.23 Loan Agreement between Edward D. Jones & Co., L.P.
and Boatmen's Bank dated April 28, 1995,
incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 25, 1995.
10.24 Conforming Systems Agreement between Tri-Tek
Information Systems, Inc. and Edward D. Jones &
Co.., L.P., dated May 31, 1995, incorporated herein
by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995.
10.25 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.
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10.26 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.
10.27 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.
21 Subsidiaries of the Registrant, filed herewith.
23.1 43 Consent of Independent Public Accountants.
25 Delegation of Power of Attorney to Managing Partner
contained within Exhibit 3.1
27 Financial Data Schedule (provided for the
Securities and Exchange Commission only).
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