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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 27, 2002
Commission file number 0-16633
THE JONES FINANCIAL COMPANIES, L.L.L.P.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MISSOURI 43-1450818
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12555 Manchester Road
St. Louis, Missouri 63131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 515-2000
--------------------
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 the filing date, there are no voting
securities held by non-affiliates of the Registrant.
THE JONES FINANCIAL COMPANIES, L.L.L.P.
INDEX
Page
Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition....................3
Consolidated Statements of Income ................................5
Consolidated Statements of Cash Flows.............................6
Consolidated Statements of Changes in Partnership Capital.........7
Notes to Consolidated Financial Statements........................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings................................................19
Item 6. Exhibits and Reports on Form 8-K.................................19
Signatures.......................................................20
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
(Unaudited)
September 27, December 31,
(Amounts in thousands) 2002 2001
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 147,360 $ 196,508
Securities purchased under agreements to resell 100,000 80,000
Receivable from:
Customers 1,943,514 1,881,021
Brokers, dealers and clearing organizations 79,355 80,088
Mortgages and loans 108,162 100,782
Securities owned, at market value:
Inventory securities 95,219 118,872
Investment securities 175,327 180,719
Equipment, property and leasehold improvements 302,358 298,072
Other assets 206,897 222,346
---------- ----------
Total assets $3,158,192 $3,158,408
========== ==========
The accompanying notes are an integral part of these financial statements.
3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES AND PARTNERSHIP CAPITAL
(Unaudited)
September 27, December 31,
(Amounts in thousands) 2002 2001
- ----------------------------------------------------------------------------------------------------
Bank loans $ 36,930 $ 13,679
Securities loaned 23,500 132,231
Payable to:
Customers 1,449,725 1,602,726
Brokers, dealers and clearing organizations 22,903 41,990
Depositors 109,020 103,950
Securities sold, not yet purchased, at market value 15,004 35,251
Accounts payable and accrued expenses 142,010 121,558
Accrued compensation and employee benefits 178,743 180,422
Long-term debt 54,975 46,285
---------- ----------
2,032,810 2,278,092
---------- ----------
Liabilities subordinated to claims of general creditors 428,875 205,600
---------- ----------
Partnership capital 674,955 638,944
Partnership capital reserved for anticipated withdrawals 21,552 35,772
---------- ----------
Total partnership capital 696,507 674,716
---------- ----------
Total liabilities and partnership capital $3,158,192 $3,158,408
========== ==========
The accompanying notes are an integral part of these financial statements.
4
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per unit information)
Three Months Ended Nine Months Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2002 2001 2002 2001
--------- --------- ---------- ----------
Net revenue:
Commissions $299,605 $302,744 $1,005,717 $ 947,392
Principal transactions 102,755 94,946 312,072 256,489
Investment banking 16,612 6,167 31,503 15,814
Interest and dividends 35,090 43,368 103,124 139,538
Gain on investment 3,625 - 3,625 -
Other 90,240 81,242 280,215 237,083
-------- -------- ---------- ----------
Total revenue 547,927 528,467 1,736,256 1,596,316
Interest expense 16,818 16,472 43,593 51,991
-------- -------- ---------- ----------
Net revenue 531,109 511,995 1,692,663 1,544,325
-------- -------- ---------- ----------
Operating expenses:
Compensation and benefits 307,617 299,964 987,012 893,619
Communications and data processing 66,644 59,377 198,924 168,441
Occupancy and equipment 54,983 53,812 161,809 155,307
Payroll and other taxes 18,380 17,044 66,335 61,224
Floor brokerage and clearance fees 3,159 3,181 10,937 10,885
Advertising 11,142 10,332 32,958 32,547
Other operating expenses 37,827 34,347 111,607 109,874
-------- -------- ---------- ----------
Total operating expenses 499,752 478,057 1,569,582 1,431,897
-------- -------- ---------- ----------
Net income $ 31,357 $ 33,938 $ 123,081 $ 112,428
======== ======== ========== ==========
Net income allocated to:
Limited partners $ 4,242 $ 5,200 $ 16,739 $ 17,349
Subordinated limited partners 3,287 3,380 13,233 11,364
General partners 23,828 25,358 93,109 83,715
-------- -------- ---------- ----------
$ 31,357 $ 33,938 $ 123,081 $ 112,428
======== ======== ========== ==========
Net income per weighted average $1,000 equivalent
partnership unit outstanding:
Limited partners $ 18.43 $ 22.04 $ 72.34 $ 73.02
======== ======== ========== ==========
Subordinated limited partners $ 34.60 $ 40.79 $ 139.29 $ 138.26
======== ======== ========== ==========
Weighted average $1,000 equivalent partnership
unit outstanding:
Limited partners 230,168 235,935 231,393 237,592
======== ======== ========== ==========
Subordinated limited partners 95,000 82,855 95,003 82,188
======== ======== ========== ==========
The accompanying notes are an integral part of these financial statements.
5
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 27, September 28,
2002 2001
--------- ---------
Cash Flows (Used in) / Provided by Operating Activities:
Net income $ 123,081 $ 112,428
Adjustments to reconcile net income to net cash
(used in) / provided by operating activities:
Depreciation and amortization 66,010 53,710
Gain on investment (3,625) -
Changes in assets and liabilities:
Securities purchased under agreements to resell (20,000) -
Securities sold under agreement to repurchase - (24,969)
Net receivable from customers (215,494) 6,447
Net receivable from brokers, dealers and clearing organizations (18,354) 32,327
Receivable from mortgages and loans (7,380) (698)
Securities owned, net 8,798 1,646
Other assets 15,449 (12,656)
Bank loans 23,251 67,454
Securities loaned (108,731) (5,784)
Payables to depositors 5,070 13,139
Accounts payable and other accrued expenses 18,773 (23,372)
--------- ---------
Net cash (used in) / provided by operating activities (113,152) 219,672
--------- ---------
Cash Flows Used in Investing Activities:
Purchase of equipment, property and leasehold improvements (70,296) (87,215)
Proceeds from sale of investment 3,625 -
--------- ---------
Net cash used in investing activities (66,671) (87,215)
--------- ---------
Cash Flows Provided by / (Used in) Financing Activities:
Issuance of long-term debt 13,100 -
Repayment of long-term debt (4,410) (6,960)
Issuance of subordinated debt 250,000 -
Repayment of subordinated debt (26,725) (26,725)
Issuance of partnership interests 13,124 12,450
Redemption of partnership interests (4,119) (4,630)
Withdrawals and distributions from partnership capital (110,295) (117,926)
--------- ---------
Net cash provided by / (used in) financing activities 130,675 (143,791)
--------- ---------
Net decrease in cash and cash equivalents (49,148) (11,334)
Cash and Cash Equivalents, beginning of period 196,508 176,356
--------- ---------
Cash and Cash Equivalents, end of period $ 147,360 $ 165,022
========= =========
Cash paid for interest $ 40,059 $ 54,107
========= =========
The accompanying notes are an integral part of these financial statements.
6
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL
NINE MONTHS ENDED SEPTEMBER 27, 2002 AND SEPTEMBER 28, 2001
(Unaudited)
(Amounts in thousands)
Partnership Capital
-------------------------------------------------------------
Subordinated
Limited Limited General Total
-------- -------- -------- --------
Balance, December 31, 2000 $240,144 $ 70,405 $292,541 $603,090
Net income 17,349 11,364 83,715 112,428
Issuance of partnership interests - 12,450 - 12,450
Redemption of partnership interests (4,630) - - (4,630)
Withdrawals and distributions (1,306) (10,688) (53,541) (65,535)
Reserved for anticipated withdrawals (16,043) (676) (7,068) (23,787)
-------- -------- -------- --------
Balance, September 28, 2001 $235,514 $ 82,855 $315,647 $634,016
======== ======== ======== ========
Balance, December 31, 2001 $233,228 $ 82,455 $323,261 $638,944
Net income 16,739 13,233 93,109 123,081
Issuance of partnership interests - 13,124 - 13,124
Redemption of partnership interests (3,532) (587) - (4,119)
Withdrawals and distributions (984) (12,684) (60,855) (74,523)
Reserved for anticipated withdrawals (15,755) (549) (5,248) (21,552)
-------- -------- -------- --------
Balance, September 27, 2002 $229,696 $ 94,992 $350,267 $674,955
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
7
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of The Jones Financial Companies, L.L.L.P. and all wholly owned
subsidiaries (collectively, the "Partnership"). All material intercompany
balances and transactions have been eliminated in consolidation. Investments
in nonconsolidated companies which are at least 20% owned are accounted for
using the equity method.
The Partnership's principal operating subsidiary, Edward D. Jones &
Co., L.P. ("EDJ"), is engaged in business as a registered broker/dealer
primarily serving individual investors. EDJ derives its revenues from the
sale of listed and unlisted securities and insurance products, investment
banking and principal transactions and as a distributor of mutual fund
shares. EDJ conducts business throughout the United States of America,
Canada and the United Kingdom with its customers, various brokers, dealers,
clearing organizations, depositories and banks.
The financial statements have been prepared using the accrual basis
of accounting which requires the use of certain estimates by management in
determining the Partnership's assets, liabilities, revenues and expenses.
The financial information included herein is unaudited. However, in
the opinion of management, such information includes all adjustments,
including all normal recurring accruals, which are necessary for a fair
presentation of the results of interim operations.
The results of operations for the nine months ended September 27,
2002 and September 28, 2001 are not necessarily indicative of the results to
be expected for the full year.
NET CAPITAL REQUIREMENTS
As a result of its activities as a broker/dealer, EDJ is subject to
the Net Capital provisions of Rule 15c3-1 of the Securities Exchange Act of
1934 and the capital rules of the New York Stock Exchange. Under the
alternative method permitted by the rules, EDJ must maintain minimum Net
Capital, 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 Securities and Exchange
Commission ("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.
8
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
At September 27, 2002, EDJ's Net Capital of $645.0 million was 34%
of aggregate debit items and its Net Capital in excess of the minimum
required was $607.0 million. Net Capital as a percentage of aggregate debits
after anticipated withdrawals was 34%. Net Capital and the related capital
percentage may fluctuate on a daily basis.
The Partnership has other operating subsidiaries, including Boone
National Savings and Loan Association, F.A. (the "Association") and
broker/dealer subsidiaries in Canada and the United Kingdom. These wholly
owned subsidiaries are required to maintain specified levels of liquidity
and capital standards. Each subsidiary is in compliance with the applicable
regulations as of September 27, 2002.
SIGNIFICANT EVENT - GAIN ON INVESTMENT
During September 2002, the Partnership sold 660,763 shares received
from its membership in the London Stock Exchange when it demutualized. The
Partnership realized a $3.6 million gain on the sale of London Stock Exchange
shares.
9
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
THE JONES FINANCIAL COMPANIES, L.L.L.P.
MANAGEMENT'S FINANCIAL DISCUSSION
QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 2002, VERSUS
QUARTER AND NINE MONTHS ENDED SEPTEMBER 28, 2001
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 27, 2002 AND
SEPTEMBER 28, 2001
For the third quarter of 2002, net revenue increased 4% ($19.1
million) to $531.1 million, while net income decreased 8% ($2.6 million) to
$31.4 million. Excluding a $3.6 million investment gain from the partial
sale of the Partnership's London Stock Exchange holding, net revenue
increased 3% ($15.5 million) and net income decreased 16% ($5.5 million).
Quarter over quarter, the Partnership's net revenue increased due to growth
in trade revenue, partially offset by reduced net fee revenues due to lower
customer asset values and the impact of lower interest rates. Net income
decreased as the growth in net revenue of 4% was exceeded by the 5% increase
in operating expenses. Operating expenses have increased as the Partnership
continues to expand its branch office network.
The Partnership broadly categorizes its revenues as trade revenue
(revenue from buy or sell transactions on securities) or net fee revenue
(sources other than trade revenue including service fees, management fees,
retirement fees, account fees and net interest income). On the Partnership's
Consolidated Statements of Income, trade revenue is included in commissions,
principal transactions and investment banking. Net fee revenue comprises the
service fee component of commissions, interest and dividends net of interest
expenses, and other revenues.
The following table shows the Partnership's net revenue by trade
and net fee sources, for the quarter ended September 27, 2002 and
September 28, 2001:
10
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Three Months Ended 2002 over 2001
Sept. 27, Sept. 28, %
2002 2001 Change Change
--------- --------- ------- ------
Trade Revenue $354,625 $330,364 $24,261 7%
Net Fee Revenue
Services Fees 64,199 72,523 (8,324) (11%)
Management, Retirement and Other 90,388 82,212 8,176 10%
Net Interest Income 18,272 26,896 (8,624) (32%)
-------- -------- -------
Total Net Fee Revenue 172,859 181,631 (8,772) (5%)
-------- -------- -------
Net Revenue before Gain on Investment 527,484 511,995 15,489 3%
Gain on Investment* 3,625 -- 3,625
-------- -------- -------
Net Revenue $531,109 $511,995 $19,114 4%
======== ======== =======
*Investment gain from the sale of London Stock Exchange shares.
Trade revenue comprised 67% of net revenue during the third quarter
of 2002, up from 65% in the third quarter of 2001. Conversely net fee
revenue comprised 33% of net revenue for the third quarter of 2002, down
from 35% in the corresponding period.
Trade revenue increased 7% ($24.3 million) due to an increase in
customer dollars invested. Total customer dollars invested were $13.1
billion during the third quarter of 2002, representing an 8% ($1.0 billion)
increase from comparable prior year period. Quarter over quarter, the
Partnership's gross margin earned on each $1,000 invested decreased to
$26.30 in 2002 from $26.60 in the third quarter of 2001. The composition of
the product mix has shifted to fixed income products and mutual funds, from
individual equities and insurance products.
Commissions revenue excluding the service fee component increased
2% ($5.2 million) during the third quarter due to a shift in customer
dollars invested from individual equities and insurance products to fixed
income products (principal transactions) and mutual funds. For the third
quarter, mutual fund commissions increased 10% ($12.4 million) while revenue
from insurance commissions decreased 12% ($5.1 million) and individual
equity commissions decreased 3% ($2.3 million).
Principal transactions revenue, which includes trade revenue from
the sale of municipal, corporate and government bonds, increased 8% ($7.8
million) during the third quarter of 2002. Customers invested $6 billion
(20% increase) in fixed income products in third quarter of 2002 compared to
$5 billion in third quarter of 2001. Revenue from corporate bonds increased
20% ($4.3 million), municipal
11
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
bonds increased 8% ($3.0 million), and government bond revenue decreased
5% ($0.6 million). Customers invested more in fixed income products due to
volatility in the equity markets.
Net fee revenue (fee revenue less interest expense) decreased 5%
($8.8 million) for the third quarter. Service fees decreased 11% ($8.3
million) due to the impact of market conditions on the value of customers'
assets. The average customer assets supporting service fees decreased to
$109 billion in the third quarter of 2002, compared to $114 billion in the
third quarter of 2001. Management, retirement and other fee revenue
increased 10% ($8.2 million) for the quarter due primarily to growth in
revenue from sub-transfer agent accounting services, revenue sharing
agreements with mutual funds and insurance companies, and retirement fees.
The number of retirement accounts increased, resulting in custodial fee
revenue growth of 25% ($2.2 million). Net interest income decreased 32%
($8.6 million) due primarily to the impact of lower interest rates on
customer loan (margin) interest. Interest income from customer loans
outstanding decreased 24% ($8.6 million). The average rate earned on
customer balances decreased to approximately 5.70% during the third quarter
of 2002 from approximately 7.34% during the third quarter of 2001. Average
customer margin balances increased 2% to $1.909 billion during the third
quarter of 2002.
During September 2002, the Partnership sold 660,763 shares received
from its membership in the London Stock Exchange when it demutualized. The
Partnership realized a $3.6 million gain on the sale of the London Stock
Exchange shares. The Partnership still holds 339,237 shares.
Operating expenses increased 5% ($21.7 million) for the third
quarter of 2002. Compensation and benefits costs increased 3% ($7.7
million). Payroll expense increased 13% ($12.9 million) due to existing
personnel and additional support at both the headquarters and in the
branches as the firm continues to grow its sales force sales. Sales
compensation increased 3% ($5.2 million) due to increased trade revenue.
Variable compensation, including bonuses and profit sharing paid to
investment representatives ("IRs"), branch office assistants and
headquarters associates, which expands and contracts in relation to
revenues, net income and profit margin, decreased 47% ($9.9 million).
Communications and data processing expenses increased 12% ($7.3
million) during the third quarter of 2002. Occupancy and equipment expenses
increased 2% ($1.2 million). Underlying the increased expenses is the
opening in November 2001 of the Partnership's Southwest regional campus in
Tempe, Arizona, which contains a second data center. Additionally, the
Partnership added facilities in Tempe for branch office training and in St.
Louis for headquarters support.
12
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 27, 2002 AND
SEPTEMBER 28, 2001
For the nine months ended September 27, 2002, net revenue increased
10% ($148.3 million), and net income increased 10% ($10.7 million).
Excluding a $3.6 million investment gain for the partial sale of the
Partnership's London Stock Exchange holding, net revenue increased 9%
($144.7 million) and net income increased 7% ($7.8 million). Year to date,
the Partnership's net revenue and net income increased due to growth in
trade revenue, and slight growth in net fee revenue. Trade revenue has
increased year over year, but its growth has slowed recently due to market
conditions. Net fee revenue continues to be negatively impacted by the
effect of market conditions on interest rates, and more recently on the
value of customer assets.
The following table shows the Partnership's net revenue by trade
and net fee sources, for the nine months ended September 27, 2002 and
September 28, 2001:
Nine Months Ended 2002 over 2001
Sept. 27, Sept. 28, %
2002 2001 Change Change
---------- ---------- -------- ------
Trade Revenue $1,137,395 $1,007,285 $130,110 13%
Net Fee Revenue
Service Fees 211,981 212,415 (434) -%
Management, Retirement and Other 280,131 237,078 43,053 18%
Net Interest Income 59,531 87,547 (28,016) (32%)
---------- ---------- --------
Total Net Fee Revenue 551,643 537,040 14,603 3%
---------- ---------- --------
Net Revenue before Gain on Investment 1,689,038 1,544,325 144,713 9%
Gain on Investment* 3,625 -- 3,625
---------- ---------- --------
Net Revenue $1,692,663 $1,544,325 $148,338 10%
========== ========== ========
*Investment gain from the sale of London Stock Exchange shares.
Trade revenue comprised 67% of net revenue year to date 2002, up
from 65% year to date 2001. Conversely net fee revenue comprised 33% year to
date 2002, down from 35% in the corresponding period.
13
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Trade revenue increased 13% ($130.1 million) during the first nine
months of 2002 due to an increase in customer dollars invested, and to a
higher gross margin compared to the prior year period. Total customer
dollars invested were $41.6 billion during the first nine months of 2002,
representing a 10% ($3.9 billion) increase from comparable prior year
period. The firm's gross margin increased to $26.50 in the first nine months
of 2002 from $26.00 in the first nine months of 2001. Year over year, the
composition of the product mix has shifted to fixed income and mutual fund
products, from individual equities.
Commissions revenue excluding the service fee component increased
8% ($58.8 million) for the first nine months of 2002. Commissions revenue
increased year over year due to a 2% net increase in customer dollars
invested in equities and mutual funds and a higher gross margin. Year to
date, mutual fund commissions increased 18% ($72.7 million) and insurance
commissions increased 4% ($4.2 million), while individual equity agency
commissions decreased 8% ($18.7 million).
Principal transactions revenue increased 22% ($55.6 million) during
the first nine months of 2002 due to a 25% increase in customer dollars
invested in bonds. Customers invested $17.4 billion in fixed income products
through September of 2002 compared to $13.9 billion in the first nine months
of last year. Revenue from government bonds increased 125% ($27.0 million),
municipal bonds increased 27% ($29.0 million), while corporate bonds
decreased 10% ($7.1 million).
Net fee revenue increased 3% ($14.6 million) year to date. Service
fees decreased $0.4 million due to the impact of market conditions on the
value of customer assets. The average customer assets related to service
fees were $115 billion for both the first nine months of 2002 and the first
nine months of 2001. Management, retirement and other fee revenue increased
18% ($43.1 million) year to date, due primarily to growth in revenue from
sub-transfer agent accounting services, revenue sharing agreements with
mutual funds and insurance companies, and retirement fees. The number of
retirement accounts increased, resulting in custodial fee revenue growth of
28% ($8.1 million).
Net interest income decreased 32% ($28.0 million) year to date due
primarily to the impact of lower interest rates on margin loan interest, and
to lower bank loans outstanding. Interest income from customer loans
outstanding decreased 31% ($37.1 million). The average rate earned on
customer balances decreased to approximately 5.70% during the first nine
months of 2002 from approximately 8.25% during the first nine months of
2001. Average customer margin balances increased 2% to $1.923 billion
14
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
during the first nine months of 2002. Interest expense from bank loans
decreased 77% ($9.1 million), due to lower bank loans outstanding. Average
bank loans decreased 61% to $129.4 million during the first nine months
of 2002.
Operating expenses increased 10% ($137.7 million) for the first
nine months of 2002. Compensation and benefits costs increased 11% ($93.4
million). Within compensations and benefits costs, sales compensation
increased 10% ($54.3 million) due to increased revenue, and payroll expense
increased 15% ($40.8 million) due to existing personnel and additional
support at both the headquarters and in the branches as the firm grows its
sales force.
Communications and data processing expenses increased 18% ($30.5
million) during the first nine months of 2002. Occupancy and equipment
expenses increased 4% ($6.5 million). Underlying these increases is the
Partnership's continued expansion of its headquarters, branch locations and
communications systems to enable it to continue to increase its number of
IRs, locations and customers.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's equity capital at September 27, 2002, excluding
the reserve for anticipated withdrawals, was $675.0 million, compared to
$638.9 million at December 31, 2001. Equity capital has increased primarily
due to the issuance, net of redemptions, of Subordinated Limited Partner
interests ($12.5 million) and the retention of General Partner earnings
($27.0 million).
At September 27, 2002, the Partnership had $147.4 million in cash
and cash equivalents. Uncommitted lines of credit are in place aggregating
$1.1 billion. Actual borrowing availability is based on securities owned and
customers' margin securities which serve as collateral for the loans. Total
bank loans outstanding under these lines were $23.0 million at September 27,
2002. The Partnership also participates in securities loaned transactions,
under which it receives collateral in the form of cash or other collateral
in an amount in excess of the market value of securities loaned. Securities
loaned outstanding were $23.5 million at September 27, 2002, for which the
Partnership received cash collateral.
The Partnership believes that the liquidity provided by existing
cash balances, other highly liquid assets, and borrowing arrangements will
be sufficient to meet the Partnership's capital and liquidity requirements.
Depending on conditions in the capital markets and other factors, the
Partnership will, from time to time, consider the issuance of debt, the
proceeds of which could be used to meet growth needs or for other purposes.
15
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
The Partnership's growth in recent years has been financed through
sales of limited partnership interests to its employees, retention of
earnings, private placements of long-term and subordinated debt, long-term
secured debt and operating leases under which the firm rents facilities,
furniture, fixtures, computers and communication equipment. During June
2002, the Partnership privately placed $250 million of subordinated debt
with institutional investors. The debt bears interest at 7.33% and has an
average maturity of ten years, with annual payments of $50 million per year
commencing in year eight. The proceeds of the placement will be used for
general partnership purposes.
For the nine months ended September 27, 2002, cash and cash
equivalents decreased $49.1 million. Cash used in operating activities was
$113.2 million. The main source is net income of $123.1 million. Uses
include a $215.5 million increase in the net receivable from customers, the
balance of which may fluctuate in the normal course of business, and a
$108.7 million decrease in securities loaned. Cash used in investing
activities consisted of $70.3 million in capital expenditures attributable
to the firm's expansion of its headquarters and branch facilities required
as the firm grows its sales force. Cash provided by financing activities was
$130.7 million consisting primarily of the issuance of subordinated debt
($250.0 million) partially offset by partnership withdrawals ($110.3
million).
For a discussion of the Partnership's net capital requirements,
refer to the "Notes to Consolidated Financial Statements" included in this
Form 10-Q.
CRITICAL ACCOUNTING POLICIES
The Partnership's financial statements are prepared in accordance
with accounting principles generally accepted in the United States of
America, which may require judgement and involve estimation processes to
determine its assets, liabilities, revenues and expenses which may affect
its results of interim operations. For a discussion of the Partnership's
accounting policies that may involve a higher degree of judgement and
complexity, refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Critical Accounting Policies" and
"Note 1 - Summary of Significant Accounting Policies" included in Form 10-K.
THE EFFECTS OF INFLATION
The Partnership's net assets are primarily monetary, consisting of
cash, securities inventories and receivables less liabilities. Monetary net
assets are primarily liquid in nature and would not be
16
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
significantly affected by inflation. Inflation and future expectations of
inflation influence securities prices, as well as activity levels in the
securities markets. As a result, profitability and capital may be impacted
by inflation and inflationary expectations. Additionally, inflation's impact
on the Partnership's operating expenses may affect profitability to the
extent that additional costs are not recoverable through increased prices of
services offered by the Partnership.
FORWARD-LOOKING STATEMENTS
Management's Financial Discussion contains forward-looking
statements within the meaning of federal securities laws. Actual results are
subject to risks and uncertainties, including both those specific to the
Partnership and those specific to the industry which could cause results to
differ materially from those contemplated. The risks and uncertainties
include, but are not limited to, general economic conditions, actions of
competitors, regulatory actions, changes in legislation and technology
changes. Undue reliance should not be placed on the forward-looking
statements, which speak only as of the date of this Quarterly Report on Form
10-Q. The Partnership does not undertake any obligation to publicly update
any forward-looking statements.
17
Part I. FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The SEC issued market risk disclosure requirements to enhance
disclosures of accounting policies for derivatives and other financial
instruments and to provide quantitative and qualitative disclosures about
market risk inherent in derivatives and other financial instruments. Various
levels of management within the Partnership manage the firm's risk exposure.
Position limits in trading and inventory accounts are established and
monitored on an ongoing basis. Credit risk related to various financing
activities is reduced by the industry practice of obtaining and maintaining
collateral. The Partnership monitors its exposure to counterparty risk
through the use of credit exposure information, the monitoring of collateral
values and the establishment of credit limits. The Partnership earns
interest on customer margin account balances and pays interest on certain
credit balances in customer accounts.
There were no changes in the Partnership's exposure to interest
rate risk during the quarter ended September 27, 2002 that would have a
material adverse effect on the consolidated financial position or results of
operations of the Partnership.
18
Part II. OTHER INFORMATION
THE JONES FINANCIAL COMPANIES, L.L.L.P.
Item 1. Legal Proceedings
There have been no material changes in the legal proceedings previously
reported.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Reference is made to the Exhibit Index contained hereinafter.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements 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.
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(Registrant)
Dated: November 11, 2002 /s/ Steven Novik
-----------------------
Steven Novik
Chief Financial Officer
20
EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 27, 2002
Exhibit
Number Page Description
99 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
* Incorporated by reference to previously filed exhibits.
21