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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 MARCH 28, 2003 Commission file number 0-16633
THE JONES FINANCIAL COMPANIES, L.L.L.P.
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(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..........................................17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................18
Item 6. Exhibits and Reports on Form 8-K ...................................................................18
Signatures..........................................................................................19
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
(Unaudited)
March 28, December 31,
(Amounts in thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 146,790 $ 175,953
Securities purchased under agreements to resell 200,000 65,000
Receivable from:
Customers 1,918,649 1,909,376
Brokers, dealers and clearing organizations 131,717 99,848
Mortgages and loans 113,938 112,959
Securities owned, at market value:
Inventory securities 112,982 204,970
Investment securities 174,234 175,249
Equipment, property and improvements, at cost, net
of accumulated depreciation 295,370 298,129
Other assets 203,735 216,761
--------------- ----------------
Total assets $ 3,297,415 $ 3,258,245
=============== ================
===================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED)
LIABILITIES AND PARTNERSHIP CAPITAL
(Unaudited)
March 28, December 31,
(Amounts in thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Bank loans $ 13,777 $ 13,828
Payable to:
Customers 1,644,898 1,622,595
Brokers, dealers and clearing organizations 34,165 20,334
Depositors 107,064 109,724
Securities loaned 12,004 10,149
Securities sold, not yet purchased, at market value 22,341 15,536
Accounts payable and accrued expenses 130,926 120,846
Accrued compensation and employee benefits 143,841 157,050
Long-term debt 47,719 49,363
--------------- ----------------
2,156,735 2,119,425
--------------- ----------------
Liabilities subordinated to claims of general creditors 428,875 428,875
--------------- ----------------
Commitments and contingencies
Partnership capital net of reserve for anticipated withdrawals:
Limited partners 226,737 228,666
Subordinated limited partners 103,633 95,299
General partners 362,653 357,406
--------------- ----------------
693,023 681,371
Reserve for anticipated withdrawals 18,782 28,574
--------------- ----------------
Total Partnership Capital 711,805 709,945
--------------- ----------------
Total Liabilities And Partnership Capital $ 3,297,415 $ 3,258,245
=============== ================
The accompanying notes are an integral part of these consolidated financial statements.
4
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
(Amounts in thousands, March 28, March 29,
except per unit information) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Revenue:
Commissions $ 317,033 $ 342,023
Principal transactions 80,786 102,294
Investment banking 14,293 5,223
Interest and dividends 30,919 32,511
Other 99,630 93,954
--------------- ----------------
Total revenue 542,661 576,005
Interest expense 14,587 11,740
--------------- ----------------
Net revenue 528,074 564,265
--------------- ----------------
Operating expenses:
Compensation and benefits 304,178 324,678
Communications and data processing 64,679 65,349
Occupancy and equipment 57,541 53,822
Payroll and other taxes 24,050 25,490
Floor brokerage and clearance fees 3,301 3,746
Advertising 10,399 10,806
Other operating expenses 39,184 38,745
--------------- ----------------
Total operating expenses 503,332 522,636
--------------- ----------------
Net income $ 24,742 $ 41,629
=============== ================
Net income allocated to:
Limited partners $ 2,990 $ 5,680
Subordinated limited partners 2,741 4,574
General partners 19,011 31,375
--------------- ----------------
$ 24,742 $ 41,629
=============== ================
Net income per weighted average $1,000
equivalent partnership unit outstanding:
Limited partners $ 13.15 $ 24.46
=============== ================
Subordinated limited partners $ 26.47 $ 48.16
=============== ================
Weighted average $1,000 equivalent
partnership units outstanding:
Limited partners 227,376 232,216
=============== ================
Subordinated limited partners 103,551 94,975
=============== ================
===================================================================================================================
The accompanying notes are an integral part of these consolidated 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)
Three Months Ended
March 28, March 29,
(Amounts in thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 24,742 $ 41,629
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 21,344 21,146
Changes in assets and liabilities:
Securities purchased under agreements to resell (135,000) 80,000
Net receivable from customers 13,030 (299,392)
Net receivable from brokers, dealers and
clearing organizations (18,038) (19,896)
Receivable from mortgages and loans (979) 1,932
Securities owned, net of securities sold, not yet purchased 99,808 (63,569)
Other assets 13,026 6,123
Bank loans (51) 256,401
Payable to depositors (2,660) 1,081
Securities loaned 1,855 3,696
Accounts payable and accrued expenses 10,080 (5,692)
Accrued compensation and employee benefits (13,209) (4,075)
--------------- ----------------
Net cash provided by operating activities 13,948 19,384
--------------- ----------------
Cash Flows From Investing Activities:
Purchase of equipment, property and improvements, net (18,585) (20,877)
--------------- ----------------
Net cash used in investing activities (18,585) (20,877)
--------------- ----------------
Cash Flows From Financing Activities:
Repayment of long-term debt (1,644) (1,400)
Issuance of partnership interests 9,274 13,124
Redemption of partnership interests (2,870) (1,831)
Withdrawals and distributions from partnership capital (29,286) (36,961)
--------------- ----------------
Net cash used in financing activities (24,526) (27,068)
--------------- ----------------
Net decrease in cash and cash equivalents (29,163) (28,561)
Cash And Cash Equivalents,
Beginning of year 175,953 196,508
--------------- ----------------
End of year $ 146,790 $ 167,947
=============== ================
Cash paid for interest $ 11,229 $ 12,878
=============== ================
The accompanying notes are an integral part of these consolidated 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
THREE MONTHS ENDED MARCH 28, 2003 AND MARCH 29, 2002
(Unaudited)
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Amounts in thousands) Capital Capital Capital Total
- -------------------------------------------------------------------------------------------------------------------
Partnership capital net of reserve for
anticipated withdrawals,
December 31, 2001 $ 233,228 $ 82,455 $ 323,261 $ 638,944
Issuance of partnership interests - 13,124 - 13,124
Redemption of partnership interests (1,295) (536) - (1,831)
Net income 5,680 4,574 31,375 41,629
Withdrawals and distributions (3) (160) (1,026) (1,189)
------------ ------------- ------------- -------------
TOTAL PARTNERSHIP CAPITAL 237,610 99,457 353,610 690,677
Reserve for anticipated withdrawals (5,677) (4,414) (21,690) (31,781)
------------ ------------- ------------- -------------
Partnership capital net of reserve for
anticipated withdrawals,
March 29, 2002 $ 231,933 $ 95,043 $ 331,920 $ 658,896
Partnership capital net of reserve for
anticipated withdrawals,
December 31, 2002 $ 228,666 $ 95,299 $ 357,406 $ 681,371
Issuance of partnership interests - 9,274 - 9,274
Redemption of partnership interests (1,929) (941) - (2,870)
Net income 2,990 2,741 19,011 24,742
Withdrawals and distributions (4) (96) (612) (712)
------------ ------------- ------------- -------------
TOTAL PARTNERSHIP CAPITAL 229,723 106,277 375,805 711,805
Reserve for anticipated withdrawals (2,986) (2,644) (13,152) (18,782)
------------ ------------- ------------- -------------
Partnership capital net of reserve for
anticipated withdrawals,
March 28, 2003 $ 226,737 $ 103,633 $ 362,653 $ 693,023
The accompanying notes are an integral part of these consolidated 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. Boone National Savings and
Loan Association, F.A. (the "Association"), a wholly owned subsidiary of the
Partnership, makes commercial, real estate and other loans to individuals
primarily to customers in Central Missouri. Additionally, the Association
offers trust services to EDJ customers through its division, the Edward
Jones Trust Co.
The financial statements have been prepared using the accrual basis
of accounting in conformity with accounting principles generally accepted in
the United States of America which requires the use of certain estimates by
management in determining the Partnership's assets, liabilities, revenues
and expenses. Actual results could differ from these estimates.
The financial information included herein is unaudited. However, in
the opinion of management, such information includes all adjustments,
consisting primarily of normal recurring accruals, which are necessary for a
fair presentation of the results of interim operations. Certain prior period
amounts have been reclassified to conform with the current year
presentation.
The results of operations for the three months ended March 28, 2003
and March 29, 2002 are not necessarily indicative of the results to be
expected for the full year.
8
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
NET CAPITAL REQUIREMENTS
As a result of its activities as a broker/dealer, EDJ is subject to
the Net Capital provisions of Rule 15c3-1 of the Securities Exchange Act of
1934 and the capital rules of the New York Stock Exchange. Under the
alternative method permitted by the rules, EDJ must maintain minimum Net
Capital, equal to the greater of $250,000 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 March 28, 2003, EDJ's Net Capital of $654.1 million was 35% of
aggregate debit items and its Net Capital in excess of the minimum required
was $616.6 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 firm has other operating subsidiaries, including the
Association and broker/dealer subsidiaries in Canada and the United Kingdom.
These wholly owned subsidiaries are required to maintain specified levels of
liquidity and capital standards. Each subsidiary is in compliance with the
applicable regulations as of March 28, 2003.
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 ENDED MARCH 28, 2003, VERSUS
QUARTER ENDED MARCH 29, 2002
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 28, 2003 AND
MARCH 29, 2002
For the first three months of 2003, net revenue decreased 6% ($36.2
million) to $528.1 million, while net income decreased 41% ($16.9 million)
to $24.7 million. The Partnership's profit margin decreased to 4.6% in the
first quarter of 2003, compared to 7.2% in the first quarter of 2002. The
Partnership's net revenue and net income are lower due primarily to the
impact of market conditions on customer activity and on the value of
customer assets.
The Partnership broadly categorizes its revenues as trade revenue
(revenue from buy or sell transactions of securities) or net fee revenue
(sources other than trade revenue including asset fees, account and activity
fees and net interest income). In the Partnership's Consolidated Statements
of Income, trade revenue is included in commissions, principal transactions
and investment banking. Net fee revenue comprises the asset fee component of
commissions, interest and dividends net of interest expense, and other
revenues.
Trade revenue comprised 66% of net revenue for the first quarter of
2003, compared to 67% for the first quarter of 2002. Conversely, net fee
revenue comprised 34% for the first quarter of 2003, up from 33% in the
corresponding period.
The following table reconciles the components of net revenue
discussed here in the Results of Operations to the components reported in
the Consolidated Statements of Income.
Quarter ended March 28, 2003
Trade Asset Account, Activity Net Interest & Net
Revenue Fees & Other Dividend Income Revenue
---------------------------------------------------------------------------------------
Commissions $ 250,369 $ 66,664 $ - $ - $ 317,033
Principal Transactions 81,600 - (814) - 80,786
Investment Banking 14,293 - - - 14,293
Interest and Dividends - - - 30,919 30,919
Other - 37,570 62,060 - 99,630
Interest Expense - - - (14,587) (14,587)
-------------- ------------- ------------- ------------- -------------
Net Revenue $ 346,262 $ 104,234 $ 61,246 $ 16,332 $ 528,074
============== ============= ============= ============= =============
10
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Quarter ended March 29, 2002
Trade Asset Account, Activity Net Interest & Net
Revenue Fees & Other Dividend Income Revenue
---------------------------------------------------------------------------------------
Commissions $ 269,658 $ 72,365 $ - $ - $ 342,023
Principal Transactions 102,402 - (108) - 102,294
Investment Banking 5,223 - - - 5,223
Interest and Dividends - - - 32,511 32,511
Other - 39,756 54,198 - 93,954
Interest Expense - - - (11,740) (11,740)
-------------- ------------- ------------- ------------- -------------
Net Revenue $ 377,283 $ 112,121 $ 54,090 $ 20,771 $ 564,265
============== ============= ============= ============= =============
Trade revenue decreased 8% ($31.0 million) during the first quarter
of 2003 due primarily to a decrease in customer dollars invested (customers'
buy and sell transactions generating trade revenue), partially offset by a
higher gross margin earned on customer dollars invested compared to the
first quarter of 2002. Total customer dollars invested were $12.2 billion
during the first quarter of 2003, representing a 10% ($1.4 billion) decrease
from the comparable prior year period. The firm's margin earned on each
$1,000 invested increased to $27.50 in the first quarter of 2003 from $26.90
in the first quarter of 2002 due primarily to a shift in product mix. Year
over year, customer purchases shifted to higher margin mutual fund products
from individual equities.
Commissions revenue, excluding asset based fees, decreased 7%
($19.3 million) during the first quarter of 2003. Commissions revenue
decreased year over year due primarily to the overall decrease in customer
dollars invested. Individual equity agency commissions decreased 24% ($16.3
million) and insurance commissions decreased 20% ($8.5 million), while
mutual fund commissions increased 4% ($5.5 million).
Principal transactions revenue decreased 21% ($21.5 million) during
the first quarter of 2003 due to a 10% decrease in customer dollars invested
in fixed income products and to a lower margin earned on principal
transactions. Customers invested $4.7 billion in fixed income products in
the first quarter of 2003 compared to $5.2 billion in the first quarter of
2002. Revenue from government bonds decreased 54% ($10.3 million), municipal
bonds decreased 22% ($10.0 million), while corporate bonds decreased 12%
($2.2 million). The firm's margin earned on each $1,000 invested decreased
to $16.70 in the first quarter of 2003, down from $19.10 in the first
quarter of 2002 due primarily to a shift in product mix to lower margin
shorter maturity fixed income products in the first quarter of 2003 compared
with the first quarter of 2002.
11
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Investment banking revenue increased 174% ($9.1 million) during the
first quarter of 2003 to $14.3 million, due to an increase in syndicate
corporate debt offerings which increased $9.2 million in the current
quarter.
Net fee revenue decreased 3% ($5.2 million) during the first
quarter of 2003. Asset fees, including service fees and revenue sharing on
customers' mutual funds, insurance and money market assets decreased 7%
($7.9 million) due to the impact of market conditions on the value of
customer assets. Customers mutual fund, insurance and money market assets
averaged $125.4 billion during the first quarter of 2003 compared with
$132.1 billion in the first quarter of 2002. Account, activity and other fee
revenue increased 13% ($7.2 million) during the first quarter of 2003.
Revenue received from subtransfer agent services increased 16% ($4.4
million) due to growth in the number of accounts. The number of retirement
accounts increased, resulting in custodial fee revenue growth of 19% ($2.6
million).
Net interest and dividend income decreased 22% ($4.5 million)
during the first quarter of 2003 due primarily to the impact of lower
interest rates charged on customers' margin loans, and to a shift in source
of funds borrowed. Subordinated debt interest increased $4.0 million in the
first quarter of 2003 due to the issuance of $250 million subordinated debt
in June 2002. Interest income from customer loans outstanding decreased 9%
($2.2 million). The average rate earned on customer loan balances decreased
to approximately 5.2% in the first quarter of 2003 from approximately 5.70%
in the first quarter of 2002. Average customer margin loan balances were
$1.89 billion in the first quarter of 2003, compared to $l.90 billion in the
corresponding period, a decrease of 1%. Partially offsetting these decreases
to net interest income is a $0.7 million decrease in bank loan interest due
to reduced borrowings and $0.7 million increase in interest income from
investing excess funds in reverse repurchase agreements. The firm has been
in a net investing position for substantially all of 2003 compared with a
net borrowing position in the first quarter of 2002.
Operating expenses decreased 4% ($19.3 million) during the first
quarter of 2003. Compensation and benefits costs decreased 6% ($20.5
million). Within compensation and benefits costs, sales compensation
decreased 7% ($14.5 million) due to decreased 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 the firm's profit margin, decreased 77% ($17.9 million) due to the
decrease in the Partnership's net income and profit margin. Payroll expense
increased 12% ($12.2 million) due to existing personnel and additional
support at both the headquarters and in the branches as the firm grows its
sales force. The Partnership added 486 IRs in the year ended March 28, 2003,
ending the quarter with 9,131 IRs, an increase of 5%,
12
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
although for the first quarter of 2003, the number of IRs decreased by 41
from 9,172 as of January 1, 2003.
Occupancy and equipment expenses increased 7% ($3.7 million), due
primarily to growth in the number of branch office locations as the firm
expands its sales force.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's equity capital at March 28, 2003, net of the
reserve for anticipated withdrawals, was $693.0 million, compared to $681.4
million at December 31, 2002. Equity capital has increased primarily due to
the issuance, net of redemptions, of Subordinated Limited Partner interests
($8.3 million) and the retention of General Partner earnings ($5.2 million),
offset by redemption of Limited Partner interests ($1.9 million).
At March 28, 2003, the Partnership had $146.8 million in cash and
cash equivalents. Lines of credit are in place aggregating $1.19 billion
($1.14 billion of which is through uncommitted lines of credit). Actual
borrowing availability is based on securities owned and customers' margin
securities which serve as collateral for the loans. No amounts were
outstanding under these lines at March 28, 2003. The Association had loans
from The Federal Home Loan Bank of $13.8 million as of March 28, 2003, which
are secured by mortgage loans. The Partnership also participates in
securities loaned transactions, under which it receives collateral in the
form of cash or other collateral in an amount in excess of the market value
of securities loaned. Securities loaned outstanding were $12.0 million at
March 28, 2003, 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.
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. There were no significant
changes in the Partnership's financial commitments and obligations for the
quarter ended March 28, 2003.
13
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Included in the Partnership's operating lease commitments and
contingent residual payments are synthetic leasing agreements for two
buildings, one in Tempe, Arizona, and one in St. Louis, Missouri. The lessor
of the buildings, along with a group of financial institutions, funded the
construction of the facilities. The total cost of the facilities covered by
these leases was $60.4 million.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities - Interpretation of ARB No. 51 "("FIN 46"), which would become
effective for the Partnership for periods beginning after June 27, 2003.
Because the lessor for the Partnership's synthetic leases, an entity
unrelated to JFC or its affiliates, may be considered a variable interest
entity, the Partnership may be required to capitalize the buildings. The
Partnership is currently examining its alternatives, including terminating
the leases and purchasing the buildings which would result in recording the
cost of the buildings as an asset. Purchasing the buildings could reduce the
firm's Net Capital by approximately $60.4 million and would require either a
cash outlay or additional financing.
For the three months ended March 28, 2003, cash and cash
equivalents decreased $29.2 million. Cash provided by operating activities
was $13.9 million. The primary sources of cash from operating activities
include net income and a decrease in inventory during the quarter.
Securities owned, net, decreased $99.8 million from December 31, 2002. Cash
invested in overnight securities purchased under agreements to resell
increased $135.0 million. Cash used in investing activities was $18.6
million consisting of capital expenditures attributable to the firm's
expansion of its headquarters and branch facilities as the firm grows its
sales force. Cash used in financing activities was $24.5 million consisting
primarily of partnership withdrawals and distributions ($29.3 million) net
of cash proceeds from the placement of subordinated limited partnership
capital of $9.3 million.
As a result of its activities as a broker/dealer, EDJ, the
Partnership's principal subsidiary, is subject to the Net Capital provisions
of Rule 15c3-1 of the Securities Exchange Act of 1934 and the capital rules
of the New York Stock Exchange. Under the alternative method permitted by
the rules, EDJ must maintain minimum Net Capital, as defined, equal to the
greater of $250 or 2% of aggregate debit items arising from customer
transactions. The Net Capital rule also provides that partnership capital
may not be withdrawn if resulting Net Capital would be less than 5% of
aggregate debit items. Additionally, certain withdrawals require the consent
of the SEC to the extent they exceed defined levels even though such
withdrawals would not cause Net Capital to be less than 5% of aggregate
debit items. At March 28, 2003, EDJ's Net Capital of $654.1 million was 35%
of aggregate debit items and its Net Capital in excess of the minimum
required was $616.6 million. Net Capital as a percentage of aggregate debits
after
14
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
anticipated withdrawals was 34%. Net Capital and the related capital
percentage may fluctuate on a daily basis.
CRITICAL ACCOUNTING POLICIES
The Partnership's financial statements are prepared in accordance
with accounting principles generally accepted in the United States of
America, which may require judgement and involve estimation processes to
determine its assets, liabilities, revenues and expenses which affect its
results of operations. The Partnership believes that of its significant
accounting policies, the following critical policies, estimates and
assumptions may involve a higher degree of judgement and complexity.
Customer's transactions are recorded on a settlement date basis
with the related revenue and expenses recorded on a trade date basis. The
Partnership may be exposed to risk of loss in the event customers, other
brokers and dealers, banks, depositories or clearing organizations are
unable to fulfill contractual obligations. For transactions in which it
extends credit to customers, the Partnership seeks to control the risks
associated with these activities by requiring customers to maintain margin
collateral in compliance with various regulatory and internal guidelines.
Securities owned and sold, not yet purchased, including inventory
securities and investment securities, are valued at market value which is
determined by using quoted market or dealer prices.
For additional discussions of the Partnership's accounting
policies, refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Critical Accounting Policies" included
in the December 31, 2002 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 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.
15
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and
Results of Operations contain forward-looking statements within the meaning
of federal securities laws. Actual results are subject to risks and
uncertainties, including both those specific to the Partnership and those
specific to the industry which could cause results to differ materially from
those contemplated. The risks and uncertainties include, but are not limited
to, general economic conditions, actions of competitors, regulatory actions,
changes in legislation and technology changes. Undue reliance should not be
placed on the forward-looking statements, which speak only as of the date of
this Quarterly Report on Form 10-Q. The Partnership does not undertake any
obligation to publicly update any forward-looking statements.
16
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 is exposed to market risk from changes in interest
rates. Such changes in interest rates impact the income from interest
earning assets, primarily receivables from customers on margin balances, and
may have an impact on the expense from liabilities that finance these
assets. At March 28, 2003, amounts receivable from customers were $1.919
billion. Liabilities include amounts payable to customers and other interest
and non-interest bearing liabilities.
Under current market conditions and based on current levels of
interest earning assets and the liabilities that finance these assets, the
Partnership estimates that a 100 basis point increase in interest rates
could increase its annual net interest income by approximately $13 million.
Conversely, the Partnership estimates that a 100 basis point decrease in
interest rates could decrease the Partnership's annual net interest income
by up to $22 million. A decrease in interest rates has a more significant
impact on net interest income because under the current low interest rate
environment the Partnership's interest bearing liabilities are less interest
rate sensitive compared to its interest earning assets.
There were no changes in the Partnership's exposure to market risk
and changes in interest rates during the quarter ended March 28, 2003 that
would have a material adverse effect on the consolidated financial position
or results of operations of the Partnership.
17
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
99.1 Certification pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
18
Part II. OTHER INFORMATION
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: May 12, 2003 /s/ Steven Novik
-----------------------
Steven Novik
Chief Financial Officer
19
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, John W. Bachmann, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Jones
Financial Companies, L.L.L.P.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition and results of operations
and cash flows of the Partnership as of, and for, the periods
presented in this quarterly report.
4. The Partnership's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Partnership
and have;
a) designed such disclosure controls and procedures to ensure that
material information relating to the Partnership including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is prepared;
b) evaluated the effectiveness of the Partnership's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of our disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The Partnership's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Partnership's auditors
and the Executive Committee:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Partnership's
ability to record, process, summarize, and report financial data
and have identified for the Partnership's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other associates who have a significant role in the Partnership's
internal controls.
6. The Partnership's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ John W. Bachmann
---------------------------------------
Chief Executive Officer
The Jones Financial Companies, L.L.L.P.
May 12, 2003
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Steven Novik, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Jones
Financial Companies, L.L.L.P.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition and results of operations
and cash flows of the Partnership as of, and for, the periods
presented in this quarterly report.
4. The Partnership's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Partnership
and have;
a) designed such disclosure controls and procedures to ensure that
material information relating to the Partnership including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is prepared;
b) evaluated the effectiveness of the Partnership's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of our disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The Partnership's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Partnership's auditors
and the Executive Committee:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Partnership's
ability to record, process, summarize, and report financial data
and have identified for the Partnership's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other associates who have a significant role in the Partnership's
internal controls.
6. The Partnership's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Steven Novik
---------------------------------------
Chief Financial Officer
The Jones Financial Companies, L.L.L.P.
May 12, 2003