Back to GetFilings.com
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 JUNE 27, 2003 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
- ------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12555 Manchester Road
St. Louis, Missouri 63131
- ------------------------------------------------------------------------------
(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.......................20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................21
Item 6. Exhibits and Reports on Form 8-K ................................................21
Signatures.......................................................................22
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
(Unaudited)
June 27, December 31,
(Amounts in thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 135,073 $ 175,953
Securities purchased under agreements to resell 185,000 65,000
Receivable from:
Customers 2,018,984 1,909,376
Brokers, dealers and clearing organizations 143,018 99,848
Mortgages and loans 115,640 112,959
Securities owned, at market value:
Inventory securities 111,166 204,970
Investment securities 168,762 175,249
Equipment, property and improvements, at cost, net
of accumulated depreciation 350,919 298,129
Other assets 228,330 216,761
--------------- ----------------
Total assets $ 3,456,892 $ 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)
June 27, December 31,
(Amounts in thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Bank loans $ 16,678 $ 13,828
Payable to:
Customers 1,735,371 1,622,595
Brokers, dealers and clearing organizations 49,470 20,334
Depositors 104,451 109,724
Securities loaned 12,266 10,149
Securities sold, not yet purchased, at market value 15,078 15,536
Accounts payable and accrued expenses 138,818 120,846
Accrued compensation and employee benefits 194,655 157,050
Long-term debt 46,040 49,363
--------------- ----------------
2,312,827 2,119,425
--------------- ----------------
Liabilities subordinated to claims of general creditors 418,650 428,875
--------------- ----------------
Commitments and contingencies
Partnership capital net of reserve for anticipated withdrawals:
Limited partners 225,028 228,666
Subordinated limited partners 103,433 95,299
General partners 374,128 357,406
--------------- ----------------
702,589 681,371
Reserve for anticipated withdrawals 22,826 28,574
--------------- ----------------
Total Partnership Capital 725,415 709,945
--------------- ----------------
Total Liabilities And Partnership Capital $ 3,456,892 $ 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 Six Months Ended
June 27, June 28, June 27, June 28,
(Amounts in thousands) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Net Revenue
Commissions $ 397,222 $ 364,089 $ 714,255 $ 706,112
Principal transactions 79,636 107,023 160,422 209,317
Investment banking 11,635 9,668 25,928 14,891
Interest and dividends 33,378 36,011 64,297 68,522
Other 115,342 100,613 214,972 194,567
------------- -------------- ------------- --------------
Total revenue 637,213 617,404 1,179,874 1,193,409
Interest expense 14,783 13,097 29,370 24,837
------------- -------------- ------------- --------------
Net revenue 622,430 604,307 1,150,504 1,168,572
------------- -------------- ------------- --------------
Operating expenses:
Compensation and benefits 359,825 354,717 664,003 679,395
Communications and data processing 65,391 66,931 130,070 132,280
Occupancy and equipment 58,993 53,004 116,534 106,826
Payroll and other taxes 22,609 22,465 46,659 47,955
Floor brokerage and clearance fees 3,769 4,032 7,070 7,778
Advertising 10,537 11,010 20,936 21,816
Other operating expenses 47,388 42,053 86,572 80,798
------------- -------------- ------------- --------------
Total operating expenses 568,512 554,212 1,071,844 1,076,848
------------- -------------- ------------- --------------
Net income $ 53,918 $ 50,095 $ 78,660 $ 91,724
============= ============== ============= ==============
Net income allocated to:
Limited partners $ 6,468 $ 6,817 $ 9,458 $ 12,497
Subordinated limited partners 5,873 5,372 8,614 9,946
General partners 41,577 37,906 60,588 69,281
------------- -------------- ------------- --------------
$ 53,918 $ 50,095 $ 78,660 $ 91,724
============= ============== ============= ==============
Net income per weighted average $1,000
equivalent partnership unit outstanding:
Limited partners $ 28.67 $ 29.45 $ 41.82 $ 53.91
============= ============== ============= ==============
Subordinated limited partners $ 56.74 $ 56.53 $ 83.21 $ 104.69
============= ============== ============= ==============
Weighted average $1,000 equivalent
partnership unit outstanding:
Limited partners 225,602 231,477 226,160 231,812
============= ============== ============= ==============
Subordinated limited partners 103,507 95,029 103,521 95,004
============= ============== ============= ==============
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)
Six Months Ended
June 27, June 28,
(Amounts in thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 78,660 $ 91,724
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 43,440 43,158
Changes in assets and liabilities:
Securities purchased under agreements to resell (120,000) 74,000
Net receivable from customers 3,168 (312,543)
Net receivable from brokers, dealers and
clearing organizations (14,034) (16,423)
Receivable from mortgages and loans (2,681) 243
Securities owned, net of securities sold, not yet purchased 99,833 (56,199)
Other assets (11,569) 8,423
Bank loans 2,850 327
Payable to depositors (5,273) (1,166)
Securities loaned 2,117 2,560
Accounts payable and accrued expenses 17,972 11,066
Accrued compensation and employee benefits 37,605 (12,167)
--------------- ----------------
Net cash provided by (used in) operating activities 132,088 (166,997)
--------------- ----------------
Cash Flows From Investing Activities:
Purchase of equipment, property and improvements, net (96,230) (49,636)
--------------- ----------------
Net cash used in investing activities (96,230) (49,636)
--------------- ----------------
Cash Flows From Financing Activities:
Issuance of long-term debt - 13,100
Repayment of long-term debt (3,323) (2,829)
Issuance of subordinated debt - 250,000
Repayment of subordinated debt (10,225) (16,225)
Issuance of partnership interests 9,274 13,124
Redemption of partnership interests (4,779) (2,680)
Withdrawals and distributions from partnership capital (67,685) (85,301)
--------------- ----------------
Net cash (used in) provided by financing activities (76,738) 169,189
--------------- ----------------
Net decrease in cash and cash equivalents (40,880) (47,444)
Cash And Cash Equivalents,
Beginning of period 175,953 196,508
--------------- ----------------
End of period $ 135,073 $ 149,064
=============== ================
Cash paid for interest $ 28,939 $ 24,002
=============== ================
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
SIX MONTHS ENDED JUNE 27, 2003 AND JUNE 28, 2002
(Unaudited)
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Amounts in thousands) Capital Capital Capital Total
- -------------------------------------------------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL $ 247,718 $ 86,654 $ 340,344 $ 674,716
Reserve for anticipated withdrawals (14,490) (4,199) (17,083) (35,772)
------------- -------------- --------------- --------------
Partnership capital net of reserve
for anticipated withdrawals,
December 31, 2001 233,228 82,455 323,261 638,944
Issuance of partnership interests - 13,124 - 13,124
Redemption of partnership interests (2,093) (587) - (2,680)
Net income 12,497 9,946 69,281 91,724
Withdrawals and distributions (900) (8,874) (39,755) (49,529)
------------- -------------- ------------- --------------
TOTAL PARTNERSHIP CAPITAL 242,732 96,064 352,787 691,583
Reserve for anticipated withdrawals (11,597) (1,072) (10,405) (23,074)
------------- -------------- ------------- --------------
Partnership capital net of reserve
for anticipated withdrawals,
June 28, 2002 $ 231,135 $ 94,992 $ 342,382 $ 668,509
TOTAL PARTNERSHIP CAPITAL $ 239,839 $ 98,422 $ 371,684 $ 709,945
Reserve for anticipated withdrawals (11,173) (3,123) (14,278) (28,574)
------------- -------------- ------------- --------------
Partnership capital net of reserve
for anticipated withdrawals,
December 31, 2002 228,666 95,299 357,406 681,371
Issuance of partnership interests - 9,274 - 9,274
Redemption of partnership interests (3,638) (1,141) - (4,779)
Net income 9,458 8,614 60,588 78,660
Withdrawals and distributions (954) (6,901) (31,256) (39,111)
------------- -------------- ------------- --------------
TOTAL PARTNERSHIP CAPITAL 233,532 105,145 386,738 725,415
Reserve for anticipated withdrawals (8,504) (1,712) (12,610) (22,826)
------------- -------------- ------------- --------------
Partnership capital net of reserve
for anticipated withdrawals,
June 27, 2003 $ 225,028 $ 103,433 $ 374,128 $ 702,589
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 primarily to
individual 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 require the use of certain estimates by
management in determining the Partnership's assets, liabilities, revenues
and expenses. Actual results could differ from these estimates.
Substantially all of the Partnership's short-term financial assets
and liabilities are carried at fair value or contracted amounts which
approximate fair value. Assets which are recorded at contracted amounts
approximating fair value consist largely of short-term receivables.
Similarly, the Partnership's short-term liabilities are recorded at
contracted amounts approximating fair value.
The interim 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 six months ended June 27, 2003
and June 28, 2002 are not necessarily indicative of the results to be
expected for the full year.
8
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
MATERIAL TRANSACTIONS DURING THE QUARTER ENDING JUNE 27, 2003
During the second quarter, the Partnership received approximately $7.0
million from a September 11, 2001 business interruption insurance claim.
This was included in Other revenue.
The Partnership purchased two buildings for $60.4 million, one in
Tempe, Arizona, and one in St. Louis, Missouri. Both buildings were
previously occupied by the Partnership and leased under synthetic operating
leases. The purchases were funded from Partnership working capital.
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 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.
At June 27, 2003, EDJ's Net Capital of $591.8 million was 30% of
aggregate debit items and its Net Capital in excess of the minimum required
was $552.2 million. Net Capital as a percentage of aggregate debit items
after anticipated withdrawals was 29%. 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 June 27, 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
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 27, 2003 VERSUS QUARTER ENDED JUNE 28, 2002
For the second quarter of 2003, net revenue increased 3% ($18.1
million) to $622.4 million, and net income increased 8% ($3.8 million) to
$53.9 million. The Partnership's profit margin increased to 8.46% for the
second quarter of 2003 from 8.1% for the second quarter of 2002. Net revenue
and net income were positively impacted by a shift in product mix to higher
margin products offset by a slight decrease in customer activity.
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.
The following tables reconcile the components of net revenue
discussed here in the Results of Operations to the components reported in
the Consolidated Statements of Income.
Quarter ended June 27, 2003 (in thousands):
Trade Asset Account, Activity Net Interest & Net
Revenue Fees & Other Dividend Income Revenue
------------- ------------- ----------------- --------------- -------------
Commissions $ 323,969 $ 73,253 $ - $ - $ 397,222
Principal Transactions 78,792 - 844 - 79,636
Investment Banking 11,635 - - - 11,635
Interest and Dividends - - - 33,378 33,378
Other - 36,060 79,282 - 115,342
Interest Expense - - - (14,783) (14,783)
------------- ------------- ------------- ------------- -------------
Net Revenue $ 414,396 $ 109,313 $ 80,126 $ 18,595 $ 622,430
============= ============= ============= ============= =============
Quarter ended June 28, 2002 (in thousands):
Trade Asset Account, Activity Net Interest & Net
Revenue Fees & Other Dividend Income Revenue
------------- ------------- ----------------- --------------- -------------
Commissions $ 288,671 $ 75,418 $ - $ - $ 364,089
Principal Transactions 107,148 - (125) - 107,023
Investment Banking 9,668 - - - 9,668
Interest and Dividends - - - 36,011 36,011
Other - 40,035 60,578 - 100,613
Interest Expense - - - (13,097) (13,097)
------------- ------------- ------------- ------------- -------------
Net Revenue $ 405,487 $ 115,453 $ 60,453 $ 22,914 $ 604,307
============= ============= ============= ============= =============
Trade revenue increased 2% ($8.9 million) due to a 12% ($35.3
million) increase in commission revenue, offset by a 26% ($28.4 million)
decrease in principal transactions. Customer dollars invested (customers'
buy and sell transactions generating trade revenue) were $14.3 billion
during the second
10
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
quarter of 2003, representing a 3% ($0.5 billion) decrease from the
comparable prior year period. The firm's gross margin earned on each $1,000
invested increased 7% from $26.40 to $28.20 during the second quarter due
primarily to a shift in product mix. Customer purchases shifted from equity
and fixed income products to higher margin mutual fund products.
Commissions revenue, excluding asset based fees, increased 12%
($35.3 million) due to an increased margin earned on customer dollars
invested and an increase in customer dollars invested. Mutual fund
commissions increased 18% ($42.2 million) due to a 30% increase in customer
dollars invested in mutual funds, from $4.4 billion invested in the second
quarter of 2002 to $5.7 billion invested in the second quarter of 2003. This
was offset by a decrease in commissions from insurance products ($4.7
million) due to a decrease in customer dollars invested, from $1.1 billion
during the second quarter of 2002 to $.8 billion in the second quarter of
2003. At the same time, commissions from individual equity products
decreased 6% ($4.3 million) due to a 9% ($.3 billion) decrease in customer
dollars invested in equity products. Customer purchases shifted from equity
and fixed income products to higher margin mutual fund products.
Principal transactions revenue decreased 26% ($28.4 million) during
the second quarter due to a decrease in customer dollars invested in fixed
income products and to a lower margin earned on principal transactions.
Customers invested $4.4 billion for the second quarter of 2003 compared to
$5.6 billion for the same period in 2002. Revenue from municipal bonds
decreased 27% ($12.9 million), while revenue from government bonds decreased
68% ($11.5 million). The firm's margin earned on each $1,000 invested
decreased from $18.40 from the second quarter 2002 to $16.80 in the second
quarter 2003 due to a shift to lower margin shorter maturity fixed income
products.
Net fee revenue (fee revenue less interest expense) increased 5%
($9.2 million) during the second quarter. Included in other revenue in
account, activity and other revenue in the second quarter is approximately
$7.0 million in revenue from a September 11, 2001 business interruption
insurance claim. Excluding this non-recurring revenue, net fee revenue
increased 1% ($2.2 million).
Asset fees, including service fees and revenue sharing from mutual
fund and insurance companies decreased 5% ($6.1 million). These revenues are
primarily comprised of service fees and revenue sharing from mutual fund and
insurance vendors which are based on customers' asset values. While the
average quarterly value increased slightly (2%) comparing the two quarters,
asset values have fluctuated significantly throughout the year, underlying
the decrease between the quarters. Average mutual fund and
11
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
insurance customer assets were $123.3 billion for the second quarter of 2003
compared to $120.6 billion for the second quarter of 2002.
Excluding the business interruption insurance claim, account,
activity and other fees increased 21% ($12.7 million) during the second
quarter of 2003. The firm offers a variety of financial services to
customers, including credit cards and mortgages which are offered through
relationships with other financial institutions. Revenues from these and
other financial services have increased due to growth in the firm's number
of customers and customer accounts. Revenue received from mutual fund
subtransfer agent services increased 16% ($4.2 million) due to growth in the
number of accounts. Additionally, the number of retirement accounts
increased, resulting in custodial fee revenue growth of 19% ($2.6 million).
Net interest and dividend income decreased 19% ($4.3 million)
during the second quarter due to reduced interest rates charged on
customers' margin loans coupled with decreased bank borrowings and increased
subordinated debt borrowings. Subordinated debt interest expense increased
$3.3 million due to the issuance of $250 million subordinated debt in June
2002. Interest income from customer loans outstanding decreased 10% ($2.8
million). The average rate earned on customer loan balances decreased to
approximately 5.2% during the second quarter from approximately 5.7% during
the second quarter in 2002. Average customer margin loan balances remained
relatively flat year over year, at an average of $1.95 billion for the
second quarter of 2003 versus $1.97 billion for the second quarter of 2002.
Partially offsetting these decreases to net interest income is a $1.1
million decrease in bank loan interest expense due to reduced borrowings and
an $0.8 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 to a net borrowing position in 2002
up to the issuance of the subordinated debt in June 2002.
Operating expenses increased 3% ($14.3 million) due to increased
revenue as well as the firm's continued emphasis on expanding its sales
force. The Partnership added 354 IRs in the year ended June 27, 2003, ending
the quarter with 9,136 IRs, an increase of 4%, although for the first six
months of 2003, the number of IRs decreased by 36 from 9,172 as of January
1, 2003. The primary areas of operating expense increase include
compensation ($5.1 million), occupancy and equipment ($6.0 million) and
other operating expenses ($5.3 million). At the same time, the firm has
focused on containing costs which is reflected in reduced costs in other
areas.
Compensation and benefits increased 1% ($5.1 million) during the
second quarter. Sales compensation increased 1% ($2.8 million) due to
increased revenue. Variable compensation, including bonuses and profit
sharing paid to investment representatives ("IRs"), branch office assistants
and
12
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
headquarters associates decreased 16% ($5.8 million). Although revenue and
net income increased comparing the second quarter of 2003 with the second
quarter of 2002, bonus decreased. Profit sharing, which is based on net
income, increased slightly. The firm pays bonuses based on three four month
periods in the year. In the second quarter of 2002, bonuses were provided
for all three months of the quarter based on the firm meeting the
profitability requirements for bonuses in both the first and second bonus
periods. In 2003, the firm did not meet the minimum profit margin
requirements for a bonus for the first bonus period and no bonus was
provided until May. Payroll expense increased 10% ($10.4 million) during the
second quarter of 2003 due to existing personnel and additional support at
both the headquarters and in the branches as the firm grows its sales force.
The firm's branch and home office support staff increased 2% from 13,029
full time equivalents as of June 28, 2002 to 13,238 full time equivalents as
of June 27, 2003.
SIX MONTHS ENDED JUNE 27, 2003 VERSUS SIX MONTHS ENDED JUNE 28, 2002
For the six months ended June 27, 2003, net revenue decreased 2%
($18.1 million), and net income decreased 14% ($13.1 million) to $78.7
million. The Partnership's profit margin (net income as a percentage of
total revenue) decreased to 6.7% for the first six months of 2003 from 7.8%
for the first six months of 2002. Net revenue and net income were impacted
by decreased customer activity, partially offset by a shift in product mix
to higher margin products.
Although net revenue and net income are down year over year,
operating results were significantly stronger in the second quarter of 2003,
with net income of $53.9 million, compared to the first quarter of 2003,
with net income of $24.7 million, a 118% increase. Net income for 2003 was
earned at a rate of 31% in the first quarter and 69% in the second quarter.
This compares to a more even spread last year, in which 45% of year to date
net income was earned in the first quarter and 55% was earned in the second
quarter. During the second quarter of 2003, the firm has seen a 17% increase
in customer activity with $14.3 billion invested compared to $12.2 billion
invested during the first quarter of 2003. Additionally, the average value
of customer assets, which underlies fee revenue, has increased 10% in the
second quarter of 2003 to $123.3 billion, compared to $112.1 billion in the
first quarter of 2003.
The following tables reconcile the components of net revenue
discussed here in the Results of Operations to the components reported in
the Consolidated Statements of Income.
13
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Six months ended June 27, 2003 (in thousands):
Trade Asset Account, Activity Net Interest & Net
Revenue Fees & Other Dividend Income Revenue
------------- ------------- ----------------- --------------- -------------
Commissions $ 574,338 $ 139,917 $ - $ - $ 714,255
Principal Transactions 160,392 - 30 - 160,422
Investment Banking 25,928 - - - 25,928
Interest and Dividends - - - 64,297 64,297
Other - 73,630 141,342 - 214,972
Interest Expense - - - (29,370) (29,370)
------------- ------------- ------------- ------------- -------------
Net Revenue $ 760,658 $ 213,547 $ 141,372 $ 34,927 $ 1,150,504
============= ============= ============= ============= =============
Six months ended June 28, 2002 (in thousands):
Trade Asset Account, Activity Net Interest & Net
Revenue Fees & Other Dividend Income Revenue
------------- ------------- ----------------- --------------- -------------
Commissions $ 558,330 $ 147,782 $ - $ - $ 706,112
Principal Transactions 209,549 - (232) - 209,317
Investment Banking 14,891 - - - 14,891
Interest and Dividends - - - 68,522 68,522
Other - 79,792 114,775 - 194,567
Interest Expense - - - (24,837) (24,837)
------------- ------------- ------------- ------------- -------------
Net Revenue $ 782,770 $ 227,574 $ 114,543 $ 43,685 $ 1,168,572
============= ============= ============= ============= =============
Trade revenue decreased 3% ($22.1 million) during the first six
months of 2003. Customer dollars invested were $26.5 billion during the
first six months of 2003, representing a 7% ($2.0 billion) decrease from the
comparable prior year period. The firm's gross margin earned on each $1,000
invested increased 4% from $26.70 to $27.90 during the first six months of
2003 due primarily to a shift in product mix. Customer purchases shifted
from equity and fixed income products to higher margin mutual fund products.
Although customer activity was down year over year, customer activity has
trended upwards throughout the course of 2003.
Commissions revenue, excluding asset based fees, increased 3%
($16.0 million) year to date due to increased margins earned on customer
dollars invested as a result of a shift in product mix. Mutual fund
commissions increased 10% ($44.2 million), offset by decreases in
commissions from insurance products of 13% ($15.4 million) and individual
equity products of 15% ($20.7 million). Approximately 37% of customer
dollars invested in 2003 were invested in mutual funds, compared to 30% for
the same period in 2002. Equity and insurance products together decreased
from 30% of the firms product mix in the first six months of 2002 to 26% in
the first six months of 2003.
Principal transactions revenue decreased 23% ($49.2 million) during
the first six months of 2003 due to a decrease in customer dollars invested
in fixed income products and to a lower margin earned on principal
transactions. Customers invested $9.1 billion in principal transactions
during the first six months of 2003 compared to $10.8 billion for the same
period in 2002. Revenue from municipal bonds decreased 24% ($22.9 million),
while revenue from government bonds decreased 60% ($21.9 million).
14
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
The firm's margin earned on each $1,000 invested decreased from $18.70 from
the six months ended June 2002 to $16.70 in the six months ended June 2003.
The product mix has shifted to lower margin shorter maturity fixed income
products in 2003.
Investment banking revenue increased 74% ($11.0 million) to $25.9
million. The Partnership benefitted from issuers taking advantage of the
relatively attractive interest rate environment. During the second quarter
interest rates hit a 40 year low point.
Net fee revenue (fee revenue less interest expense) increased 1%
($4.0 million) year to date. Included in other revenue in account, activity
and other revenue is approximately $7.0 million in revenue from a September
11, 2001 business interruption insurance claim. Excluding this non-recurring
revenue, net fee revenue decreased 1% ($3.0 million).
Asset fees, including service fees and revenue sharing from mutual
funds and insurance products decreased 6% ($14.0 million), due to the impact
of market conditions on the value of customer assets. Customer mutual fund
and insurance assets averaged $117.9 billion for the first six months of
2003 compared to $119.2 billion for the first six months of 2002.
Excluding the business interruption insurance claim, account,
activity and other fees increased 17% ($19.8 million). Revenues from credit
cards, mortgages and other financial services have increased due to growth
in the firm's number of customers and customer accounts. Revenue received
from mutual fund subtransfer agent services increased 19% (9.5 million) due
to growth in the number of accounts. The number of retirement accounts
increased, resulting in custodial fee revenue growth of 20% ($5.3 million)
during the first six months of 2003.
Net interest and dividend income decreased 20% ($8.8 million)
during the first six months of 2003 as the interest rates charged on
customers' margin loans continue to decrease, and the source of funds
borrowed has shifted. Subordinated debt interest expense increased $7.3
million due to the issuance of $250 million subordinated debt in June 2002.
Interest income from customer loans outstanding decreased 9% ($5.0 million).
The average rate earned on customer loan balances decreased to approximately
5.2% during the first six months of 2003 from approximately 5.7% during the
same period in 2002. Average customer margin loan balances were $1.92
billion in the first six months of 2003, compared to $1.94 billion in the
corresponding period, a decrease of 1%. Partially offsetting these decreases
to net interest income is a $1.8 million year to date decrease in bank loan
interest expense due to reduced borrowings and $1.5 million increase in year
to date interest income from investing excess
15
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
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 2002 up to the issuance of the subordinated debt in June 2002.
Operating expenses decreased 0.5% ($5.0 million) during the first
six months of 2003. Compensation and benefits decreased 2% ($15.4 million)
during the first six months. Sales compensation decreased 3% ($10.7 million)
year to date due to decreased revenue. Variable compensation, including
bonuses and profit sharing paid to IRs, branch office assistants and
headquarters associates, which expands and contracts in relation to
revenues, net income and the firm's profit margin, decreased 39% ($23.7
million). Payroll expense increased 11% ($22.6 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 354 IRs in
the year ended June 27, 2003, ending the quarter with 9,136 IRs, an increase
of 4%, although for the first six months of 2003, the number of IRs
decreased by 36 from 9,172 as of January 1, 2003. The firm's branch and home
office support staff increased 2% from 13,029 full time equivalents as of
June 28, 2002 to 13,238 full time equivalents as of June 27, 2003.
Occupancy and equipment expenses increased 9% ($9.7 million), due
primarily to growth in the number of branch offices as the firm expands its
sales force.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's equity capital at June 27, 2003, net of the
reserve for anticipated withdrawals, was $702.6 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
($8.1 million) and the retention of General Partner earnings ($16.7
million), offset by redemption of Limited Partner interests ($3.6 million).
At June 27, 2003, the Partnership had $135.1 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 June 27, 2003. The Association had loans
from The Federal Home Loan Bank of $16.7 million as of June 27, 2003, which
were 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 $12.3 million at
June 27, 2003, for which the Partnership received cash collateral.
16
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
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 subordinated debt, long-term secured debt and
operating leases under which the firm rents facilities, furniture, fixtures,
computers and communication equipment. During the second quarter of 2003,
the Partnership purchased two buildings for $60.4 million, one in Tempe,
Arizona, and one in St. Louis, Missouri. Both buildings were previously
occupied by the Partnership and leased under synthetic operating leases. The
purchases were funded from Partnership working capital. There were no
significant changes in the Partnership's financial commitments and
obligations for the six months ended June 27, 2003.
For the six months ended June 27, 2003, cash and cash equivalents
decreased $40.9 million. Cash provided by operating activities was $132.1
million. The primary sources of cash from operating activities include net
income, depreciation, decrease in inventory, and an increase in accrued
expenses during the six months. Securities owned, net, decreased $99.8
million from December 31, 2002.
Cash invested in overnight securities purchased under agreements to
resell increased $120.0 million. Cash used in investing activities was $96.2
million including capital expenditures of $60.4 million for two headquarter
buildings previously leased under synthetic operating leases. Cash used in
financing activities was $76.7 million consisting primarily of partnership
withdrawals and distributions ($67.7 million) net of cash proceeds from the
issuance 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 thousand or 2% of aggregate debit items arising from
customer transactions. The Net Capital rule 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 June 27, 2003, EDJ's Net Capital of $591.8 million was 30%
of aggregate debit items and its Net Capital in excess
17
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
of the minimum required was $552.2 million. Net Capital as a percentage of
aggregate debit items after anticipated withdrawals was 29%. 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.
18
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
THE EFFECTS OF INFLATION
The Partnership's net assets are primarily monetary, consisting of
cash, securities inventories and receivables less liabilities. Monetary net
assets are primarily liquid in nature and would not be significantly
affected by inflation. Inflation and future expectations of inflation
influence securities prices, as well as activity levels in the securities
markets. As a result, profitability and capital may be impacted by inflation
and inflationary expectations. Additionally, inflation's impact on the
Partnership's operating expenses may affect profitability to the extent that
additional costs are not recoverable through increased prices of services
offered by the Partnership.
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.
19
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 June 27, 2003, amounts receivable from customers were $2.019
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 $14 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 $24 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
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 six months ended June 27, 2003 that
would have a material adverse effect on the consolidated financial position
or results of operations of the Partnership.
20
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
31 Certification pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 302 of the Sarbanes-Oxley act
of 2002.
32 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
21
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: August 8, 2003 /s/ Steven Novik
-----------------------
Steven Novik
Chief Financial Officer
22