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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 26, 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
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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.................................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........................................21
Part II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................22
Item 4. Controls and Procedures.............................................................................22
Item 6. Exhibits and Reports on Form 8-K ...................................................................22
Signatures..........................................................................................23
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 26, December 31,
(Amounts in thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 163,292 $ 175,953
Securities purchased under agreements to resell 170,000 65,000
Receivable from:
Customers 2,066,999 1,909,376
Brokers, dealers and clearing organizations 143,985 99,848
Mortgages and loans 121,169 112,959
Securities owned, at market value:
Inventory securities 102,284 204,970
Investment securities 167,031 175,249
Equipment, property and improvements, at cost, net
of accumulated depreciation 337,313 298,129
Other assets 220,139 216,761
--------------- ----------------
Total Assets $ 3,492,212 $ 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
(Unaudited)
September 26, December 31,
(Amounts in thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Bank loans $ 21,348 $ 13,828
Payable to:
Customers 1,725,420 1,622,595
Brokers, dealers and clearing organizations 30,465 20,334
Depositors 106,977 109,724
Securities loaned 13,939 10,149
Securities sold, not yet purchased, at market value 16,940 15,536
Accounts payable and accrued expenses 140,278 120,846
Accrued compensation and employee benefits 242,474 157,050
Long-term debt 45,372 49,363
--------------- ----------------
2,343,213 2,119,425
--------------- ----------------
Liabilities subordinated to claims of general creditors 408,150 428,875
--------------- ----------------
Partnership capital net of reserve for anticipated withdrawals:
Limited partners 223,380 228,666
Subordinated limited partners 103,938 95,299
General partners 385,621 357,406
--------------- ----------------
712,939 681,371
Reserve for anticipated withdrawals 27,910 28,574
--------------- ----------------
Total partnership capital 740,849 709,945
Commitments and contingencies - -
--------------- ----------------
Total Liabilities $ 3,492,212 $ 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 Nine Months Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
(Amounts in thousands) 2003 2002 2003 2002
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Net revenue:
Commissions $ 401,173 $ 299,605 $ 1,115,428 $ 1,005,717
Principal transactions 103,829 102,755 264,251 312,072
Investment banking 9,318 16,612 35,246 31,503
Interest and dividends 33,104 35,192 97,401 103,714
Gain on investment - 3,625 - 3,625
Other 104,972 92,759 319,944 287,326
------------- -------------- ------------- --------------
Total revenue 652,396 550,548 1,832,270 1,743,957
Interest expense 14,380 15,743 43,750 40,580
------------- -------------- ------------- --------------
Net revenue 638,016 534,805 1,788,520 1,703,377
------------- -------------- ------------- --------------
Operating expenses:
Compensation and benefits 382,142 307,617 1,046,145 987,012
Communications and data processing 66,630 66,643 196,700 198,923
Occupancy and equipment 59,962 54,983 176,496 161,809
Payroll and other taxes 21,637 18,380 68,296 66,335
Floor brokerage and clearance fees 3,436 3,159 10,506 10,937
Advertising 10,476 11,142 31,412 32,958
Other operating expenses 39,961 41,524 126,533 122,322
------------- -------------- ------------- --------------
Total operating expenses 584,244 503,448 1,656,088 1,580,296
------------- -------------- ------------- --------------
Net income $ 53,772 $ 31,357 $ 132,432 $ 123,081
============= ============== ============= ==============
Net income allocated to:
Limited partners $ 6,402 $ 4,242 $ 15,860 $ 16,739
Subordinated limited partners 5,729 3,287 14,343 13,233
General partners 41,641 23,828 102,229 93,109
------------- -------------- ------------- --------------
$ 53,772 $ 31,357 $ 132,432 $ 123,081
============= ============== ============= ==============
Net income per weighted average $1,000
equivalent partnership unit outstanding:
Limited partners $ 28.58 $ 18.43 $ 70.40 $ 72.34
============= ============== ============= ==============
Subordinated limited partners $ 55.11 $ 34.60 $ 138.32 $ 139.29
============= ============== ============= ==============
Weighted average $1,000 equivalent
partnership unit outstanding:
Limited partners 224,003 230,168 225,284 231,393
============= ============== ============= ==============
Subordinated limited partners 103,956 95,000 103,694 95,003
============= ============== ============= ==============
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)
Nine Months Ended
Sept. 26, Sept. 27,
(Amounts in thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 132,432 $ 123,081
Adjustments to reconcile net income to net cash provided by/
(used in) operating activities:
Depreciation and amortization 66,036 66,010
Gain on investment - (3,625)
Changes in assets and liabilities:
Securities purchased under agreements to resell (105,000) (20,000)
Net receivable from customers (54,798) (215,494)
Net receivable from brokers, dealers
and clearing organizations (34,006) (18,354)
Receivable from mortgages and loans (8,210) (7,380)
Securities owned, net of securities sold, not yet purchased 112,308 8,798
Other assets (3,378) 15,449
Bank loans 7,520 23,251
Payables to depositors (2,747) 5,070
Securities loaned 3,790 (108,731)
Accounts payable and accrued expenses 19,432 20,452
Accrued compensation and employee benefits 85,424 (1,679)
----------- -----------
Net cash provided by/(used in) operating activities 218,803 (113,152)
----------- -----------
Cash Flows From Investing Activities:
Purchase of equipment, property and improvements, net (105,220) (70,296)
Proceeds from sale of investment - 3,625
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Net cash used in investing activities (105,220) (66,671)
----------- -----------
Cash Flows From Financing Activities:
Issuance of long-term debt - 13,100
Repayment of long-term debt (3,991) (4,410)
Issuance of subordinated debt - 250,000
Repayment of subordinated debt (20,725) (26,725)
Issuance of partnership interests 9,829 13,124
Redemption of partnership interests (6,477) (4,119)
Withdrawals and distributions from partnership capital (104,880) (110,295)
----------- -----------
Net cash (used in)/provided by financing activities (126,244) 130,675
----------- -----------
Net decrease in cash and cash equivalents (12,661) (49,148)
Cash and Cash Equivalents
Beginning of period 175,953 196,508
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End of period $ 163,292 $ 147,360
=========== ===========
Cash paid for interest $ 40,963 $ 37,046
=========== ===========
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
NINE MONTHS ENDED SEPTEMBER 26, 2003 AND SEPTEMBER 27, 2002
(Unaudited)
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Amounts in thousands) Capital Capital Capital Total
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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 (3,532) (587) - (4,119)
Net income 16,739 13,233 93,109 123,081
Withdrawals and distributions (984) (12,684) (60,855) (74,523)
------------ ------------- ------------- -------------
TOTAL PARTNERSHIP CAPITAL 245,451 95,541 355,515 696,507
Reserve for anticipated withdrawals (15,755) (549) (5,248) (21,552)
------------ ------------- ------------- -------------
Partnership capital net of reserve for
anticipated withdrawals,
September 27, 2002 $ 229,696 $ 94,992 $ 350,267 $ 674,955
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 - 9,829 - 9,829
Redemption of partnership interests (5,287) (1,190) - (6,477)
Net income 15,860 14,343 102,229 132,432
Withdrawals and distributions (1,089) (12,937) (62,280) (76,306)
------------ ------------- ------------- -------------
TOTAL PARTNERSHIP CAPITAL 238,150 105,344 397,355 740,849
Reserve for anticipated withdrawals (14,770) (1,406) (11,734) (27,910)
------------ ------------- ------------- -------------
Partnership capital net of reserve for
anticipated withdrawals,
September 26, 2003 $ 223,380 $ 103,938 $ 385,621 $ 712,939
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.
Under the terms of the Partnership agreement, a partner's capital
will be redeemed by the Partnership in the event of the partner's death,
resignation or termination. In the event of the partner's death, the
Partnership must redeem the partner's capital within six months of the
partner's death. Limited
8
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
partners withdrawing from the Partnership due to termination or resignation
are repaid their capital in three equal annual installments beginning the
month after their resignation or termination.
Subordinated limited partners are repaid their capital in four
equal annual installments beginning the month after their resignation or
termination. The capital of general partners resigning or terminated from
the Partnership is converted to subordinated limited partnership capital and
is subject to repayment in four equal annual installments.
The Partnership's managing partner has the discretion to waive
these withdrawal restrictions. All current and future partnership capital is
subordinate to all current and future liabilities of the Partnership
including the liabilities subordinated to the claims of general creditors.
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.
NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity," applicable
to the Partnership's financial statements effective for periods beginning
after December 15, 2003. Under the provisions of Statement 150, the
obligation to redeem a partner's capital in the event the partner dies is
one of the Statement's criteria requiring equity capital to be classified as
a liability. Since the Partnership is obligated to redeem a partner's
capital upon a partner's death, the Statement will require all of the
Partnership's equity capital to be classified as a liability. Historically,
withdrawing general partners' capital, whether from voluntary withdrawal or
due to a general partner's death or dismissal, has been purchased by other
individuals. The classification of all of the Partnership's equity capital
as a liability will not alter or modify its treatment as equity capital for
other purposes, including its subordination to the claims of general and
subordinated creditors.
The results of operations for the nine months ended September 26,
2003 and September 27, 2002 are not necessarily indicative of the results to
be expected for the full year.
9
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
MATERIAL TRANSACTIONS DURING THE NINE MONTHS ENDING SEPTEMBER 26, 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.
Also during the second quarter, 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 September 26, 2003, EDJ's Net Capital of $589.2 million was 29%
of aggregate debit items and its Net Capital in excess of the minimum
required was $548.8 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 September 26, 2003.
10
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
Net income of $132.4 million year to date in 2003 has increased by
7.6% from $123.1 million in 2002, while third quarter results of $53.8
million in 2003 have increased by 72% over $31.4 million earned in third
quarter 2002. The firm has experienced very different trends in 2003 and
2002. In 2002, customer activity and the related operating results started
out strong and weakened significantly in the second and third quarters. In
early 2003, customer activity and the related operating results were similar
to the third and fourth quarters of 2002 and have strengthened significantly
beginning in the second quarter.
QUARTER ENDED SEPTEMBER 26, 2003 VERSUS QUARTER ENDED SEPTEMBER 27, 2002
For the third quarter of 2003, net revenue increased 19% ($103.2
million) to $638.0 million, and net income increased 72% ($22.4 million) to
$53.8 million. The Partnership's net profit margin (net income as a
percentage of net revenue) increased to 8.4% for the third quarter of 2003
from 5.9% for the third quarter of 2002. Net revenue and net income were
positively impacted by both a shift in product mix to higher margin products
and an increase 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.
11
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
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 Sept. 26, 2003 Trade Asset Acct/Act. Net Interest & Gain on Net
(in thousands): Revenue Fees & Other Fees Dividend Income Investments Revenue
-------------- ------------- ------------- --------------- ------------- -------------
Commissions $ 319,679 $ 81,494 $ - $ - $ - $ 401,173
Principal Transactions 105,729 - (1,900) - - 103,829
Investment Banking 9,318 - - - - 9,318
Interest and Dividends - - - 33,104 - 33,104
Other - 40,556 64,416 - - 104,972
Interest Expense - - - (14,380) - (14,380)
-------------- ------------- ------------- --------------- ------------- -------------
Net Revenue $ 434,726 $ 122,050 $ 62,516 $ 18,724 $ - $ 638,016
============== ============= ============= =============== ============= =============
Quarter ended Sept. 27, 2002 Trade Asset Acct/Act. Net Interest & Gain on Net
(in thousands): Revenue Fees & Other Fees Dividend Income Investments Revenue
-------------- ------------- ------------- --------------- ------------- -------------
Commissions $ 235,406 $ 64,199 $ - $ - $ - $ 299,605
Principal Transactions 102,607 - 148 - - 102,755
Investment Banking 16,612 - - - - 16,612
Interest and Dividends - - - 35,192 - 35,192
Gain on Investment - - - - 3,625 3,625
Other - 38,936 53,823 - - 92,759
Interest Expense - - - (15,743) - (15,743)
-------------- ------------- ------------- --------------- ------------- -------------
Net Revenue $ 354,625 $ 103,135 $ 53,971 $ 19,449 $ 3,625 $ 534,805
============== ============= ============= =============== ============= =============
Trade revenue increased 23% ($80.1 million) due to a 36% ($84.3
million) increase in commission revenue, and a 3% ($3.1 million) increase in
principal transactions. These were partially offset by a 44% ($7.3 million)
decrease in investment banking revenues. Customer dollars invested
(customers' buy and sell transactions generating trade revenue) were $15.5
billion during the second quarter of 2003, representing an 18% ($2.4
billion) increase from the comparable prior year period. The firm's gross
margin earned on each $1,000 invested increased 3% from $26.30 to $27.10
during the third quarter due primarily to a shift in product mix from fixed
income products to higher margin mutual fund products.
Commissions revenue, excluding asset based fees, increased 36%
($84.3 million) due to an increase in customer dollars invested and an
increased margin earned on customer dollars invested. The increased margin
resulted from a shift in product mix from fixed income products, which
decreased from $5.2 billion or 39% of the customer dollars invested in 2002
to $4.8 billion or 31% in 2003, to mutual funds, which increased from $3.4
billion or 26% of the customer dollars invested in 2002 to $5.7 billion or
37% in 2003. Mutual fund commissions increased 57% ($76.0 million) due to a
68% increase in customer dollars invested in mutual funds, from $3.4 billion
invested in the third quarter of 2002 to $5.7 billion invested in the third
quarter of 2003. In addition, commissions from insurance products increased
12
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
12% ($4.5 million) due to a 13% increase in customer dollars invested, from
$0.8 billion during the third quarter of 2002 to $0.9 billion during the
third quarter of 2003.
Principal transactions revenue increased 3% ($3.1 million) during
the third quarter due to a slight increase in customer dollars invested in
fixed income products. Customers invested $5.5 billion for the third quarter
of 2003 compared to $5.4 billion for the same period in 2002.
Investment banking revenue decreased 44% ($7.3 million) from the
third quarter of 2002. Several of the underwritings completed in 2002 were
significantly larger than those completed in 2003.
Net fee revenue (fee revenue less interest expense) increased 13%
($23.1 million) during the third quarter.
Asset fees, including service fees and revenue sharing from mutual
fund and insurance companies increased 18% ($18.9 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. Average
mutual fund and insurance customer assets were $137.0 billion for the third
quarter of 2003 compared to $108.6 billion for the third quarter of 2002.
Account, activity and other fees increased 16% ($8.5 million)
during the third quarter 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% ($4.9 million) due to
growth in the number of accounts. Additionally, the number of retirement
accounts increased, resulting in custodial fee revenue growth of 21% ($2.2
million). Also included in account, activity and other fees is a $1.9
million loss on inventory that the firm holds for principal transactions.
Net interest and dividend income decreased 4% ($0.7 million) during
the third quarter due to reduced interest rates charged on customers' margin
loans. Interest income from customer loans outstanding decreased 8% ($2.2
million). The average rate earned on customer loan balances decreased to
approximately 5.0% during the third quarter from approximately 5.7% during
the third quarter in 2002. Average customer margin loan balances increased
slightly year over year, from $1.91 billion during the third quarter of 2002
to $2.02 billion during the third quarter of 2003. Partially offsetting this
decrease in interest income is $0.5 million in increased interest income
earned from investing excess funds in reverse repurchase agreements, $0.4
million in reduced subordinated debt interest expense due to regularly
scheduled principal payments throughout the year, and $0.2 million in
reduced interest expense paid to depositors at the Association.
Operating expenses increased 16% ($80.8 million) due to variable
expenses which increased in accordance with increased revenue as well as the
firm's continued emphasis on expanding its sales force. The Partnership
added 341 Investment Representatives ("IRs") in the twelve months ended
September 26, 2003,
13
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
ending the quarter with 9,304 IRs, an increase of 4%. The primary areas of
operating expense increase include compensation ($74.5 million) and
occupancy and equipment ($5.0 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 24% ($74.5 million) during the
third quarter. Sales compensation increased 24% ($40.5 million) due to
increased revenue. Variable compensation, including bonuses and profit
sharing paid to investment representatives, branch office assistants and
headquarters associates more than tripled ($25.4 million increase from $11.4
million in the third quarter of 2002) due to increased profitability.
Payroll expense for branch office associates increased 13% ($7.7 million)
due to increased costs for existing personnel and additional support as the
firm grows its sales force.
Recently a task force organized by the Securities and Exchange
Commission, National Association of Securities Dealers ("NASD"), the
Securities Industry Association, and the Investment Company Institute
examined the ability of broker-dealers to deliver breakpoint discounts in
the sale of front-end sales load mutual fund shares. The task force has
recommended significant changes in procedures for gathering information from
clients and sharing information with mutual funds to better enable
broker-dealers to meet their obligations to deliver breakpoint discounts. In
addition, NASD has issued a Notice to Members (August 2003, NtM 03-47) which
orders restitution where members are aware that customers did not receive
the breakpoint discounts to which they were entitled. The Partnership has
not yet determined the amount of restitution that it will ultimately be
required to make, although it has paid $18 thousand to date. In the opinion
of management we do not believe the total amount of restitution will have a
material adverse effect on the Partnership and its subsidiaries as a whole,
nonetheless the amounts involved could be substantial.
Regulators at the state and federal level, as well as the Congress,
are also investigating the manner in which mutual funds compensate
broker-dealers in connection with the sale of the mutual funds' shares by
the broker-dealer. It is likely in the future that broker-dealers will be
required to provide more disclosure to their clients with respect to such
payments and possible that such payments may be restricted. Any further
resultant action from the task force and regulatory studies concerning
mutual funds could negatively affect the Partnership. The Partnership
derived 41% of its revenue from Mutual Fund related revenue in the third
quarter and year to date September 26, 2003.
14
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
NINE MONTHS ENDED SEPTEMBER 26, 2003 VERSUS NINE MONTHS ENDED SEPTEMBER 27, 2002
For the nine months ended September 26, 2003, net revenue increased
5% ($85.1 million), and net income increased 8% ($9.4 million). The
Partnership's net profit margin increased to 7.4% for the first nine months
of 2003 from 7.2% for the first nine months of 2002. Net revenue and net
income were impacted by a slight increase in customer activity as well as a
shift in product mix to higher margin products.
Although net revenue and net income have increased year over year,
the underlying trends have been very different. The first quarter of 2002
was strong, and due to decreased customer activity, the second and third
quarters were progressively weaker. In 2002, net income for the first nine
months was earned 34% in the first quarter, 41% in the second quarter and
25% in the third quarter. During 2003, the year started out very similar to
late 2002, and has progressively improved. Net income for 2003 to date has
been earned 19% in the first quarter, 41% in the second quarter and 40% in
the third quarter.
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.
Nine months ended
Sept. 26, 2003 Trade Asset Acct/Act. Net Interest & Gain on Net
(in thousands): Revenue Fees & Other Fees Dividend Income Investments Revenue
-------------- ------------- ------------- --------------- ------------- -------------
Commissions $ 894,017 $ 221,411 $ - $ - $ - $ 1,115,428
Principal Transactions 266,121 - (1,870) - - 264,251
Investment Banking 35,246 - - - - 35,246
Interest and Dividends - - - 97,401 - 97,401
Other - 114,186 205,758 - - 319,944
Interest Expense - - - (43,750) - (43,750)
-------------- ------------- ------------- --------------- ------------- -------------
Net Revenue $ 1,195,384 $ 335,597 $ 203,888 $ 53,651 $ - $ 1,788,520
============== ============= ============= =============== ============= =============
Nine months ended
Sept. 27, 2002 Trade Asset Acct/Act. Net Interest & Gain on Net
(in thousands): Revenue Fees & Other Fees Dividend Income Investments Revenue
-------------- ------------- ------------- --------------- ------------- -------------
Commissions $ 793,735 $ 211,982 $ - $ - $ - $ 1,005,717
Principal Transactions 312,157 - (85) - - 312,072
Investment Banking 31,503 - - - - 31,503
Interest and Dividends - - - 103,714 - 103,714
Gain on Investment - - - - 3,625 3,625
Other - 118,727 168,599 - - 287,326
Interest Expense - - - (40,580) - (40,580)
-------------- ------------- ------------- --------------- ------------- -------------
Net Revenue $ 1,137,395 $ 330,709 $ 168,514 $ 63,134 $ 3,625 $ 1,703,377
============== ============= ============= =============== ============= =============
Trade revenue increased 5% ($58.0 million) during the first nine
months of 2003. Customer dollars invested were $42.0 billion during the
first nine months of 2003, representing a 1% ($0.4 billion) increase from
the comparable prior year period. The firm's gross margin earned on each
$1,000 invested increased 4% from $26.50 to $27.60 during the first nine
months of 2003 due primarily to a shift in
15
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
product mix. Customer purchases shifted from equity and fixed income
products to higher margin mutual fund products.
Commission revenue, excluding asset based fees, increased 13%
($100.3 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 27% ($125.7 million), offset by decreases in
commissions from individual equity products of 8% ($16.9 million) and
insurance products of 7% ($8.5 million). Approximately $15.5 billion or 37%
of customer dollars invested in 2003 were invested in mutual funds, compared
to $11.8 billion or 28% for the same period in 2002. Equity and insurance
products together decreased from $12.4 billion or 30% of the firms product
mix in the first nine months of 2002 to $11.1 billion or 27% in the first
nine months of 2003.
Principal transactions revenue decreased 15% ($46.0 million) during
the first nine 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 $14.6 billion in principal transactions
during the first nine months of 2003 compared to $16.3 billion for the same
period in 2002. As a result, revenue from government bonds decreased 39%
($19.1 million), and revenue from municipal bonds decreased 13% ($17.1
million). The firm's margin earned on each $1,000 invested decreased from
$18.60 from the nine months ended September 2002 to $18.00 in the nine
months ended September 2003. The product mix has shifted to lower margin
shorter maturity fixed income products in 2003.
Net fee revenue increased 5% ($27.2 million) year to date. Included
in other revenue in account, activity and other fees in 2003 is
approximately $7.0 million in revenue from a September 11, 2001 business
interruption insurance claim. Net fee revenue in 2002 includes a $3.6
million investment gain from a partial sale of the firm's London Stock
Exchange shares when the London Stock Exchange demutualized. Excluding these
two non-recurring revenue items, net fee revenue increased 4% ($23.8
million).
Asset fees, including service fees and revenue sharing from mutual
funds and insurance products increased 1% ($4.9 million), due to the impact
of market conditions on the value of customer assets. Customer mutual fund
and insurance assets averaged $124.3 billion for the first nine months of
2003 compared to $115.3 billion for the first nine months of 2002.
Excluding the business interruption insurance claim, account,
activity and other fees increased 17% ($28.4 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 16% ($14.0 million)
due to growth in the number of accounts. The number of retirement accounts
increased, resulting in custodial fee revenue growth of 20% (7.6 million)
during the first nine months of 2003.
16
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Net interest and dividend income decreased 15% ($9.5 million)
during the first nine months of 2003 as the interest rates charged on
customers' margin loans continued to decrease, and the source of funds
borrowed shifted. Interest income from customer loans outstanding decreased
9% ($7.2 million). The average rate earned on customer loan balances
decreased to approximately 5.1% during the first nine months of 2003 from
approximately 5.7% during the same period in 2002. Average customer margin
loan balances were $1.95 billion in the first nine months of 2003, compared
to $1.92 billion in the corresponding period of 2002, an increase of 1%.
Subordinated debt interest expense increased $6.9 million due to the
issuance of $250 million subordinated debt in June 2002. 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
$1.3 million increase in year to date 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 2002 up to the issuance of the subordinated debt in June 2002.
Operating expenses increased 5% ($75.8 million) during the first
nine months of 2003. Compensation and benefits increased 6% ($59.1 million).
Sales compensation increased 6% ($29.8 million) year to date due to
increased 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, increased 3% ($1.8 million). Payroll expense for
branch office associates increased 15% ($24.5 million) due to increased
costs for existing personnel and additional support as the firm grows its
sales force. The Partnership added 341 Investment Representatives ("IRs") in
the twelve months ended September 26, 2003, ending the quarter with 9,304
IRs, an increase of 4%.
Occupancy and equipment expenses increased 9% ($14.7 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 capital at September 26, 2003, net of the reserve
for anticipated withdrawals, was $712.9 million, compared to $681.4 million
at December 31, 2002. Capital has increased primarily due to the issuance,
net of redemptions, of Subordinated Limited Partner interests ($8.6 million)
and the retention of General Partner earnings ($28.2 million), offset by
redemption of Limited Partner interests ($5.3 million).
At September 26, 2003, the Partnership had $163.3 million in cash
and cash equivalents. Lines of credit are in place aggregating $1.16 billion
($1.11 billion of which is through uncommitted lines of credit). Actual
borrowing availability is based on securities owned and customers' margin
securities
17
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
which serve as collateral for the loans. No amounts were outstanding under
these lines at September 26, 2003. The Association had loans from the
Federal Home Loan Bank of $21.3 million as of September 26, 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 $13.9 million at September 26,
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 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 nine months ended September 26, 2003.
For the nine months ended September 26, 2003, cash and cash
equivalents decreased $12.7 million. Cash provided by operating activities
was $218.8 million. The primary sources of cash from operating activities
include net income adjusted for depreciation, a decrease in inventory, and
an increase in accrued expenses during the nine months. Securities owned,
net, decreased $112.3 million from December 31, 2002. Cash invested in
overnight securities purchased under agreements to resell increased $105.0
million.
Cash used in investing activities was $105.2 million, including
capital expenditures of $60.4 million for two headquarter buildings
previously leased under synthetic operating leases. Cash used in financing
activities was $126.2 million, consisting primarily of partnership
withdrawals and distributions ($104.9 million) and scheduled repayments of
subordinated debt ($20.7 million), offset by cash proceeds from the issuance
of subordinated limited partnership capital of $9.8 million.
On September 12, 2003, the Partnership filed a Form S-8 with the
Securities and Exchange Commission to register $150 million additional
Limited Partnership Interests. The Partnership intends to issue these
interests on December 31, 2003. The funds received will be used for general
purposes.
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
18
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
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 September
26, 2003, EDJ's Net Capital of $589.2 million was 29% of aggregate debit
items and its Net Capital in excess of the minimum required was $548.8
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.
19
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.
20
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 September 26, 2003, amounts receivable from customers were $2.067
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 $23 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 nine months ended September 26,
2003 that would have a material adverse effect on the consolidated financial
position or results of operations of the Partnership.
21
THE JONES FINANCIAL COMPANIES, L.L.L.P.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes in the legal proceedings previously
reported.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Partnership
conducted an evaluation, under the supervision and with the participation of
the chief executive officer and chief financial officer, of the
Partnership's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")). Based on this evaluation, the chief executive officer and
chief financial officer concluded that the Partnership's disclosure controls
and procedures were effective as of the end of the period covered by this
report. There was no change in the Partnership's internal controls over
financial reporting during the Partnership's most recently completed fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Partnership's internal controls over financial reporting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31(a) Certification of Chief Executive Officer pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 302 of
the Sarbanes-Oxley Act of 2002.
31(b) Certification of Chief Financial Officer 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
22
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 7, 2003 /s/ Steven Novik
-----------------------
Steven Novik
Chief Financial Officer
23