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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003 Commission file number 0-16633
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THE JONES FINANCIAL COMPANIES, L.L.L.P.
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(Exact name of registrant as specified in its Partnership Agreement)
MISSOURI 43-1450818
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12555 Manchester Road
Des Peres, Missouri 63131
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (314) 515-2000
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Securities registered pursuant to Section 12(b) of the act:
Name of each exchange
Title of each class on which registered
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NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). YES [ ] NO [X]
As of March 27, 2004 there were no voting securities held by non-affiliates
of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE None
1
PART I
ITEM 1. BUSINESS
The Jones Financial Companies, L.L.L.P. (the "Registrant" and also referred
to herein as the "Partnership") is organized under the Revised Uniform
Limited Partnership Act of the State of Missouri. The terms "Registrant" and
"Partnership" used throughout, refer to The Jones Financial Companies,
L.L.L.P. and any or all of its consolidated subsidiaries. The Partnership is
the successor to Whitaker & Co., which was established in 1871 and dissolved
on October 1, 1943, said date representing the organization date of Edward
D. Jones & Co., L.P. ("EDJ"), the Partnership's principal subsidiary. EDJ
was reorganized on August 28, 1987, which date represents the organization
date of The Jones Financial Companies, L.L.L.P.
The Partnership's principal operating subsidiary, EDJ, is a registered
broker-dealer primarily serving individual investors. EDJ derives its
revenues from the sale of listed and unlisted securities and insurance
products, investment banking, principal transactions and is a distributor of
mutual fund shares. EDJ conducts business throughout the United States of
America, Canada and the United Kingdom with its customers, various brokers
and dealers, clearing organizations, depositories and banks.
The Partnership is a member firm of the New York, Chicago and London
exchanges, a participating organization in the Toronto exchange, and is a
registered broker-dealer with the National Association of Securities
Dealers, Inc. ("NASD").
As of January 30, 2004, the Partnership was composed of 275 general
partners, 5,021 limited partners and 146 subordinated limited partners.
At December 31, 2003, the Partnership is organized as follows: The
Partnership owns 100% of the outstanding common stock of EDJ Holding
Company, Inc., a Missouri corporation and 100% of the outstanding common
stock of LHC, Inc. ("LHC"), a Missouri corporation. The Partnership also
holds all of the partnership equity of Edward D. Jones & Co., L.P., a
Missouri limited partnership and EDJ Leasing Co., L.P., a Missouri limited
partnership. EDJ Holding Company, Inc. and LHC, Inc. are the general
partners of Edward D. Jones & Co., L.P. and EDJ Leasing Co., L.P.,
respectively. In addition, the Partnership owns 100% of the outstanding
common stock of Conestoga Securities, Inc., a Missouri corporation and also
owns, as a limited partner, 49.5% of Passport Research Ltd., a Pennsylvania
limited partnership, which acts as an investment advisor to a money market
mutual fund. The Partnership owns 100% of the partnership equity of Edward
Jones, an Ontario, Canada limited partnership and all of the common stock of
Edward D. Jones & Co. Canada Holding Co., Inc., an Ontario, Canada
corporation, its general partner. Through its Canadian entities, the
Partnership owns all of the partnership equity of Edward Jones Insurance
Agency, an Ontario, Canada limited partnership, all of the common stock of
Edward D. Jones & Co. Agency Holding Co., Inc., an Ontario, Canada
corporation, its general partner, and 100% of the common stock of Edward
Jones Insurance Agency (Quebec) Inc., a Canada corporation. The Partnership
also owns 100% of the equity of Edward Jones Limited, a U.K. private limited
company, which owns 100% of the equity of Edward Jones Nominees Limited. The
Partnership owns 100% of the equity of Boone National Savings and Loan
Association, F.A., (the "Association"), a federally chartered stock savings
and loan association. The Partnership also owns 100% of the equity of EJ
Mortgage L.L.C., a Missouri limited liability company. EJ Mortgage L.L.C.
owns 50% of Edward Jones Mortgage, a joint venture. The Partnership holds
all of the partnership equity in a Missouri limited partnership, EDJ
Ventures, Ltd. Conestoga Securities, Inc., is the general partner of EDJ
Ventures, Ltd.
The Partnership is the sole member of Edward Jones Insurance Agency Holding,
L.L.C., a Missouri limited liability company; California Agency Holding,
L.L.C., a California limited liability company and Edward Jones Insurance
Agency of New Mexico, L.L.C., a New Mexico limited liability company. Edward
Jones Insurance Agency Holding, L.L.C. is the sole member of Edward Jones
Insurance Agency
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PART I
of Wyoming, L.L.C., a Wyoming limited liability company and Edward Jones
Insurance Agency of Michigan, L.L.C., a Michigan limited liability company.
The Partnership and Edward Jones Insurance Agency Holding, L.L.C. are
members of Edward Jones Insurance Agency of Massachusetts, L.L.C., a
Massachusetts limited liability company; and Edward Jones Insurance Agency
of Montana, L.L.C., a Montana limited liability company. Edward Jones
Insurance Agency Holding, L.L.C. and California Agency Holding, L.L.C. are
members of Edward Jones Insurance Agency of California, L.L.C., a California
limited liability company. All of the insurance agencies engage in general
insurance brokerage activities.
The Partnership holds all of the partnership equity of Unison Investment
Trusts, L.P., d/b/a Unison Investment Trusts, Ltd., a Missouri limited
partnership, which has sponsored unit investment trusts. The general partner
of Unison Investment Trusts, L.P., Unison Capital Corp., Inc., a Missouri
corporation, is wholly owned by LHC. EDJ owns 100% of the outstanding common
stock of Cornerstone Mortgage Investment Group II, Inc., a Delaware limited
purpose corporation which has structured and sold secured mortgage bonds.
EDJ also owns 50% of issued common stock of S-J Capital Corp., a Missouri
corporation. Conestoga owns 100% of the outstanding stock of CIP Management,
Inc., which is the managing general partner of CIP Management, L.P. CIP
Management, L.P. is the managing general partner of Community Investment
Partners II, L.P., Community Investment Partners III, L.P., L.L.L.P.,
Community Investment Partners IV, L.P., L.L.L.P., and Community Investment
Partners V, L.P., L.L.L.P., business development companies. EDJ owns 7% of
the Customer Account Protection Company Holdings, Inc. ("CAPCO"), a captive
insurance group.
During 2002, the Partnership's affiliates, Edward Jones Insurance Agency of
Nevada, Inc., Edward Jones Insurance Agency of Alabama, L.L.C., EJ Insurance
Agency of Ohio, and EDJ Insurance Agency of Texas, Inc., were dissolved. The
Partnership's affiliates, Edward Jones Nominees PEP Limited and Edward Jones
Nominees ISA Limited, both 100% owned by Edward Jones Limited, a U.K.
private limited company, were also dissolved in 2002. During 2003, the
Partnership's affiliate, Edward Jones Insurance Agency of Montana, L.L.C.,
was dissolved. None of these had conducted active businesses.
Within the past five years, the Registrant has added several new legal
entities. During 2000, Edward Jones Nominees Limited, Edward Jones Nominees
PEP Limited, and Edward Jones Nominee ISA Limited, all three of which are
U.K. private limited companies, were organized and subsequently dissolved in
2002. During 2002, Edward Jones Insurance Agency (Quebec) Inc., a Canada
corporation, was organized. During 2003, Community Investment Partners V,
L.P., L.L.L.P., a business development company, was organized.
3
PART I
REVENUES BY SOURCE. The following table sets forth, for the past three
years, the sources of the Partnership's revenues by dollar amounts (all
amounts in thousands):
2003 2002 2001
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Commissions
Listed $ 214,431 $ 214,247 $ 219,359
Mutual Funds 1,087,599 831,652 740,209
Over-the-Counter 49,804 50,429 77,618
Insurance 226,376 213,496 216,009
Other 612 753 667
Principal Transactions 350,662 403,329 370,327
Investment Banking 43,817 41,055 24,676
Interest and Dividends 132,114 137,579 181,032
Sub-Transfer Agent Revenue 137,729 119,307 95,022
Mutual Fund & Insurance Revenue 91,842 87,298 79,107
Money Market Revenue 72,708 75,707 73,594
IRA Custodial Service Fees 58,537 48,695 38,554
Other Revenue 72,631 48,349 38,213
Gain on Investments - 8,186 -
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Total Revenue $ 2,538,862 $ 2,280,082 $ 2,154,387
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Because of the interdependence of the activities and departments of the
Partnership's investment business and the arbitrary assumptions involved in
allocating overhead, it is impractical to identify and specify expenses
applicable to each aspect of the Partnership's operations. Furthermore, the
net income of firms principally engaged in the securities business,
including the Partnership's, is affected by interest savings as a result of
customer and other credit balances and interest earned on customer margin
accounts.
LISTED BROKERAGE TRANSACTIONS. A portion of the Partnership's revenue is
derived from customer transactions in which the Partnership acts as agent in
the purchase and sale of listed corporate securities. These securities
include common and preferred stocks and corporate debt securities traded on
and off the securities exchanges. Revenue from brokerage transactions is
highly influenced by the volume of business and securities prices.
Customer transactions in securities are effected on either a cash or a
margin basis. In a margin account, the Partnership lends the customer a
portion of the purchase price up to the limits imposed by the margin
regulations of the Federal Reserve Board ("Regulation T"), New York Stock
Exchange, Inc. ("NYSE") margin requirements, or the Partnership's internal
policies, which may be more stringent than the regulatory minimum
requirements. Such loans are secured by the securities held in customer
margin accounts. These loans provide a source of income to the Partnership
since it is able to lend to customers at rates which are higher than the
rates at which it is able to borrow on a secured basis. The Partnership is
permitted to use as collateral for the borrowings securities owned by margin
customers having an
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PART I
aggregate market value generally up to 140% of the debit balance in margin
accounts. The Partnership may also use funds provided by free credit
balances in customer accounts to finance customer margin account borrowings.
In permitting customers to purchase securities on margin, the Partnership
assumes the risk of a market decline which could reduce the value of its
collateral below a customer's indebtedness before the collateral is sold.
Under the NYSE rules, the Partnership requires, in the event of a decline in
the market value of the securities in a margin account, the customer to
deposit additional securities or cash so that, at all times, the loan to the
customer is no greater than 75% of the value of the securities in the
account (or to sell a sufficient amount of securities in order to maintain
this percentage). The Partnership, however, imposes a more stringent
maintenance requirement.
Variations in revenues from listed brokerage commissions between periods is
largely a function of market conditions.
MUTUAL FUNDS. The Partnership distributes mutual fund shares in continuous
offerings and new underwritings. As a dealer in mutual fund shares, the
Partnership receives a dealer's discount which generally ranges from 1% to 5
3/4% of the purchase price of the shares, depending on the terms of the
dealer agreement and the amount of the purchase. The Partnership earns
service fees which are generally based on 15 to 25 basis points of its
customer assets which are held by the mutual funds. The Partnership also
earns revenue sharing from certain mutual fund vendors. The particular
revenue sharing agreements involving the Partnership vary among fund
families, with the investment advisers or distributors of some families
providing a percentage of average assets held by the Partnership's
customers. Other fund families provide a payment to the Partnership of the
underlying fund management fees based on the underlying assets of the
Partnership's customers. In addition, the Partnership may receive profit
sharing participation or the revenue sharing agreement may pay the
Partnership a flat dollar amount. The underlying management fees vary by
fund within each fund family. In addition, certain revenue sharing
agreements may also include payments based on current year sales. These
arrangements vary and are based on either a percentage of the underwriter's
concession retained by the fund distribution company or a specified number
of basis points on the Partnership's current year fund sales. The
Partnership does not manage any mutual fund, although it is a limited
partner of Passport Research, Ltd., an advisor to a money market mutual
fund.
OVER-THE-COUNTER TRANSACTIONS. Partnership activities in unlisted
(over-the-counter) transactions are essentially similar to its activities as
a broker in listed securities. In connection with customer orders to buy or
sell securities, the Partnership charges a commission for both principal and
agency transactions.
INSURANCE. The Partnership has executed agency agreements with various
national insurance companies. EDJ is able to offer life insurance, long term
care insurance, fixed and variable annuities and other types of insurance to
its customers through substantially all of its investment representatives
who hold insurance sales licenses. As an agent for the insurance company,
the Partnership receives commission on the purchase price of the policy. The
Partnership also earns service fees which are generally based on its
customer assets held by the insurance companies. The Partnership also earns
revenue sharing from certain insurance vendors. The revenue sharing
agreements vary, with amounts generally based on assets held by the
Partnership's customers or based on current year sales.
PRINCIPAL TRANSACTIONS. The Partnership makes a market in over-the-counter
corporate securities, municipal obligations, U.S. Government obligations,
including general obligations and revenue bonds, unit investment trusts and
mortgage-backed securities. The Partnership's market-making activities are
conducted with other dealers in the "wholesale" market and "retail" market
wherein the Partnership acts as a dealer buying from and selling to its
customers. In making markets in principal and over-the-counter
5
PART I
securities, the Partnership exposes its capital to the risk of fluctuation
in the market value of its security positions. It is the Partnership's
policy not to trade for its own account.
As in the case of listed brokerage transactions, revenue from
over-the-counter and principal transactions is highly influenced by the
volume of business and securities prices, as well as by the increasing
number of investment representatives employed by the Partnership over the
periods indicated.
INVESTMENT BANKING. The Partnership's investment banking activities are
performed by its Syndicate and Underwriting Departments. The principal
service which the Partnership renders as an investment banker is the
underwriting and distribution of securities either in a primary distribution
on behalf of the issuer of such securities, or in a secondary distribution
on behalf of a holder of such securities. The distributions of corporate and
municipal securities are, in most cases, underwritten by a group or
syndicate of underwriters. Each underwriter has a participation in the
offering.
Unlike many larger firms against which the Partnership competes, the
Partnership does not presently engage in other investment banking activities
such as assisting in mergers and acquisitions, arranging private placement
of securities issues with institutions or providing consulting and financial
advisory services to corporations.
The Syndicate and Underwriting Departments are responsible for the largest
portion of the Partnership's investment banking business. In the case of an
underwritten offering managed by the Partnership, these departments may form
underwriting syndicates and work closely with the branch office network for
sales of the Partnership's own participation and with other members of the
syndicate in the pricing and negotiation of other terms. In offerings
managed by others in which the Partnership participates as a syndicate
member, these departments serve as active coordinators between the managing
underwriter and the Partnership's branch office network.
The underwriting activity of the Partnership involves substantial risks. An
underwriter may incur losses if it is unable to resell the securities it is
committed to purchase or if it is forced to liquidate all or part of its
commitment at less than the agreed upon purchase price. Furthermore, the
commitment of capital to an underwriting may adversely affect the
Partnership's capital position and, as such, its participation in an
underwriting may be limited by the requirement that it must at all times be
in compliance with the Securities and Exchange Commission's Uniform Net
Capital Rule.
The Securities Act of 1933 and other applicable laws and regulations impose
substantial potential liabilities on underwriters for material misstatements
or omissions in the prospectus used to describe the offered securities. In
addition, there exists a potential for possible conflict of interest between
an underwriter's desire to sell its securities and its obligation to its
customers not to recommend unsuitable securities. In recent years, there has
been an increasing incidence of litigation in these areas. These lawsuits
are frequently brought for the benefit of large classes of purchasers of
underwritten securities. Such lawsuits often name underwriters as defendants
and typically seek substantial amounts in damages.
INTEREST AND DIVIDENDS. Interest and dividend income is earned primarily on
margin account balances, inventory securities and investment securities.
Interest is also earned by the Association on its loan portfolio. The
Partnership is exposed to market risk for changes in interest rates.
MONEY MARKET FEES, IRA CUSTODIAL SERVICE FEES AND OTHER REVENUES. Other
revenue sources include money market fees, IRA custodial services fees,
sub-transfer agent accounting services, revenue sharing, gains from sales of
certain assets, and other product and service fees.
6
PART I
The Partnership charges a fee to certain mutual funds for sub-accounting
services. Additionally, under certain agreements, non-commission revenue is
received from companies whose mutual funds and insurance products the
Partnership distributes. The Partnership has a minority partnership interest
in the investment advisor to the Edward Jones Money Market Fund. The
Partnership does not have management responsibility for the advisor. Revenue
from this source has increased over the years due to growth in the fund,
both in dollars invested and number of accounts. EDJ is also the custodian
for its IRA accounts and charges customers an annual fee for its services.
The Partnership has registered an investment advisory program with the
Securities and Exchange Commission ("SEC") under the Investment Advisors Act
of 1940. This service is offered firmwide and involves income and estate tax
planning and analysis for clients. Revenues from this source are immaterial
and are included under "Other Revenue".
The Partnership offers trust services to its customers through the Edward
Jones Trust Company, a division of the Association. The Partnership offers a
co-branded credit card with a major credit card company and receives revenue
from this service. The Partnership offers mortgage loans to its customers
through a joint venture.
RESEARCH DEPARTMENT. The Partnership maintains a Research Department to
provide specific investment recommendations and market information for
retail customers. The Department supplements its own research with the
services of various independent research services.
CUSTOMER ACCOUNT ADMINISTRATION AND OPERATIONS. Operations associates are
responsible for activities relating to customer securities and the
processing of transactions with other broker-dealers, exchanges and clearing
organizations. These activities include receipt, identification, and
delivery of funds and securities, internal financial controls, accounting
and personnel functions, office services, storage of customer securities and
the handling of margin accounts. The Partnership processes substantially all
of its own transactions for its United States and United Kingdom entities.
In Canada, the Partnership has entered into an introducing/carrying
arrangement with National Bank of Canada. It is important that the
Partnership maintain current and accurate books and records from both a
profit viewpoint as well as for regulatory compliance. To expedite the
processing of orders, the Partnership's branch office system is linked to
the St. Louis headquarters office through an extensive communications
network. Orders for all securities are captured at the branch
electronically, routed to St. Louis and forwarded to the appropriate market
for execution. The Partnership's processing of paperwork following the
execution of a security transaction is automated, and operations are
generally on a current basis.
There is considerable fluctuation during any one year and from year to year
in the volume of transactions the Partnership processes. The Partnership
records transactions and posts its books on a daily basis. Operations
personnel monitor day-to-day operations to determine compliance with
applicable laws, rules and regulations. Failure to keep current and accurate
books and records can render the Partnership liable to disciplinary action
by governmental and self-regulatory organizations.
The Partnership has a computerized branch office communication system which
is principally utilized for entry of security orders, quotations, messages
between offices, research of various customer account information, and cash
and security receipts functions.
The Partnership clears and settles virtually all of its listed and over the
counter equities, municipal bond, corporate bond and mutual fund
transactions through the National Securities Clearing Corporation ("NSCC"),
New York, New York. NSCC effects clearing of securities on the New York,
American and Chicago Stock Exchanges.
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PART I
In conjunction with clearing and settling transactions with NSCC, the
Partnership holds customer securities on deposit with the Depository Trust
Company ("DTC") in lieu of maintaining physical custody of the certificates.
The Partnership also uses a major bank for custody and settlement of
treasury securities and Government National Mortgage Association ("GNMA"),
Federal National Mortgage Association ("FNMA"), and Federal Home Loan
Mortgage Corporation ("FHLMC") issues.
The Partnership's United Kingdom operation clears and settles virtually all
of its listed transactions through CREST. CREST effects clearing of
securities on the London Stock Exchange. In conjunction with clearing and
settling transactions with CREST, the Partnership's United Kingdom operation
holds customer securities on deposit with CREST in lieu of maintaining
physical custody of the certificates. The Partnership's United Kingdom
operation also uses DTC for custody of United States securities, a major
independent brokerage firm for custody of non-United Kingdom and non-United
States securities, and individual unit trust vendors for custody of unit
trust holdings.
In Canada, the Partnership has entered into an introducing/carrying
arrangement with National Bank of Canada. As the carrying broker, National
Bank of Canada ("NBF") handles the routing and settlement of customer
transactions. Transactions are settled through the Canadian Depository for
Securities ("CDS"), of which National Bank of Canada is a member. CDS
effects clearing of securities on the Toronto, Montreal and TSX Venture
stock exchanges. Customer securities on deposit are also held with CDS.
The Partnership is substantially dependent upon the operational capacity and
ability of NSCC/DTC/CREST/NBF. Any serious delays in the processing of
securities transactions encountered by NSCC/DTC/CREST/NBF may result in
delays of delivery of cash or securities to the Partnership's customers.
These services are performed for the Partnership under contracts which may
be changed or terminated at will by either party.
Automated Data Processing, Inc., ("ADP"), ADP Wilco (a subsidiary of ADP)
and National Bank of Canada provide automated data processing services for
customer account activity and related records for the United States, United
Kingdom and Canada, respectively.
The Partnership does not employ its own floor broker for transactions on
exchanges. The Partnership has arrangements with other brokers to execute
the Partnership's transactions in return for a commission based on the size
and type of trade. If, for any reason, any of the Partnership's clearing,
settling or executing agents were to fail, the Partnership and its customers
would be subject to possible loss. To the extent that the Partnership would
not be able to meet the obligations of the customers, such customers might
experience delays in obtaining the protections afforded them.
Customers are protected from firm insolvency by the Securities Investors
Protection Corporation ("SIPC") in the United States, Investors Compensation
Scheme ("ICS") in the United Kingdom and Canadian Investor Protection Fund
("CIPF") in Canada, and through excess insurance coverage maintained by the
Partnership in The United States and the United Kingdom. As of February 16,
2004, excess coverage in the United States is provided by CAPCO, of which
the Partnership is a 7% owner. SIPC provides protection for customer
accounts for up to $500,000, including up to $100,000 for cash claims. ICS
covers 100% of the first (pound)30,000 and 90% for the next (pound)20,000,
for a maximum protection of (pound)48,000 for all investment business. CIPF
limits coverage to $1,000,000 total, which can be any combination of
securities and cash. The coverage provided by SIPC, ICS and CIPF, and
protection in excess limits thereof, would be available to customers of the
Partnership in the event of insolvency.
The Partnership believes that its internal controls and safeguards
concerning the risks of securities thefts are adequate. Although the
possibility of securities thefts is a risk of the industry, the Partnership
has not
8
PART I
had, to date, a significant problem with such thefts. The Partnership
maintains fidelity bonding insurance which, in the opinion of management,
provides adequate coverage.
EMPLOYEES. Including its 275 general partners, the Partnership has
approximately 29,200 full and part-time employees. This includes 9,426
registered salespeople as of January 30, 2004. The Partnership's
salespersons are generally compensated on a commission basis and may, in
addition, be entitled to bonus compensation based on their respective branch
office profitability and the profitability of the Partnership. The
Partnership has no formal bonus plan for its non-registered employees. The
Partnership has, however, in the past paid bonuses to its non-registered
employees on an informal basis, but there can be no assurance that such
bonuses will be paid for any given period or will be within any specific
range of amounts.
Employees of the Partnership are bonded under a blanket policy as required
by NYSE rules. The annual aggregate amount of coverage is $50,000,000
subject to a $2,000,000 deductible provision, per occurrence.
The Partnership maintains a training program for prospective salespeople
which includes nine weeks of concentrated instruction and on-the-job
training in a branch office. During the first phase, the trainee spends 60
days studying Series 7 examination materials and taking the examination.
After passing the examination, trainees spend one week in a comprehensive
training program in St. Louis followed by three weeks at a designated
location to conduct market research and prepare for opening the office. The
trainee then spends three weeks of on-the-job training in a branch location
reviewing investments, office procedures and sales techniques. Next, the
trainee returns to his or her designated location for one week to continue
building a prospect base. One final week is then spent in a central location
to complete the initial training program. Two and four months later, the
investment representative attends additional training classes in St. Louis,
and subsequently, EDJ offers periodic continuing training to its experienced
sales force. EDJ's basic brokerage payout is similar to its competitors.
The Partnership considers its employee relations to be good and believes
that its compensation and employee benefits which include medical, life and
disability insurance plans and profit sharing and deferred compensation
retirement plans, are competitive with those offered by other firms
principally engaged in the securities business.
BRANCH OFFICE NETWORK. The Partnership operates 9,063 branch offices as of
January 30, 2004, primarily staffed by a single investment representative.
The Partnership operates 8,419 offices in the United States located in all
50 states, predominantly in communities with populations of under 50,000 and
metropolitan suburbs. The Partnership also operates in Canada (through 554
offices as of January 30, 2004) and the United Kingdom (through 90 offices
as of January 30, 2004).
COMPETITION. The Partnership is subject to intensive competition in all
phases of its business from other securities firms, many of which are
substantially larger than the Partnership in terms of capital, brokerage
volume and underwriting activities. In addition, the Partnership encounters
competition from other organizations such as banks, insurance companies, and
others offering financial services and advice. The Partnership also competes
with a number of firms offering discount brokerage services, usually with
lower levels of service to individual customers. In recent periods, many
regulatory requirements prohibiting non-securities firms from engaging in
certain aspects of brokerage firms' business have been eliminated and
further removal of such prohibitions is anticipated. With minor exceptions,
customers are free to transfer their business to competing organizations at
any time. There is intense competition among securities firms for
salespeople with good sales production records. In recent periods, the
Partnership has experienced increasing efforts by competing firms to hire
away its registered representatives, although the
9
PART I
Partnership believes that its rate of turnover of investment representatives
is not higher than that of other firms comparable to the Partnership.
REGULATION. The securities industry in the United States is subject to
extensive regulation under both federal and state laws. The SEC is the
federal agency responsible for the administration of the federal securities
laws. The Partnership's principal subsidiary is registered as a
broker-dealer and investment advisor with the SEC. Much of the regulation of
broker-dealers has been delegated to self-regulatory organizations,
principally the NASD, and national securities exchanges such as the NYSE,
which has been designated by the SEC as the Partnership's primary regulator.
These self-regulatory organizations adopt rules (which are subject to
approval by the SEC) that govern the industry and conduct periodic
examinations of the Partnership's operations. Securities firms are also
subject to regulation by state securities administrators in those states in
which they conduct business. EDJ or an affiliate is registered as a
broker-dealer in 50 states, Puerto Rico, Canada and the United Kingdom.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customer funds and securities,
capital structure of securities firms, record-keeping and the conduct of
directors, officers and employees. Additional legislation, changes in rules
promulgated by the SEC and self-regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules, may directly
affect the mode of operation and profitability of broker-dealers. The SEC,
self-regulatory organizations and state securities commissions may conduct
administrative proceedings which can result in censure, fine, suspension or
expulsion of a broker-dealer, its officers or employees. The principal
purpose of regulation and discipline of broker-dealers is the protection of
customers and the securities markets, rather than protection of the
creditors and stockholders of broker-dealers. In addition, EDJ conducts
business in Canada through a subsidiary partnership which is regulated by
the Investment Dealers Association of Canada and in the United Kingdom
through a subsidiary which is regulated by The Financial Services Authority.
As a federally chartered savings and loan, the Association is subject to
regulation by the Office of Thrift Supervision ("OTS").
UNIFORM NET CAPITAL RULE. As a broker-dealer and a member firm of the NYSE,
the Partnership is subject to the Uniform Net Capital Rule ("Rule")
promulgated by the SEC. The Rule is designed to measure the general
financial integrity and liquidity of a broker-dealer and the minimum Net
Capital deemed necessary to meet the broker-dealer's continuing commitments
to its customers. The Rule provides for two methods of computing Net Capital
and the Partnership has adopted what is generally referred to as the
alternative method. Minimum required Net Capital under the alternative
method is equal to 2% of the customer debit balances, as defined. The Rule
prohibits withdrawal of equity capital whether by payment of dividends,
repurchase of stock or other means, if Net Capital would thereafter be less
than 5% of customer debit balances. Additionally, certain withdrawals
require the consent of the SEC to the extent they exceed defined levels even
though such withdrawals would not cause Net Capital to be less than 5% of
aggregate debit items. In computing Net Capital, various adjustments are
made to exclude assets which are not readily convertible into cash and to
provide a conservative statement of other assets such as a company's
securities owned. Failure to maintain the required Net Capital may subject a
firm to suspension or expulsion by the NYSE, the SEC and other regulatory
bodies and may ultimately require its liquidation. The Partnership has, at
all times, been in compliance with the Uniform Net Capital Rule.
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 December 31, 2003.
10
PART I
ITEM 2. PROPERTIES
The Partnership conducts its United States headquarters operations from
three locations in St. Louis County, Missouri and one location in Tempe,
Arizona, comprising a total of 26 separate buildings. Twenty-two buildings
are owned by the Partnership and four buildings are leased through long-term
operating leases. In addition, the Partnership leases its Canadian home
office facility in Mississauga, Ontario through an operating lease and has
an operating lease for its United Kingdom home office located in London,
England. The Partnership also maintains facilities in 9,063 branch locations
(as of January 30, 2004) which are located in the United States, Canada and
the United Kingdom and are rented under predominantly cancelable leases. The
Partnership believes that its properties are both suitable and adequate to
meet the current and future growth projections of the organization.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Partnership has been named, from time
to time, as a defendant in various legal actions, including arbitrations,
class actions and other litigation. Certain of these legal actions include
claims for substantial compensatory and/or punitive damages or claims for
indeterminate amounts of damages. The Partnership is involved, from time to
time, in investigations and proceedings by governmental and self-regulatory
agencies, certain of which may result in adverse judgements, fines or
penalties. Recently, the number of investigations has increased with a focus
on mutual fund issues among many firms in the financial services industry,
including the Partnership.
MUTUAL FUND MATTERS. Beginning in 2003, mutual fund and annuity products
have come under increased scrutiny from various state and federal regulatory
authorities in connection with several industry wide issues including market
timing, late trading, the failure of broker-dealers to provide breakpoint
discounts to mutual fund purchasers and the manner in which mutual fund and
annuity companies compensate broker-dealers. In connection with various
investigations, the Partnership has received information requests and
subpoenas from various state government regulators, the SEC, the NYSE, the
NASD, and the U.S. Attorney for the Eastern District of Missouri, regarding
the Partnership's revenue sharing arrangements, mutual fund sales practices
and other mutual fund issues. The following summarizes the most significant
of such actions that currently are directed at the Partnership.
In January 2004, the staff of the SEC informed the Partnership that it is
considering recommending enforcement action in connection with the
Partnership's mutual fund sales practices. The staff advised the Partnership
that the proposed action against it would be based upon, among other things,
the adequacy of the Partnership's disclosures regarding revenue sharing
arrangements with specified investment companies and the Partnership's
alleged favored sale or distribution of shares of those investment companies
based upon considerations received.
Similarly, in January of 2004, the staff of the NASD informed the
Partnership that it is considering recommending enforcement action in
connection with the Partnership's mutual fund sales practices. The staff
advised the Partnership that the proposed action would be predicated upon,
among other things, (1) the disclosures regarding revenue sharing
arrangements with specified investment companies and entities affiliated
with certain variable annuity investments were violative of NASD rules; and
(2) the receipt of certain directed brokerage commissions by the Partnership
and its sponsorship of certain award promotions were violative of other
rules of the NASD.
11
PART I
On or about January 20, 2004, a class action captioned Enriquez, et. al. v.
Edward D. Jones & Co., L.P., et. al. was filed in the Circuit Court of St.
Louis, Missouri on behalf of all purchasers of recommended mutual funds at
any time. The complaint alleges that the Partnership's alleged failure to
adequately disclose revenue sharing arrangements constituted a breach of
common law fiduciary duty and constitutes unjust enrichment under state law.
On February 17, 2004, this case was removed to the U.S. District Court for
the Eastern District of Missouri.
On or about January 23, 2004, a securities class action captioned Spahn IRA,
et. al. v. Edward D. Jones & Co., L.P., et. al. was filed in the U.S.
District Court for the Eastern District of Missouri against the Partnership
and members of its Executive Committee on behalf of purchasers of
recommended mutual funds from January 25, 1999 to January 9, 2004. The
complaint alleges that the Partnership failed to adequately disclose revenue
sharing arrangements in connection with the sale of the subject mutual
funds. The complaint alleges violations of Sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 thereunder.
On or about January 26, 2004, a class action captioned Bressler, et. al. v.
Edward D. Jones & Co. was filed in the Superior Court for Los Angeles,
California against the Partnership on behalf of California purchasers of
recommended mutual funds over an indeterminate period of time. The complaint
alleges that the Partnership violated Section 17200 of the California
Business and Professions Code by receiving inadequately disclosed revenue
sharing payments from the subject mutual funds and that the Partnership
breached a fiduciary duty that it was allegedly obliged to disclose such
arrangements to holders of the mutual funds. On February 24, 2004, this case
was removed to the U.S. District Court for the Central District of
California.
On or about January 29, 2004, a securities class action captioned Howard,
et. al. v. Edward D. Jones & Co., L.P., et. al. was filed in the U.S.
District Court for the Eastern District of Missouri against the Partnership
and members of its Executive Committee on behalf of purchasers of
recommended mutual funds from January 29, 1999 to January 9, 2004. The
complaint alleges that the Partnership failed to adequately disclose revenue
sharing arrangements in connection with the sale of the subject mutual
funds. The complaint alleges violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule
10b-5 thereunder.
On or about February 3, 2004, a securities class action captioned Potter,
et. al. v. Edward D. Jones & Co., L.P., was filed in the Superior Court for
Los Angeles, California against the Partnership on behalf of purchasers of
recommended mutual funds over an indeterminate period of time. The complaint
alleges that the Partnership violated Section 17200 of the California
Business and Professions Code by receiving inadequately disclosed revenue
sharing payments from the subject mutual funds and that the Partnership
breached a fiduciary duty alleging it was obliged to disclose such
arrangements to holders of the mutual funds.
On or about February 10, 2004, a securities class action captioned Corbi,
et. al. v. Edward D. Jones & Co., L.P., et. al. was filed in the U.S.
District Court for the Southern District of New York against the Partnership
and members of its Executive Committee on behalf of purchasers of
recommended mutual funds from January 25, 1999 to January 9, 2004. The
complaint alleges that the Partnership failed to adequately disclose revenue
sharing arrangements in connection with the sale of the subject mutual
funds. The complaint alleges violations of Section 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 thereunder.
12
PART I
On or about February 13, 2004, a securities class action captioned Gadway,
et. al. v. Edward D. Jones & Co., L.P., et. al. was filed in the U.S.
District Court for the Southern District of New York against the Partnership
and members of its Executive Committee on behalf of purchasers of
recommended mutual funds from January 25, 1999 to January 9, 2004. The
complaint alleges that the Company failed to adequately disclose revenue
sharing arrangements in connection with the sale of the subject mutual
funds. The complaint alleges violations of Section 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 thereunder.
On or about March 2, 2004, a securities class action captioned Pasik, et.
al. v. Edward D. Jones & Co. was filed in the U.S. District Court for the
Eastern District of Missouri against the Partnership on behalf of purchasers
of recommended mutual funds from February 27, 1999 to January 9, 2004. The
complaint alleges that the Partnership failed to adequately disclose revenue
sharing arrangements in connection with the sale of the subject mutual funds
in violations of Section 10(b) and 20(a) of the Exchange Act and Rule 10b-5
thereunder, as well as Rule 2830 of the NASD.
On or about March 8, 2004, a securities class action captioned Gerding et.
al. v. Edward D. Jones & Co., L.P., et. al., was filed in the U.S. District
Court for the Eastern District of Missouri against the Partnership and
members of its Executive Committee on behalf of purchasers of recommended
mutual funds from January 25, 1999 to January 9, 2004. The complaint alleges
that the Partnership failed to adequately disclose revenue sharing
arrangements in connection with the sale of the subject mutual funds. The
complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act
and Rule 10b-5 thereunder.
In addition to the foregoing, other state and self-regulatory authorities
have initiated inquiries concerning aspects of the Partnership's mutual fund
transactions. To date, each of these inquiries are informal and the
Partnership is voluntarily cooperating with each inquiry.
In view of the inherent difficulty of predicting the outcome of such
matters, particularly in cases in which claimants seek substantial or
indeterminate damages or actions which are in very preliminary stages, the
Partnership cannot predict with certainty the eventual loss or range of loss
related to such matters. The Partnership believes, based on current
knowledge and after consultation with counsel, that the outcome of these
actions will not have a material adverse effect on the consolidated
financial condition of the Partnership, although the outcome could be
material to the Partnership's future operating results for a particular
period or periods.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Limited or
Subordinated Limited Partnership interests and their assignment is
prohibited.
ITEM 6. SELECTED FINANCIAL DATA
The following information sets forth, for the past five years, selected
financial data. (All dollars in thousands, except per unit information.)
Summary Consolidated Income Statement Data:
2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Total revenue $2,538,862 $2,280,082 $2,154,387 $2,227,842 $1,797,020
Net income $ 203,310 $ 148,915 $ 149,186 $ 229,823 $ 187,331
Net income per
weighted average
$1,000 equivalent
limited partnership
unit outstanding $ 108.08 $ 87.44 $ 96.89 $ 179.21 $ 173.81
Weighted average
$1,000 equivalent
limited partnership
units outstanding 224,389 230,970 236,696 175,436 150,670
Net income per
weighted average
$1,000 equivalent
subordinated limited
partnership unit
outstanding $ 208.90 $ 167.16 $ 181.70 $ 333.92 $ 325.21
Weighted average
$1,000 equivalent
subordinated limited
partnership units
outstanding 103,782 95,053 82,273 63,770 51,741
- ------------------------------------------------------------------------------------------------------------------
14
PART II
ITEM 6. SELECTED FINANCIAL DATA
Summary Consolidated Balance Sheet Data:
2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Total assets $3,723,159 $3,258,245 $3,158,408 $3,170,385 $2,693,241
============ ============ ============ ============ ============
Long-term debt $ 39,691 $ 49,363 $ 46,285 $ 29,618 $ 34,540
Other liabilities
exclusive of
subordinated
liabilities 2,490,032 2,070,062 2,231,807 2,252,961 1,908,117
Subordinated liabilities 408,150 428,875 205,600 232,325 259,050
Total partnership
capital 785,286 709,945 674,716 655,481 491,534
------------ ------------ ------------ ------------ ------------
Total liabilities and
partnership capital $3,723,159 $3,258,245 $3,158,408 $3,170,385 $2,693,241
============ ============ ============ ============ ============
15
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table summarizes the increase (decrease) in major categories
of revenues and expenses for the last two years (dollar amounts in
thousands).
2003 vs. 2002 2002 vs. 2001
------------------------------- -------------------------------
Amount Percentage Amount Percentage
- -----------------------------------------------------------------------------------------------------------------
Revenue:
Commissions $ 268,245 20 % $ 56,715 5 %
Principal transactions (52,667) (13) 33,002 9
Investment banking 2,762 7 16,379 66
Interest and dividends (5,465) (4) (43,453) (24)
Gain on investments (8,186) - 8,186 -
Other 54,091 14 54,866 17
----------- ----------
Total revenue 258,780 11 125,695 6
Interest expense 2,304 4 (11,463) (17)
----------- ----------
Net revenue 256,476 12 137,158 7
----------- ----------
Operating Expenses:
Compensation and benefits 169,116 13 85,059 7
Communications and data
processing 133 - 29,527 13
Occupancy and equipment 18,971 9 7,151 3
Payroll and other taxes 9,019 11 8,413 11
Floor brokerage and
clearance fees (35) - (383) (3)
Advertising (2,533) (6) 321 1
Other operating expenses 7,410 4 7,341 5
----------- ----------
Total operating expenses 202,081 10 137,429 7
----------- ----------
Net Income $ 54,395 37 % $ (271) - %
- -----------------------------------------------------------------------------------------------------------------
16
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 expenses, and other
revenues.
The following table reconciles the components of net revenue discussed here
in the Results of Operations to the components reported in the Consolidated
Statements of Income.
Account, Net Interest
2003: Trade Asset Activity & Dividend Gain on Net
Revenue Fees & Other Income Investments Revenue
------------- ----------- ----------- ------------ ------------ --------------
Commissions $ 1,269,605 $ 309,217 $ - $ - $ - $ 1,578,822
Principal Transactions 351,802 - (1,140) - - 350,662
Investment Banking 43,817 - - - - 43,817
Interest and Dividends - - - 132,114 - 132,114
Other - 155,248 278,199 - - 433,447
Interest Expense - - - (58,313) - (58,313)
------------- ----------- ----------- ------------ ------------ -------------
Net Revenue $ 1,665,224 $ 464,465 $ 277,059 $ 73,801 $ - $ 2,480,549
============= =========== =========== ============ ============ =============
Account, Net Interest
2002: Trade Asset Activity & Dividend Gain on Net
Revenue Fees & Other Income Investments Revenue
------------- ----------- ----------- ------------ ------------ --------------
Commissions $ 1,034,719 $ 275,858 $ - $ - $ - $ 1,310,577
Principal Transactions 402,182 - 1,147 - - 403,329
Investment Banking 41,055 - - - - 41,055
Interest and Dividends - - - 137,579 - 137,579
Gain on Investments - - - - 8,186 8,186
Other - 153,886 225,470 - - 379,356
Interest Expense - - - (56,009) - (56,009)
------------- ----------- ----------- ------------ ------------ -------------
Net Revenue $ 1,477,956 $ 429,744 $ 226,617 $ 81,570 $ 8,186 $ 2,224,073
============= =========== =========== ============ ============ =============
Account, Net Interest
2001: Trade Asset Activity & Dividend Gain on Net
Revenue Fees & Other Income Investments Revenue
------------- ----------- ----------- ------------ ------------ --------------
Commissions $ 975,625 $ 278,237 $ - $ - $ - $ 1,253,862
Principal Transactions 371,558 - (1,231) - - 370,327
Investment Banking 24,676 - - - - 24,676
Interest and Dividends - - - 181,032 - 181,032
Other - 138,641 185,849 - - 324,490
Interest Expense - - - (67,472) - (67,472)
------------- ----------- ----------- ------------ ------------ -------------
Net Revenue $ 1,371,859 $ 416,878 $ 184,618 $ 113,560 $ - $ 2,086,915
============= =========== =========== ============ ============ =============
17
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (2003 VERSUS 2002)
For 2003, net revenue increased 12% ($256.5 million) to $2.481 billion,
while net income increased $54.4 million and the profit margin increased to
8.0% from 6.5%. Year over year, the Partnership's net revenue and net income
increased due primarily to an increase in customer activity as well as
growth in customers' assets and accounts. Additionally, the underlying
trends between the years have been different. For 2002, customer activity
and customer asset values became progressively weaker throughout the year as
securities prices and interest rates declined. In 2003, customer activity
and customer asset values increased throughout the year due to a more
favorable securities market as the year progressed. Operating expenses
increased in 2003 due primarily to growth in sales compensation related to
the increase in net revenues and to additional costs as the Partnership
continued to expand its branch office network. The Partnership added 237
Investment Representatives ("IRs") during 2003, ending the year with 9,409
IRs, an increase of 3%.
Trade revenue comprised 67% of net revenue for 2003, up from 66% for 2002.
Conversely, net fee revenue comprised 33% of net revenue for 2003, down from
34% in 2002.
Trade revenue increased 13% ($187.3 million) during 2003 due primarily to an
increase in customer dollars invested (customers' buy and sell transactions
generating trade revenue), and to higher gross margins earned on customer
dollars invested compared to the prior year. Total customer dollars invested
were $58.7 billion during 2003, a 9% ($4.9 billion) increase from 2002. The
firm's margin earned on each $1,000 invested increased to $27.40 in 2003
from $26.60 in 2002 due primarily to a shift in product mix. Year over year,
customer dollars invested shifted to higher margin mutual fund products,
primarily from fixed income products.
Commissions revenue, excluding the asset fee component of commissions,
increased 23% ($234.9 million) during 2003. Commissions revenue increased
year over year due primarily to a 23% increase in customer dollars invested
in mutual funds, insurance and individual equities to $38.5 billion in 2003
from $31.2 billion in 2002. Underlying the increase in commissions revenues,
mutual fund commissions increased 37% ($226.9 million), while insurance
commissions increased 6% ($8.6 million).
Principal transactions revenue decreased 13% ($52.7 million) during 2003 due
to a decrease in customer dollars invested in fixed income products.
Customers invested $19.1 billion in principal transactions in 2003 compared
to $21.1 billion in 2002, a decrease of 9%. Revenue from municipal bonds
decreased 14% ($24.5 million), government bonds decreased 31% ($18.0
million), while collateralized mortgage obligations decreased 14% ($6.2
million).
Net fee revenue increased 9% ($69.2 million) during 2003. Net fee revenue in
2003 includes a business interruption insurance claim of $7.0 million
pertaining to September 11, 2001, which is included in other revenue. Net
fee revenue in 2002 includes an $8.2 million gain from the sale of the
Partnership's London Stock Exchange and Toronto Stock Exchange holdings.
Asset fees increased 8% ($34.7 million) due to the favorable impact of
market conditions increasing customers' mutual fund and insurance assets
generating asset fees. Average customer mutual fund and insurance assets
increased $16.3 billion to $130.9 billion in 2003 compared to $114.6 billion
in 2002.
Account, activity and other fees increased 19% ($43.5 million) year over
year, excluding the business interruption insurance claim in 2003. The major
elements of the increase were sub-transfer agent fees and retirement account
fees. Revenue received from sub-transfer agent services performed for mutual
fund companies increased 16% ($18.9 million) due to a 22% increase in the
number of customer accounts the Partnership provides mutual fund
sub-transfer agent services for. The number of retirement accounts increased
by 16%, resulting in custodial fee revenue growth of 18% ($8.9 million).
18
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net interest and dividend income decreased 10% ($7.8 million) during 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 6% ($6.7 million). The average rate earned on
customer loan balances decreased to approximately 5.07% during 2003 from
approximately 5.62% during 2002. Average customer margin loan balances were
$1.985 billion in 2003, compared to $1.911 billion in 2002, an increase of
4%. Subordinated debt interest expense increased 26% ($6.4 million) due to
the issuance of $250 million of subordinated debt in June 2002. Partially
offsetting these decreases to net interest income is a $1.8 million decrease
in bank loan interest expense due to reduced bank borrowings and a $1.6
million increase in interest income from investing excess funds in reverse
repurchase agreements. The firm has been in a net investing position for
substantially all of 2003 compared with a net borrowing position in 2002
prior to the issuance of the subordinated debt in June 2002.
Operating expenses increased 10% ($202.1 million) during 2003. Compensation
and benefits costs increased 13% ($169.1 million). Within compensation and
benefits costs, sales compensation increased 11% ($86.6 million) 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 53% ($40.5 million). Payroll expense
increased 10% ($43.1 million) due to increased costs for existing personnel
and additional support in the branches as the firm grows its sales force. On
a full time equivalent basis, the Partnership had 3,887 headquarters
associates and 9,567 branch staff associates as of December 31, 2003,
compared to 3,938 headquarters associates and 9,177 branch staff associates
as of December 31, 2002.
Occupancy and equipment expenses increased 9% ($19.0 million) due primarily
to growth in the number of branch offices as the firm expands its sales
force.
MUTUAL FUND MATTERS
Recently, mutual fund and variable annuity products have come under
increased scrutiny from various state and federal regulatory authorities in
connection with several industry wide issues including market timing, late
trading, the failure of broker-dealers to provide breakpoint discounts to
mutual fund purchasers and the manner in which mutual fund and annuity
companies compensate broker-dealers.
During 2003, a task force organized by the Securities and Exchange
Commission (SEC), The National Association of Securities Dealers, Inc.
(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 commonly
known as A shares. The task force 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 to clients purchasing A shares.
The NASD issued a notice to its members in August 2003 requiring restitution
where member firms were aware that customers did not receive the breakpoint
discounts to which they were entitled. As of December 31, 2003, the
Partnership paid $18,000 in restitution to mutual fund purchasers. After
issuing the August notice, the NASD further directed almost 450 securities
firms, including the Partnership, to notify its customers who purchased
Class A mutual funds since January 1, 1999, that they may be due refunds as
a result of the firms' failure to provide breakpoint discounts. Subsequent
to December 31, 2003, the Partnership notified its customers that they may
not have received breakpoint discounts to which they may have been entitled.
Through February 27, 2004, the Partnership has made $0.5 million in
additional restitution payments. While the Partnership cannot determine with
certainty the ultimate liability that may result from its failure to deliver
breakpoint discounts, the Partnership does not anticipate that any
additional restitution payments will be significant, nor are they expected
to exceed reserves established by the Partnership for potential refunds.
19
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In response to various inquires during 2003 by both the SEC and NASD, the
Partnership furnished information about revenue sharing arrangements it has
in place with selected mutual fund and insurance companies. These revenue
sharing arrangements provide the Partnership with additional compensation
related to the initial sale or the ongoing maintenance of customers' assets
in these companies' investment products. Under these revenue sharing
arrangements, the Partnership received aggregate payments of $89.9 million
in 2003 and $85.9 million in 2002.
In January 2004, the staff of the SEC informed the Partnership that it is
considering recommending enforcement action in connection with the
Partnership's mutual fund sales practices. The staff advised the Partnership
that the proposed action against it would be based upon, among other things,
the adequacy of the Partnership's disclosures regarding revenue sharing
arrangements with specified investment companies and the Partnership's
alleged favored sale or distribution of shares of those investment companies
based upon considerations received.
Similarly, in January of 2004, the staff of the NASD informed the
Partnership that it is considering recommending enforcement action in
connection with the Partnership's mutual fund sales practices. The staff
advised the Partnership that the proposed action would be predicated upon,
among other things, (1) the disclosures regarding revenue sharing
arrangements with specified investment companies and entities affiliated
with certain variable annuity investments were violative of NASD rules; and
(2) the receipt of certain directed brokerage commissions by the Partnership
and its sponsorship of certain award promotions were violative of other
rules of the NASD.
In addition to the foregoing, the Partnership has received information
requests and subpoenas from various regulatory authorities including the
U.S. Attorney for the Eastern District of Missouri regarding the
Partnership's revenue sharing arrangements, mutual fund sales practices and
other mutual fund issues. The Partnership is voluntarily cooperating with
each inquiry. Also, the Partnership has been named as a defendant in various
class actions on behalf of purchasers of recommended mutual funds. See Item
3 - Legal Proceedings.
In addition to the regulatory actions directed at the firm, there are
various regulatory and legislative proposals being considered that could
significantly impact the compensation that broker-dealers derive from mutual
funds and annuity products. It is likely in the future that broker-dealers
will be required to provide more disclosure to their clients with respect to
payments received by them from the sales of these products. It is also
possible that such payments may be restricted by law or regulation. The
Partnership derived 57% of its total revenue from sales and services related
to mutual fund and annuity products in 2003 and 52% in 2002. Any reduction
in the revenues from these products could have a material adverse impact on
the Partnership.
RESULTS OF OPERATIONS (2002 VERSUS 2001)
For 2002, net revenue increased 7% ($137.2 million) to $2.224 billion, while
net income decreased $0.3 million and the profit margin decreased to 6.5%
from 6.9%. Year over year, the Partnership's net revenue increased due
primarily to growth in trade revenue. Net fee revenue increased over prior
year, but has been negatively impacted by lower customer asset values and
lower interest rates. Net income decreased as the growth in net revenue was
exceeded by the increase in operating expenses. Operating expenses have
increased as the Partnership continues to expand its branch office network.
The Partnership added 656 Investment Representatives ("IRs") during 2002,
ending the year with 9,172 IRs, an increase of 8%.
Trade revenue comprised 66% of net revenue for 2002 and 2001. Conversely net
fee revenue comprised 34% for 2002 and 2001.
20
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Trade revenue increased 8% ($106.1 million) during 2002 due primarily to an
increase in customer dollars invested (customers' buy and sell transactions
generating trade revenue), and to a higher gross margin earned on customer
dollars invested compared to the prior year. Total customer dollars invested
were $53.8 billion during 2002, representing a 6% ($3.0 billion) increase
from 2001. The firm's margin earned on each $1,000 invested increased to
$26.60 in 2002 from $26.30 in 2001 due primarily to a shift in product mix.
Year over year, customer purchases shifted to higher margin fixed income and
mutual fund products, from individual equities.
Commissions revenue, excluding the service fee component, increased 6%
($59.1 million) during 2002. Commissions revenue increased year over year
due primarily to an 18% increase in customer dollars invested in mutual
funds. Year to date, mutual fund commissions increased 18% ($93.6 million),
while insurance commissions decreased 2% ($2.5 million) and individual
equity agency commissions decreased 11% ($32.3 million).
Principal transactions revenue increased 9% ($33.0 million) during 2002 due
to a 14% increase in customer dollars invested in bonds. Customers invested
$22.6 billion in fixed income products in 2002 compared to $19.7 billion in
2001. Revenue from government bonds increased 75% ($25.0 million), municipal
bonds increased 12% ($17.9 million), while corporate bonds decreased 14%
($14.8 million).
Net fee revenue increased 4% ($31.1 million) during 2002. Excluding an $8.2
million investment gain from the sale of the Partnership's London Stock
Exchange and Toronto Stock Exchange holdings, net fee revenue increased 3%
($22.9 million). Asset fees increased 3% ($12.9 million). Within asset fees,
service fees decreased 1% ($2.4 million) due to the impact of market
conditions on the value of customer assets. Average customer mutual fund and
insurance assets were $114.6 billion in 2002 compared to $115.0 billion
2001. Fees from revenue sharing agreements with mutual funds and insurance
companies increased 20% ($12.6 million).
Account, activity and other fees increased 23% ($42.0 million) during 2002.
Revenue received from money market and sub-transfer agent services increased
26% ($25.2 million). The number of retirement accounts increased, resulting
in custodial fee revenue growth of 26% ($10.1 million).
Net interest and dividend income decreased 28% ($32.0 million) during 2002
due primarily to the impact of lower interest rates charged on customers'
margin loans, and to a shift in source of funds borrowed. Interest income
from customer loans outstanding decreased 27% ($39.8 million). The average
rate earned on customer loan balances decreased to approximately 5.62% in
2002 from approximately 7.70% in 2001. Average customer margin loan balances
increased 2% to $1.911 billion in 2002. Interest expense from bank loans
decreased 82% ($10.6 million), due to lower bank loans outstanding and lower
interest rates. Average bank loans decreased 65% to $102.7 million in 2002.
Partially offsetting the decrease in bank loan interest was a $7.8 million
increase in subordinated debt interest due to issuance of $250 million
subordinated debt in June 2002.
Operating expenses increased 7% ($137.4 million) during 2002. Compensation
and benefits costs increased 7% ($85.1 million). Within compensation and
benefits costs, sales compensation increased 6% ($43.9 million) due to
increased revenue, and payroll expense increased 15% ($54.7 million) due to
existing personnel and additional support at both the headquarters and in
the branches as the firm grows its sales force. On a full time equivalent
basis, the Partnership had 3,938 headquarters associates and 9,177 branch
staff associates as of December 31, 2002, compared to 3,748 headquarters
associates and 8,321 branch staff associates as of December 31, 2001.
Variable compensation, including bonuses and profit sharing paid to IRs,
branch office assistants and headquarters associates, which expands and
21
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
contracts in relation to revenues, net income and the firm's profit margin,
decreased 14% ($12.2 million) due to the decrease in the Partnership's net
income and profit margin.
Communications and data processing expenses increased 13% ($29.5 million) in
2002. Occupancy and equipment expenses increased 3% ($7.2 million).
Underlying the increased expenses is the opening in November 2001 of the
Partnership's Southwest campus in Tempe, Arizona, which contains a second
data center. Additionally, the Partnership added facilities in Tempe for
branch training and in St. Louis for headquarters support. Payroll and other
taxes increased 11% ($8.4 million) due to growth in the sales force,
headquarters associates and branch staff.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's equity capital at December 31, 2003, excluding the reserve
for anticipated withdrawals, was $727.3 million, compared to $681.4 million
at December 31, 2002. Equity capital has increased primarily due to the
retention of General Partner earnings ($43.4 million) and the issuance, net
of redemptions, of Subordinated Limited Partner interests ($8.6 million),
offset by redemption of Limited Partner interests ($6.2 million).
At December 31, 2003, the Partnership had $188.0 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
which serve as collateral for the loans. No amounts were outstanding under
these lines at December 31, 2003. The Association had loans from The Federal
Home Loan Bank of $23.7 million as of December 31, 2003, which are secured
by mortgage loans. The Partnership also participates in securities loaned
transactions, under which it receives collateral in the form of cash or
other collateral in an amount in excess of the market value of securities
loaned. Securities loaned outstanding were $10.0 million at December 31,
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 June 2002, the Partnership
privately placed $250 million of subordinated debt with institutional
investors. The debt bears interest at 7.33% and has an average maturity of
ten years, with annual payments of $50 million per year commencing in year
eight. The proceeds of the placement were used for general partnership
purposes.
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.
The following table summarizes the Partnership's financing commitments and
obligations, as of December 31, 2003, excluding customer accounts due on
demand. Subsequent to December 31, 2003, these commitments and obligations
could fluctuate based on the changing business environment.
22
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Payments Due by Period
----------------------
Total 2004 2005 2006 2007 2008 Thereafter
-----------------------------------------------------------------------------------
Bank Loans $ 23,656 $ 5,800 $ 2,435 $ 2,975 $ 660 $ 1,000 $ 10,786
Securities loaned 9,953 9,953 - - - - -
Long-term debt 39,691 7,857 8,080 9,321 3,582 1,759 9,092
Liabilities subordinated to -
claims of general creditors 408,150 20,725 43,225 45,700 23,200 14,200 261,100
Rental commitments 381,896 118,020 58,644 40,963 27,693 17,652 118,924
- ---------------------------------------------------------------------------------------------------------------------
Total financing commitments
and obligations $ 863,346 $ 162,355 $ 112,384 $ 98,959 $ 55,135 $ 34,611 $ 399,902
===================================================================================
For the year ended December 31, 2003, cash and cash equivalents increased
$12.0 million. Cash provided by operating activities was $291.7 million. The
primary sources of cash from operating activities include net income
adjusted for depreciation, a decrease in inventory levels, an increase in
accrued compensation and employee benefits, and an increase in customer
credit balances. Cash used in investing activities was $121.3 million
consisting primarily of capital expenditures attributable to the
Partnership's expansion of its headquarters and branch facilities required
as the Partnership grows its sales force, including $60.4 million paid for
two headquarter buildings previously leased under synthetic operating
leases. Cash used in financing activities was $158.4 million, consisting
primarily of partnership withdrawals ($130.4 million) and repayment of
subordinated debt ($20.7 million).
For the year ended December 31, 2002, cash and cash equivalents decreased
$20.6 million. Cash used in operating activities was $52.1 million. Cash
used for operating activities includes lower securities loaned and higher
inventory as of December 31, 2002. Securities loaned decreased $122.1
million due to a shift in borrowing to subordinated debt. Securities owned,
net, increased $100.3 million year over year. The primary source of cash
from operating activities is net income of $148.9 million. Cash used in
investing activities was $81.1 million consisting primarily of capital
expenditures ($89.4 million) attributable to the Partnership's expansion of
its headquarters and branch facilities required as the Partnership grows its
sales force. Cash provided by financing activities was $112.7 million,
consisting primarily of the issuance of subordinated debt ($250.0 million)
partially offset by Partnership withdrawals ($122.0 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
NYSE. Under the alternative method permitted by the rules, EDJ must maintain
minimum Net Capital, as defined, equal to the greater of $250 or 2% of
aggregate debit items arising from customer transactions. The Net Capital
rule also provides that partnership capital may not be withdrawn if
resulting Net Capital would be less than 5% of aggregate debit items.
Additionally, certain withdrawals require the consent of the SEC to the
extent they exceed defined levels even though such withdrawals would not
cause Net Capital to be less than 5% of aggregate debit items. At December
31, 2003, EDJ's Net Capital of $579.0 million was 27.8% of aggregate debit
items and its Net Capital in excess of the minimum required was $537.3
million. Net Capital as a percentage of aggregate debits after anticipated
withdrawals was 27.3%. 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
23
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 may involve a higher degree of judgement and
complexity.
Customers' 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.
The following significant accounting policies require estimates that involve
a higher degree of judgement and complexity.
The Partnership provides for potential losses that may arise out of
litigation, regulatory proceedings and other contingencies to the extent
that such losses can be estimated, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies." See
Item 3 - Legal Proceedings, Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Mutual Fund Matters and Note
16 to the consolidated financial statements for further discussion of these
items. The Partnership regularly monitors its exposures for potential
losses. The Partnership's total liability with respect to litigation
represents the best estimate of probable losses after considering, among
other factors, the progress of each case, the Partnership's experience and
the opinions and views of legal counsel.
The Association's periodic evaluation of the adequacy of its allowance for
loan losses is based on past loan loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower's ability
to repay, the estimated value of any underlying collateral and current
economic conditions.
The Partnership's periodic evaluation of the estimated useful lives of
equipment, property and improvements is based on the original life
determined at the time of purchase and any events or changes in
circumstances that would result in a change in the useful life.
Included in management's discussion and analysis of financial condition and
results of operations, and in the quantitative and qualitative disclosures
about market risk, and in the notes to the financial statements (See Note 1
to the consolidated financial statements), are additional discussions of the
Partnership's accounting policies.
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
24
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
significantly affected by inflation. Inflation and future expectations of
inflation influence securities prices, as well as activity levels in the
securities markets. As a result, profitability and capital may be impacted
by inflation and inflationary expectations. Additionally, inflation's impact
on the Partnership's operating expenses may affect profitability to the
extent that additional costs are not recoverable through increased prices of
services offered by the Partnership.
NEW ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity." SFAS No. 150 establishes standards for
classifying and measuring certain financial instruments with characteristics
of both liabilities and equity. The provisions of SFAS No. 150 are
applicable to the Partnership's financial statements effective for the
quarter ended March 26, 2004. Under the provisions of SFAS No. 150, the
obligation to redeem a partner's capital in the event a 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. The classification of all of
the Partnership's equity capital as a liability will not alter or modify its
treatment as equity capital for any other purposes, including its
subordination to the claims of general and subordinated creditors, nor will
SFAS No. 150 have any effect on, or change the presentation of, the
Partnership's subsidiaries' financial statements. The Partnership intends to
adopt SFAS No. 150 as required in fiscal 2004 with no expected significant
impact on its consolidated financial condition, results of operations, or
cash flows.
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 Annual Report on Form 10-K. The Partnership does not undertake any
obligation to publicly update any forward-looking statements.
25
PART II
ITEM 7a. 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
December 31, 2003, amounts receivable from customers were $2.135 billion.
Liabilities include amounts payable to customers and other interest and
non-interest bearing liabilities.
The Partnership performed an analysis of its financial instruments and
assessed the related interest rate risk and materiality in accordance with
the rules. 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 $15.4
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 $24.0 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.
Based on its analysis, in the opinion of management, the risk associated
with the Partnership's financial instruments at December 31, 2003 will not
have a material adverse effect on the consolidated financial position or
results of operations of the Partnership.
26
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements Included in this Item
Page No.
Report of Independent Auditors .................................. 28
Consolidated Statements of Financial Condition as of
December 31, 2003 and 2002 ...................................... 29
Consolidated Statements of Income for the years ended
December 31, 2003, 2002 and 2001 ................................ 31
Consolidated Statements of Changes in Partnership Capital
for the years ended December 31, 2003, 2002 and 2001............. 32
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001................................. 33
Notes to Consolidated Financial Statements....................... 34
27
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To The Jones Financial Companies, L.L.L.P.
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of income, of changes in
partnership capital, and of cash flows present fairly, in all material
respects, the consolidated financial position of The Jones Financial
Companies, L.L.L.P. and subsidiaries (the "Partnership") at December 31,
2003 and 2002, and the results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally
accepted in the United States of America. These consolidated financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United
States of America which require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion. The consolidated financial
statements of the Partnership for the year ended December 31, 2001 were
audited by other independent accountants who have ceased operations. Those
independent accountants expressed an unqualified opinion on those statements
in their report dated February 22, 2002.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 19, 2004
28
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
December 31, December 31,
(Dollars in thousands) 2003 2002
- ----------------------------------------------------------------------------------
Cash and cash equivalents $ 187,980 $ 175,953
Securities purchased under agreements to resell 290,000 65,000
Receivable from:
Customers 2,134,655 1,909,376
Brokers, dealers and clearing organizations 155,083 99,848
Mortgages and loans 126,060 112,959
Securities owned, at market value
Inventory securities 115,775 204,970
Investment securities 145,238 175,249
Equipment, property and improvements, at cost,
net of accumulated depreciation 330,626 298,129
Other assets 237,742 216,761
------------- -------------
TOTAL ASSETS $ 3,723,159 $ 3,258,245
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
29
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES AND PARTNERSHIP CAPITAL
December 31, December 31,
(Dollars in thousands) 2003 2002
- ----------------------------------------------------------------------------------
Bank loans $ 23,656 $ 13,828
Payable to:
Customers 1,924,882 1,622,595
Brokers, dealers and clearing organizations 33,598 20,334
Depositors 107,988 109,724
Securities loaned 9,953 10,149
Securities sold, not yet purchased,
at market value 20,318 15,536
Accounts payable and accrued expenses 120,908 120,846
Accrued compensation and employee benefits 248,729 157,050
Long-term debt 39,691 49,363
------------- -------------
2,529,723 2,119,425
------------- -------------
Liabilities subordinated to claims
of general creditors 408,150 428,875
------------- -------------
Commitments and contingencies (Note 15 and Note 16) - -
Partnership capital net of reserve for anticipated
withdrawals:
Limited partners 222,500 228,666
Subordinated limited partners 103,938 95,299
General partners 400,842 357,406
------------- -------------
727,280 681,371
Reserve for anticipated withdrawals 58,006 28,574
------------- -------------
TOTAL PARTNERSHIP CAPITAL 785,286 709,945
------------- -------------
TOTAL LIABILITIES AND PARTNERSHIP
CAPITAL $ 3,723,159 $ 3,258,245
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
30
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended
---------------------------------------------------------
(Dollars in thousands, December 31, December 31, December 31,
except per unit information) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------
Revenue:
Commissions $ 1,578,822 $ 1,310,577 $ 1,253,862
Principal transactions 350,662 403,329 370,327
Investment banking 43,817 41,055 24,676
Interest and dividends 132,114 137,579 181,032
Gain on investments - 8,186 -
Other 433,447 379,356 324,490
------------- ------------- -------------
Total revenue 2,538,862 2,280,082 2,154,387
Interest expense 58,313 56,009 67,472
------------- ------------- -------------
Net revenue 2,480,549 2,224,073 2,086,915
------------- ------------- -------------
Operating expenses:
Compensation and benefits 1,454,400 1,285,284 1,200,225
Communications and data processing 262,884 262,751 233,224
Occupancy and equipment 237,509 218,538 211,387
Payroll and other taxes 91,537 82,518 74,105
Floor brokerage and clearance fees 13,958 13,993 14,376
Advertising 41,438 43,971 43,650
Other operating expenses 175,513 168,103 160,762
------------- ------------- -------------
Total operating expenses 2,277,239 2,075,158 1,937,729
------------- ------------- -------------
Net income $ 203,310 $ 148,915 $ 149,186
============= ============= =============
Net income allocated to:
Limited partners $ 24,252 $ 20,196 $ 22,935
Subordinated limited partners 21,680 15,889 14,949
General partners 157,378 112,830 111,302
------------- ------------- -------------
$ 203,310 $ 148,915 $ 149,186
============= ============= =============
Net income per weighted average $1,000
equivalent partnership unit outstanding:
Limited partners $ 108.08 $ 87.44 $ 96.89
============= ============= =============
Subordinated limited partners $ 208.90 $ 167.16 $ 181.70
============= ============= =============
Weighted average $1,000 equivalent
parnership units outstanding:
Limited partners 224,389 230,970 236,696
============= ============= =============
Subordinated limited partners 103,782 95,053 82,273
============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
31
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Dollars in thousands) Capital Capital Capital Total
- --------------------------------------------------------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL $ 260,717 $ 76,203 $ 318,561 $ 655,481
Reserve for anticipated withdrawals (20,573) (5,798) (26,020) (52,391)
----------- ----------- ----------- -----------
Parnership capital net of reserve for
anticipated withdrawals,
December 31, 2000 240,144 70,405 292,541 603,090
Issuance of partnership interests - 12,450 - 12,450
Redemption of partnership interests (6,916) (400) - (7,316)
Net Income 22,935 14,949 111,302 149,186
Withdrawals and distributions (8,445) (10,750) (63,499) (82,694)
----------- ----------- ----------- -----------
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 - 13,709 - 13,709
Redemption of partnership interests (4,562) (865) - (5,427)
Net Income 20,196 15,889 112,830 148,915
Withdrawals and distributions (9,023) (12,766) (64,407) (86,196)
----------- ----------- ----------- -----------
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 (6,166) (1,190) - (7,356)
Net Income 24,252 21,680 157,378 203,310
Withdrawals and distributions (8,907) (13,212) (79,749) (101,868)
----------- ----------- ----------- -----------
TOTAL PARTNERSHIP CAPITAL 237,845 112,406 435,035 785,286
Reserve for anticipated withdrawals (15,345) (8,468) (34,193) (58,006)
----------- ----------- ----------- -----------
Partnership capital net of reserve for
anticipated withdrawals,
December 31, 2003 $ 222,500 $ 103,938 $ 400,842 $ 727,280
Included in Total Partnership Capital as of December 31, 2003, 2002, and 2001 is a Reserve for Anticipated
Withdrawals, which the Partnership distributed to its General and Limited Partners subsequent to year end.
The accompanying notes are an integral part of these consolidated financial statements.
32
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
------------------------------------------
Dec. 31, Dec. 31, Dec. 31,
(Dollars in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 203,310 $ 148,915 $ 149,186
Adjustments to reconcile net income to net
cash provided by/(used in) operating activities -
Depreciation and amortization 88,785 89,295 77,237
Gain on sales of investments - (8,186) -
Changes in assets and liabilities:
Securities purchased under agreements to resell (225,000) 15,000 (80,000)
Net receivable from customers 77,008 (8,486) 348,086
Net receivable from brokers, dealers and
clearing organizations (41,971) (41,416) 20,260
Receivable from mortgages and loans (13,101) (12,177) (1,836)
Securities owned, net 123,988 (100,343) 39,597
Other assets (20,981) 5,514 13,351
Bank loans 9,828 149 (204,635)
Securities sold under agreements to repurchase - - (24,969)
Payable to depositors (1,736) 5,774 16,400
Securities loaned (196) (122,082) (8,365)
Accounts payable and accrued expenses 62 (712) (4,561)
Accrued compensation and employee benefits 91,679 (23,372) (52,571)
----------- ----------- -----------
Net cash provided by/(used in) operating activities 291,675 (52,127) 287,180
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, property and improvements, net (121,282) (89,352) (127,019)
Proceeds from sales of investments - 8,257 -
----------- ----------- -----------
Net cash used in investing activities (121,282) (81,095) (127,019)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt - 13,100 25,000
Repayment of long-term debt (9,672) (10,022) (8,333)
Issuance of subordinated liabilities - 250,000 -
Repayment of subordinated liabilities (20,725) (26,725) (26,725)
Issuance of partnership interests 9,829 13,709 12,450
Redemption of partnership interests (7,356) (5,427) (7,316)
Withdrawals and distributions from partnership capital (130,442) (121,968) (135,085)
----------- ----------- -----------
Net cash (used in)/provided by financing activities (158,366) 112,667 (140,009)
----------- ----------- -----------
Net increase/(decrease) in cash and cash equivalents 12,027 (20,555) 20,152
CASH AND CASH EQUIVALENTS,
Beginning of year 175,953 196,508 176,356
End of year $ 187,980 $ 175,953 $ 196,508
=========== =========== ===========
Cash paid for interest $ 58,813 $ 60,201 $ 67,523
The accompanying notes are an integral part of these consolidated financial statements.
33
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE JONES FINANCIAL COMPANIES, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit information)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE PARTNERSHIP'S BUSINESS AND BASIS OF ACCOUNTING. 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
under the equity method.
The Partnership's principal operating subsidiary, Edward D. Jones & Co.,
L.P. ("EDJ"), comprises three registered broker-dealers 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
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 under the accrual basis of
accounting in conformity with accounting principles generally accepted in
the United States of America which requires the use of certain estimates by
management in determining the Partnership's assets, liabilities, revenues
and expenses. Actual results could differ from these estimates.
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.
TRANSACTION RISK. The Partnership's securities activities involve execution,
settlement and financing of various securities transactions for customers.
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.
REVENUE RECOGNITION. Customers' transactions are recorded on a settlement
date basis and the related commissions, principal transactions and
investment banking revenues are recorded on a trade date basis. All other
forms of revenue are recorded on an accrual basis.
CASH AND CASH EQUIVALENTS. The Partnership considers all highly liquid
investments, including money market securities, with original maturities of
three months or less to be cash equivalents.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE. The Partnership participates in short-term resale
agreements and repurchase agreements collateralized by U.S. government and
agency securities. The market value of the underlying collateral as
determined daily, plus accrued interest thereon, must equal or exceed 102%
of the carrying amount of the
34
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
transaction. It is the Partnership's policy to have such underlying resale
agreement collateral deposited in its accounts at its custodian banks.
Repurchase transactions require the Partnership to deposit collateral with
the lender. Resale and repurchase agreements are carried at the amount at
which the securities will be subsequently resold/repurchased as specified in
the agreements.
SECURITIES-LENDING ACTIVITIES. Securities borrowed and securities loaned
transactions are reported as collateralized financings. Securities borrowed
transactions require the Partnership to deposit cash or other collateral
with the lender. In securities loaned transactions, the Partnership receives
collateral in the form of cash or other collateral. Collateral for both
securities borrowed and securities loaned is based on 102% of the market
value of the underlying securities loaned. The Partnership monitors the
market value of securities borrowed and loaned on a daily basis, with
additional collateral being obtained or refunded as necessary.
COLLATERAL. The Partnership reports as assets collateral it has pledged in
secured borrowings and other arrangements when the secured party cannot sell
or repledge the assets or the Partnership can substitute collateral or
otherwise redeem it on short notice. The Partnership does not report as an
asset collateral it has received in secured lending and other arrangements
when the debtor has the right to redeem or substitute the collateral on
short notice.
SECURITIES OWNED AND SOLD, NOT YET PURCHASED. 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.
EQUIPMENT, PROPERTY AND IMPROVEMENTS. Equipment, including furniture and
fixtures, is recorded at cost and depreciated using straight-line and
accelerated methods over estimated useful lives of two to twelve years.
Buildings are depreciated using the straight-line method over their useful
lives, which are estimated at thirty years. Property improvements are
amortized based on the remaining life of the property or economic useful
life of the improvement, whichever is less. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation or
amortization are removed from the accounts. The cost of maintenance and
repairs is charged against income as incurred, whereas significant
enhancements are capitalized. Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the book value of
the asset may not be fully recoverable. If impairment is indicated, the
asset value is written down to its fair market value.
SEGREGATED CASH. Cash of $51 and $53, respectively, was segregated in a
special reserve bank account for the benefit of customers, and is included
in Cash and Cash Equivalents as of December 31, 2003 and 2002 under rule
15c3-3 of the Securities and Exchange Commission ("SEC").
INCOME TAXES. Income taxes have not been provided for in the consolidated
financial statements since The Jones Financial Companies, L.L.L.P. is
organized as a partnership and each partner is liable for their own tax
payments.
NEW ACCOUNTING STANDARDS. In May 2003, The Financial Accounting Standard
Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No.
150 establishes standards for classifying and measuring certain financial
instruments with characteristics of both liabilities and equity. The
provisions of SFAS No. 150 are applicable to the Partnership's financial
statements effective for the quarter ended March 26, 2004. Under the
provisions of SFAS No. 150, the obligation to redeem a partner's capital in
the event a 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 classification of
all of the Partnership's equity capital as a liability will not alter or
modify its treatment as equity capital for any other purposes,
35
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
including its subordination to the claims of general and subordinated
creditors, nor will SFAS No. 150 have any effect on, or change the
presentation of, the Partnership's subsidiaries' financial statements. The
Partnership intends to adopt SFAS No. 150 as required in fiscal 2004 with no
expected significant impact on its consolidated financial condition, results
of operations, or cash flows.
NOTE 2 - RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
Accounts receivable from and payable to customers include margin balances
and amounts due on cash transactions. The value of securities owned by
customers and held as collateral for these receivables is not reflected in
the consolidated financial statements. Substantially all amounts payable to
customers are subject to withdrawal upon customer request. The Partnership
pays interest on certain credit balances in customer accounts.
NOTE 3 - RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING
ORGANIZATIONS
The components of receivable from and payable to brokers, dealers and
clearing organizations are as follows:
2003 2002
--------- --------
Receivable from clearing organizations $ 131,911 $ 74,805
Securities failed to deliver 9,929 15,601
Dividends receivable 5,653 6,303
Deposits paid for securities borrowed 4,307 1,601
Other 3,283 1,538
--------- --------
Total receivable from brokers, dealers
and clearing organizations $ 155,083 $ 99,848
========= ========
Securities failed to receive $ 23,855 $ 18,067
Other 9,743 2,267
--------- --------
Total payable to brokers, dealers and
clearing organizations $ 33,598 $ 20,334
========= ========
Receivable from clearing organizations represents balances and deposits with
clearing organizations and the Partnership's Canadian carrying broker.
Securities failed to deliver/receive represent the contract value of
securities which have not been received or delivered by settlement date.
NOTE 4 - RECEIVABLE FROM MORTGAGES AND LOANS
Receivable from mortgages and loans is composed of the Association's
primarily adjustable rate mortgage loans, commercial and other loans, net of
discounts, deferred origination fees and the allowance for loan losses. The
carrying amounts of the receivables approximate their fair values.
36
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NOTE 5 - SECURITIES OWNED AND SOLD, NOT YET PURCHASED
Securities owned and sold, not yet purchased, are summarized as follows (at
market value):
2003 2002
---------------------------- ---------------------------
Securities Securities
Sold, Sold,
Securities not yet Securities not yet
Owned Purchased Owned Purchased
--------- ---------- ---------- ---------
Inventory securities:
Certificates of deposit $ 7,487 $ 3,241 $ 3,340 $ 730
U.S. and Canadian government
and U.S. agency obligations 13,251 7,319 68,571 2,899
State and municipal obligations 60,605 519 124,299 383
Corporate bonds and notes 22,996 3,995 5,585 9,238
Equities 2,872 5,141 1,545 250
Collateralized mortgage obligations 4,771 - 480 -
Other 3,793 103 1,150 2,036
--------- -------- --------- --------
$ 115,775 $ 20,318 $ 204,970 $ 15,536
========= ======== ========= ========
Investment securities:
U.S. government and agency
obligations $ 145,238 $ 175,249
========= =========
The Partnership attempts to reduce its exposure to market price fluctuations
of its inventory securities through the sale of U.S. government securities
and, to a limited extent, the sale of fixed income futures contracts. The
amount of the securities purchased or sold will fluctuate on a daily basis
due to changes in inventory securities owned, interest rates and market
conditions. The futures contracts are settled daily, and any gain or loss is
recognized in principal transactions revenue. The notional amount of futures
contracts sold was $12,000 and $10,000 at December 31, 2003 and 2002,
respectively.
NOTE 6 - EQUIPMENT, PROPERTY AND IMPROVEMENTS
Equipment, property and improvements are summarized as follows:
2003 2002
--------- ---------
Land $ 12,915 $ 12,915
Buildings and improvements 312,025 238,641
Equipment, furniture and fixtures 588,235 539,038
--------- ---------
Total equipment, property and improvements 913,175 790,594
Accumulated depreciation and amortization (582,549) (492,465)
--------- ---------
Equipment, property and improvements, net $ 330,626 $ 298,129
========= =========
37
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Depreciation expense on equipment, property and improvements is included in
the consolidated statements of income under Communications and Data
Processing and Occupancy and Equipment. During 2003, the Partnership
purchased, for a cost of $60,400, two buildings, one in Tempe, Arizona and
one in St, Louis, Missouri. Both buildings were previously occupied by the
Partnership under operating leases.
NOTE 7 - BANK LOANS
The Partnership borrows from banks on a short-term basis primarily to
finance customer margin balances and inventory securities. As of December
31, 2003, the Partnership had bank lines of credit aggregating $1,160,000 of
which $1,110,000 were through uncommitted facilities. Actual borrowing
availability is primarily based on the value of securities owned and
customers' margin securities. At December 31, 2003, collateral with a market
value $1,963,000 was available to support bank loans of EDJ. There were no
bank loans outstanding under these lines as of December 31, 2003 or 2002.
Additionally, the Association had loans from The Federal Home Loan Bank of
$23,656 and $13,828 as of December 31, 2003 and 2002, respectively, which
are collateralized by mortgage loans. Bank loans outstanding approximate
their fair value.
Interest is at a fluctuating rate based on short-term lending rates. During
2003, EDJ had bank loans outstanding for one day of $50,000 at an interest
rate of 1.98%. During 2003, the Association's average aggregate short-term
bank loans outstanding were $19,000 and the average interest rate was 4.58%.
During 2002 and 2001, the average of the aggregate short-term bank loans
outstanding was $179,000 and $272,000 and the average interest rate was 2.7%
and 4.6%, respectively.
NOTE 8 - PAYABLE TO DEPOSITORS
Amounts payable to depositors are composed of the Association's various
savings instruments offered to its customers, which include transaction
accounts and certificates of deposit with maturities ranging from 90 days to
72 months. The carrying amounts of the deposits approximate their fair
values.
38
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NOTE 9 - LONG-TERM DEBT
Long-term debt is composed of the following:
2003 2002
-------- -------
Note payable, collateralized by equipment, interest paid quarterly at a
variable rate (2.90% at December 31, 2003 and 3.53% at December 31,
2002) based on LIBOR plus applicable margin, due in annual installments
of $5,000, with a final installment of $6,000 on September 30, 2006. $ 16,000 $ 21,000
Note payable, collateralized by real estate, fixed rate of 7.28%, principal
and interest due in monthly installments, with a final installment
on June 1, 2017. 12,335 12,854
Notes payable, collateralized by real estate, fixed rates of either 8.23% or
6.82%, principal and interest due in monthly installments,
with a final installment on April 5, 2008. 11,356 13,486
Notes payable, collateralized by real estate, fixed rates of either 8.72% or
6.52%, principal and interest due in monthly installments,
with a final installment on June 5, 2003. - 2,023
-------- --------
$ 39,691 $ 49,363
======== ========
Scheduled annual principal payments, as of December 31, 2003, are as
follows:
Principal
Year Payment
---------- ---------
2004 $ 7,857
2005 8,080
2006 9,321
2007 3,582
2008 1,759
Thereafter 9,092
--------
$ 39,691
========
The real estate notes payable of $23,691 at December 31, 2003 is
collateralized by land and buildings with a cost basis of $70,300 and a
carrying value of $46,400 at December 31, 2003. The $16,000 equipment note
payable as of December 31, 2003 is collateralized by equipment with a cost
basis of $26,300 and a carrying value of $8,400 at December 31, 2003.
Certain notes payable agreements contain restrictions that among other
things, require maintenance of a fixed charge coverage ratio of 1.0 to 1.0
and minimum net capital of $14,000, as defined in the agreement. The
Partnership is in compliance with all
39
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
debt covenants and restrictions as of December 31, 2003 and 2002. The
Partnership has estimated the fair value of the long-term debt to be
approximately $41,200 and $51,000 as of December 31, 2003 and 2002,
respectively.
NOTE 10 - LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Liabilities subordinated to claims of general creditors consist of:
2003 2002
--------- ---------
Capital notes, 7.33%, due in annual installments of $50,000
commencing on June 12, 2010, with a final installment
on June 12, 2014. $ 250,000 $ 250,000
Capital notes, with rates ranging from 7.51% to 7.79%,
due in annual installments ranging from $3,700 to
$25,000, commencing on August 15, 2005, with a
final installment of $3,700 on August 15, 2011. 75,000 75,000
Capital notes, 8.18%, due in annual installments of $10,500,
with a final installment on September 1, 2008. 52,500 63,000
Capital notes, 7.95%, due in annual installments
of $10,225, with a final installment
of $10,200 on April 15, 2006. 30,650 40,875
--------- ---------
$ 408,150 $ 428,875
========= =========
Required annual principal payments, as of December 31, 2003, are as follows:
Principal
Year Payment
---------- ---------
2004 $ 20,725
2005 43,225
2006 45,700
2007 23,200
2008 14,200
Thereafter 261,100
---------
$ 408,150
=========
The capital note agreements contain restrictions which, among other things,
require maintenance of certain financial ratios, restrict encumbrance of
assets and creation of indebtedness and limit the withdrawal of partnership
capital. As of December 31, 2003, the Partnership was required, under the
note
40
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
agreements, to maintain minimum partnership capital of $400,000 and Net
Capital as computed in accordance with the Uniform Net Capital rule of 5% of
aggregate debit items, or $104,288 (see Note 12).
The subordinated liabilities are subject to cash subordination agreements
approved by the New York Stock Exchange, Inc. and, therefore, are included
in the Partnership's computation of Net Capital under the SEC's Uniform Net
Capital Rule. The Partnership has estimated the fair value of the
subordinated capital notes to be approximately $428,800 and $466,000 as of
December 31, 2003 and 2002, respectively.
NOTE 11 - PARTNERSHIP CAPITAL
The limited partnership capital, consisting of 222,500 and 228,666 $1,000
units at December 31, 2003 and 2002, respectively, is held by current and
former employees and general partners of the Partnership. Each limited
partner receives interest at seven and one-half percent on the principal
amount of capital contributed and a varying percentage of the net income of
the Partnership. Interest expense includes $16,868, $17,307 and $17,754, for
the years ended December 31, 2003, 2002 and 2001, respectively, paid to
limited partners on capital contributed.
The subordinated limited partnership capital of $103,938 and $95,299 at
December 31, 2003 and 2002, respectively, is held by current and former
general partners of the Partnership. Each subordinated limited partner
receives a varying percentage of the net income of the Partnership. The
subordinated limited partner capital is subordinated to the limited
partnership capital.
Under the Partnership agreement, a withdrawing limited partner's capital is
payable in three equal annual installments; a withdrawing subordinated
limited partner's or general partner's capital is payable in four equal
annual installments. The repayments of withdrawing limited, subordinated
limited and general partners' capital commence at their withdrawal dates.
The Partnership is obligated to redeem a partner's capital upon a partner's
death.
NOTE 12 - NET CAPITAL REQUIREMENTS
As a result of its activities as a broker-dealer, EDJ is subject to the Net
Capital provision of Rule 15c3-1 of the Securities Exchange Act of 1934 and
the capital rules of the New York Stock Exchange, Inc. Under the alternative
method permitted by the rules, EDJ must maintain minimum Net Capital equal
to the greater of $250 or 2% of aggregate debit items arising from customer
transactions. The Uniform Net Capital Rule also provides that partnership
capital may not be withdrawn if resulting Net Capital would be less than 5%
of aggregate debit items. Additionally, certain withdrawals require the
consent of the SEC to the extent they exceed defined levels, even though
such withdrawals would not cause Net Capital to be less than 5% of aggregate
debit items.
At December 31, 2003, EDJ's Net Capital of $578,965 was 27.8% of aggregate
debit items and its Net Capital in excess of the minimum required was
$537,250. Net Capital as a percentage of aggregate debits after anticipated
withdrawals was 27.3%. Net Capital and the related capital percentage may
fluctuate on a daily basis.
At December 31, 2003, the Partnership's foreign broker-dealer subsidiaries
were in compliance with regulatory capital requirements in the jurisdictions
in which they operate.
41
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NOTE 13 - OTHER REVENUE / GAIN ON INVESTMENTS
During 2003, the Partnership received a business interruption insurance
claim of $6,950 pertaining to September 11, 2001, which is included in other
revenue.
During 2002, the Partnership sold all of the shares it received from its
memberships in the London Stock Exchange and Toronto Stock Exchange when
they demutualized. The Partnership realized an $8,186 gain on the sale of
these shares.
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Partnership maintains profit sharing plans covering all eligible
employees. Contributions to the plans are at the discretion of the
Partnership. Additionally, participants may contribute on a voluntary basis.
Approximately $47,900, $35,600 and $36,000 were provided by the Partnership
for its contributions to the plans for the years ended December 31, 2003,
2002 and 2001, respectively.
NOTE 15 - COMMITMENTS
The Partnership leases headquarters office space, furniture, computers and
communication equipment under various operating leases. Additionally, branch
offices are leased generally for terms of three to five years. Rent expense
was $183,500, $179,400 and $162,200 for the years ended December 31, 2003,
2002 and 2001, respectively.
The Partnership's noncancelable lease commitments greater than one year, as
of December 31, 2003, are summarized below:
Year
----------
2004 $118,020
2005 58,644
2006 40,963
2007 27,693
2008 17,652
Thereafter 118,924
--------
$381,896
========
NOTE 16 - CONTINGENCIES
In the normal course of business, the Partnership has been named, from time
to time, as a defendant in various legal actions, including arbitrations,
class actions and other litigation. Certain of these legal actions include
claims for substantial compensatory and/or punitive damages or claims for
indeterminate amounts of damages. The Partnership is involved, from time to
time, in investigations and proceedings by governmental and self-regulatory
agencies, certain of which may result in adverse judgements, fines or
penalties. Recently, the number of investigations has increased with a focus
on mutual fund issues among many firms in the financial services industry,
including the Partnership.
In view of the inherent difficulty of predicting the outcome of such
matters, particularly in cases in which claimants seek substantial or
indeterminate damages, or actions which are in very preliminary stages, the
42
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Partnership cannot predict with certainty the eventual loss or range of loss
related to such matters. The Partnership believes, based on current
knowledge and after consultation with counsel, that the outcome of these
actions will not have a material adverse effect on the consolidated
financial condition of the Partnership, although the outcome could be
material to the Partnership's future operating results for a particular
period or periods.
NOTE 17 - RELATED PARTIES
EDJ has a minority partnership interest in the investment advisor to the
Edward Jones Money Market Fund (the "Money Market Fund"). The Partnership
does not have management responsibility for the advisor. Other than the
Money Market Fund, the Partnership does not distribute any other proprietary
funds. Approximately 3% of the Partnership's revenues were derived from
the advisor and the Money Market Fund during 2003, 2002 and 2001.
NOTE 18 - QUARTERLY INFORMATION
(Unaudited)
Quarters Ended
--------------
March 29, June 28, September 27, December 31,
--------- -------- ------------- ------------
2002
Total revenue $ 576,005 $ 617,404 $ 546,923 $ 531,565
Net income 41,629 50,095 31,357 25,834
Net income per weighted average
$1,000 equivalent partnership
unit outstanding:
Limited partners $ 24.46 $ 29.45 $ 18.43 $ 15.10
Subordinated limited partners 48.16 56.53 34.60 27.87
March 28, June 27, September 26, December 31,
--------- -------- ------------- ------------
2003
Total revenue $ 542,661 $ 637,213 $ 652,396 $ 706,592
Net income 24,742 53,918 53,772 70,878
Net income per weighted average
$1,000 equivalent partnership
unit outstanding:
Limited partners $ 13.15 $ 28.67 $ 28.58 $ 37.68
Subordinated limited partners 26.47 56.74 55.11 70.58
43
PART III
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 11, 2002, the Partnership dismissed Arthur Andersen LLP ("Arthur
Andersen") as its independent accountants. The reports of Arthur Andersen on
the financial statements for the two years ended December 31, 2001 contained
no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle. In
connection with its audits for the two years prior to and through July 11,
2002 there were no disagreements with Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of Arthur Andersen would have caused them to make reference
thereto in their report on the financial statements for such years. Prior to
and through July 11, 2002, there were no reportable events (as defined in
Regulation S-K Item 304(a)(1)(v)). The Partnership has provided Arthur
Andersen a copy of the foregoing disclosure.
The Partnership requested that Arthur Andersen furnish it with a letter
addressed to the Securities and Exchange Commission stating whether or not
it agrees with the foregoing statements as reported in the Partnership's
July 11, 2002 Form 8K. The Partnership was notified by Arthur Andersen that
they are no longer issuing such acknowledgements.
The Partnership engaged PricewaterhouseCoopers LLP ("PwC") as its new
independent accountants as of July 11, 2002. Prior to and through July 11,
2002, the Partnership had not consulted with PwC regarding either (i) the
application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered
on the Registrant's financial statements, and either a written report was
provided to the Partnership or oral advice was provided that PwC concluded
was an important factor considered by the Partnership in reaching a decision
as to the accounting, auditing or financial reporting issue; or (ii) any
matter that was either the subject of a disagreement, as that term is
defined in Item 304(a)(1)(iv) of Regulation S-K, or a reportable event, as
that term is defined in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9a. CONTROLS AND PROCEDURES
Based upon an evaluation performed as of the end of the period covered by
this report, the Partnership's certifying officers, the Chief Executive
Officer and the Chief Financial Officer, have concluded that the
Partnership's disclosure controls and procedures were effective.
There have been no significant changes in internal controls or other factors
that significantly affect these controls subsequent to the date of the
evaluation.
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Jones Financial Companies, L.L.L.P., organized as a partnership, does
not have individuals associated with it designated as officers or directors.
As of January 30, 2004, the Partnership was composed of 275 general
partners, 5,021 limited partners and 146 subordinated limited partners.
Under the terms of the Partnership Agreement, Douglas E. Hill is designated
Managing Partner and in said capacity has primary responsibility for
administering the Partnership's business, determining its policies,
controlling the management and conduct of the Partnership's business and has
the power to appoint and dismiss general partners of the Partnership and to
fix the proportion of their respective interests in the Partnership. Subject
to the foregoing, the Partnership is managed by its 275 general partners.
Effective January 1, 2004, John W. Bachmann retired as Managing Partner of
the Partnership. Also, effective January 1, 2004, Douglas E. Hill assumed
the role of Managing Partner. He has been a partner for 29 years.
The Executive Committee of the Partnership is composed of Douglas E. Hill,
Michael R. Holmes, Rich L. Malone, Steven Novik, Darryl L. Pope and Lawrence
R. Sobol. The purpose of the Executive Committee is to provide counsel and
advice to the Managing Partner in discharging his functions. Furthermore, in
the event the position of Managing Partner is vacant, the Executive
Committee shall succeed to all of the powers and duties of the Managing
Partner.
None of the general partners are appointed for any specific term nor are
there any special arrangements or understandings pursuant to their
appointment other than as contained in the Partnership Agreement.
No general partner is or has been individually, nor in association with any
prior business, the subject of any action under any insolvency law or
criminal proceeding or has ever been enjoined temporarily or permanently
from engaging in any business or business practice.
Following is a listing of the names of the Executive Committee, ages, dates
of becoming a general partner and area of responsibility for each as of
March 9, 2004:
Name Age Partner Area of responsibility
- -------------------------------------------------------------------------
Douglas E. Hill 59 1974 Managing Partner
Michael R. Holmes 45 1996 Human Resources
Rich L. Malone 55 1979 Information Systems
Steven Novik 54 1983 Finance & Accounting
Darryl L. Pope 64 1971 Service Division
Lawrence R. Sobol 53 1977 General Counsel
- -------------------------------------------------------------------------
Each member of the Executive Committee has been a general partner of the
Partnership for more than five preceding years.
Rich L. Malone is a director of F5 Networks, Inc., Seattle, Washington.
45
PART III
ITEM 11. EXECUTIVE COMPENSATION
The following table identifies the compensation of the firm's Managing
Partner and the four highest compensated individuals of the Partnership
during the three most recent years (including respective shares of profit
participation).
(1) (2) (3)
Net Income
Deferred Allocated
Compen- to General Total
Year Salaries sation Partners (1)(2)(3)
- -------------------------------------------------------------------------------------------------------------
John W. Bachmann* 2003 $225,000 $7,160 $1,447,872 $1,680,032
2002 206,250 5,620 1,043,042 1,254,912
2001 200,000 5,202 1,449,260 1,654,462
Douglas E. Hill 2003 200,000 7,160 4,287,876 4,495,036
2002 181,250 5,620 3,119,026 3,305,896
2001 175,000 5,202 3,097,686 3,277,888
Rich L. Malone 2003 175,000 7,160 4,192,168 4,374,328
2002 163,750 5,620 3,012,976 3,182,346
2001 160,000 5,202 2,995,288 3,160,490
Gary D. Reamey 2003 150,000 7,160 4,054,043 4,211,203
2002 138,750 5,620 2,998,277 3,142,647
2001 135,000 5,202 2,969,546 3,109,748
James D. Weddle 2003 175,000 7,160 3,897,020 4,079,180
2002 163,750 5,620 2,795,363 2,964,733
2001 160,000 5,202 2,764,750 2,929,952
=============================================================================================================
* Effective January 1, 2004, retired as Managing Partner.
(1) Each non-selling general partner receives a salary generally ranging
from $90,000 - $225,000 annually. Selling general partners do not
receive a specified salary, rather, they receive the net sales
commissions earned by them (none of the five individuals listed above
earned any such commissions). Additionally, general partners who are
principally engaged in sales are entitled to office bonuses based on
the profitability of their respective branch office, on the same
basis as the office bonus program established for all investment
representative employees.
(2) Each general partner is a participant in the Partnership's profit
sharing plan which covers all eligible employees. Contributions to
the plan, which are within the discretion of the Partnership, are
made annually and have historically been determined based on
approximately twenty-four percent of the Partnership's net income.
Allocation of the Partnership's contribution among participants is
determined by each participant's relative level of eligible earnings,
including in the case of general partners, their net income
participation.
46
PART III
ITEM 11. EXECUTIVE COMPENSATION
(3) Each general partner is entitled to participate in the annual net
income of the Partnership based upon the respective percentage
interest in the Partnership of each partner. Interests in the
Partnership held by each general partner ranged from 0.03% to 3.0% in
2003, 0.03% to 3.1% in 2002, and 0.03% to 3.1% in 2001. At the
discretion of the Managing Partner, the partnership agreement
provides that, generally, the first eight percent of net income
allocable to general partners be distributed on the basis of
individual merit or otherwise as determined by the Managing Partner.
Thereafter, the remaining net income allocable to general partners is
distributed based upon each individual's percentage interest in the
Partnership. Net income allocated to general partners excludes income
required to be reinvested under the Partnership Agreement.
Net income allocable to general partners is the amount remaining
after payment of interest and earnings on capital invested to limited
partners and subordinated limited partners.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Being organized as a limited partnership, management is vested in the
general partners thereof and there are no other outstanding "voting" or
"equity" securities. It is the opinion of the Partnership that the general
partnership interests are not securities within the meaning of federal and
state securities laws primarily because each of the general partners
participates in the management and conduct of the business.
In connection with outstanding limited and subordinated limited partnership
interests (non-voting securities), 219 of the general partners also own
limited partnership interests and 52 of the general partners also own
subordinated limited partnership interests, as noted in the table below.
As of January 30, 2004:
Name of Amount of
Beneficial Beneficial % of
Title of Class Owner Ownership Class
- --------------------------------------------------------------------------------------------
Limited Partnership All General
Interests Partners as
a Group $26,788,000 12%
Subordinated All General
Limited Partnership Partners as
Interests a Group $45,933,927 40%
- --------------------------------------------------------------------------------------------
47
PART III
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the ordinary course of its business the Partnership has extended credit
to certain of its partners and employees in connection with their purchase
of securities. Such extensions of credit have been made on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with non-affiliated persons, and did
not involve more than the normal risk of collectability or present other
unfavorable features. The Partnership also, from time to time and in the
ordinary course of business, enters into transactions involving the purchase
or sale of securities from or to partners or employees and members of their
immediate families, as principal. Such purchases and sales of securities on
a principal basis are effected on substantially the same terms as similar
transactions with unaffiliated third parties.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees paid by the Partnership to its auditors,
PricewaterhouseCoopers LLP.
(Dollars in thousands) 2003 2002
------- -------
Fees paid by the Partnership:
Audit fees $ 897 $ 859
Audit-related fees (1) 375 234
Tax fees (2) 488 520
All other (3) 133 196
------- -------
Total fees $ 1,893 $ 1,809
======= =======
(1) Audit-related fees consist primarily of fees for internal control reviews,
attestation/agreed-upon procedures, employee benefit plan audits, and
consultations concerning financial accounting and reporting standards.
(2) Tax fees consist of fees for tax compliance, consultation on tax matters,
and other tax planning and advice.
(3) All other fees consist primarily of information technology advisory services.
The audit committee pre-approved all audit and non-audit related services in
fiscal year 2003. No services were provided under the deminimis fee
exception to the audit committee pre-approval requirements.
48
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page No.
INDEX
(a) (1) The following financial statements are included in Part II,
Item 8:
Report of Independent Auditors.......................................28
Consolidated Statements of Financial Condition as of
December 31, 2003 and 2002...........................................29
Consolidated Statements of Income for the years ended
December 31, 2003, 2002 and 2001.....................................31
Consolidated Statements of Changes in Partnership Capital
for the years ended December 31, 2003, 2002 and 2001.................32
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001.....................................33
Notes to Consolidated Financial Statements ..........................34
(2) The following financial statements are included in Schedule I:
Parent Company Only Condensed Statements of Financial Condition as
of December 31, 2003 and 2002........................................57
Parent Company Only Condensed Statements of Income for the years
ended December 31, 2003, 2002 and 2001...............................58
Parent Company Only Condensed Statements of Cash Flows for the
years ended December 31, 2003, 2002 and 2001.........................59
Report of Independent Auditors.......................................60
Schedules are omitted because they are not required,
inapplicable, or the information is otherwise shown in the
consolidated financial statements or notes thereto.
(b) Report on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 2003.
(c) Exhibits
Reference is made to the Exhibit Index hereinafter contained.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized:
(Registrant) THE JONES FINANCIAL COMPANIES, L.L.L.P.
----------------------------------------
By (Signature and Title) /s/ Douglas E. Hill
----------------------------------------
Douglas E. Hill, Chief Executive Officer
Date March 19, 2004
----------------------------------------
By (Signature and Title) /s/ Steven Novik
----------------------------------------
Steven Novik, Chief Financial Officer
Date March 19, 2004
----------------------------------------
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
There have been no annual reports sent to security holders covering the
registrant's last fiscal year nor have there been any proxy statements, form
of proxy or other proxy soliciting material sent to any of registrant's
security holders.
50
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Douglas E. Hill, certify that:
1. I have reviewed this annual report on Form 10-K of The Jones
Financial Companies, L.L.L.P.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Partnership as of, and for, the periods presented
in this annual report.
4. The Partnership's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the Partnership and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Partnership, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the Partnership's disclosure
controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the Partnership's
internal control over financial reporting that occurred during
the Partnership's fourth quarter that has materially affected,
or is reasonable likely to materially affect, the Partnership's
internal control over financial reporting; and
5. The Partnership's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the Partnership's auditors and the Executive
Committee:
a) All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect the Partnership's
ability to record, process, summarize, and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other associates who have a significant role in the Partnership's
internal control over financial reporting.
/s/ Douglas E. Hill
---------------------------------------
Chief Executive Officer
The Jones Financial Companies, L.L.L.P.
March 19, 2004
51
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Steven Novik, certify that:
1. I have reviewed this annual report on Form 10-K of The Jones
Financial Companies, L.L.L.P.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Partnership as of, and for, the periods presented
in this annual report.
4. The Partnership's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the Partnership and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Partnership, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the Partnership's disclosure
controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the Partnership's
internal control over financial reporting that occurred during
the Partnership's fourth quarter that has materially affected,
or is reasonable likely to materially affect, the Partnership's
internal control over financial reporting; and
5. The Partnership's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the Partnership's auditors and the Executive
Committee:
a) All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect the Partnership's
ability to record, process, summarize, and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other associates who have a significant role in the Partnership's
internal control over financial reporting.
/s/ Steven Novik
---------------------------------------
Chief Financial Officer
The Jones Financial Companies, L.L.L.P.
March 19, 2004
52
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
Exhibit
Number Page Description
3.1 Fourteenth Amended and Restated Agreement of Registered
Limited Liability Limited Partnership of The Jones
Financial Companies, L.L.L.P., dated as of January 1,
2004.
3.2 * Form of Limited Partnership Agreement of Edward D. Jones
& Co., L.P.
10.1 * Form of Cash Subordination Agreement between the Registrant
and Edward D. Jones & Co., incorporated herein by
reference to Exhibit 10.1 to the Company's registration
statement of Form S-1 (Reg. No. 33-14955).
10.2 * Agreements of Lease between EDJ Leasing Company and Edward
D. Jones & Co., L.P., dated August 1, 1991, incorporated
herein by reference to Exhibit 10.18 to the Company's
Annual Report or Form 10-K for the year ended September
27, 1991.
10.3 * Edward D. Jones & Co., L.P. Note Purchase Agreement dated as
of May 8, 1992, incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 26, 1992.
10.4 * Purchase and Sale Agreement by and between EDJ Leasing Co.,
L.P. and the Resolution Trust Corporation incorporated
herein by reference to Exhibit 10.21 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1992.
10.5 * Master Lease Agreement between EDJ Leasing Company and
Edward D. Jones & Co., L.P., dated March 9, 1993, and
First Amendment to Lease dated March 9, 1994, incorporated
herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 25, 1994.
10.6 * Mortgage Note and Amendment to Deed of Trust between EDJ
Leasing Co., L.P. and Nationwide Insurance Company dated
March 9, 1994, incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 25, 1994.
10.7 * Mortgage Note; Deed of Trust and Security Agreement;
Assignment of Leases, Rents and Profits; and Subordination
and Attornment Agreement between EDJ Leasing Co., L.P. and
53
Nationwide Insurance Company dated April 6, 1994,
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
25, 1994.
10.8 * Note Purchase Agreement by Edward D. Jones & Co., L.P.,
for $92,000,000 aggregate principal amount of 7.95%
subordinated capital notes due April 15, 2006,
incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 24, 1994.
10.9 * Master Lease Agreement and Addendum by and between Edward D.
Jones & Co., L.P. and General Electric Capital Corporated
dated April 21, 1994, incorporated herein by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 24, 1994.
10.10 * Agreement and Plan of Acquisition between The Jones Financial
Companies and Boone National Savings and Loan Association,
F.A., incorporated herein by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994.
10.11 * Mortgage Note; South Second Deed of Trust and Security
Agreement between EDJ Leasing Co., L.P. and Nationwide
Life Insurance Company dated August 31, 1995, incorporated
herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 29, 1995.
10.12 * Mortgage Note; North Second Deed of Trust and Security
Agreement between EDJ Leasing Co., L.P. and Nationwide
Life Insurance Company dated August 31, 1995, incorporated
herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 29, 1995.
10.13 * Note Purchase Agreement by Edward D. Jones & Co., L.P.
for $94,500,000 aggregate principal amount of 8.18%
subordinated capital notes due September 1, 2008,
incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 27, 1996.
10.14 * Note Purchase Agreement by Edward D. Jones & Co., L.P. for
$75,000,000 aggregate principal amount of subordinated
capital notes with rates ranging from 7.51% to 7.79% due
September 15, 2011, incorporated herein by reference to
the Company's Quarterly Report on Form 10-Q for the
quarter ended September 24, 1999.
10.15 * Lease between Eckelkamp Office Center South, L.L.C., a
Missouri Limited Liability Company, as Landlord and Edward
D. Jones & Co., L.P., a Missouri Limited Partnership, as
Tenant,
54
dated February 3, 2000, incorporated by reference
to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.
10.16 * Master Agreement dated as of November 30, 2000 among
Edward D. Jones & Co., L.P., as Lessee, Construction Agent
and Guarantor, Atlantic Financial Group, Ltd., (registered
to do business in Arizona as AFG Equity, Limited
Partnership) as Lessor, Suntrust Bank and Certain
Financial Institutions Parties Hereto, as Lenders, and
Suntrust Bank as agent, and joined in by The Jones
Financial Companies, L.L.L.P., incorporated herein by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
10.17 * Master Lease Agreement dated as of November 30, 2000
between Atlantic Financial Group, Ltd. (registered to do
business in Arizona as AFG Equity, Limited Partnership),
as Lessor, and Edward D. Jones & Co., L.P., as Lessee,
incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
10.18 * Master Lease Agreement between Edward D. Jones & Co., L.P.
and Fleet Capital Corporation dated as of August 22, 2001,
incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
10.19 * Credit Agreement dated as of August 27, 2001 between EDJ
Leasing Co., L.P. and Southtrust Bank, incorporated herein
by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001.
10.20 * Master Lease Agreement between EDJ Leasing Co., L.P. and
Edward D. Jones & Co., L.P. dated August 27, 2001,
incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
10.21 * Master Agreement dated as of September 18, 2001 among
Edward D. Jones & Co., L.P., as Lessee, Construction Agent
and Guarantor, Atlantic Financial Group, Ltd., (registered
to do business in Missouri as Atlantic Financial Group,
L.P.) as Lessor, Suntrust Bank and Certain Financial
Institutions Parties Hereto, as Lenders, and Suntrust
Bank, as Agent and joined in by The Jones Financial
Companies, L.L.L.P., incorporated herein by reference to
the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.
10.22 * Master Lease Agreement dated as of September 18, 2001
between Atlantic Financial Group, Ltd. (registered to do
business in Missouri as Atlantic Financial Group, L.P.),
as Lessor, and Edward D. Jones & Co., L.P., as Lessee,
incorporated herein by
55
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
10.23 * Note Purchase Agreement by Edward D. Jones & Co., L.P.,
for $250,000,000 aggregate principal amount of 7.33%
subordinated capital notes due June 12, 2014, incorporated
herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 28, 2002.
23.1 Consent of Independent Auditors, filed herewith.
24 * Delegation of Power of Attorney to Managing Partner contained
within Exhibit 3.1.
99.1 Certification pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002.
* Incorporated by reference to previously filed exhibits.
56
Schedule I
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31, December 31,
(Dollars in thousands) 2003 2002
- ------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 4,364 $ 3,420
Investment in subsidiaries 769,985 701,748
Others assets 11,744 5,907
----------- -----------
TOTAL ASSETS $ 786,093 $ 711,075
=========== ===========
LIABILITIES AND PARTNERSHIP CAPITAL:
Payable to limited partners, accounts payable
and accrued expenses $ 807 $ 1,130
----------- -----------
TOTAL LIABILITIES 807 1,130
TOTAL PARTNERSHIP CAPITAL 785,286 709,945
----------- -----------
TOTAL LIABILITIES AND PARTNERSHIP CAPITAL $ 786,093 $ 711,075
=========== ===========
These financial statements should be read in conjunction with the notes to
the consolidated financial statements of The Jones Financial Companies,
L.L.L.P.
57
Schedule I (continued)
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
Years Ended
--------------------------------------------
(Dollars in thousands, December 31, December 31, December 31,
except per unit information) 2003 2002 2001
- ------------------------------------------------------------------------------------------------
NET REVENUE
Subsidiary earnings $ 200,978 $ 148,066 $ 147,835
Management fee income 36,265 35,661 32,876
Other 645 (280) 495
----------- ----------- -----------
Total revenue 237,888 183,447 181,206
Interest expense 16,880 17,325 17,800
----------- ----------- -----------
Net revenue 221,008 166,122 163,406
----------- ----------- -----------
OPERATING EXPENSES
Compensation and benefits 17,532 17,065 14,099
Payroll and other taxes 75 115 73
Other operating expenses 91 27 48
----------- ----------- -----------
Total operating expenses 17,698 17,207 14,220
----------- ----------- -----------
----------- ----------- -----------
NET INCOME $ 203,310 $ 148,915 $ 149,186
=========== =========== ===========
These financial statements should be read in conjunction with the notes to
the consolidated financial statements of The Jones Financial Companies,
L.L.L.P.
58
Schedule I (continued)
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
December 31, December 31, December 31,
(Dollars in thousands) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 203,310 $ 148,915 $ 149,186
Adjustments to reconcile net income to net cash
provided by operating activities -
Increase in investment in subsidiaries (68,237) (34,396) (12,760)
Increase in other assets and liabilities, net (6,160) (1,091) (2,934)
----------- ----------- -----------
Net cash provided by operating activities 128,913 113,428 133,492
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of partnership interests 9,829 13,709 12,450
Redemption of partnership interests (7,356) (5,427) (7,316)
Withdrawals and distributions from
partnership capital (130,442) (121,968) (135,085)
----------- ----------- -----------
Net cash used in financing activities (127,969) (113,686) (129,951)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 944 (258) 3,541
CASH AND CASH EQUIVALENTS,
Beginning of year 3,420 3,678 137
----------- ----------- -----------
End of year $ 4,364 $ 3,420 $ 3,678
=========== =========== ===========
These financial statements should be read in conjunction with the notes to
the consolidated financial statements of The Jones Financial Companies,
L.L.L.P.
59
REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULES
To The Jones Financial Companies, L.L.L.P.:
Our audit of the consolidated financial statements referred to in our report
dated March 19, 2004 appearing in the Form 10-K of The Jones Financial
Companies, L.L.L.P. also included an audit of the financial statement
schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these
financial statement schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 19, 2004
60
The following is a copy of a report previously issued by Arthur Andersen LLP
and has not been reissued by Arthur Andersen LLP.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Jones Financial Companies, L.L.L.P.
We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements included in The Jones Financial
Companies, L.L.L.P. Form 10-K for the year ended December 31, 2001, and have
issued our report thereon dated February 22, 2002. Our audit was made for
the purpose of forming an opinion on those statements taken as a whole.
Schedule I listed in the index to Item 14 on Form 10-K for the year ended
December 31, 2001, is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. Schedule I has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
Arthur Andersen LLP
St. Louis, Missouri,
February 22, 2002
61