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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
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, 1998 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 and 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
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 [ ]
As of March 29, 1999 there were no voting securities held by non-
affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None
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, 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, American, Chicago,
Toronto, Montreal and London exchanges, and is a registered
broker/dealer with the National Association of Securities Dealers, Inc.,
("NASD").
As of February 28, 1999, the Partnership was comprised of 166 general
partners, 3,943 limited partners and 84 subordinated limited partners.
At December 31, 1998, the Partnership is organized as follows: The
Partnership owns 100 percent of the outstanding common stock of EDJ
Holding Company, Inc., a Missouri corporation and 100 percent of the
outstanding common stock of LHC, Inc., 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 percent
of the outstanding common stock of Conestoga Securities, Inc., a
Missouri corporation and also owns, as a limited partner, 49.5 percent
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 equity of Edward D. Jones & Co., an Ontario
limited partnership and its general partner, Edward D. Jones & Co.
Canada Holding Co., Inc. The Partnership also owns 100% of the equity of
Edward Jones Limited, a U.K. private limited company. The Partnership
owns 100% of the equity of Boone National Savings and Loan Association,
F.A., ("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 has an
equity position in several entities formed to act as general partners of
various direct participation programs sponsored by the Nooney
Corporation as follows: Nooney Income Investments, Inc. (a Missouri
corporation), 100% of outstanding Class B non-voting stock; Nooney
Income Investments Two, Inc. (a Missouri corporation), 100% of
outstanding Class B non-voting stock. The Partnership holds all of the
partnership equity in a Missouri limited partnership, EDJ Ventures, Ltd.
Conestoga Securities, Inc., also a wholly owned subsidiary, is the
general partner of EDJ Ventures, Ltd.
2
PART I
The Partnership is the sole member of EJ Insurance Agency Holding,
L.L.C., a Missouri limited liability company; California Agency Holding,
L.L.C., a California limited liability company; EJ Insurance Agency of
Michigan, L.L.C., a Michigan limited liability company; and EJ Insurance
Agency of New Mexico. L.L.C., a New Mexico limited liability company.
EJ Insurance Agency Holding, L.L.C. is the sole member of EJ Insurance
Agency of Wyoming, L.L.C., a Wyoming limited liability company. The
Partnership and EJ Insurance Agency are multi-members of EJ Insurance
Agency of Massachusetts, L.L.C., a Massachusetts limited liability
company; EJ Insurance Agency of Alabama, L.L.C., an Alabama limited
liability company, EJ Insurance Agency of Montana, L.L.C., a Montana
limited liability company; and EJ Insurance Agency of Ohio, an Ohio
limited liability company. EJ Insurance Agency Holding, L.L.C. and
California Agency Holding, L.L.C. are multi-members of EJ Insurance
Agency of California, L.L.C., a California limited liability company.
The Partnership owns all of the outstanding common stock of EJ Insurance
Agency of Nevada, Inc. The Partnership is an affiliate of EJ Insurance
Agency of Texas, Inc. 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, Inc.,
a Delaware limited purpose corporation which has issued and sold
collateralized mortgage obligation bonds, and Cornerstone Mortgage
Investment Group II, Inc., a Delaware limited purpose corporation which
has structured and sold secured mortgage bonds. 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, L.L.P.
Community Investment Partners II, L.L.P. and Community Investment
Partners III, L.L.P., business development companies.
Other affiliates of the Partnership include Patronus, Inc. and EDJ
Investment Advisory Services. Neither has conducted an active business.
Within the past five years, the Registrant has added several new legal
entities. In 1994, Edward D. Jones & Co., an Ontario limited partnership
and its general partner Edward D. Jones & Co. Canada Holding Co., Inc.
were established as subsidiaries of EDJ. These Canadian subsidiaries
allowed expansion of the Registrant into Canada. In 1995, Boone National
Savings and Loan Association, F.A. was purchased and has allowed EDJ to
offer trust services to its customers in all 50 states. During 1997,
Edward Jones Limited, a U.K. private limited company was organized.
During 1998, the Registrant began brokerage operations in the United
Kingdom under this entity. During 1998, EJ Mortgage L.L.C. was
established. EJ Mortgage L.L.C., a wholly owned subsidiary of EDJ, owns
50% of Edward Jones Mortgage, a joint venture offering residential
mortgage lending services to EDJ's customers.
Due to state laws and regulations, certain states require separate legal
entities to transact insurance business. During 1998, changes were made
to certain insurance entities as a result of changes in state laws and
regulations. The following entity was added: EDJ Insurance Agency of
Michigan, L.L.C., limited liability company.
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):
1998 1997 1996
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Commissions
Listed $ 170,621 $ 138,199 $102,905
Mutual Funds 529,285 407,430 319,091
O-T-C 80,774 64,488 49,728
Insurance 178,436 161,800 139,860
Other 303 110 1,986
Principal Transactions 147,938 166,209 171,903
Investment Banking 51,726 13,865 15,719
Interest & Dividends 118,238 92,938 72,726
Money Market Fees 43,987 35,831 30,187
IRA Custodial Service Fees 16,121 12,200 8,927
Other Revenues 71,539 42,209 39,036
Gain on Investment 40,995 - -
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Total Revenues $1,449,963 $1,135,279 $952,068
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 customers' 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.
Customers' 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 ("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
customers' 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 aggregate market value
generally up to 140 percent of the debit balance in margin accounts. The
Partnership may also use funds provided by free credit balances in
customers' accounts to finance customers' 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 is required in
the event of a decline in the market value of the securities in a margin
account to require the customer to deposit additional securities or cash
so that at all times the loan to the customer is no greater than 75
percent of the value of the securities in
4
PART I
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; however, some portion of the
overall increases in recent years is due to the growth in the number of
investment representatives over these periods.
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 dealers' discount which generally
ranges from 1 percent to 5 3/4 percent of the purchase price of the
shares, depending on the terms of the dealer agreement and the amount of
the purchase. The Partnership also earns service fees which are
generally based on 15 to 25 basis points of its customers' assets which
are held by the mutual funds. 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 customers' orders to buy
or sell securities, the Partnership charges a commission for both
principal and agency transactions.
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 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 varying number of
investment representatives employed by the Partnership over the periods
indicated.
INSURANCE. The Partnership has executed agency agreements with various
national insurance companies. EDJ is able to offer life insurance, long
term care insurance, and fixed and variable annuities 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.
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.
5
PART I
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 system 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 system.
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 purchase price. Furthermore,
the commitment of capital to 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 and securities held. Interest is also earned
by the Association on its loan portfolio.
MONEY MARKET FEES, IRA CUSTODIAL SERVICE FEES AND OTHER REVENUES. Other
revenue sources include money market management fees, IRA custodial
services fees, gains from sales of certain assets, and other product and
service fees. Also, non-commission revenue is received from mutual funds
the Partnership distributes. The Partnership has an interest in the
investment advisor to its money market fund, Daily Passport Cash Trust.
Revenue from this source has increased over the periods 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
service fee for its services.
The Partnership has registered an investment advisory program with the
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 insignificant and are included
under "Other Revenues."
The Partnership also 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
processing company and receives revenue on new card issuances, card
renewals, and a portion of sales transactions made on the credit card.
In 1998, the Partnership began offering mortgage loans to its customers
through a joint venture. The Partnership also offers loans to small
businesses through a regional bank.
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. The Partnership
competes with many other securities firms with substantially larger
research staffs in its research activities.
6
PART I
SHAREHOLDER ACCOUNTING. In 1998, the Partnership began performing
Shareholder Accounting Services for certain mutual funds which it
distributes. Shareholder Accounting includes performing sub-accounting
for accounts registered in firm name including supporting, in-house,
trade processing, dividend calculations, and other sub-transfer agent
processes. The firm charges the mutual funds for the services it
performs.
CUSTOMER ACCOUNT ADMINISTRATION AND OPERATIONS. Operations associates
are responsible for activities relating to customers' securities and the
processing of transactions with other broker/dealers. 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. 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
transactions through the National Securities Clearing Corporation
("NSCC"), New York, New York. NSCC effects clearing of securities on the
New York, American and Midwest Stock Exchanges.
In conjunction with clearing and settling transactions with NSCC, the
Partnership holds customers' securities on deposit with the Depository
Trust Company ("DTC") in lieu of maintaining physical custody of the
certificates. The Partnership also uses Participant Trust Company for
custody of GNMA securities and a major bank for custody of treasury
securities.
The Partnership is substantially dependent upon the operational capacity
and ability of NSCC/DTC. Any serious delays in the processing of
securities transactions encountered by NSCC/DTC 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"), First Marathon Securities
Limited and Pershing Securities Limited provide automated data
processing services for customer account activity and related records
for the United States, Canada, and the United Kingdom, respectively.
7
PART I
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. While
the coverages provided by the Securities Investors Protection
Corporation ("SIPC") and protection in excess of SIPC limits would be
available to customers of the Partnership, 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 by the SIPC and the Partnership's insurance carrier.
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 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 general partners, the Partnership has
approximately 15,795 full and part-time employees. This includes 4,807
registered salespeople as of February 28, 1999. The Partnership's
salespersons are 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. The first phase of training is spent
studying Series 7 examination materials and preparing for and taking the
examination. After passing the examination, trainees spend one week in
a comprehensive training program in St. Louis followed by three weeks
of on-the-job training in branch locations reviewing investments, office
procedures and sales techniques. The salesperson is then sent to a
designated location, for four weeks, to establish the EDJ office,
conduct market research and prepare for opening the office. After the
salesperson has opened a branch office, one final week is 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 4,605 branch offices as
of February 28, 1999, primarily staffed by a single registered
representative. The offices are located in all 50 states, predominantly
in communities with populations of under 50,000 and metropolitan
suburbs. The Partnership also operates in Canada (through 181 offices
as of February 28, 1999) and the United Kingdom (through 36 offices as
of February 28, 1999).
8
PART I
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 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 customers' 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 the United Kingdom which is regulated by The
Securities and Futures 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
9
PART I
are not readily convertible into cash and to provide a conservative
statement of other assets such as a company's inventories. 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 Net Capital Rule.
ITEM 2. PROPERTIES
The Partnership conducts its headquarters operations from three
locations in St. Louis County, Missouri, comprising 19 separate
buildings. Two of the locations are owned by the Partnership and the
third location is leased through a long-term operating lease. In
addition, the Partnership leases its Canadian headquarters facility in
Mississauga, Ontario through an operating lease and has a long-term
operating lease for its United Kingdom headquarters located in London,
England. The Partnership also maintains facilities in 4,605 branch
locations (as of February 28, 1999) 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 recent years there has been an increasing incidence of litigation
involving the securities industry. Such suits often seek to benefit
large classes of industry customers; many name securities dealers as
defendants along with exchanges in which they hold membership and seek
large sums as damages under federal and state securities laws, anti-
trust laws, and common law.
Various legal actions are pending against the Partnership, with certain
cases claiming substantial damages. These actions are in various stages
and the results of such actions cannot be predicted with certainty. In
the opinion of management, after consultation with legal counsel, the
ultimate resolution of these actions is not expected to have a material
adverse impact on the Partnership's operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
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 amounts in thousands, except per unit information.)
Summary Income Statement Data:
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Revenue $1,449,963 $1,135,279 $952,068 $722,785 $661,258
Net income $ 199,209 $ 114,184 $ 92,888 $ 58,186 $ 53,857
Net income per
weighted average
$1,000 equivalent
limited partnership
unit outstanding $ 274.30 $ 176.06 $170.63 $125.01 $127.59
Weighted average
$1,000 equivalent
limited partnership
units outstanding 103,747 93,962 96,879 67,345 63,165
Net income per
weighted average
$1,000 equivalent
subordinated limited
partnership unit
outstanding $ 448.17 $ 320.61 $301.44 $225.00 $237.83
Weighted average
$1,000 equivalent
subordinated limited
partnership units
outstanding 44,026 37,332 30,543 27,720 21,789
- -----------------------------------------------------------------------------------------------------------------------------
11
PART II
Item 6. Selected Financial Data
Summary Balance Sheet Data:
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $2,118,844 $1,554,798 $1,380,416 $1,045,501 $953,359
========== ========== ========== ========== ========
Long-term debt $ 41,825 $ 53,350 $ 67,190 $ 70,127 $ 41,779
Other liabilities,
exclusive of
subordinated
liabilities 1,434,020 979,797 826,609 605,080 585,057
Subordinated liabilities 200,275 216,500 216,500 122,000 136,000
Total partnership capital 442,724 305,151 270,117 248,294 190,523
---------- ---------- ---------- ---------- --------
Total liabilities and
partnership capital $2,118,844 $1,554,798 $1,380,416 $1,045,501 $953,359
========== ========== ========== ========== ========
12
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the changes in major categories of
revenues and expenses for the last two years (dollar amounts in
thousands).
1998 vs. 1997 1997 vs. 1996
Increase (Decrease)
Amount Percentage Amount Percentage
- -------------------------------------------------------------------------------------------------------------
Net Revenue:
Commissions $187,392 24% $158,457 26%
Principal transactions (18,271) (11) (5,694) (3)
Investment banking 37,861 273 (1,854) (12)
Interest and dividends 25,300 27 20,212 28
Gain on investment 40,995 N/A - -
Other 41,407 46 12,090 15
-------- --------
Total revenue 314,684 28 183,211 19
Interest expense 3,012 7 7,665 21
-------- --------
Net Revenue 311,672 29 175,546 19
-------- --------
Operating Expenses:
Compensation and benefits 173,000 27 99,300 18
Occupancy and equipment 16,030 12 28,617 27
Communications and data
processing 10,978 14 6,085 9
Payroll and other taxes 10,054 29 5,407 18
Floor brokerage and
clearance fees 1,018 13 1,021 14
Other operating expenses 15,567 19 13,820 21
-------- --------
Total operating expenses 226,647 23 154,250 19
-------- --------
Net income $ 85,025 74% $ 21,296 23%
======== ========
=============================================================================================================
RESULTS OF OPERATIONS (1998 VERSUS 1997)
Revenue and Net Income reached record levels in 1998 of $1.4 billion and
$199 million, respectively. Total revenue compared to 1997 increased
28% and included a $41 million investment gain. Operating expenses
increased 23% compared to 1997. Net income excluding the gain on
investment increased 38% while total net income (including the
investment gain) increased 74% during 1998.
13
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
The Partnership has continued to focus on sales force growth and
increased product and service offerings. The Partnership added 731
(18%) Investment Representatives (IRs) to its sales force, in 1998
ending the year with 4,685 IRs in the United States, Canada and the
United Kingdom. The Partnership continued to expand its offering of
products and financial services during 1998, through the formation of a
joint venture, Edward Jones Mortgage, to provide residential mortgage
lending to Edward Jones' customers. Continued efforts are underway to
provide the technology infrastructure necessary for the partnership to
support continued office growth and new product offerings.
Total revenue increased 28% ($315 million) during 1998 compared to 1997.
Revenue growth was attributable to strong securities markets, an
increase in the number of IRs, continued maturity of existing IRs and
the gain from the Partnership's holdings of Federated securities. The
Partnership segments its revenues between trade revenues (revenues from
buy or sell transactions on securities) and fee revenues (sources other
than trade revenues). Trade revenue comprised 70% of revenue (excluding
the federated gain) versus 72% during 1997. Fee Revenue sources, such as
service fees, management fees, IRA fees and interest income
represented the remaining 30% of revenue (excluding the Federated gain)
reported for 1998.
Trade revenue increased 21% ($169 million) to $987 million during 1998.
Revenue growth resulted from growth in the number of IRs and customer
dollars invested, offset by a decrease in the commission earned on each
dollar invested and one less selling day in 1998 compared to 1997.
Total customer dollars invested were $39.9 billion during 1998,
representing a 22% ($7.3 billion) increase compared to 1997. Continued
maturity and growth of the sales force and strong securities markets
contributed to increasing customer dollars invested to record levels. A
shift in product mix to lower margin products resulted in a 1% decrease
in revenue per $1,000 invested from $25.10 in 1997 to $24.80 in 1998.
Fee revenue sources, which include service fees, revenue sharing
agreements with mutual funds and insurance companies, interest income,
IRA custodial fees and other fees increased 33% ($106 million) to $423
million. Fee revenue is primarily associated with the value of
Customers' Assets. Total Customers' Assets increased 27% to $183
billion in 1998. The Partnership's expansion of its product and service
offerings had a positive impact on Fee revenue.
The Partnership acquired a small interest in Federated Investors in 1989
for $1 million as a strategic investment. The Partnership distributes
Federated's mutual funds. Additionally, since the early 1980's, the
Partnership and Federated have jointly owned Passport Research, Ltd.,
the investment advisor to the Partnership's money market fund, Daily
Passsport Cash Trust. During 1998, the Partnership sold two million
shares of its investment in Federated Investors in Federated's initial
public offering. The Partnership recognized a $41 million gain on its
Federated holding. The gain included $35 million realized from the sale
of two million shares and $6 million unrealized from 400,000 shares
still held.
Focusing on changes in major revenue categories, Commissions increased
24% ($187 million) during 1998. Mutual fund commissions increased 30%
($122 million) and accounted for 65% of Commission revenue growth.
Listed and over-the-counter (OTC) agency commissions increased 24% ($49
million) over 1997 levels accounting for 26% of the total commission
growth for 1998. The remaining commission growth resulted primarily
from a $17 million increase in insurance commissions.
Principal transaction revenue decreased 11% ($18 million) during 1998.
Product categories experiencing the greatest declines were CDs and
Corporate Bonds. Customers tended to invest more in mutual fund and
equities in 1998 and trended away from fixed income securities.
14
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Investment Banking revenues increased 273% ($38 million) compared to
1997 and represented 12% of total revenue growth for the partnership.
The Partnership was more active in originating equity and debt
securities for major issuers.
Interest and dividend income increased 27% ($25 million) to $118.2
million. Interest from customer loans increased 41% ($27.4 million) as
the Partnership's customer loan balances increased to $1.1 billion (29%)
during 1998.
Other Revenue increased 46% ($41 million) compared to 1997. Fee revenue
received from mutual fund and insurance products, and money market
management fees increased 80% ($26 million) and 25% ($9 million),
respectively. Fee revenues are earned based on Customer Asset balances.
Customers' Assets continued to grow during 1998 due to strong securities
markets and an increase in the number of customers the Partnership
serves as it increased its sales force. Additionally, the number of IRA
accounts increased, resulting in custodial fee revenue growth of 32% ($4
million).
Interest expense increased 7% ($3 million) compared to 1997. The
interest expense growth is directly related to interest paid on customer
balances.
Operating Expenses increased 23% ($227 million) to $1.2 billion in 1998.
Compensation costs represent 76% ($173 million) of the total expense
growth for the year. Sales compensation increased 22% ($87.8 million)
due to increased revenue and an increased number of IRs. Variable
compensation which expands and contracts in relation to revenues net
income and profit margin, increased 50% ($45 million) in 1998 due to the
Partnership's strong revenue and earnings levels. Bonuses paid to IRs
and BOAs increased 57% ($31.3 million), and profit sharing expense
increased 37% ($10.8 million). Remaining increases in compensation
expense are primarily attributable to increased payroll for existing
personnel and additional support at both the headquarters and in the
branches.
Occupancy and Equipment and Communications and data processing expenses
increased 12% ($16 million) and 14% ($11 million) compared to 1997. The
Partnership continues to expand its headquarters, branch locations and
communications systems to enable it to continue to increase the number
of its IRs, locations, and customers.
Other operating expenses include costs associated with the firm's
marketwide advertising program which expanded in 1998. Remaining
expense increases represent costs necessary to support a larger
organization.
RESULTS OF OPERATIONS (1997 VERSUS 1996)
Revenue exceeded $1 billion and net income exceeded $100 million for the
first time in the Partnership's history. Revenues of $1.135 billion
increased by 19% ($183.2 million) and expenses of $1.021 billion
increased by 19% ($161.9 million) compared to 1996. As a result, net
income increased 23% ($21.3 million) over 1996 to $114.2 million.
The Partnership also progressed on other significant objectives in 1997,
which include growth of its sales force, expansion of the products and
services offered to customers, and implementation of new technology.
During 1997, the Partnership added 428 (12%) Investment Representatives
("IRs") to its sales force, ending the year with 3,954 IRs in the United
States and Canada. The Partnership continued to expand its offering of
products and services through the co-issuance of a credit card.
Additionally, its trust services, which commenced in 1996, were expanded
to all 50 states. The Partnership completed its conversion to client
server technology in all of its branch offices during mid-1997. This
conversion marked the beginning of a new technological infrastructure
for the Partnership which will support growth
15
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
in the number of offices and the ability to offer more products and
services to meet the needs of the individual investor.
Looking at the financial results of 1997, strong securities markets,
coupled with growth in the number of IRs and continued maturity of
existing IRs, helped to increase revenues 19% in 1997. The Partnership
segments its revenues between Trade Revenues (revenues resulting from a
customer trade) and Fee Revenue (revenue sources which are not
transaction oriented). Trade Revenue accounted for 72% of total revenues
versus 74% of total revenues in 1996. Fee Revenue sources, such as
Service Fees, management fees, IRA fees, and interest income, accounted
for the remaining 28% of revenue in 1997.
Trade Revenues increased 16% ($111.7 million) to $818.2 million in 1997.
This increase is a result of increased IRs, and increased customer
dollars invested, offset by a decrease in the commission earned on every
dollar invested and one less selling day in 1997 compared to 1996. Total
customer dollars invested of $32.6 billion increased 19% ($5.3 billion)
over 1996 due to the strong financial markets and the continued maturity
and growth of the sales force. These positive factors were offset
slightly by a shift in the product mix sold. The shift in customer
demand to lower commission equity products resulted in a 3% decrease in
the revenue earned per $1,000 dollars invested from $25.90 in 1996 to
$25.10 in 1997.
Fee Revenue sources, which include service fees, revenue sharing
agreements with mutual funds and insurance companies, interest income,
and IRA custodial fees and other fees, increased 30% ($72.2 million) to
$317.1 million. These revenues are directly related to the value of
Customers' Assets. New Customer Assets were accumulated through
securities transactions in 1997 and strong markets continued to help
increase existing assets. Total Customers' Assets increased 29% to $144
billion in 1997. Loans to EDJ customers, which is the base for a
significant portion of interest income, increased 46% to $878 million at
the end of 1997.
Focusing on changes in major revenue categories, Commissions increased
26% ($158.5 million) for the period. Mutual fund commissions increased
28% ($88.3 million) due to increased transaction revenue (67% of the
increase) and increased service fees paid on Customers' Assets (33% of
the increase). Listed and Over-the-Counter (OTC) agency commissions
increased 33% ($50.1 million) due to increased transactions resulting
from a shift in the overall product mix to equities throughout 1997.
Insurance and Annuity commissions increased 16% ($21.9 million) due to
increased transaction revenue (62% of overall increase) and increased
service fees (38% of increase).
Principal Transaction revenues decreased 3% ($5.7 million) as customers
invested more in equities and mutual fund products in 1997. CD revenue
declined 37% ($15.8 million) and was the primary reason for the
decreased revenue. This decline was offset by increases in Equity Unit
Investment Trusts of 109% ($5.4 million) and Municipal Bonds of 7% ($3.4
million).
Interest and dividend income increased 28% ($20.2 million) to $92.9
million primarily due to increased loans to customers. Interest from
customer loans increased 37% ($18.0 million) due to growth in the loan
base throughout 1997. The remaining increase is due to interest earned
on product inventories held for sale to the Partnership's customers.
Other Revenues increased 15% ($12.1 million) over 1996; however, 1996
included a $7.0 million gain from the sale of the Partnership's minority
interest in a mutual fund company. Excluding this gain, Other Revenues
increased 27% ($19.1 million) over 1996. Revenues from money market
management fees and fee revenue received from mutual fund and insurance
products increased 20% ($5.9 million) and 37% ($8.8 million),
respectively. These increases are attributable to increased Customers'
Assets. Custodial fees from IRA accounts increased 37% ($3.3 million)
due to the result of increased numbers of accounts. The remaining
increase is due to increased services offered to customers of the
Partnership.
16
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Expenses increased 19% ($161.9 million) to $1.021 billion in 1997.
Increased compensation costs account for 61% ($99.3 million) of the
expense increases. Sales Compensation increased 18% ($58.2 million) due
to increased revenues and IRs. The Partnership also has a variable
compensation structure which expands and contracts in relation to
revenues, net income, and profit margin. Since revenues and net income
increased significantly over 1996, the variable compensation increased
as well. Bonuses paid to IRs increased 21% ($9.7 million) as a result of
the strong revenues and profits compared to 1996. Profit Sharing
increased 22% ($5.3 million) as a result of increased net income over
1996. The remaining increase in Compensation costs is attributable to
increased payroll costs of existing and additional support personnel in
both the Headquarters and individual branch offices.
The Partnership continued to build the infrastructure necessary to
support a larger sales force which included investments in technology
and expansion of the branch network. Occupancy and equipment and
Communications and data processing costs increased 27% ($28.6 million)
and 9% ($6.1 million), respectively over 1996 levels. These increases
are due to growth in the branch office network and the implementation of
client server technology. The addition of client server and other
equipment added $20.0 million in lease and depreciation expense (70% of
the increased Occupancy and Communications increase). The remaining
increase is due to growth in the number of offices and other client
server related expenditures not captured in depreciation or lease
expenses.
Interest expense increased 21% ($7.7 million) to $44.0 million. In late
1996, the Partnership issued $94.5 million in Subordinated Debt. Also,
the Partnership pays interest on certain customer balances of EDJ. The
additional debt and growth in the average customer balances resulted in
the increased interest expense in 1997.
Of the remaining expenses, increases were primarily related to costs
necessary to support a larger organization.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's equity capital at December 31, 1998, including the
reserve for anticipated withdrawals, was $442.7 million compared to
$305.2 million as of December 31, 1997. Equity capital has increased
primarily due to retention of General Partner earnings, net
contributions of subordinated limited partnership capital, and
completion of a $62 million limited partnership offering in July, 1998.
At December 31, 1998, the Partnership had $143.7 million in cash and
cash equivalents. Lines of credit are in place at ten banks aggregating
$575 million ($500 million of which is through uncommitted lines of
credit). Actual borrowing availability is primarily based on securities
owned and customers' margin securities which serve as collateral for the
loans.
A substantial portion of the Partnership's assets are primarily liquid,
consisting mainly of cash and assets readily convertible into cash.
These assets are financed primarily by customer credit balances, equity
capital, bank lines of credit and other payables. The Partnership has
$166.9 million in U.S. agency and treasury securities (Investment
Securities) which can be sold to meet liquidity needs. The Partnership
believes that the liquidity provided by existing cash balances,
borrowing arrangements, and investment securities will be sufficient to
meet the Partnership capital and liquidity requirements.
The Partnership's growth in recent years has been financed through sales
of limited partnership interests to its employees, retention of
earnings, and private placements of long-term and subordinated debt.
17
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
The Partnership's principal subsidiary, Edward D. Jones & Co., L.P.
("EDJ") as a securities broker/dealer, is subject to the Securities and
Exchange Commission regulations requiring EDJ to maintain certain
liquidity and capital standards. EDJ has been in compliance with these
regulations.
For the year ended December 31, 1998, cash and cash equivalents
increased $82 million. Cash flows from operating activities provided
$194.4 million. Investing activities used $23 million. Fixed asset
purchases totalled $58.6 million, and were offset by $35.6 million in
proceeds from the Federated security sale. Cash flows from financing
activities used $89.4 million for partnership withdrawals and repayment
of subordinated liabilities. A significant source of cash from financing
activities was a $62 million limited partnership offering in July, 1998.
For the year ended December 31, 1997, cash and cash equivalents
decreased $3.1 million. Cash flows from operating activities provided
$143.4 million. Investing activities used $53.6 million for the
purchase of fixed assets primarily related to the purchase of client
server equipment. Cash flows from financing activities used $93 million
primarily for withdrawals and distributions from partnership capital and
to repay long-term debt.
For the year ended December 31, 1996, cash and cash equivalents
increased $20.7 million. Cash flows from operating activities provided
$107.9 million. Investing activities used $107.6 million primarily for
the purchase of fixed assets and investment securities. Financing
activities which provided cash were the issuance of long-term debt,
subordinated liabilities and partnership interests. Cash flows from
financing activities provided $20.5 million primarily from the issuance
of subordinated debt offset by capital withdrawals and distributions.
As a result of its activities as a broker/dealer, EDJ, the Partnership's
principal subsidiary, is subject to the Net Capital provisions of Rule
15c3-1 of the Securities Exchange Act of 1934 and the capital rules of
the New York Stock Exchange. Under the alternative method permitted by
the rules, EDJ must maintain minimum Net Capital, as defined, equal to
the greater of $250,000 or 2% of aggregate debit items arising from
customer transactions. The Net Capital Rule also provides that
partnership capital may not be withdrawn if resulting Net Capital would
be less than 5% of aggregate debit items. Additionally, certain
withdrawals require the consent of the SEC to the extent they exceed
defined levels even though such withdrawals would not cause Net Capital
to be less than 5% of aggregate debit items. At December 31, 1998, EDJ's
Net Capital of $298.3 million was 26% of aggregate debit items and its
net capital in excess of the minimum required was $275.4 million. Net
Capital as a percentage of aggregate debits after anticipated
withdrawals was 25%. Net Capital and the related capital percentage may
fluctuate on a daily basis.
There were no material changes in the Partnership's overall financial
condition during the year ended December 31, 1998, compared with the
year ended December 31, 1997. The Partnership's consolidated statement
of financial condition is comprised primarily of cash and assets readily
convertible into cash. Securities inventories are carried at market
value and are readily marketable. Customer margin accounts are
collateralized by marketable securities. Other customer receivables and
receivables and payables with other broker/dealers normally settle on a
current basis. Liabilities, including amounts payable to customers,
checks and accounts payable and accrued expenses are sources of funds to
the Partnership. These liabilities, to the extent not utilized to
finance assets, are available to meet liquidity needs and provide funds
for short-term investments, which favorably impacts profitability.
YEAR 2000 SYSTEM ISSUES
The Partnership has been preparing its systems for the Year 2000. Year
2000 plans encompass The Jones Financial Companies, L.L.L.P. and its
subsidiaries, both domestic and international. The Partnership's
18
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
assessment of the impact of Year 2000 on its systems and the steps
required to modify its systems is substantially complete. The
Partnership is in the process of implementing these steps through
renovation and replacement of its systems and testing.
The Partnership participated in the March, 1999 securities industry test
and plans to have its Year 2000 efforts, including testing, completed by
June 30, 1999. Contingency plans for the Year 2000 were completed
durding March 1999. The cost of preparing the systems for Year 2000
compliance is not anticipated to have a material impact on the
Partnership's operating results or financial condition.
In addition to renovating its own systems, the Partnership is working
with its vendors to assess their Year 2000 readiness. Regardless of
these efforts, no level of effort or testing can guarantee that
potential Year 2000 problems will not occur.
FORWARD-LOOKING STATEMENTS
The Management's Financial Discussion, including the discussion under
"Year 2000," contains forward-looking statements within the meaning of
federal securities laws. Actual results are subject to risks and
uncertainties, including both those specific to the Partnership and
those specific to the industry which could cause results to differ
materially from those contemplated. The risks and uncertainties
include, but are not limited to, third-party or Partnership failures to
achieve timely, effective remediation of the Year 2000 issues, 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.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities", which
requires that all derivatives be recognized as either assets or
liabilities in the statement of financial position at fair value unless
specific hedge criteria are met. The Partnership is required to adopt
the provisions of SFAS 133 in the year 2000. Adoption of this statement
is not expected to significantly impact the Partnership's consolidated
financial position, results of operations or cash flows.
ITEM 7A . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Securities and Exchange Commission 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 maintains inventories as detailed in Note 5 to the
Consolidated Financial Statements. The fair value of these securities
at December 31, 1998 was $111 million in long positions and $19 million
in short positions. The Partnership performed an analysis of its
financial instruments and assessed the related interest rate risk and
materiality in accordance with the rules. Based on this analysis, in
the opinion of management, the risk associated with the Partnership's
financial instruments at December 31, 1998 will not have a material
adverse effect on the consolidated financial position or results of
operations of the Partnership.
19
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements Included in this Item
Page No.
Report of Independent Public Accountants 21
Consolidated Statements of Financial Condition as of
December 31, 1998 and 1997 22
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 24
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 25
Consolidated Statements of Changes in Partnership Capital
for the years ended December 31, 1998, 1997 and 1996 26
Notes to Consolidated Financial Statements 27
20
PART II
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Jones Financial Companies, L.L.L.P.:
We have audited the accompanying consolidated statements of financial
condition of The Jones Financial Companies, L.L.L.P. (a Missouri Limited
Liability Limited Partnership) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, cash flows
and changes in partnership capital for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Jones
Financial Companies, L.L.L.P. and subsidiaries as of December 31, 1998
and 1997, and the results of their operations, their cash flows and the
changes in their partnership capital for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 22, 1999
21
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,
(Amounts in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 143,745 $ 61,738
Securities purchased under agreements to resell 115,000 1,450
Receivable from:
Customers (Note 2) 1,165,483 894,509
Brokers, dealers and clearing organizations (Note 3) 34,518 26,449
Mortgages and loans (Note 4) 68,822 70,545
Securities owned, at market value (Note 5):
Inventory securities 110,864 63,407
Investment securities 166,887 171,087
Equipment, property and improvements (Note 6) 201,901 187,540
Other assets 111,624 78,073
---------- ----------
TOTAL ASSETS $2,118,844 $1,554,798
=====================================================================================================
The accompanying notes are an integral part of these statements.
22
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,
(Amounts in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------
Bank loans (Note 7) $ 6,967 $ 19,000
Payable to:
Customers (Note 2) 1,045,440 664,874
Brokers, dealers and clearing organizations (Note 3) 55,423 34,100
Depositors (Note 8) 74,152 67,588
Securities sold but not yet purchased,
at market value (Note 5) 18,928 17,198
Accounts payable and accrued expenses 75,811 59,472
Accrued compensation and employee benefits 157,299 117,565
Long-term debt (Note 9) 41,825 53,350
---------- ----------
1,475,845 1,033,147
---------- ----------
Liabilities subordinated to claims
of general creditors (Note 10) 200,275 216,500
---------- ----------
Partnership capital (Notes 11 and 12):
Limited partners 152,732 92,965
Subordinated limited partners 44,896 37,446
General partners 204,734 146,817
---------- ----------
402,362 277,228
Partnership capital reserved for anticipated withdrawals 40,362 27,923
---------- ----------
TOTAL PARTNERSHIP CAPITAL 442,724 305,151
---------- ----------
TOTAL LIABILITIES AND CAPITAL $2,118,844 $1,554,798
======================================================================================================
The accompanying notes are an integral part of these statements.
23
PART II
Item 8. Financial Statements and Supplementary Data
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended
-------------------------------------------------
(Amounts in thousands, December 31, December 31, December 31,
except per unit information) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Net Revenue:
Commissions $ 959,419 $ 772,027 $613,570
Principal transactions 147,938 166,209 171,903
Investment banking 51,726 13,865 15,719
Interest and dividends 118,238 92,938 72,726
Gain on investment 40,995 - -
Other 131,647 90,240 78,150
---------- ---------- --------
Total Revenue 1,449,963 1,135,279 952,068
Interest expense (Notes 2, 7, 8, 9, 10 and 11) 46,986 43,974 36,309
---------- ---------- --------
Net Revenue 1,402,977 1,091,305 915,759
---------- ---------- --------
Operating Expenses:
Compensation and benefits (Note 13) 816,025 643,025 543,725
Occupancy and equipment (Notes 6 and 14) 150,163 134,133 105,516
Communications and data processing 87,381 76,403 70,318
Payroll and other taxes 45,018 34,964 29,557
Floor brokerage and clearance fees 9,123 8,105 7,084
Other operating expenses 96,058 80,491 66,671
---------- ---------- --------
Total Operating Expenses 1,203,768 977,121 822,871
---------- ---------- --------
Net income $ 199,209 $ 114,184 $ 92,888
========== ========== ========
Net income allocated to:
Limited partners $ 28,458 $ 16,543 $ 16,530
Subordinated limited partners 19,731 11,969 9,207
General partners 151,020 85,672 67,151
---------- ---------- --------
$ 199,209 $ 114,184 $ 92,888
========== ========== ========
Net income per weighted average $1,000
equivalent partnership units outstanding:
Limited partners $ 274.30 $ 176.06 $ 170.63
========== ========== ========
Subordinated limited partners $ 448.17 $ 320.61 $ 301.44
========== ========== ========
Weighted average $1,000 equivalent
partnership units outstanding:
Limited partners 103,747 93,962 96,879
========== ========== ========
Subordinated limited partners 44,026 37,332 30,543
========== ========== ========
The accompanying notes are an integral part of these statements.
24
PART II
Item 8. Financial Statements and Supplementary Data
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
------------------------------------------------
December 31, December 31, December 31,
(Amounts in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 199,209 $ 114,184 $ 92,888
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 44,201 39,741 30,880
Gain on investment (40,995) - -
(Increase) decrease in securities purchased under
agreements to resell (113,550) 143,550 (145,000)
Decrease (increase) in net receivable from customers 109,592 (208,973) 102,799
Increase in net payable to brokers, dealers and
clearing organizations 13,254 16,351 11,437
Decrease (increase) in receivable from mortgages
and loans 1,723 (4,429) (7,280)
(Increase) decrease in securities owned, net (41,527) (961) 24,709
Increase in payable to depositors 6,564 4,463 1,936
Increase in accounts payable
and other accrued expenses 56,073 37,254 25,429
(Decrease) increase in bank loans (12,033) 16,250 (29,753)
Increase in other assets (28,151) (13,998) (176)
--------- --------- ---------
Net cash provided by operating activities 194,360 143,432 107,869
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of equipment, property and improvements (58,562) (53,562) (59,504)
Purchase of investment securities - - (48,117)
Proceeds from sale of investment 35,595 - -
--------- --------- ---------
Net cash used in investing activities (22,967) (53,562) (107,621)
--------- --------- ---------
CASH FLOWS (USED) PROVIDED BY FINANCING ACTIVITIES:
Issuance of long-term debt - - 7,993
Repayment of long-term debt (11,525) (13,840) (10,930)
Issuance of subordinated liabilities - - 94,500
Repayment of subordinated liabilities (16,225) - -
Issuance of partnership interests 69,771 8,833 3,365
Redemption of partnership interests (2,554) (3,407) (5,733)
Withdrawals and distributions from partnership capital (128,853) (84,576) (68,697)
--------- --------- ---------
Net cash (used) provided by financing activities (89,386) (92,990) 20,498
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 82,007 (3,120) 20,746
CASH AND CASH EQUIVALENTS,
Beginning of year 61,738 64,858 44,112
--------- --------- ---------
End of year $ 143,745 $ 61,738 $ 64,858
========= ========= =========
Cash paid for interest $ 47,274 $ 43,823 $ 33,982
========= ========= =========
==================================================================================================================
The accompanying notes are an integral part of these statements.
25
PART II
Item 8. Financial Statements and Supplementary Data
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Amounts in thousands) Capital Capital Capital Total
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 98,410 $ 28,943 $103,465 $ 230,818
Issuance of partnership interests - 3,365 - 3,365
Redemption of partnership interests (2,603) (3,130) - (5,733)
Net income 16,530 9,207 67,151 92,888
Withdrawals and distributions (5,337) (6,713) (39,171) (51,221)
Reserved for anticipated withdrawals (11,193) (2,494) (8,273) (21,960)
-------- -------- -------- ---------
Balance, December 31, 1996 95,807 29,178 123,172 248,157
Issuance of partnership interests - 8,833 - 8,833
Redemption of partnership interests (2,842) (565) - (3,407)
Net income 16,543 11,969 85,672 114,184
Withdrawals and distributions (6,388) (8,262) (47,966) (62,616)
Reserved for anticipated withdrawals (10,155) (3,707) (14,061) (27,923)
-------- -------- -------- ---------
Balance, December 31, 1997 92,965 37,446 146,817 277,228
Issusance of partnership interests 62,265 7,506 - 69,771
Redemption of partnership interests (2,498) (56) - (2,554)
Net income 28,458 19,731 151,020 199,209
Withdrawals and distributions (10,804) (15,775) (74,351) (100,930)
Reserved for anticipated withdrawals (17,654) (3,956) (18,752) (40,362)
-------- -------- -------- ---------
Balance, December 31, 1998 $152,732 $ 44,896 $204,734 $ 402,362
The accompanying notes are an integral part of these statements.
26
PART II
Item 8. Financial Statements and Supplementary Data
THE JONES FINANCIAL COMPANIES, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(Amounts in thousands)
NOTE 1 - SUMMARY OF 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 (the
"Partnership"). All material intercompany balances and transactions have
been eliminated. 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"), is engaged in business as a registered broker/dealer
primarily serving individual investors. The Partnership derives its
revenues from the sale of listed and unlisted securities and insurance
products, investment banking and principal transactions, and is a
distributor of mutual fund shares. The Partnership conducts business
throughout the United States, Canada and the United Kingdom with its
customers, various brokers, dealers, clearing organizations,
depositories and banks.
The financial statements have been prepared under the accrual basis of
accounting which requires the use of certain estimates by management in
determining the Partnership's assets, liabilities, revenues and
expenses.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL. The Partnership invests
in short-term resale 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 transaction. It is the Partnership's
policy to have such underlying collateral deposited in its accounts at
its custodian banks. Resale agreements are carried at the amount at
which the securities will be subsequently resold as specified in the
agreements.
TRANSACTIONS. The Partnership's securities activities involve execution,
settlement and financing of various securities transactions for
customers. These transactions (and related revenue and expense) are
recorded on a settlement-date basis, generally representing the third
business day following the transaction date, which is not materially
different than 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. Boone
National Savings and Loan Association, F.A. (the "Association"), a
wholly owned subsidiary of the Partnership, makes commercial, real
estate, and other loans to individuals primarily to customers in Central
Missouri. Additionally, the Association offers trust services to EDJ
customers through its division, the Edward Jones Trust Co.
27
PART II
Item 8. Financial Statements and Supplementary Data
SECURITIES-LENDING ACTIVITIES. Securities borrowed and securities
loaned transactions are generally reported as collateralized financings.
Securities-borrowed transactions require the Partnership to deposit cash
or other collateral with the lender. With respect to securities loaned,
the Partnership receives collateral in the form of cash or other
collateral in an amount generally in excess of the market value of
securities loaned. The Partnership monitors the market value of
securities borrowed and loaned on a daily basis, with additional
collateral obtained or refunded as necessary.
SECURITIES OWNED. Securities owned are valued at current market prices.
COLLATERAL. The Partnership continues to report asssets it has pledged
as collateral in secured borrowing 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 generally does not report assets received as collateral in
secured lending and other arrangements because the debtor typically has
the right to redeem the collateral on short notice.
EQUIPMENT, PROPERTY AND IMPROVEMENTS. Equipment, including furniture and
fixtures, is depreciated using straight-line and accelerated methods
over estimated useful lives of five to seven years. Buildings are
depreciated using the straight-line method over their useful lives,
which are estimated between thirty and thirty-two 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,
and any resulting gain or loss is reflected in income for the period.
The cost of maintenance and repairs is charged against income as
incurred, whereas significant renewals and betterments are capitalized.
SEGREGATED CASH AND SECURITIES OWNED. Cash and securities of $34,338 and
$43,474 were segregated in a special bank account for the benefit of
customers as of December 31, 1998 and 1997, respectively, under rule
15c3-3 of the Securities and Exchange Commission.
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 partners are liable for
their own tax payments.
NOTE 2 - RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
Accounts receivable from and payable to customers include margin
balances and amounts due on uncompleted transactions. Values of
securities owned by customers and held as collateral for these
receivables are not reflected in the 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.
28
PART II
Item 8. Financial Statements and Supplementary Data
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:
1998 1997
- --------------------------------------------------------------------------------
Securities failed to deliver $ 9,397 $ 4,851
Deposits paid for securities borrowed 12,243 10,985
Deposits with clearing organizations 2,394 2,318
Other 10,484 8,295
------- -------
Total receivable from brokers, dealers
and clearing organizations $34,518 $26,449
======= =======
Securities failed to receive $11,651 $10,873
Deposits received for securities loaned 43,651 23,207
Other 121 20
------- -------
Total payable to brokers, dealers and
clearing organizations $55,423 $34,100
======= =======
NOTE 4 - RECEIVABLE FROM MORTGAGES AND LOANS
Receivable from mortgages and loans is comprised of the Association's
mortgage loans, which are primarily adjustable rate, 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.
NOTE 5 - SECURITIES OWNED
Securities owned are summarized as follows (at market value):
1998 1997
----------------------------- ----------------------------
Securities Securities
Sold but Sold but
Securities not yet Securities not yet
Owned Purchased Owned Purchased
- -------------------------------------------------------------------------------------------------------------------
Inventory Securities:
Certificates of deposit $ 1,481 $ 875 $ 7,921 $ 1,392
U.S. and Canadian government
and U.S. agency obligations 11,239 12,782 9,338 8,599
State and municipal obligation 76,764 384 32,319 190
Corporate bonds and notes 17,955 3,307 8,689 4,881
Corporate stocks 3,425 1,580 5,140 2,136
-------- ------- -------- -------
$110,864 $18,928 $ 63,407 $17,198
======== ======= ======== =======
Investment Securities:
U.S. government and agency
obligations $166,887 $171,087
======== ========
29
PART II
Item 8. Financial Statements and Supplementary Data
The Partnership attempts to reduce its exposure to market price
fluctuations of its inventory securities through the sale of U.S.
government securities. The amount of the securities purchased or sold
will fluctuate on a daily basis due to changes in interest rates and
market conditions. Any gain or loss on the hedging activities is
recognized in Principal transaction revenue.
NOTE 6 - EQUIPMENT, PROPERTY AND IMPROVEMENTS
Equipment, property and improvements are summarized as follows:
1998 1997
- --------------------------------------------------------------------------------------------------
Land $ 13,505 $ 13,756
Buildings and improvements 112,215 103,577
Equipment, furniture and fixtures 291,964 251,015
--------- ---------
Total equipment, property and improvements 417,684 368,348
Accumulated depreciation and amortization (215,783) (180,808)
--------- ---------
Equipment, property and improvements, net $ 201,901 $ 187,540
========= =========
NOTE 7 - BANK LOANS
EDJ borrows from banks on a short-term basis primarily to finance
customer margin balances and inventory securities. As of December 31,
1998, the Partnership had bank lines of credit aggregating $575,000 of
which $500,000 was through uncommitted facilities. Actual borrowing
availability is primarily based on securities owned and customers'
margin securities. At December 31, 1998 and 1997, collateral with a
market value of $1,149,316 and $766,264, respectively, was available to
support secured bank loans of EDJ. Total bank loans outstanding under
these lines were $15,000 as of December 31, 1997. The Association had
loans from The Federal Home Loan Bank of $6,967 and $4,000 as of
December 31, 1998 and 1997, respectively, which are secured by mortgage
loans. Bank loans outstanding approximate their fair value.
Interest is at a fluctuating rate (weighted average rate of 5.8% and
6.6% at December 31, 1998 and 1997, respectively) based on short-term
lending rates. The average of the aggregate short-term bank loans
outstanding was $13,107, $10,424 and $3,025 and the average interest
rate (computed on the basis of the average aggregate loans outstanding)
was 6.1%, 6.0%, and 6.7% for the years ended December 31, 1998, 1997 and
1996, respectively.
NOTE 8 - PAYABLE TO DEPOSITORS
Amounts payable to depositors is comprised 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.
30
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 9 - LONG-TERM DEBT
Long-term debt is comprised of the following:
1998 1997
- --------------------------------------------------------------------------------------------------
Note payable, secured by equipment, interest at
a rate of 6.66% at December 31, 1998, due in
installments of principal plus interest, maturing
through December 2000. $ 4,250 $ 9,250
Notes payable, secured by property, interest
rates ranging from 6.62% to 8.72% at
December 31, 1998, principal and interest
due in monthly installments, maturing from
June 2003 through April 2008. 36,082 40,403
Notes payable, secured by the Association's
stock, interest at a rate of 7.6% at
December 31, 1998, annual principal due plus
interest, maturing through June 2000. 1,493 3,697
------- -------
$41,825 $53,350
======= =======
Scheduled annual principal payments, as of December 31, 1998 are as
follows:
Year Principal Payment
---- -----------------
1999 $ 6,787
2000 8,419
2001 5,334
2002 5,781
2003 4,157
Thereafter 11,347
-------
$41,825
=======
The Partnership has land, buildings and equipment and the Association's
stock, with carrying values at December 31, 1998 of $58,106 and $10,543,
respectively, which are subject to security agreements which
collateralize various notes payable. Certain agreements contain
restrictions that among other things, require maintenance of certain
financial ratios, levels of indebtedness and limit the withdrawal of
partnership capital. The carrying amounts of the long-term debt
approximate their fair value as of December 31, 1998 and 1997.
31
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 10 - LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Liabilities subordinated to the claims of general creditors consist of:
1998 1997
- -------------------------------------------------------------------------------------------------
Capital notes, 8.18%, due in annual installments of $10,500
commencing on September 1, 2000, with a final
installment on September 1, 2008. $ 94,500 $ 94,500
Capital notes, 7.95%, due in annual
installments of $10,225 commencing on
April 15, 1998, with a final installment
of $10,200 due on April 15, 2006. 81,775 92,000
Capital notes, 8.96%, due in annual
installments of $6,000 commencing on
May 1, 1998, with a final installment on
May 1, 2002 24,000 30,000
-------- --------
$200,275 $216,500
======== ========
Required annual principal payments, as of December 31, 1998, are as
follows:
Year Principal Payment
---- -----------------
1999 $ 16,225
2000 26,725
2001 26,725
2002 26,725
2003 20,725
Thereafter 83,150
--------
$200,275
========
The capital note agreements contain restrictions that 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, 1998, the
Partnership was required, under the note agreements, to maintain minimum
partnership capital of $165,000 and Net Capital as computed in
accordance with the uniform Net Capital Rule of 7.5% of aggregate debit
items, or $85,774.
The subordinated liabilities are subject to cash subordination
agreements approved by the New York Stock Exchange and, therefore, are
included in the Partnership's computation of Net Capital under the
Securities and Exchange Commission's uniform Net Capital Rule. The
Partnership has estimated the fair value of the subordinated capital
notes to be approximately $213,315 and $226,655 as of December 31, 1998
and 1997, respectively.
32
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 11 - PARTNERSHIP CAPITAL
The limited partnership capital, consisting of 152,732 and 92,965 $1,000
units at December 31, 1998 and 1997, 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 $8,808, $7,053
and $7,271, for the years ended December 31, 1998, 1997 and 1996,
respectively, paid to limited partners on capital contributed.
The subordinated limited partnership capital, consisting of 44,896 and
37,446 $1,000 units at December 31, 1998 and 1997, 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 or general partner's capital is payable in four
equal annual installments. The repayments of withdrawing limited,
subordinated limited and general partners' capital commences at their
withdrawal dates.
NOTE 12 - CAPITAL REQUIREMENTS
As a result of its activities as a broker/dealer, EDJ is subject to the
Net Capital provisions of Rule 15c3-1 of the Securities Exchange Act of
1934 and the capital rules of the New York Stock Exchange. Under the
alternative method permitted by the rules, EDJ must maintain minimum Net
Capital, as defined, equal to the greater of $250 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, 1998, EDJ's Net Capital of $298,256 was 26% of aggregate
debit items and its Net Capital in excess of the minimum required was
$275,383. Net Capital as a percentage of aggregate debits after
anticipated withdrawals was 25%. Net Capital and the related capital
percentage may fluctuate on a daily basis.
The Association is required under federal regulation to maintain
specified levels of liquidity and capital standards. The Association is
in compliance with these regulations as of December 31, 1998.
NOTE 13 - EMPLOYEE BENEFIT PLAN
The Partnership maintains a profit sharing plan covering all eligible
employees. Contributions to the plan are at the discretion of the
Partnership. Additionally, participants may contribute on a voluntary
basis. Approximately $39,805, $29,014 and $23,634 were provided by the
Partnership for its contributions to the plan for the years ended
December 31, 1998, 1997 and 1996, respectively.
33
PART II
Item 8. Financial Statements and Supplementary Data
NOTE 14 - COMMITMENTS
Furniture, fixtures, computer and communication equipment are rented
under various operating leases. Additionally, branch offices are leased
on a three to five year basis and are cancellable at the option of the
Partnership. Rent expense was $82,670, $73,146, and $55,959 for the
years ended December 31, 1998, 1997 and 1996, respectively. The
Partnership's non-cancellable lease commitments greater than one year
are summarized below:
1999 $58,266
2000 41,028
2001 33,866
2002 20,555
2003 11,873
Thereafter 14,676
NOTE 15 - CONTINGENCIES
Various legal actions are pending against the Partnership with certain
cases claiming substantial damages. These actions are in various stages
and the results of such actions cannot be predicted with certainty. In
the opinion of management, after consultation with legal counsel, the
ultimate resolution of these actions is not expected to have a material
adverse impact on the Partnership's results of operations or financial
condition.
34
PART III
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
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 February 26, 1999, the Partnership was comprised of
166 general partners, 3,943 limited partners and 84 subordinated limited
partners. Under the terms of the Partnership Agreement, John W.
Bachmann 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 166 general partners.
The Executive Committee of the Partnership is comprised of John W.
Bachmann, Douglas E. Hill, Michael R. Holmes, Richie L. Malone, Steven
Novik, Darryl L. Pope and Robert Virgil, Jr. 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 February 26, 1999:
Name Age Partner Area of Responsibility
- --------------------------------------------------------------------------------------------
John W. Bachmann 60 1970 Managing Partner
Douglas E. Hill 54 1974 Product & Sales Division
Michael R. Holmes 40 1996 Human Resources
Richie L. Malone 50 1979 Information Systems
Steven Novik 49 1983 Finance & Accounting
Darryl L. Pope 59 1971 Service Division
Robert Virgil, Jr. 64 1993 Headquarters Administration
Each member of the Executive Committee has been a general partner of the
Partnership for more than five preceding years, except for Michael R.
Holmes. Prior to 1996, Michael R. Holmes served as the Human Resource
Officer for Automatic Data Processing.
35
PART III
Item 10. Directors and Executive Officers of the Registrant
John W. Bachmann is a director of Trans World Airlines, St. Louis,
Missouri. Robert Virgil, Jr. is a director of CPI Corp., St. Louis,
Missouri, General American Life Insurance Company, St. Louis, Missouri,
and OmniQuip International, Inc., Port Washington, Wisconsin.
ITEM 11. EXECUTIVE COMPENSATION
The following table identifies the six highest compensated individuals
of the Partnership during the three most recent years (including
respective shares of profit participation).
Return to General
Partner Capital
------------------------------
Net income General Partner
Deferred allocated invested
Compen- to General Capital at Total
Year Salaries sation Partners 12/31
- -----------------------------------------------------------------------------------------------------------------------------
John W. Bachmann 1998 193,750 8,736 3,894,758 4,955,447 4,097,244
1997 175,000 7,976 2,528,085 4,894,502 2,711,061
1996 120,000 7,104 2,356,162 4,719,726 2,483,266
Douglas E. Hill 1998 153,750 8,736 5,116,327 7,591,323 5,278,813
1997 135,000 7,976 2,843,359 5,506,315 2,986,335
1996 118,000 7,104 2,426,261 4,978,341 2,551,365
Richie L. Malone 1998 153,750 8,736 4,955,823 7,064,148 5,118,309
1997 135,000 7,976 2,764,542 5,353,361 2,907,518
1996 118,000 7,104 2,426,261 4,978,341 2,551,365
Jim Weddle 1998 153,750 8,736 4,267,475 6,431,538 4,429,961
1997 135,000 7,976 2,364,562 4,588,595 2,507,538
1996 115,000 7,104 1,806,904 3,879,227 1,983,008
Ray L. Robbins 1998 143,750 8,736 4,267,475 6,431,538 4,419,961
1997 125,000 7,976 2,364,562 4,555,595 2,497,538
1996 115,000 7,104 1,922,932 4,008,535 2,045,036
Larry R. Sobol 1998 143,750 8,736 4,267,475 6,413,538 4,419,961
1997 125,000 7,976 2,364,562 4,555,595 2,497,538
1996 115,000 7,104 1,922,932 4,008,535 2,045,036
Each non-selling general partner receives a salary generally
ranging from $90,000 - $193,750 annually. Selling general
partners do not receive a specified salary, rather, they receive
the net sales commissions earned by them (none of the six
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.
36
PART III
Item 11. Executive Compensation
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.
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 .05% to 3.60%
in 1998 and 1997 and .05% to 3.85% in 1996. 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 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), 111 of the general
partners also own limited partnership interests and 36 of the general
partners also own subordinated limited partnership interests, as noted
in the table below.
As of February 28, 1999:
Name of Amount of
Beneficial Beneficial Percent of
Title of Class Owner Ownership Class
- ------------------------------------------------------------------------------------------------
Limited Partnership All General
Interests Partners as
a Group $13,520,200 9%
Subordinated All General
Limited Partnership Partners as
Interests a Group $20,000,053 39%
- ------------------------------------------------------------------------------------------------
37
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
collectibility 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.
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
INDEX
(a) (1) The following financial statements are included in Part
II, Item 8:
Page No.
Report of Independent Public Accountants 21
Consolidated Statements of Financial Condition as of
December 31, 1998 and 1997 22
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 24
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 25
Consolidated Statements of Changes in Partnership Capital
for the years ended December 31, 1998, 1997 and 1996 26
Notes to Consolidated Financial Statements 27
All schedules are omitted because they are not required,
inapplicable, or the information is otherwise shown in the
financial statements or notes thereto.
(b) Report on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of
1998.
(c) Exhibits
Reference is made to the Exhibit Index hereinafter contained.
39
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/ John W. Bachmann
-----------------------------------------
John W. Bachmann, Managing Partner
Date March 29, 1999
-----------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of
the registrant and in the capacity and on the date indicated.
By (Signature and Title) /s/ John W. Bachmann
-----------------------------------------
John W. Bachmann, Managing Partner
Date March 29, 1999
-----------------------------------------
By (Signature and Title) /s/ Steven Novik
-----------------------------------------
Steven Novik, Chief Financial Officer
Date March 29, 1999
-----------------------------------------
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.
40
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
Exhibit
Number Page Description
3.1 Eighth Amended and Restated Limited Partnership Agreement of The
Jones Financial Companies, L.P., LLP, dated November 1, 1996,
incorporated herein by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 27,
1996.
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 Master Lease Agreement dated as of October 17, 1988, between Edward
D. Jones & Co., L.P., and BancBoston Leasing, incorporated herein by
reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1988.
10.3 Satellite Communications Agreement dated as of September 12, 1988,
between Hughes Network Systems and Edward D. Jones & Co., L.P.,
incorporated herein by reference to Exhibit 10.1 to the Company's
Annual Report on Form 10-K for the year ended September 30, 1988.
10.4 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.
10.5 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.
10.6 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.
41
10.7 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.
10.8 Purchase Agreement by and between Edward D. Jones & Co., L.P. and
Genicom Corporation dated November 25, 1992, incorporated herein by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992.
10.9 Mortgage Note and Deed of Trust and Security Agreement between EDJ
Leasing Co., L.P. and Nationwide Insurance Company dated March 9,
1993, incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 24, 1993.
10.10 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.
10.11 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 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.
10.12 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.
10.13 Equipment Lease Agreement between IFA Incorporated and Edward D.
Jones & Company, L.P., dated June 8, 1994, incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 24, 1994.
10.14 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.
10.15 Equipment Lease by and between Edward D. Jones & Co., L.P., and EDJ
Leasing Co., L.P. dated April 1, 1994, incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 24, 1994.
42
10.16 $8,200,000 Promissory Note to Commerce Bank National Association by
EDJ Leasing Co., L.P., dated April 5, 1994, incorporated herein by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 24, 1994.
10.17 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.
10.18 Credit Agreement between EDJ Leasing Co., L.P. and Southtrust Bank of
Alabama, N.A. dated October 26, 1994 incorporated herein by reference
to the company's Annual Report on Form 10-K for the year ended
December 31, 1994.
10.19 Master Lease Agreement between EDJ Leasing Company and Edward D.
Jones & Co., L.P. dated October 26, 1994.
10.20 Lease Financing Line of Credit Agreement and Term Note Agreement
between EDJ Leasing Co., L.P. and Enterprise Bank dated December 6,
1994 incorporated herein by reference to the company's Annual Report
on Form 10-K for the year ended December 31, 1994.
10.21 Master Lease Agreement between EDJ Leasing Co. and Edward D. Jones &
Co., L.P., dated December 6, 1994 incorporated herein by reference to
the company's Annual Report on Form 10-K for the year ended December 31, 1994.
10.22 Purchase Agreement by and between Edward D. Jones & Co., L.P. and
Tektronix, Inc. dated February 28, 1995 incorporated herein by
reference to the company's Annual Report on Form 10-K for the year ended
December 31, 1994.
10.23 Loan Agreement between Edward D. Jones & Co., L.P. and Boatmen's Bank
dated April 28, 1995, incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 25, 1995.
10.24 Conforming Systems Agreement between Tri-Tek Information Systems,
Inc. and Edward D. Jones & Co.., L.P., dated May 31, 1995, incorporated
herein by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995.
10.25 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.
43
10.26 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.
10.27 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.
21 Subsidiaries of the Registrant, filed herewith.
23.1 45 Consent of Independent Public Accountants.
25 Delegation of Power of Attorney to Managing Partner contained within
Exhibit 3.1
27 Financial Data Schedule (provided for the Securities and Exchange
Commission only).
Incorporated by reference to previously filed exhibits.
44