-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H8n2SfWlwaLZvdRj5IRUZi599coRMu+bWaEmzIv3ZjqEiVPtk3nTzrKiWdtqmGje 6InOEI3KyCG7WXT7iHLYog== 0001068800-99-000130.txt : 19990402 0001068800-99-000130.hdr.sgml : 19990402 ACCESSION NUMBER: 0001068800-99-000130 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JONES FINANCIAL COMPANIES LP LLP CENTRAL INDEX KEY: 0000815917 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 431450818 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16633 FILM NUMBER: 99581233 BUSINESS ADDRESS: STREET 1: 12555 MANCHESTER CITY: ST LOUIS STATE: MO ZIP: 63131 BUSINESS PHONE: 3148512000 FORMER COMPANY: FORMER CONFORMED NAME: JONES FINANCIAL COMPANIES L P DATE OF NAME CHANGE: 19920703 10-K 1 THE JONES FINANCIAL COMPANIES, L.L.L.P. 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 ----------------- ------- THE JONES FINANCIAL COMPANIES, L.L.L.P. - -------------------------------------------------------------------------- (Exact name of registrant as specified in its Partnership Agreement) MISSOURI 43-1450818 - -------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 12555 Manchester Road Des Peres, Missouri 63131 - -------------------------------------------------------------------------- (Address and principal executive office) (Zip Code) Registrant's telephone number, including area code (314) 515-2000 ----------------------- Securities registered pursuant to Section 12(b) of the act: Name of each exchange Title of each class on which registered - ------------------------------------- -------------------------------- NONE NONE Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Interests - -------------------------------------------------------------------------- (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 - ------------------------------------------------------------------------------ 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 - - ---------- ---------- -------- 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 EX-23.1 2 CONSENT OF EXPERT Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, in The Jones Financial Companies, L.L.L.P.'s previously filed S-2 Registration Statement File No. 33-61049 and S-8 Registration Statements File No. 333-48233, No. 333-55729, No. 33-35247 and No. 33-62734. ARTHUR ANDERSEN LLP St. Louis, Missouri March 29, 1999 EX-27 3 FINANCIAL DATA SCHEDULE
BD This schedule contains summary financial information extracted from the financial statements for The Jones Financial Companies for the 12 months ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 143,745 1,256,580 115,000 12,243 277,751 201,901 1,868,039 6,967 1,131,364 0 43,651 18,928 242,100 0 0 0 402,362 1,868,039 0 118,238 1,107,357 51,726 172,642 46,986 816,025 199,209 199,209 0 0 199,209 0 0
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