-----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, Lvg4pYZiEIl/1ixDAZICyef92+nmL1/ShktPmsUtKvp6BfRA+glaJOLmCkX0lIvP Ix7aAwasRBCIIfx20BAEFA== 0001068800-03-000237.txt : 20030328 0001068800-03-000237.hdr.sgml : 20030328 20030328094823 ACCESSION NUMBER: 0001068800-03-000237 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 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: 1934 Act SEC FILE NUMBER: 000-16633 FILM NUMBER: 03622813 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 tenk.txt THE JONES FINANCIAL COMPANIES, L.L.L.P. FORM 10-K 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, 2002 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 of 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 27, 2003 there were no voting securities held by non-affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE None 1 PART I ITEM 1. BUSINESS The Jones Financial Companies, L.L.L.P. (the "Registrant" and also referred to herein as the "Partnership") is organized under the Revised Uniform Limited Partnership Act of the State of Missouri. The terms "Registrant" and "Partnership" used throughout, refer to The Jones Financial Companies, L.L.L.P. and any or all of its consolidated subsidiaries. The Partnership is the successor to Whitaker & Co., which was established in 1871 and dissolved on October 1, 1943, said date representing the organization date of Edward D. Jones & Co., L.P. ("EDJ"), the Partnership's principal subsidiary. EDJ was reorganized on August 28, 1987, which date represents the organization date of The Jones Financial Companies, L.L.L.P. The Partnership's principal operating subsidiary, EDJ, is a registered broker/dealer primarily serving individual investors. EDJ derives its revenues from the sale of listed and unlisted securities and insurance products, investment banking, principal transactions and is a distributor of mutual fund shares. EDJ conducts business throughout the United States of America, Canada and the United Kingdom with its customers, various brokers and dealers, clearing organizations, depositories and banks. The Partnership is a member firm of the New York, Chicago, Toronto, Montreal and London exchanges, and is a registered broker/dealer with the National Association of Securities Dealers, Inc. ("NASD"). As of January 31, 2003, the Partnership was comprised of 235 general partners, 5,217 limited partners and 134 subordinated limited partners. At December 31, 2002, the Partnership is organized as follows: The Partnership owns 100% of the outstanding common stock of EDJ Holding Company, Inc., a Missouri corporation and 100% of the outstanding common stock of LHC, Inc. ("LHC"), a Missouri corporation. The Partnership also holds all of the partnership equity of Edward D. Jones & Co., L.P., a Missouri limited partnership and EDJ Leasing Co., L.P., a Missouri limited partnership. EDJ Holding Company, Inc. and LHC, Inc. are the general partners of Edward D. Jones & Co., L.P. and EDJ Leasing Co., L.P., respectively. In addition, the Partnership owns 100% of the outstanding common stock of Conestoga Securities, Inc., a Missouri corporation and also owns, as a limited partner, 49.5% of Passport Research Ltd., a Pennsylvania limited partnership, which acts as an investment advisor to a money market mutual fund. The Partnership owns 100% of the partnership equity of Edward Jones, an Ontario, Canada limited partnership and all of the common stock of Edward D. Jones & Co. Canada Holding Co., Inc., an Ontario, Canada corporation, its general partner. Through its Canadian entities, the Partnership owns all of the partnership equity of Edward Jones Insurance Agency, an Ontario, Canada limited partnership, all of the common stock of Edward D. Jones & Co. Agency Holding Co., Inc., an Ontario, Canada corporation, its general partner, and 100% of the common stock of Edward Jones Insurance Agency (Quebec) Inc., a Canada corporation. The Partnership also owns 100% of the equity of Edward Jones Limited, a U.K. private limited company, which owns 100% of the equity of Edward Jones Nominees Limited. The Partnership owns 100% of the equity of Boone National Savings and Loan Association, F.A., ("Association"), a federally chartered stock savings and loan association. The Partnership also owns 100% of the equity of EJ Mortgage L.L.C., a Missouri limited liability company. EJ Mortgage L.L.C. owns 50% of Edward Jones Mortgage, a joint venture. The Partnership holds all of the partnership equity in a Missouri limited partnership, EDJ Ventures, Ltd. Conestoga Securities, Inc., is the general partner of EDJ Ventures, Ltd. The Partnership is the sole member of Edward Jones Insurance Agency Holding, L.L.C., a Missouri limited liability company; California Agency Holding, L.L.C., a California limited liability company and Edward Jones Insurance Agency of New Mexico, L.L.C., a New Mexico limited liability company. Edward Jones Insurance Agency Holding, L.L.C. is the sole member of Edward Jones Insurance Agency of Wyoming, L.L.C., a Wyoming limited liability company and Edward Jones Insurance Agency of Michigan, L.L.C., a Michigan limited liability company. The Partnership and Edward Jones Insurance Agency Holding, L.L.C. are members of Edward Jones Insurance Agency of Massachusetts, L.L.C., a 2 PART I Massachusetts limited liability company; and Edward Jones Insurance Agency of Montana, L.L.C., a Montana limited liability company. Edward Jones Insurance Agency Holding, L.L.C. and California Agency Holding, L.L.C. are members of Edward Jones Insurance Agency of California, L.L.C., a California limited liability company. All of the insurance agencies engage in general insurance brokerage activities. The Partnership holds all of the partnership equity of Unison Investment Trusts, L.P., d/b/a Unison Investment Trusts, Ltd., a Missouri limited partnership, which has sponsored unit investment trusts. The general partner of Unison Investment Trusts, L.P., Unison Capital Corp., Inc., a Missouri corporation, is wholly owned by LHC. EDJ owns 100% of the outstanding common stock of Cornerstone Mortgage Investment Group II, Inc., a Delaware limited purpose corporation which has structured and sold secured mortgage bonds. EDJ also owns 50% of issued common stock of S-J Capital Corp., a Missouri corporation. Conestoga owns 100% of the outstanding stock of CIP Management, Inc., which is the managing general partner of CIP Management, L.P. CIP Management, L.P. is the managing general partner of Community Investment Partners II, L.P., Community Investment Partners III, L.P., L.L.L.P., and Community Investment Partners IV, L.P., L.L.L.P., business development companies. During 2002, the Partnership's affiliates Edward Jones Insurance Agency of Nevada, Inc., Edward Jones Insurance Agency of Alabama, LLC, EJ Insurance Agency of Ohio, and EDJ Insurance Agency of Texas, Inc. were dissolved. The Partnership's affiliates Edward Jones Nominees PEP Limited and Edward Jones Nominees ISA Limited, both 100% owned by Edward Jones Limited, a U.K. private limited company, were also dissolved in 2002. None of these had conducted active businesses. Within the past five years, the Registrant has added several new legal entities. During 1998, the Registrant began brokerage operations in the United Kingdom under its subsidiary entity, Edward Jones Limited. 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: Edward Jones Insurance Agency of Michigan, L.L.C., a limited liability company. During 2000, Edward Jones Nominees Limited, Edward Jones Nominees PEP Limited, and Edward Jones Nominee ISA Limited, all three of which are U.K. private limited companies, were organized and subsequently dissolved in 2002. During 2002, Edward Jones Insurance Agency (Quebec) Inc., a Canada corporation, was organized. 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):
2002 2001 2000 - -------------------------------------------------------------------------------------------------------------- Commissions Listed $ 214,247 $ 219,359 $ 272,260 Mutual Funds 831,652 740,209 749,144 O-T-C 50,429 77,618 170,058 Insurance 213,496 216,009 222,175 Other 753 667 837 Principal Transactions 403,329 370,327 264,361 Investment Banking 41,055 24,676 29,545 Interest and Dividends 137,029 176,277 224,497 Sub-Transfer Agent Revenue 119,307 95,022 69,874 Mutual Fund & Insurance Revenue 87,298 79,107 89,993 Money Market Revenue 75,707 73,594 60,604 IRA Custodial Service Fees 48,695 38,554 30,591 Other Revenue 38,842 30,578 28,021 Gain on Investments 8,186 - - ------------- ------------- ------------- Total Revenue $ 2,270,025 $ 2,141,997 $ 2,211,960 ==============================================================================================================
Because of the interdependence of the activities and departments of the Partnership's investment business and the arbitrary assumptions involved in allocating overhead, it is impractical to identify and specify expenses applicable to each aspect of the Partnership's operations. Furthermore, the net income of firms principally engaged in the securities business, including the Partnership's, is affected by interest savings as a result of customer and other credit balances and interest earned on customer margin accounts. LISTED BROKERAGE TRANSACTIONS. A portion of the Partnership's revenue is derived from customer transactions in which the Partnership acts as agent in the purchase and sale of listed corporate securities. These securities include common and preferred stocks and corporate debt securities traded on and off the securities exchanges. Revenue from brokerage transactions is highly influenced by the volume of business and securities prices. Customer transactions in securities are effected on either a cash or a margin basis. In a margin account, the Partnership lends the customer a portion of the purchase price up to the limits imposed by the margin regulations of the Federal Reserve Board ("Regulation T"), New York Stock Exchange ("NYSE") margin requirements, or the Partnership's internal policies, which may be more stringent than the regulatory minimum requirements. Such loans are secured by the securities held in customer margin accounts. These loans provide a source of income to the Partnership since it is able to lend to customers at rates which are higher than the rates at which it is able to borrow on a secured basis. The Partnership is permitted to use as collateral for the borrowings, securities owned by margin customers having an aggregate market value generally up to 140% of the debit balance in margin accounts. The Partnership may also use funds provided by free credit balances in customer accounts to finance customer margin account borrowings. In permitting customers to purchase securities on margin, the Partnership assumes the risk of a market decline which could reduce the value of its collateral below a customer's indebtedness before the collateral is sold. Under the NYSE rules, the Partnership requires in the event of a decline in the market value of the securities in a margin account, the customer to deposit additional securities or cash so that, at all times, the loan to the customer is no greater than 75% of the value of the securities in the account (or to 4 PART I sell a sufficient amount of securities in order to maintain this percentage). The Partnership, however, imposes a more stringent maintenance requirement. Variations in revenues from listed brokerage commissions between periods is largely a function of market conditions. MUTUAL FUNDS. The Partnership distributes mutual fund shares in continuous offerings and new underwritings. As a dealer in mutual fund shares, the Partnership receives a dealers' discount which generally ranges from 1% to 5 3/4% of the purchase price of the shares, depending on the terms of the dealer agreement and the amount of the purchase. The Partnership also earns service fees which are generally based on 15 to 25 basis points of its customer assets which are held by the mutual funds. The Partnership does not manage any mutual fund, although it is a limited partner of Passport Research, Ltd., an advisor to a money market mutual fund. OVER-THE-COUNTER TRANSACTIONS. Partnership activities in unlisted (over-the-counter) transactions are essentially similar to its activities as a broker in listed securities. In connection with customer orders to buy or sell securities, the Partnership charges a commission for both principal and agency transactions. INSURANCE. The Partnership has executed agency agreements with various national insurance companies. EDJ is able to offer life insurance, long term care insurance, fixed and variable annuities and other types of insurance to its customers through substantially all of its investment representatives who hold insurance sales licenses. As an agent for the insurance company, the Partnership receives commission on the purchase price of the policy. The Partnership also earns service fees which are generally based on its customer assets held by the insurance companies. 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 increasing number of investment representatives employed by the Partnership over the periods indicated. INVESTMENT BANKING. The Partnership's investment banking activities are performed by its Syndicate and Underwriting Departments. The principal service which the Partnership renders as an investment banker is the underwriting and distribution of securities either in a primary distribution on behalf of the issuer of such securities, or in a secondary distribution on behalf of a holder of such securities. The distributions of corporate and municipal securities are, in most cases, underwritten by a group or syndicate of underwriters. Each underwriter has a participation in the offering. Unlike many larger firms against which the Partnership competes, the Partnership does not presently engage in other investment banking activities such as assisting in mergers and acquisitions, arranging private placement of securities issues with institutions or providing consulting and financial advisory services to corporations. The Syndicate and Underwriting Departments are responsible for the largest portion of the Partnership's investment banking business. In the case of an underwritten offering managed by the Partnership, these departments may form underwriting syndicates and work closely with the branch office system for sales of the Partnership's own participation and with other members of the syndicate in the pricing and 5 PART I 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 upon purchase price. Furthermore, the commitment of capital to an underwriting may adversely affect the Partnership's capital position and, as such, its participation in an underwriting may be limited by the requirement that it must at all times be in compliance with the Securities and Exchange Commission's uniform Net Capital Rule. The Securities Act of 1933 and other applicable laws and regulations impose substantial potential liabilities on underwriters for material misstatements or omissions in the prospectus used to describe the offered securities. In addition, there exists a potential for possible conflict of interest between an underwriter's desire to sell its securities and its obligation to its customers not to recommend unsuitable securities. In recent years there has been an increasing incidence of litigation in these areas. These lawsuits are frequently brought for the benefit of large classes of purchasers of underwritten securities. Such lawsuits often name underwriters as defendants and typically seek substantial amounts in damages. INTEREST AND DIVIDENDS. Interest and dividend income is earned primarily on margin account balances, inventory securities and investment securities. Interest is also earned by the Association on its loan portfolio. The Partnership is exposed to market risk for changes in interest rates. MONEY MARKET FEES, IRA CUSTODIAL SERVICE FEES AND OTHER REVENUES. Other revenue sources include money market fees, IRA custodial services fees, sub-transfer agent accounting services, revenue sharing, gains from sales of certain assets, and other product and service fees. The Partnership charges a fee to certain mutual funds for sub-accounting services. Additionally, under certain agreements, non-commission revenue is received from companies whose mutual funds and insurance products the Partnership distributes. The Partnership has a minority partnership interest in the investment advisor to the Edward Jones Money Market Fund. The Partnership does not have management responsibility for the advisor. Revenue from this source has increased over the 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 fee for its services. The Partnership has registered an investment advisory program with the Securities and Exchange Commission ("SEC") under the Investment Advisors Act of 1940. This service is offered firmwide and involves income and estate tax planning and analysis for clients. Revenues from this source are insignificant and are included under "Other Revenues." The Partnership offers trust services to its customers through the Edward Jones Trust Company, a division of the Association. The Partnership offers a co-branded credit card with a major credit card company and receives revenue from this service. The Partnership offers mortgage loans to its customers through a joint venture. RESEARCH DEPARTMENT. The Partnership maintains a Research Department to provide specific investment recommendations and market information for retail customers. The Department supplements its own research with the services of various independent research services. CUSTOMER ACCOUNT ADMINISTRATION AND OPERATIONS. Operations associates are responsible for activities relating to customer securities and the processing of transactions with other broker/dealers. 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 6 PART I margin accounts. The Partnership processes substantially all of its own transactions for its United States and United Kingdom entities. In Canada, the Partnership has entered into an introducing/carrying arrangement with National Bank of Canada. It is important that the Partnership maintain current and accurate books and records from both a profit viewpoint as well as for regulatory compliance. To expedite the processing of orders, the Partnership's branch office system is linked to the St. Louis headquarters office through an extensive communications network. Orders for all securities are captured at the branch electronically, routed to St. Louis and forwarded to the appropriate market for execution. The Partnership's processing of paperwork following the execution of a security transaction is automated, and operations are generally on a current basis. There is considerable fluctuation during any one year and from year to year in the volume of transactions the Partnership processes. The Partnership records transactions and posts its books on a daily basis. Operations personnel monitor day-to-day operations to determine compliance with applicable laws, rules and regulations. Failure to keep current and accurate books and records can render the Partnership liable to disciplinary action by governmental and self-regulatory organizations. The Partnership has a computerized branch office communication system which is principally utilized for entry of security orders, quotations, messages between offices, research of various customer account information, and cash and security receipts functions. The Partnership clears and settles virtually all of its listed transactions through the National Securities Clearing Corporation ("NSCC"), New York, New York. NSCC effects clearing of securities on the New York, American and Chicago Stock Exchanges. In conjunction with clearing and settling transactions with NSCC, the Partnership holds customer securities on deposit with the Depository Trust Company ("DTC") in lieu of maintaining physical custody of the certificates. The Partnership also uses Participants Trust Company for custody of Government National Mortgage Association ("GNMA") securities and a major bank for custody of treasury securities. The Partnership's United Kingdom operation clears and settles virtually all of its listed transactions through CREST. CREST effects clearing of securities on the London Stock Exchange. In conjunction with clearing and settling transactions with CREST, the Partnership's United Kingdom operation holds customer securities on deposit with CREST in lieu of maintaining physical custody of the certificates. The Partnership's United Kingdom operation also uses DTC for custody of United States securities, a major independent brokerage firm for custody of non-United Kingdom and non-United States securities, and individual unit trust vendors for custody of unit trust holdings. In Canada, the Partnership has entered into an introducing/carrying arrangement with National Bank of Canada. As the carrying broker, National Bank of Canada ("NBF") handles the routing and settlement of customer transactions. Transactions are settled through the Canadian Depository for Securities ("CDS"), of which National Bank of Canada is a member. CDS effects clearing of securities on the Toronto, Montreal and TSX Venture stock exchanges. Customer securities on deposit are also held with CDS. The Partnership is substantially dependent upon the operational capacity and ability of NSCC/DTC/CREST/NBF. Any serious delays in the processing of securities transactions encountered by NSCC/DTC/CREST/NBF may result in delays of delivery of cash or securities to the Partnership's customers. These services are performed for the Partnership under contracts which may be changed or terminated at will by either party. Automated Data Processing, Inc., ("ADP"), ADP Wilco (a subsidiary of ADP) and National Bank of Canada provide automated data processing services for customer account activity and related records for the United States, United Kingdom and Canada, respectively. 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. To the extent that the Partnership would not be able to meet the obligations of the customers, such customers might experience delays in obtaining the protections afforded them. Customers are protected from firm insolvency by the Securities Investors Protection Corporation ("SIPC") in the United States, Investors Compensation Scheme ("ICS") in the United Kingdom and Canadian Investor Protection Fund ("CIPF") in Canada, and through excess insurance coverage maintained by the Partnership in The United States and the United Kingdom. In Canada, excess insurance coverage is maintained by National Bank of Canada. SIPC provides protection for customer accounts for up to $500,000, including up to $100,000 for cash claims. ICS covers 100% of the first (pounds) 30,000 and 90% for the next (pounds) 20,000, for a maximum protection of (pounds) 48,000 for all investment business. CIPF limits coverage to $1,000,000 total, which can be any combination of securities and cash. The coverage provided by SIPC, ICS and CIPF, and protection in excess limits thereof, would be available to customers of the Partnership in the event of insolvency. The Partnership believes that its internal controls and safeguards concerning the risks of securities thefts are adequate. Although the possibility of securities thefts is a risk of the industry, the Partnership has not 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 235 general partners, the Partnership has approximately 28,469 full and part-time employees. This includes 9,198 registered salespeople as of January 31, 2003. 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. During the first phase the trainee spends 60 days studying Series 7 examination materials and taking the examination. Also during this study period, the trainees spend up to 20 hours a week in a branch office to learn the mechanics of running a branch office. After passing the examination, trainees spend one week in a comprehensive training program in St. Louis followed by three weeks at a designated location to conduct market research and prepare for opening the office. The trainee then spends three weeks of on-the-job training in a branch location reviewing investments, office procedures and sales techniques. Next, the trainee returns to his or her designated location for one week to continue building a prospect base. One final week is then spent in a central location to complete the initial training program. Two and four months later, the investment representative attends additional training classes in St. Louis, and subsequently, EDJ offers periodic continuing training to its experienced sales force. EDJ's basic brokerage payout is similar to its competitors. The Partnership considers its employee relations to be good and believes that its compensation and employee benefits which include medical, life, disability insurance plans, profit sharing and deferred 8 PART I compensation retirement plans, are competitive with those offered by other firms principally engaged in the securities business. BRANCH OFFICE NETWORK. The Partnership operates 8,835 branch offices as of January 31, 2003, primarily staffed by a single investment representative. The Partnership operates 8,131 offices in the United States located in all 50 states, predominantly in communities with populations of under 50,000 and metropolitan suburbs. The Partnership also operates in Canada (through 584 offices as of January 31, 2003) and the United Kingdom (through 120 offices as of January 31, 2003). 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 customer funds and securities, capital structure of securities firms, record-keeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the mode of operation and profitability of broker-dealers. The SEC, self-regulatory organizations and state securities commissions may conduct administrative proceedings which can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or employees. The principal purpose of regulation and discipline of broker-dealers is the protection of customers and the securities markets, rather than protection of the creditors and stockholders of broker-dealers. In addition, EDJ conducts business in Canada, through a subsidiary partnership which is regulated by the Investment Dealers Association of Canada and in the United Kingdom, through a subsidiary which is regulated by The Financial Services Authority. As a federally chartered savings and loan, the Association is subject to regulation by the Office of Thrift Supervision ("OTS"). UNIFORM NET CAPITAL RULE. As a broker-dealer and a member firm of the NYSE, the Partnership is subject to the Uniform Net Capital Rule ("Rule") promulgated by the SEC. The Rule is designed to measure the general financial integrity and liquidity of a broker-dealer and the minimum Net Capital deemed necessary to meet the broker-dealer's continuing commitments to its customers. The Rule provides for 9 PART I two methods of computing Net Capital and the Partnership has adopted what is generally referred to as the alternative method. Minimum required Net Capital under the alternative method is equal to 2% of the customer debit balances, as defined. The Rule prohibits withdrawal of equity capital whether by payment of dividends, repurchase of stock or other means, if Net Capital would thereafter be less than 5% of customer debit balances. Additionally, certain withdrawals require the consent of the SEC to the extent they exceed defined levels even though such withdrawals would not cause Net Capital to be less than 5% of aggregate debit items. In computing Net Capital, various adjustments are made to exclude assets which are not readily convertible into cash and to provide a conservative statement of other assets such as a company's securities owned. Failure to maintain the required Net Capital may subject a firm to suspension or expulsion by the NYSE, the SEC and other regulatory bodies and may ultimately require its liquidation. The Partnership has, at all times, been in compliance with the Net Capital Rule. The firm has other operating subsidiaries, including the Association and broker-dealer subsidiaries in Canada and the United Kingdom. These wholly owned subsidiaries are required to maintain specified levels of liquidity and capital standards. Each subsidiary is in compliance with the applicable regulations as of December 31, 2002. ITEM 2. PROPERTIES The Partnership conducts its headquarters operations from three locations in St. Louis County, Missouri, and one location in Tempe, Arizona, comprising twenty-five separate buildings. Nineteen buildings are owned by the Partnership and six buildings are leased through long-term operating leases. In addition, the Partnership leases its Canadian home office facility in Mississauga, Ontario through an operating lease and has a long-term operating lease for its United Kingdom home office located in London, England. The Partnership also maintains facilities in 8,845 branch locations (as of January 31, 2003) 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 Consolidated Income Statement Data:
2002* 2001 2000 1999 1998** - -------------------------------------------------------------------------------------------------------------------- Revenue $ 2,270,025 $ 2,141,997 $ 2,211,960 $ 1,786,834 $ 1,449,963 Net income $ 148,915 $ 149,186 $ 229,823 $ 187,331 $ 199,209 Net income per weighted average $1,000 equivalent limited partnership unit outstanding $ 87.44 $ 96.89 $ 179.21 $ 173.81 $ 274.30 Weighted average $1,000 equivalent limited partnership units outstanding 230,970 236,696 175,436 150,670 103,747 Net income per weighted average $1,000 equivalent subordinated limited partnership unit outstanding $ 167.16 $ 181.70 $ 333.92 $ 325.21 $ 448.17 Weighted average $1,000 equivalent subordinated limited partnership units outstanding 95,053 82,273 63,770 51,741 44,026 - --------------------------------------------------------------------------------------------------------------------
11 PART II Item 6. Selected Financial Data Summary Consolidated Balance Sheet Data:
2002* 2001 2000 1999 1998** - -------------------------------------------------------------------------------------------------------------------- Total assets $ 3,258,245 $ 3,158,408 $ 3,170,385 $ 2,693,241 $ 2,118,844 ============= ============= ============= ============= ============= Long-term debt $ 49,363 $ 46,285 $ 29,618 $ 34,540 $ 41,825 Other liabilities, exclusive of subordinated liabilities 2,070,062 2,231,807 2,252,961 1,908,117 1,434,020 Subordinated liabilities 428,875 205,600 232,325 259,050 200,275 Total partnership capital 709,945 674,716 655,481 491,534 442,724 ------------- ------------- ------------- ------------- ------------- Total liabilities and partnership capital $ 3,258,245 $ 3,158,408 $ 3,170,385 $ 2,693,241 $ 2,118,844 ============= ============= ============= ============= ============== ==================================================================================================================== * Net income for 2002 included $8.2 million of gain on the sale of shares that the Partnership received from its memberships in the London Stock Exchange and Toronto Stock Exchange when they demutualized. ** Net income for 1998 included a $41.0 million gain on investment in Federated Investors. The Partnership acquired a small interest in Federated in 1989 for $1.0 million as a strategic investment. During 1998, the Partnership sold a significant portion of its investment in Federated's initial public offering.
12 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table summarizes the increase (decrease) in major categories of revenues and expenses for the last two years (dollar amounts in thousands).
2002 vs. 2001 2001 vs. 2000 ------------------------- ------------------------- Amount Percentage Amount Percentage - ------------------------------------------------------------------------------------------------------------------ Revenue: Commissions $ 56,715 5% $ (160,612) (11)% Principal transactions 33,002 9 105,966 40 Investment banking 16,379 66 (4,869) (16) Interest and dividends (39,248) (22) (48,220) (21) Gain on investments 8,186 - - - Other 52,994 17 37,772 14 ----------- ----------- Total revenue 128,028 6 (69,963) (3) Interest expense (6,186) (9) (21,194) (24) ----------- ----------- Net revenue 134,214 6 (48,769) (2) ----------- ----------- Operating Expenses: Compensation and benefits 85,059 7 (37,233) (3) Communications and data processing 29,527 13 21,969 10 Occupancy and equipment 7,151 3 28,726 16 Payroll and other taxes 8,413 11 6,584 10 Floor brokerage and clearance fees (383) (3) (3,208) (18) Advertising 321 1 5,723 15 Other operating expenses 4,397 3 9,307 7 ----------- ----------- Total operating expenses 134,485 7 31,868 2 ----------- ----------- Net Income $ (271) -% $ (80,637) (35)% ==================================================================================================================
13 PART II Item 7. Management's Discussion And Analysis of Financial Condition and Results of Operations The Partnership broadly categorizes its revenues as trade revenue (revenue from buy or sell transactions on securities) or net fee revenue (sources other than trade revenue including service fees, management fees, retirement fees, account fees and net interest income). On the Partnership's Consolidated Statements of Income, trade revenue is included in commissions, principal transactions and investment banking. Net fee revenue comprises the service fee component of commissions, interest and dividends net of interest expenses, and other revenues. The following table reconciles the components of net revenue reported here in the Results of Operations to the components reported on the Consolidated Statements of Income.
2002: Trade Service Mgmt., Retire, Net Interest & Gain on Net Revenue Fees & Other Dividend Income Investments Revenue ----------- ----------- -------------- --------------- ----------- ----------- Commissions $ 1,034,719 $ 275,858 $ - $ - $ - $ 1,310,577 Principal Transactions 402,182 - 1,147 - - 403,329 Investment Banking 41,055 - - - - 41,055 Interest and Dividends - - - 137,029 - 137,029 Gain on Investments - - - - 8,186 8,186 Other - - 369,849 - - 369,849 Interest Expense - - - (60,282) - (60,282) ----------- ----------- ----------- ----------- ----------- ----------- Net Revenue $ 1,477,956 $ 275,858 $ 370,996 $ 76,747 $ 8,186 $ 2,209,743 =========== =========== =========== =========== =========== =========== 2001: Trade Service Mgmt., Retire, Net Interest & Gain on Net Revenue Fees & Other Dividend Income Investments Revenue ----------- ----------- -------------- --------------- ----------- ----------- Commissions $ 975,625 $ 278,237 $ - $ - $ - $ 1,253,862 Principal Transactions 371,558 - (1,231) - - 370,327 Investment Banking 24,676 - - - - 24,676 Interest and Dividends - - - 176,277 - 176,277 Other - - 316,855 - - 316,855 Interest Expense - - - (66,468) - (66,468) ----------- ----------- ----------- ----------- ----------- ----------- Net Revenue $ 1,371,859 $ 278,237 $ 315,624 $ 109,809 $ - $ 2,075,529 =========== =========== =========== =========== =========== =========== 2000: Trade Service Mgmt., Retire, Net Interest & Gain on Net Revenue Fees & Other Dividend Income Investments Revenue ----------- ----------- -------------- --------------- ----------- ----------- Commissions $ 1,124,309 $ 290,165 $ - $ - $ - $ 1,414,474 Principal Transactions 263,816 - 545 - - 264,361 Investment Banking 29,545 - - - - 29,545 Interest and Dividends - - - 224,497 - 224,497 Other - - 279,083 - - 279,083 Interest Expense - - - (87,662) - (87,662) ----------- ----------- ----------- ----------- ----------- ----------- Net Revenue $ 1,417,670 $ 290,165 $ 279,628 $ 136,835 $ - $ 2,124,298 =========== =========== =========== =========== =========== ===========
14 PART II Item 7. Management's Discussion And Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS (2002 VERSUS 2001) For 2002, net revenue increased 6% ($134.2 million) to $2.210 billion, while net income decreased $0.3 million and the profit margin decreased to 6.6% from 7.0%. Excluding an $8.2 million investment gain from the sale of the Partnership's London Stock Exchange and Toronto Stock Exchange holdings, net revenue increased 6% ($126.0 million), net income decreased 5% ($7.0 million), and the profit margin decreased to 6.3%. Year over year, the Partnership's net revenue increased due primarily to growth in trade revenue. Net fee revenue increased over last year, but has been negatively impacted by lower customer asset values and lower interest rates. Net income decreased as the growth in net revenue was exceeded by the increase in operating expenses. Operating expenses have increased as the Partnership continues to expand its branch office network. The Partnership added 656 Investment Representatives ("IRs") during 2002, ending the year with 9,172 IRs, an increase of 8%. Trade revenue comprised 67% of net revenue for 2002, up from 66% for 2001. Conversely net fee revenue comprised 33% for 2002, down from 34% in the corresponding period. Trade revenue increased 8% ($160.1 million) during 2002 due primarily to an increase in customer dollars invested (customers' buy and sell transactions generating trade revenue), and to a higher gross margin earned on customer dollars invested compared to the prior year. Total customer dollars invested were $53.8 billion during 2002, representing a 6% ($3.0 billion) increase from 2001. The firm's margin earned on each $1,000 invested increased to $26.60 in 2002 from $26.30 in 2001 due primarily to a shift in product mix. Year over year, customer purchases shifted to higher margin fixed income and mutual fund products, from individual equities. Commissions revenue, excluding the service fee component, increased 6% ($59.1 million) during 2002. Commissions revenue increased year over year due primarily to an 18% increase in customer dollars invested in mutual funds. Year to date, mutual fund commissions increased 18% ($93.6 million), while insurance commissions decreased 2% ($2.5 million) and individual equity agency commissions decreased 11% ($32.3 million). Principal transactions revenue increased 9% ($33.0 million) during 2002 due to a 14% increase in customer dollars invested in bonds. Customers invested $22.6 billion in fixed income products in 2002 compared to $19.7 billion in 2001. Revenue from government bonds increased 75% ($25.0 million), municipal bonds increased 12% ($17.9 million), while corporate bonds decreased 14% ($14.8 million). Net fee revenue increased 3% ($19.9 million) during 2002. Service fees decreased 1% ($2.4 million) due to the impact of market conditions on the value of customer assets. Average customer assets related to service fees were $114.6 billion in 2002 compared to $115.0 billion 2001. Management, retirement and other fee revenue increased 18% ($55.4 million) during 2002. Revenue received from money market and subtransfer agent services increased 16% ($26.4 million). The number of retirement accounts increased, resulting in custodial fee revenue growth of 26% ($10.1 million). Fees from revenue sharing agreements with mutual funds and insurance companies increased 10% ($8.2 million). Net interest and dividend income decreased 30% ($33.1 million) during 2002 due primarily to the impact of lower interest rates charged on customers' margin loans, and to a shift in source of funds borrowed. Interest income from customer loans outstanding decreased 27% ($39.8 million). The average rate earned on customer loan balances decreased to approximately 5.62% in 2002 from approximately 7.70% in 2001. Average customer margin loan balances increased 2% to $1.911 billion in 2002. Interest expense from bank loans decreased 82% ($10.6 million), due to lower bank loans outstanding and lower interest rates. Average bank loans decreased 65% to $102.7 million in 2002. Partially offsetting the decrease in bank loan interest was an $7.8 million increase in subordinated debt interest due to issuance of $250 million subordinated debt in June 2002. 15 PART II Item 7. Management's Discussion And Analysis of Financial Condition and Results of Operations Operating expenses increased 7% ($134.5 million) during 2002. Compensation and benefits costs increased 7% ($85.1 million). Within compensation and benefits costs, sales compensation increased 6% ($43.9 million) due to increased revenue, and payroll expense increased 15% ($54.7 million) due to existing personnel and additional support at both the headquarters and in the branches as the firm grows its sales force. On a full time equivalent basis, the Partnership had 3,938 headquarters associates and 9,510 branch staff associates as of December 31, 2002, compared to 3,748 headquarters associates and 8,632 branch staff associates as of December 31, 2001. Variable compensation, including bonuses and profit sharing paid to IRs, branch office assistants and headquarters associates, which expands and contracts in relation to revenues, net income and the firm's profit margin, decreased 14% ($12.2 million) due to the decrease in the partnership's net income and profit margin. Communications and data processing expenses increased 13% ($29.5 million) in 2002. Occupancy and equipment expenses increased 3% ($7.2 million). Underlying the increased expenses is the opening in November 2001 of the Partnership's Southwest campus in Tempe, Arizona, which contains a second data center. Additionally, the Partnership added facilities in Tempe for branch training and in St. Louis for headquarters support. Payroll and other taxes increased 11% ($8.4 million) due to growth in the sales force, headquarters associates and branch staff. RESULTS OF OPERATIONS (2001 VERSUS 2000) The Partnership's net revenue and net income for the year ended December 31, 2001 decreased from the prior year due primarily to the impact of market conditions which resulted in lower customer activity, lower customer asset values and lower net interest income. Net revenue decreased 2% ($48.8 million) to $2.076 billion and net income decreased 35% ($80.6 million) to $149.2 million. Trade revenue of $1.372 billion and $1.418 billion comprised 66% and 67% of net revenue for 2001 and 2000. Conversely, net fee revenue sources of $703.7 million and $706.6 million were 34% and 33% of net revenue for 2001 and 2000. Trade revenue decreased 3% ($45.8 million) during 2001 due primarily to a decrease in customer dollars invested. Total customer dollars underlying buy or sell transactions were $50.8 billion during 2001, a 17% ($10.5 billion) decrease from 2000. The impact of lower customer activity was partially offset by an increase in the margin earned on each $1,000 invested, to $26.30 in 2001 from $22.60 in 2000. Year over year, the composition of the product mix, based on customer dollars invested, has shifted from individual equities and CDs, which have lower margins, to higher margin fixed income, mutual funds, and insurance products. Based on customer dollars invested, individual equities decreased to 28% from 44%, and CD's decreased to 6% from 11%. Fixed income increased to 33% from 18%, mutual funds increased to 26% from 22%, and insurance increased to 7% from 5%. The Partnership added 1,082 IRs since December 31, 2000, ending 2001 with 8,516 IRs in the United States, Canada and the United Kingdom, an increase of 15%. The increase in IRs partially mitigated the impact of the market downturn on trade revenues. Net fee revenues decreased $3.0 million during 2001. Net interest income decreased 20% ($27.0 million) in 2001 due primarily to the impact of rate reductions during the year narrowing the interest margins combined with a small decrease in customer loans outstanding. Customer loans were $1.9 billion at December 31, 2001 compared to $2.0 billion at December 31, 2000. Service fees decreased 4% ($11.9 million) during 2001 as the underlying value of customer assets was impacted by market conditions. The average of the aggregate customer assets related to service fees decreased from $117.6 billion at December 31, 2000, to $114.6 billion at December 31, 2001. Management, retirement and other fee revenue received from money market and subtransfer agent services increased 13% ($26.7 million). Additionally, the number of IRA accounts increased, resulting in custodial fee revenue growth of 26% ($8.0 million). 16 PART II Item 7. Management's Discussion And Analysis of Financial Condition and Results of Operations Commissions revenue excluding the service fee component decreased 13% ($147.6 million) during 2001. Equity commissions decreased 33% ($145.3 million) due to the shift in product mix away from individual equities. Insurance commissions decreased 1% ($1.5 million) and mutual fund commissions decreased $0.5 million, even though customer dollars invested in insurance and mutual fund products increased as a percentage of the product mix. Principal transactions revenue increased 40% ($106.0 million) during 2001. The increase was primarily attributable to an increase in corporate, US government and municipal bonds, and mortgage-backed securities, offset by a decrease in CD sales. Interest expense decreased 24% ($21.2 million) during 2001, due to a decrease in bank loans outstanding and lower interest rates. The average of the aggregate short-term bank loans outstanding was $272,000 during 2001, compared to $413,000 during 2000. Operating expenses increased 2% ($31.9 million) to $1.9 billion during 2001. Occupancy and equipment expenses increased 16% ($28.7 million) and communications and data processing expenses increased 10% ($22.0 million) during 2001. The Partnership continued to expand its headquarters, branch locations and communications systems to enable it to continue to increase its number of IRs, locations and customers. Compensation costs decreased 3% ($37.2 million). Variable compensation, including bonuses and profit sharing paid to investment representatives, branch office associates and headquarters associates, which expands and contracts in relation to revenues, net income and profit margin, decreased 54% ($105.9 million) due to the lower revenue and earning levels. Sales compensation decreased 1% ($6.5 million) due to the decrease in trade revenue and service fees. Offsetting these decreases in compensation expense was a 21% ($81.4 million) increase in compensation expense for existing personnel and additional support personnel at both the headquarters and in the branches due to growth in the sales force. On a full time equivalent basis, the firm had 3,748 headquarters associates and 8,632 branch staff associates as of December 31, 2001, compared to 3,547 headquarters associates and 7,625 branch staff associates as of December 31, 2000. LIQUIDITY AND CAPITAL RESOURCES The Partnership's equity capital at December 31, 2002, excluding the reserve for anticipated withdrawals, was $681.4 million, compared to $638.9 million at December 31, 2001. Equity capital has increased primarily due to the retention of General Partner earnings ($34.1 million) and the issuance, net of redemptions, of Subordinated Limited Partner interests ($12.8 million), offset by redemption of Limited Partner interests ($4.6 million). At December 31, 2002, the Partnership had $176.0 million in cash and cash equivalents. Lines of credit are in place aggregating $1.19 billion ($1.14 billion of which is through uncommitted lines of credit). Actual borrowing availability is based on securities owned and customers' margin securities which serve as collateral for the loans. No amounts were outstanding under these lines at December 31, 2002. The Association had loans from The Federal Home Loan Bank of $13.8 million as of December 31, 2002, which are secured by mortgage loans. The Partnership also participates in securities loaned transactions, under which it receives collateral in the form of cash or other collateral in an amount in excess of the market value of securities loaned. Securities loaned outstanding were $10.1 million at December 31, 2002, for which the Partnership received cash collateral. The Partnership believes that the liquidity provided by existing cash balances, other highly liquid assets, and borrowing arrangements will be sufficient to meet the Partnership's capital and liquidity requirements. Depending on conditions in the capital markets and other factors, the Partnership will, from 17 PART II Item 7. Management's Discussion And Analysis of Financial Condition and Results of Operations time to time, consider the issuance of debt, the proceeds of which could be used to meet growth needs or for other purposes. The Partnership's growth in recent years has been financed through sales of limited partnership interests to its employees, retention of earnings, private placements of long-term and subordinated debt, long-term secured debt and operating leases under which the firm rents facilities, furniture, fixtures, computers and communication equipment. During June 2002, the Partnership privately placed $250 million of subordinated debt with institutional investors. The debt bears interest at 7.33% and has an average maturity of ten years, with annual payments of $50 million per year commencing in year eight. The proceeds of the placement will be used for general partnership purposes. Included in the Partnership's operating lease commitments and contingent residual payments are synthetic leasing agreements for two buildings, one in Tempe, Arizona, and one in St. Louis, Missouri. The lessor of the buildings, along with a group of financial institutions, funded the construction of the facilities. The total cost of the facilities covered by these leases was $60.4 million. The synthetic leases have initial terms of five years, with renewal options for two additional terms of up to five years by either the lessor or the Partnership, subject to the approval of the other party. The Partnership may, at its option, purchase the buildings during or at the end of the terms of the leases at approximately the amount expended to construct the facilities. If the Partnership does not exercise the purchase option by or at the end of the lease, the Partnership could be obligated to pay up to $27.5 million for the Tempe, Arizona, facility and up to $23.8 million for the St. Louis, Missouri, facility. The following table summarizes the Partnership's financing commitments and obligations, excluding customer accounts due on demand.
Payments Due by Period ---------------------- Total 2003 2004 2005 2006 2007 Thereafter --------- --------- --------- --------- --------- --------- ---------- Bank loans $ 13,828 $ - $ 2,100 $ - $ - $ 450 $ 11,278 Securities loaned 10,149 10,149 - - - - - Long-term debt 49,363 9,673 7,857 8,080 9,321 3,581 10,851 Liabilities subordinated to claims of general creditors 428,875 20,725 20,725 43,225 45,700 23,200 275,300 Rental commitments 444,200 122,500 77,800 52,500 37,000 24,400 130,000 Contingent residual payments 51,300 - - - - 51,300 - --------- --------- --------- --------- --------- --------- --------- Total financing commitments and obligations $ 997,715 $ 163,047 $ 108,482 $ 103,805 $ 92,021 $ 102,931 $ 427,429 ========= ========= ========= ========= ========= ========= =========
For the year ended December 31, 2002, cash and cash equivalents decreased $20.6 million. Cash used in operating activities was $52.1 million. Cash used for operating activities includes lower securities loaned and higher inventory as of December 31, 2002. Securities loaned decreased $122.1 million due to a shift in borrowing to subordinated debt. Securities owned, net, increased $100.3 million year over year. The primary source of cash from operating activities is net income of $148.9 million. Cash used in investing activities was $81.1 million consisting primarily of capital expenditures ($89.4 million) attributable to the firm's expansion of its headquarters and branch facilities required as the firm grows its sales force. Cash provided by financing activities was $112.7 million consisting primarily of the issuance of subordinated debt ($250.0 million) partially offset by partnership withdrawals ($122.0 million). For the year ended December 31, 2001, cash and cash equivalents increased $20.2 million. Cash provided by operating activities was $287.2 million. Sources include net income ($149.2 million) and net receivable from customers ($348.1 million). These sources were partially offset by a decrease in bank loans ($204.6 million). Cash used in investing activities consisted of $127.0 million in capital expenditures primarily attributable to the firm's expansion of its headquarters and branch facilities due to growth in the sales force, and to investment in information technology hardware and software. Cash used 18 PART II Item 7. Management's Discussion And Analysis of Financial Condition and Results of Operations in financing activities was $140.0 million, primarily for partnership withdrawals ($135.1 million) and repayment of subordinated debt ($26.7 million), partially offset by issuance of long-term debt ($25.0 million) and issuance of Subordinated Limited Partner interests ($12.5 million). For the year ended December 31, 2000, cash and cash equivalents increased $33.8 million. Cash provided by operating activities was $221.5 million. Sources include net income ($229.8 million), increased bank loans ($108.4 million) and securities loaned ($94.4 million) and proceeds from disposition of securities purchased under agreements to resell ($75.0 million). These sources were partially offset by a decrease in securities sold under agreements to repurchase ($163.9 million), and an increase in net receivable from customers ($120.0 million) due primarily to increased customer loan balances. Cash used for investing activities consisted of $90.1 million in capital expenditures primarily attributable to the Partnership's expansion of its headquarters and branch facilities required as the Partnership grows its sales force. Cash used in financing activities was $97.5 million consisting of partnership withdrawals and distributions ($175.0 million) and repayment of subordinated debt ($26.7 million), partially offset by the issuance of Limited Partner and Subordinated Limited Partner interests ($114.0 million). As a result of its activities as a broker/dealer, EDJ, the Partnership's principal subsidiary, is subject to the Net Capital provisions of Rule 15c3-1 of the Securities Exchange Act of 1934 and the capital rules of the 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, 2002, EDJ's Net Capital of $636.1 million was 34% of aggregate debit items and its Net Capital in excess of the minimum required was $598.9 million. Net Capital as a percentage of aggregate debits after anticipated withdrawals was 34%. Net capital and the related capital percentage may fluctuate on a daily basis. CRITICAL ACCOUNTING POLICIES The Partnership's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which may require judgement and involve estimation processes to determine its assets, liabilities, revenues and expenses which affect its results of operations. The Partnership believes that of its significant accounting policies, the following critical policies, estimates and assumptions may involve a higher degree of judgement and complexity. Customers' transactions are recorded on a settlement date basis with the related revenue and expenses recorded on a trade date basis. The Partnership may be exposed to risk of loss in the event customers, other brokers and dealers, banks, depositories or clearing organizations are unable to fulfill contractual obligations. For transactions in which it extends credit to customers, the Partnership seeks to control the risks associated with these activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. Securities owned and sold, not yet purchased, including inventory securities and investment securities, are valued at market value which is determined by using quoted market or dealer prices. Included in management's discussion and analysis of financial condition and results of operations, and in the quantitative and qualitative disclosures about market risk, and in the notes to the financial statements (See Note 1 to the consolidated financial statements), are additional discussions of the Partnership's accounting policies. 19 PART II Item 7. Management's Discussion And Analysis of Financial Condition and Results of Operations THE EFFECTS OF INFLATION The Partnership's net assets are primarily monetary, consisting of cash, securities inventories and receivables less liabilities. Monetary net assets are primarily liquid in nature and would not be significantly affected by inflation. Inflation and future expectations of inflation influence securities prices, as well as activity levels in the securities markets. As a result, profitability and capital may be impacted by inflation and inflationary expectations. Additionally, inflation's impact on the Partnership's operating expenses may affect profitability to the extent that additional costs are not recoverable through increased prices of services offered by the Partnership. NEW ACCOUNTING STANDARDS In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - Interpretation of ARB No. 51" ("FIN 46"), which would become effective for the Partnership for periods beginning after June 27, 2003. The lessor for the Partnership's synthetic leases, an entity unrelated to JFC or its affiliates, is currently being evaluated under FIN 46. It is unclear at this time if the lessor will be considered a variable interest entity. If the lessor is deemed to be a variable interest entity, the Partnership will be required to record the synthetic leases as if they were capital leases rather than operating leases. The amount capitalized, currently estimated at $60,400, would be a deduction from the Partnership's Net Capital. Additionally, the Partnership would record a capital lease obligation for approximately the same amount. Currently, the Partnership's Net Capital is $636,100 and its Net Capital in excess of the minimum required is $598,900. The Partnership does not expect FIN 46 to have a significant impact on its consolidated financial condition, results of operations, or cash flows. Also, the FASB has issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34" ("FIN45"), effective for the partnership in 2002. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The Partnership does not expect FIN 45 to have a significant effect on its consolidated financial position, results of operations or cash flows. FORWARD-LOOKING STATEMENTS Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of federal securities laws. Actual results are subject to risks and uncertainties, including both those specific to the Partnership and those specific to the industry which could cause results to differ materially from those contemplated. The risks and uncertainties include, but are not limited to, general economic conditions, actions of competitors, regulatory actions, changes in legislation and technology changes. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. The Partnership does not undertake any obligation to publicly update any forward-looking statements. 20 PART II ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The SEC issued market risk disclosure requirements to enhance disclosures of accounting policies for derivatives and other financial instruments and to provide quantitative and qualitative disclosures about market risk inherent in derivatives and other financial instruments. Various levels of management within the Partnership manage the firm's risk exposure. Position limits in trading and inventory accounts are established and monitored on an ongoing basis. Credit risk related to various financing activities is reduced by the industry practice of obtaining and maintaining collateral. The Partnership monitors its exposure to counterparty risk through the use of credit exposure information, the monitoring of collateral values and the establishment of credit limits. The Partnership is exposed to market risk from changes in interest rates. Such changes in interest rates impact the income from interest earning assets, primarily receivables from customers on margin balances, and may have an impact on the expense from liabilities that finance these assets. At December 31, 2002, amounts receivable from customers were $1.909 billion. Liabilities include amounts payable to customers and other interest and non-interest bearing liabilities. Depending on business conditions and the mix of assets and liabilities, there can be an impact on net interest earned. 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, 2002 will not have a material adverse effect on the consolidated financial position or results of operations of the Partnership. 21 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Statements Included in this Item
Page No. Report of Independent Accountants............................................. 23 Consolidated Statements of Financial Condition as of December 31, 2002 and 2001 ................................................... 24 Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000 ............................................. 26 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000.............................................. 27 Consolidated Statements of Changes in Partnership Capital for the years ended December 31, 2002, 2001 and 2000.......................... 28 Notes to Consolidated Financial Statements.................................... 29
22 PART II Item 8. Financial Statements And Supplementary Data REPORT OF INDEPENDENT ACCOUNTANTS To The Jones Financial Companies, L.L.L.P. In our opinion, the accompanying consolidated statement of financial condition and the related consolidated statements of income, cash flows and changes in partnership capital present fairly, in all material respects, the consolidated financial position of The Jones Financial Companies, L.L.L.P. and subsidiaries (the "Partnership") at December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The consolidated financial statements of the Partnership as of December 31, 2001 and for each of the two years then ended were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those statements in their report dated February 22, 2002. PricewaterhouseCoopers LLP St. Louis, Missouri March 27, 2003 23 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) 2002 2001 - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 175,953 $ 196,508 Securities purchased under agreements to resell 65,000 80,000 Receivable from: Customers 1,909,376 1,881,021 Brokers, dealers and clearing organizations 99,848 80,088 Mortgages and loans 112,959 100,782 Securities owned, at market value Inventory securities 204,970 118,872 Investment securities 175,249 180,719 Equipment, property and improvements, at cost, net of accumulated depreciation 298,129 298,072 Other assets 216,761 222,346 ------------- ------------- TOTAL ASSETS $ 3,258,245 $ 3,158,408 ============================================================================================================== The accompanying notes are an integral part of these consolidated financial statements.
24 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) 2002 2001 - -------------------------------------------------------------------------------------------------------------- Bank loans $ 13,828 $ 13,679 Payable to: Customers 1,622,595 1,602,726 Brokers, dealers and clearing organizations 20,334 41,990 Depositors 109,724 103,950 Securities loaned 10,149 132,231 Securities sold, not yet purchased, at market value 15,536 35,251 Accounts payable and accrued expenses 120,846 121,558 Accrued compensation and employee benefits 157,050 180,422 Long-term debt 49,363 46,285 ------------- ------------- 2,119,425 2,278,092 ------------- ------------- Liabilities subordinated to claims of general creditors 428,875 205,600 ------------- ------------- Commitments and contingencies Partnership capital net of reserve for anticipated withdrawals: Limited partners 228,666 233,228 Subordinated limited partners 95,299 82,455 General partners 357,406 323,261 ------------- ------------- 681,371 638,944 Reserve for anticipated withdrawals 28,574 35,772 ------------- ------------- TOTAL PARTNERSHIP CAPITAL 709,945 674,716 ------------- ------------- TOTAL LIABILITIES AND PARTNERSHIP CAPITAL $ 3,258,245 $ 3,158,408 ============================================================================================================== The accompanying notes are an integral part of these consolidated financial statements.
25 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) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Revenue: Commissions $ 1,310,577 $ 1,253,862 $ 1,414,474 Principal transactions 403,329 370,327 264,361 Investment banking 41,055 24,676 29,545 Interest and dividends 137,029 176,277 224,497 Gain on investments 8,186 - - Other 369,849 316,855 279,083 ------------- ------------- ------------- Total revenue 2,270,025 2,141,997 2,211,960 Interest expense 60,282 66,468 87,662 ------------- ------------- ------------- Net revenue 2,209,743 2,075,529 2,124,298 ------------- ------------- ------------- Operating expenses: Compensation and benefits 1,285,284 1,200,225 1,237,458 Communications and data processing 262,751 233,224 211,255 Occupancy and equipment 218,538 211,387 182,661 Payroll and other taxes 82,518 74,105 67,521 Floor brokerage and clearance fees 13,993 14,376 17,584 Advertising 43,971 43,650 37,927 Other operating expenses 153,773 149,376 140,069 ------------- ------------- ------------- Total operating expenses 2,060,828 1,926,343 1,894,475 ------------- ------------- ------------- Net income $ 148,915 $ 149,186 $ 229,823 ============= ============= ============= Net income allocated to: Limited partners $ 20,196 $ 22,935 $ 31,440 Subordinated limited partners 15,889 14,949 21,294 General partners 112,830 111,302 177,089 ------------- ------------- ------------- $ 148,915 $ 149,186 $ 229,823 ============= ============= ============= Net income per weighted average $1,000 equivalent partnership unit outstanding: Limited partners $ 87.44 $ 96.89 $ 179.21 ============= ============= ============= Subordinated limited partners $ 167.16 $ 181.70 $ 333.92 ============= ============= ============= Weighted average $1,000 equivalent partnership units outstanding: Limited partners 230,970 236,696 175,436 ============= ============= ============= Subordinated limited partners 95,053 82,273 63,770 ============= ============= ============= ================================================================================================================== The accompanying notes are an integral part of these consolidated financial statements.
26 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) 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 148,915 $ 149,186 $ 229,823 Adjustments to reconcile net income to net cash (used in)/provided by operating activities - Depreciation and amortization 89,295 77,237 66,643 Gain on sales of investments (8,186) - - Changes in assets and liabilities: Securities purchased under agreements to resell 15,000 (80,000) 75,000 Securities sold under agreements to repurchase - (24,969) (163,911) Net receivable from customers (8,486) 348,086 (120,008) Net receivable from brokers, dealers and clearing organizations (41,416) 20,260 (43,848) Receivable from mortgages and loans (12,177) (1,836) (16,222) Securities owned, net (100,343) 39,597 9,985 Other assets 5,514 13,351 (87,879) Bank loans 149 (204,635) 108,417 Securities loaned (122,082) (8,365) 94,385 Payable to depositors 5,774 16,400 10,298 Accounts payable and accrued expenses (712) (4,561) 42,733 Accrued compensation and employee benefits (23,372) (52,571) 16,059 ------------- ------------- ------------- Net cash (used in)/provided by operating activities (52,127) 287,180 221,475 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment, property and improvements, net (89,352) (127,019) (90,141) Proceeds from sales of investments 8,257 - - ------------- ------------- ------------- Net cash used in investing activities (81,095) (127,019) (90,141) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of long-term debt 13,100 25,000 - Repayment of long-term debt (10,022) (8,333) (4,922) Issuance of subordinated liabilities 250,000 - - Repayment of subordinated liabilities (26,725) (26,725) (26,725) Issuance of partnership interests 13,709 12,450 114,014 Redemption of partnership interests (5,427) (7,316) (4,937) Withdrawals and distributions from partnership capital (121,968) (135,085) (174,953) ------------- ------------- ------------- Net cash provided by/(used in) financing activities 112,667 (140,009) (97,523) ------------- ------------- ------------- Net (decrease)/increase in cash and cash equivalents (20,555) 20,152 33,811 CASH AND CASH EQUIVALENTS, Beginning of year 196,508 176,356 142,545 End of year $ 175,953 $ 196,508 $ 176,356 ============= ============= ============= Cash paid for interest $ 60,201 $ 67,523 $ 87,479 The accompanying notes are an integral part of these consolidated financial statements.
27 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, 2002, 2001 AND 2000
Subordinated Limited Limited General Partnership Partnership Partnership (Amounts in thousands) Capital Capital Capital Total - ---------------------------------------------------------------------------------------------------------------- Partnership capital net of reserve for anticipated withdrawals, December 31, 1999 149,009 52,463 243,665 445,137 Issuance of partnership interests 95,572 18,442 - 114,014 Redemption of partnership interests (4,437) (500) - (4,937) Net Income 31,440 21,294 177,089 229,823 Withdrawals and distributions (10,867) (15,496) (102,193) (128,556) ------------- ------------- ------------- ------------- TOTAL PARTNERSHIP CAPITAL 260,717 76,203 318,561 655,481 Reserve for anticipated withdrawals (20,573) (5,798) (26,020) (52,391) ------------- ------------- ------------- ------------- Partnership capital net of reserve for anticipated withdrawals, December 31, 2000 240,144 70,405 292,541 603,090 Issuance of partnership interests - 12,450 - 12,450 Redemption of partnership interests (6,916) (400) - (7,316) Net Income 22,935 14,949 111,302 149,186 Withdrawals and distributions (8,445) (10,750) (63,499) (82,694) ------------- ------------- ------------- ------------- TOTAL PARTNERSHIP CAPITAL 247,718 86,654 340,344 674,716 Reserve for anticipated withdrawals (14,490) (4,199) (17,083) (35,772) ------------- ------------- ------------- ------------- Partnership capital net of reserve for anticipated withdrawals, December 31, 2001 233,228 82,455 323,261 638,944 Issuance of partnership interests - 13,709 - 13,709 Redemption of partnership interests (4,562) (865) - (5,427) Net Income 20,196 15,889 112,830 148,915 Withdrawals and distributions (9,023) (12,766) (64,407) (86,196) ------------- ------------- ------------- ------------- TOTAL PARTNERSHIP CAPITAL 239,839 98,422 371,684 709,945 Reserve for anticipated withdrawals (11,173) (3,123) (14,278) (28,574) ------------- ------------- ------------- ------------- Partnership capital net of reserve for anticipated withdrawals, December 31, 2002 $ 228,666 $ 95,299 $ 357,406 $ 681,371 Included in Total Partnership Capital as of December 31, 2002, 2001, and 2000 is a Reserve for Anticipated Withdrawals, which the Partnership distributed to its General and Limited Partners subsequent to year end. The accompanying notes are an integral part of these consolidated financial statements.
28 PART II Item 8. Financial Statements And Supplementary Data THE JONES FINANCIAL COMPANIES, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per unit information) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE PARTNERSHIP'S BUSINESS AND BASIS OF ACCOUNTING. The accompanying consolidated financial statements include the accounts of The Jones Financial Companies, L.L.L.P. and all wholly owned subsidiaries (collectively, the "Partnership"). All material intercompany balances and transactions have been eliminated in consolidation. Investments in nonconsolidated companies which are at least 20% owned are accounted for using the equity method. The Partnership's principal operating subsidiary, Edward D. Jones & Co., L.P. ("EDJ"), is engaged in business as a registered broker-dealer primarily serving individual investors. EDJ derives its revenues from the sale of listed and unlisted securities and insurance products, investment banking and principal transactions and as a distributor of mutual fund shares. EDJ conducts business throughout the United States of America, Canada and the United Kingdom with its customers, various brokers, dealers, clearing organizations, depositories and banks. Boone National Savings and Loan Association, F.A. (the "Association"), a wholly owned subsidiary of the Partnership, makes commercial, real estate, and other loans 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. The financial statements have been prepared using the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America which requires the use of certain estimates by management in determining the Partnership's assets, liabilities, revenues and expenses. Actual results could differ from these estimates. Substantially all of the Partnership's short-term financial assets and liabilities are carried at fair value or contracted amounts which approximate fair value. Assets which are recorded at contracted amounts approximating fair value consist largely of short-term receivables. Similarly, the Partnership's short-term liabilities are recorded at contracted amounts approximating fair value. TRANSACTIONS. The Partnership's securities activities involve execution, settlement and financing of various securities transactions for customers. Customers' transactions are recorded on a settlement date basis with the related revenue and expenses recorded on a trade date basis. The Partnership may be exposed to risk of loss in the event customers, other brokers and dealers, banks, depositories or clearing organizations are unable to fulfill contractual obligations. For transactions in which it extends credit to customers, the Partnership seeks to control the risks associated with these activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. CASH AND CASH EQUIVALENTS. The Partnership considers all highly liquid investments, including money market securities, with original maturities of three months or less, to be cash equivalents. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. The Partnership participates in short-term resale agreements and repurchase agreements collateralized by U.S. government and agency securities. The market value of the underlying collateral as determined daily, plus accrued interest thereon, must equal or exceed 102% of the carrying amount of the transaction. It is the Partnership's policy to have such underlying resale agreement collateral deposited in its accounts at its custodian banks. Repurchase transactions require the Partnership to deposit collateral 29 PART II Item 8. Financial Statements And Supplementary Data with the lender. Resale and repurchase agreements are carried at the amount at which the securities will be subsequently resold/repurchased as specified in the agreements. SECURITIES-LENDING ACTIVITIES. Securities borrowed and securities loaned transactions are reported as collateralized financings. Securities borrowed transactions require the Partnership to deposit cash or other collateral with the lender. With respect to securities loaned, the Partnership receives collateral in the form of cash or other collateral of 102% 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. COLLATERAL. The Partnership reports as assets collateral it has pledged in secured borrowings and other arrangements when the secured party cannot sell or repledge the assets or the Partnership can substitute collateral or otherwise redeem it on short notice. The Partnership does not report as an asset collateral it has received in secured lending and other arrangements because the debtor typically has the right to redeem or substitute the collateral on short notice. SECURITIES OWNED AND SOLD, NOT YET PURCHASED. Securities owned and sold, not yet purchased, including inventory securities and investment securities, are valued at market value which is determined by using quoted market or dealer prices. EQUIPMENT, PROPERTY AND IMPROVEMENTS. Equipment, including furniture and fixtures, is recorded at cost and depreciated using straight-line and accelerated methods over estimated useful lives of two to twelve years. Buildings are depreciated using the straight-line method over their useful lives, which are estimated at thirty years. Property improvements are amortized based on the remaining life of the property or economic useful life of the improvement, whichever is less. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts. The cost of maintenance and repairs is charged against income as incurred, whereas significant enhancements are capitalized. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be fully recoverable. If impairment is indicated, the asset value is written down to its fair market value. SEGREGATED CASH. Cash of $53 and $51, respectively, was segregated in a special reserve bank account for the benefit of customers, and is included in Cash and Cash Equivalents as of December 31, 2002 and 2001 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 each partner is 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 cash transactions. The value of securities owned by customers and held as collateral for these receivables is 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. 30 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:
2002 2001 ----------- ----------- Receivable from clearing organizations $ 74,805 $ 50,849 Securities failed to deliver 15,601 17,385 Dividends receivable 6,303 7,843 Deposits paid for securities borrowed 1,601 2,331 Other 1,538 1,680 ----------- ----------- Total receivable from brokers, dealers and clearing organizations $ 99,848 $ 80,088 =========== =========== Securities failed to receive $ 18,067 $ 32,071 Other 2,267 9,919 ----------- ----------- Total payable to brokers, dealers and clearing organizations $ 20,334 $ 41,990 =========== ===========
Receivable from clearing organizations represents balances and deposits with clearing organizations and the Partnership's Canadian carrying broker. Securities failed to deliver/receive represent the contract value of securities which have not been received or delivered by settlement date. NOTE 4 - RECEIVABLE FROM MORTGAGES AND LOANS Receivable from mortgages and loans is comprised of the Association's primarily adjustable rate mortgage loans, commercial and other loans, net of discounts, deferred origination fees and the allowance for loan losses. The carrying amounts of the receivables approximate their fair values. 31 PART II Item 8. Financial Statements And Supplementary Data NOTE 5 - SECURITIES OWNED AND SOLD, NOT YET PURCHASED Securities owned and sold, not yet purchased, are summarized as follows (at market value):
2002 2001 ------------------------------ ------------------------------- Securities Securities Sold, Sold, Securities not yet Securities not yet Owned Purchased Owned Purchased ------------- ------------- ------------- -------------- Inventory securities: Certificates of deposit $ 3,340 $ 730 $ 4,515 $ 1,553 U.S. and Canadian government and U.S. agency obligations 68,571 2,899 16,849 866 State and municipal obligations 124,299 383 58,935 24,577 Corporate bonds and notes 5,585 9,238 24,540 2,308 Equities 1,545 250 2,833 2,810 Collateralized mortgage obligations 480 - 7,368 - Other 1,150 2,036 3,832 3,137 ------------- ------------- ------------- -------------- $ 204,970 $ 15,536 $ 118,872 $ 35,251 ============= ============= ============= ============== Investment securities: U.S. government and agency obligations $ 175,249 $ 180,719 ============= =============
The Partnership attempts to reduce its exposure to market price fluctuations of its inventory securities through the sale of U.S. government securities and, to a limited extent, the sale of fixed income futures contracts. The amount of the securities purchased or sold will fluctuate on a daily basis due to changes in inventory securities owned, interest rates and market conditions. The futures contracts are settled daily, and any gain or loss is recognized in principal transactions revenue. The notional amount of futures contracts sold was $10,000 and $12,000 at December 31, 2002 and 2001, respectively. NOTE 6 - EQUIPMENT, PROPERTY AND IMPROVEMENTS Equipment, property and improvements are summarized as follows:
2002 2001 ----------- ----------- Land $ 12,915 $ 12,749 Buildings and improvements 238,641 211,522 Equipment, furniture and fixtures 539,038 487,957 ----------- ----------- Total equipment, property and improvements 790,594 712,228 Accumulated depreciation and amortization (492,465) (414,156) ----------- ----------- Equipment, property and improvements, net $ 298,129 $ 298,072 =========== ===========
32 PART II Item 8. Financial Statements And Supplementary Data Depreciation expense on equipment, property and improvements is included in the income statement under Communications and Data Processing and Occupancy and Equipment. NOTE 7 - BANK LOANS The Partnership borrows from banks on a short-term basis primarily to finance customer margin balances and inventory securities. As of December 31, 2002, the Partnership had bank lines of credit aggregating $1,190,000 of which $1,140,000 were through uncommitted facilities. Actual borrowing availability is primarily based on the value of securities owned and customers' margin securities. At December 31, 2002, collateral with a market value $1,666,000 was available to support bank loans of EDJ. There were no bank loans outstanding under these lines as of December 31, 2002 or 2001. Additionally, the Association had loans from The Federal Home Loan Bank of $13,828 and $13,679 as of December 31, 2002 and 2001, respectively, which are collateralized by mortgage loans. Bank loans outstanding approximate their fair value. Interest is at a fluctuating rate based on short-term lending rates. The average of the aggregate short-term bank loans outstanding was $179,000, $272,000 and $413,000 and the average interest rate was 2.7%, 4.6%, and 7.0% for the years ended December 31, 2002, 2001 and 2000, respectively. NOTE 8 - PAYABLE TO DEPOSITORS Amounts payable to depositors are 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. NOTE 9 - LONG-TERM DEBT Long-term debt is comprised of the following:
2002 2001 ----------- ----------- Note payable, secured by equipment, interest paid quarterly at a variable rate (3.53% at December 31, 2002) based on LIBOR plus applicable margin, due in annual installments of $5,000, with a final installment of $6,000 on September 30, 2006. $ 21,000 $ 25,000 Notes payable, secured by real estate, fixed rates of 8.23% and 6.82%, principal and interest due in monthly installments, with a final installment on April 5, 2008. 13,486 15,461 Note payable, secured by real estate, fixed rate of 7.28%, principal and interest due in monthly installments, with a final installment on June 1, 2017. 12,854 - Notes payable, secured by real estate, fixed rates of 8.72% and 6.52%, principal and interest due in monthly installments, with a final installment on June 5, 2003. 2,023 5,824 ----------- ----------- $ 49,363 $ 46,285 =========== ===========
33 PART II Item 8. Financial Statements And Supplementary Data Scheduled annual principal payments, as of December 31, 2002, are as follows:
Principal Year Payment -------- ----------- 2003 $ 9,673 2004 7,857 2005 8,080 2006 9,321 2007 3,581 Thereafter 10,851 ----------- $ 49,363 ===========
The real estate debt of $28,400 at December 31, 2002 is collateralized by land and buildings with a cost basis of $69,500 and a carrying value of $48,400 at December 31, 2002. The $21,000 equipment debt as of December 31, 2002 is collateralized by equipment with a cost basis of $26,300 and a carrying value of $13,800 at December 31, 2002. Certain agreements contain restrictions that among other things, require maintenance of a fixed charge coverage ratio and minimum net capital. The Partnership is in compliance with all debt covenants and restrictions as of December 31, 2002 and 2001. The carrying amounts of the long-term debt approximate their fair value as of December 31, 2002 and 2001. NOTE 10 - LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS Liabilities subordinated to the claims of general creditors consist of:
2002 2001 ----------- ----------- Capital notes, 7.33%, due in annual installments of $50,000 commencing on June 12, 2010, with a final installment on June 12, 2014. $ 250,000 $ - Capital notes, with rates ranging from 7.51% to 7.79%, due in annual installments ranging from $3,700 to $25,000, commencing on August 15, 2005, with a final installment of $3,700 on August 15, 2011. 75,000 75,000 Capital notes, 8.18%, due in annual installments of $10,500, with a final installment on September 1, 2008. 63,000 73,500 Capital notes, 7.95%, due in annual installments of $10,225, with a final installment of of $10,200 on April 15, 2006. 40,875 51,100 Capital notes, 8.96%, due in annual installments of $6,000, with a final installment on May 1, 2002. - 6,000 ----------- ----------- $ 428,875 $ 205,600 =========== ===========
34 PART II Item 8. Financial Statements And Supplementary Data Required annual principal payments, as of December 31, 2002, are as follows:
Principal Year Payment -------- ----------- 2003 $ 20,725 2004 20,725 2005 43,225 2006 45,700 2007 23,200 Thereafter 275,300 ----------- $ 428,875 ===========
The capital note agreements contain restrictions which, among other things, require maintenance of certain financial ratios, restrict encumbrance of assets and creation of indebtedness and limit the withdrawal of partnership capital. As of December 31, 2002, the Partnership was required, under the note agreements, to maintain minimum partnership capital of $400,000 and Net Capital as computed in accordance with the Uniform Net Capital rule of 7.5% of aggregate debit items, or $139,638 (see Note 12). 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 $466,000 and $213,000 as of December 31, 2002 and 2001, respectively. NOTE 11 - PARTNERSHIP CAPITAL The limited partnership capital, consisting of 228,666 and 233,228 $1,000 units at December 31, 2002 and 2001, 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 $17,307, $17,754 and $13,423, for the years ended December 31, 2002, 2001 and 2000, respectively, paid to limited partners on capital contributed. The subordinated limited partnership capital, consisting of 95,299 and 82,455 $1,000 units at December 31, 2002 and 2001, 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 commence at their withdrawal dates. NOTE 12 - NET CAPITAL REQUIREMENTS As a result of its activities as a broker/dealer, EDJ is subject to the Net Capital provisions of Rule 15c3-1 of the Securities Exchange Act of 1934 and the capital rules of the New York Stock Exchange. Under the alternative method permitted by the rules, EDJ must maintain minimum Net Capital equal to the greater of $250 or 2% of aggregate debit items arising from customer transactions. The Net Capital rule also 35 PART II Item 8. Financial Statements And Supplementary Data 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, 2002, EDJ's Net Capital of $636,100 was 34% of aggregate debit items and its Net Capital in excess of the minimum required was $598,900. Net Capital as a percentage of aggregate debits after anticipated withdrawals was also 34%. Net Capital and the related capital percentage may fluctuate on a daily basis. NOTE 13 - GAIN ON INVESTMENTS During the year, the Partnership sold all of the shares it received from its memberships in the London Stock Exchange and Toronto Stock Exchange when they demutualized. The Partnership realized an $8,186 gain on the sale of these shares. NOTE 14 - EMPLOYEE BENEFIT 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 $35,600, $36,000 and $58,000 were provided by the Partnership for its contributions to the plan for the years ended December 31, 2002, 2001 and 2000, respectively. NOTE 15 - COMMITMENTS The Partnership leases headquarters office space, furniture, computers and communication equipment under various operating leases. Additionally, branch offices are leased generally for terms of three to five years. Rent expense was $179,400, $162,200 and $136,500 for the years ended December 31, 2002, 2001 and 2000, respectively. The Partnership's noncancelable lease commitments greater than one year and its contingent residual payments, as of December 31, 2002, are summarized below:
Contingent Rental Residual Year Commitments Payments -------- ------------- ------------ 2003 $ 122,500 $ - 2004 77,800 - 2005 52,500 - 2006 37,000 - 2007 24,400 51,300 Thereafter 130,000 -
Included in the Partnership's operating lease commitments and contingent residual payments are synthetic lease agreements for two buildings: one in Tempe, Arizona and another one in St. Louis, Missouri. The lessor of the buildings, along with a group of financial institutions, funded the construction of the facilities. The total cost of the facilities covered by these leases was $60,400. The synthetic leases have initial terms of five years, with renewal options for two additional terms up to five years by either the lessor or the Partnership, subject to the approval of the other party. The Partnership may, at its option, purchase the buildings during or at the end of the terms of the leases at approximately the amount expended to construct the facilities. If the Partnership does not exercise the purchase option by or at the 36 PART II Item 8. Financial Statements And Supplementary Data end of the leases, the Partnership would be responsible for contingent residual payments of up to $27,500 for the Tempe, Arizona facility and up to $23,800 for the St. Louis, Missouri facility, which would be reduced based on the proceeds from the sale of the buildings. In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - Interpretation of ARB No. 51" ("FIN 46"), which would become effective for the Partnership for periods beginning after June 27, 2003. The lessor for the Partnership's synthetic leases, an entity unrelated to JFC or its affiliates, is currently being evaluated under FIN 46. It is unclear at this time if the lessor will be considered a variable interest entity. If the lessor is deemed to be a variable interest entity, the Partnership will be required to record the synthetic leases as if they were capital leases rather than operating leases. The amount capitalized, currently estimated at $60,400, would be a deduction from EDJ's Net Capital. Additionally, the Partnership would record a capital lease obligation for approximately the same amount. Currently, EDJ's Net Capital is $636,100 and its Net Capital in excess of the minimum required is $598,900. The Partnership does not expect FIN 46 to have a significant impact on its consolidated financial condition, results of operations, or cash flows. EDJ has an equipment acquisition agreement with a financial institution. Under terms of the agreement, equipment is purchased by the financial institution as lessor and EDJ is obligated to lease the equipment. Equipment acquired by the financial institution but not yet leased by the Partnership at December 31, 2002, amounted to $3,300, which is not included in the operating lease commitment table above. Should the equipment acquisition agreement be terminated, EDJ has a commitment to pay the financial institution for the equipment acquired under the equipment acquisition agreement. NOTE 16 - 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. NOTE 17 - RELATED PARTIES EDJ has a minority partnership interest in the investment advisor to the Edward Jones Money Market Fund (the "Money Market Fund"). The Partnership does not have management responsibility for the advisor. Other than the Money Market Fund, the Partnership does not distribute any other proprietary funds. Approximately 3% of the Partnership's revenues were derived from the advisor and the Money Market Fund during 2002, 2001 and 2000. 37 PART II Item 8. Financial Statements And Supplementary Data NOTE 18 - QUARTERLY INFORMATION
(Unaudited) Quarters Ended ------------------------ March 30, June 29, September 28, December 31, ------------- ------------- ------------- -------------- 2001 Total revenue $ 529,032 $ 538,817 $ 528,467 $ 545,681 Net income 37,786 40,703 33,938 36,759 Net income per weighted average $1,000 equivalent partnership unit outstanding: Limited partners $ 24.54 $ 26.44 $ 22.04 $ 23.87 Subordinated limited partners 47.51 50.03 40.79 43.37 March 29, June 28, September 27, December 31, ------------- ------------- ------------- -------------- 2002 Total revenue $ 573,861 $ 614,468 $ 547,927 $ 533,769 Net income 41,629 50,095 31,357 25,834 Net income per weighted average $1,000 equivalent partnership unit outstanding: Limited partners $ 24.46 $ 29.45 $ 18.43 $ 15.10 Subordinated limited partners 48.16 56.53 34.60 27.87
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On July 11, 2002, the Partnership dismissed Arthur Andersen LLP ("Arthur Andersen") as its independent accountants. The reports of Arthur Andersen on the financial statements for the past two years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. In connection with its audits for the two most recent years and through July 11, 2002 there have been no disagreements with Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Arthur Andersen would have caused them to make reference thereto in their report on the financial statements for such years. During the two most recent years and through July 11, 2002, there have been no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)). The Partnership has provided Arthur Andersen a copy of the foregoing disclosure. The Partnership requested that Arthur Andersen furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the foregoing statements as reported in the Partnership's July 11, 2002 Form 8-K. The Partnership was notified by Arthur Andersen that they are no longer issuing such acknowledgments. 38 PART II Item 9. Change In and Disagreements with Accountants on Accounting and Financial Disclosure The Partnership engaged PricewaterhouseCoopers LLP ("PwC") as its new independent accountants as of July 11, 2002. During the two most recent fiscal years and through July 11, 2002, the Partnership had not consulted with PwC regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Registrant's financial statements, and either a written report was provided to the Partnership or oral advice was provided that PwC concluded was an important factor considered by the Partnership in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K, or a reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K. 39 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Jones Financial Companies, L.L.L.P., organized as a partnership, does not have individuals associated with it designated as officers or directors. As of January 31, 2003, the Partnership was comprised of 235 general partners, 5,217 limited partners and 134 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 235 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 January 31, 2003:
Name Age Partner Area of Responsibility - ------------------------------------------------------------------------------------------------------- John W. Bachmann 64 1970 Managing Partner Douglas E. Hill 58 1974 Product & Sales Division Michael R. Holmes 44 1996 Human Resources Richie L. Malone 54 1979 Information Systems Steven Novik 53 1983 Finance & Accounting Darryl L. Pope 63 1971 Service Division Robert Virgil, Jr. 68 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 Robert Virgil, Jr. As of December 31, 2000, Robert Virgil, Jr. was no longer a general partner. He is a subordinated limited partner and is still a member of the Executive Committee. John W. Bachmann is a director of AMR Corporation, Fort Worth, Texas. Robert Virgil, Jr. is a director of CPI Corp., St. Louis, Missouri. 40 PART III ITEM 11. EXECUTIVE COMPENSATION The following table identifies the compensation of the firm's Managing Partner and the four highest compensated individuals of the Partnership during the three most recent years (including respective shares of profit participation).
(1) (2) (3) Net Income Deferred Allocated Compen- to General Total Year Salaries sation Partners (1) (2) (3) - ---------------------------------------------------------------------------------------------------------------- John W. Bachmann 2002 $ 206,250 $ 5,620 $ 1,043,042 $ 1,254,912 2001 200,000 5,202 1,449,260 1,654,462 2000 200,000 8,789 3,131,881 3,340,670 Doug Hill 2002 181,250 5,620 3,119,026 3,305,896 2001 175,000 5,202 3,097,686 3,277,888 2000 175,000 8,789 5,516,789 5,700,578 Richie L. Malone 2002 163,750 5,620 3,012,976 3,182,346 2001 160,000 5,202 2,995,288 3,160,490 2000 160,000 8,789 5,109,485 5,278,274 Gary D. Reamey 2002 138,750 5,620 2,998,277 3,142,647 2001 135,000 5,202 2,969,546 3,109,748 2000 135,000 8,789 4,724,726 4,868,515 James D. Weddle 2002 163,750 5,620 2,795,363 2,964,733 2001 160,000 5,202 2,764,750 2,929,952 2000 160,000 8,789 4,657,091 4,825,880 ================================================================================================================ (1) Each non-selling general partner receives a salary generally ranging from $90,000 - $225,000 annually. Selling general partners do not receive a specified salary, rather, they receive the net sales commissions earned by them (none of the five individuals listed above earned any such commissions). Additionally, general partners who are principally engaged in sales are entitled to office bonuses based on the profitability of their respective branch office, on the same basis as the office bonus program established for all investment representative employees. (2) Each general partner is a participant in the Partnership's profit sharing plan which covers all eligible employees. Contributions to the plan, which are within the discretion of the Partnership, are made annually and have historically been determined based on approximately twenty-four percent of the Partnership's net income. Allocation of the Partnership's contribution among participants is determined by each participant's relative level of eligible earnings, including in the case of general partners, their net income participation. (3) Each general partner is entitled to participate in the annual net income of the Partnership based upon the respective percentage interest in the Partnership of each partner. Interests in the Partnership held 41 PART III by each general partner ranged from .03% to 3.1% in 2002, 0.03% to 3.1% in 2001, and 0.05% to 3.4% in 2000. At the discretion of the Managing Partner, the partnership agreement provides that, generally, the first eight percent of net income allocable to general partners be distributed on the basis of individual merit or otherwise as determined by the Managing Partner. Thereafter, the remaining net income allocable to general partners is distributed based upon each individual's percentage interest in the Partnership. Net income allocated to general partners excludes income required to be reinvested under the Partnership Agreement. Net income allocable to general partners is the amount remaining after payment of interest and earnings on capital invested to limited partners and subordinated limited partners.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Being organized as a limited partnership, management is vested in the general partners thereof and there are no other outstanding "voting" or "equity" securities. It is the opinion of the Partnership that the general partnership interests are not securities within the meaning of federal and state securities laws primarily because each of the general partners participates in the management and conduct of the business. In connection with outstanding limited and subordinated limited partnership interests (non-voting securities), 183 of the general partners also own limited partnership interests and 52 of the general partners also own subordinated limited partnership interests, as noted in the table below. As of January 31, 2003:
Name of Amount of Beneficial Beneficial % of Title of Class Owner Ownership Class - ------------------------------------------------------------------------------------------------------ Limited Partnership All General Interests Partners as a Group $ 22,948,200 10% Subordinated All General Limited Partnership Partners as Interests a Group $ 52,514,711 51% - ------------------------------------------------------------------------------------------------------
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. 42 PART III ITEM 14. CONTROLS AND PROCEDURES Based upon an evaluation performed within 90 days of the date of this report, the Partnership's certifying officers, the Chief Executive Officer and the Chief Financial Officer, have concluded that the Partnership's disclosure controls and procedures were effective. There have been no significant changes in internal controls or other factors that significantly affect these controls subsequent to the date of the evaluation. 43 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page No. INDEX (a) (1) The following financial statements are included in Part II, Item 8: Report of Independent Accountants................................................23 Consolidated Statements of Financial Condition as of December 31, 2002 and 2001.......................................................24 Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000.................................................26 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000.................................................27 Consolidated Statements of Changes in Partnership Capital for the years ended December 31, 2002, 2001 and 2000.............................28 Notes to Consolidated Financial Statements ......................................29 (2) The following financial statements are included in Schedule I: Parent Company Only Condensed Statements of Financial Condition as of December 31, 2002 and 2001....................................................52 Parent Company Only Condensed Statements of Income for the years ended December 31, 2002, 2001 and 2000...........................................53 Parent Company Only Condensed Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000.....................................54 Report of Independent Accountants................................................55 Schedules are omitted because they are not required, inapplicable, or the information is otherwise shown in the consolidated financial statements or notes thereto. (b) Report on Form 8-K No reports on Form 8-K were filed in the fourth quarter of 2002. (c) Exhibits Reference is made to the Exhibit Index hereinafter contained.
44 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, Chief Executive Officer Date March 27, 2003 --------------------------------------------------- By (Signature and Title) /s/ Steven Novik --------------------------------------------------- Steven Novik, Chief Financial Officer Date March 27, 2003 --------------------------------------------------- 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. 45 CHIEF EXECUTIVE OFFICER CERTIFICATION I, John W. Bachmann, certify that: 1. I have reviewed this annual report on Form 10-K of The Jones Financial Companies, L.L.L.P. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report. 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition and results of operations and cash flows of the Partnership as of, and for, the periods presented in this annual report. 4. The Partnership's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Partnership and have; a) designed such disclosure controls and procedures to ensure that material information relating to the Partnership including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is prepared; b) evaluated the effectiveness of the Partnership's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of our disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The Partnership's other certifying officer and I have disclosed, based on our most recent evaluation, to the Partnership's auditors and the Executive Committee: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Partnership's ability to record, process, summarize, and report financial data and have identified for the Partnership's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other associates who have a significant role in the Partnership's internal controls. 6. The Partnership's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ John W. Bachmann ------------------------------------------- Chief Executive Officer The Jones Financial Companies, L.L.L.P. March 27, 2003 46 CHIEF FINANCIAL OFFICER CERTIFICATION I, Steven Novik, certify that: 1. I have reviewed this annual report on Form 10-K of The Jones Financial Companies, L.L.L.P. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report. 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition and results of operations and cash flows of the Partnership as of, and for, the periods presented in this annual report. 4. The Partnership's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Partnership and have; a) designed such disclosure controls and procedures to ensure that material information relating to the Partnership including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is prepared; b) evaluated the effectiveness of the Partnership's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of our disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The Partnership's other certifying officer and I have disclosed, based on our most recent evaluation, to the Partnership's auditors and the Executive Committee: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Partnership's ability to record, process, summarize, and report financial data and have identified for the Partnership's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other associates who have a significant role in the Partnership's internal controls. 6. The Partnership's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Steven Novik -------------------------------------------- Chief Financial Officer The Jones Financial Companies, L.L.L.P. March 27, 2003 47 EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002
Exhibit Number Page Description 3.1 Thirteenth Amended and Restated Agreement of Registered Limited Liability Limited Partnership of The Jones Financial Companies, L.L.L.P., dated as of February 11, 2003. 3.2 * Form of Limited Partnership Agreement of Edward D. Jones & Co., L.P. 10.1 * Form of Cash Subordination Agreement between the Registrant and Edward D. Jones & Co., incorporated herein by reference to Exhibit 10.1 to the Company's registration statement of Form S-1 (Reg. No. 33-14955). 10.2 * Agreements of Lease between EDJ Leasing Company and Edward D. Jones & Co., L.P., dated August 1, 1991, incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report or Form 10-K for the year ended September 27, 1991. 10.3 * Edward D. Jones & Co., L.P. Note Purchase Agreement dated as of May 8, 1992, incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 26, 1992. 10.4 * Purchase and Sale Agreement by and between EDJ Leasing Co., L.P. and the Resolution Trust Corporation incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.5 * Master Lease Agreement between EDJ Leasing Company and Edward D. Jones & Co., L.P., dated March 9, 1993, and First Amendment to Lease dated March 9, 1994, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1994. 10.6 * Mortgage Note and Amendment to Deed of Trust between EDJ Leasing Co., L.P. and Nationwide Insurance Company dated March 9, 1994, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1994. 10.7 * Mortgage Note; Deed of Trust and Security Agreement; Assignment of Leases, Rents and Profits; and Subordination and Attornment Agreement between EDJ Leasing Co., L.P. and 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. 48 10.8 * Note Purchase Agreement by Edward D. Jones & Co., L.P., for $92,000,000 aggregate principal amount of 7.95% subordinated capital notes due April 15, 2006, incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 24, 1994. 10.9 * Master Lease Agreement and Addendum by and between Edward D. Jones & Co., L.P. and General Electric Capital Corporated dated April 21, 1994, incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 24, 1994. 10.10 * Agreement and Plan of Acquisition between The Jones Financial Companies and Boone National Savings and Loan Association, F.A., incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. 10.11 * Mortgage Note; South Second Deed of Trust and Security Agreement between EDJ Leasing Co., L.P. and Nationwide Life Insurance Company dated August 31, 1995, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 29, 1995. 10.12 * Mortgage Note; North Second Deed of Trust and Security Agreement between EDJ Leasing Co., L.P. and Nationwide Life Insurance Company dated August 31, 1995, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 29, 1995. 10.13 * Note Purchase Agreement by Edward D. Jones & Co., L.P. for $94,500,000 aggregate principal amount of 8.18% subordinated capital notes due September 1, 2008, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 27, 1996. 10.14 * Note Purchase Agreement by Edward D. Jones & Co., L.P. for $75,000,000 aggregate principal amount of subordinated capital notes with rates ranging from 7.51% to 7.79% due September 15, 2011, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 24, 1999. 10.15 * Lease between Eckelkamp Office Center South, L.L.C., a Missouri Limited Liability Company, as Landlord and Edward D. Jones & Co., L.P., a Missouri Limited Partnership, as Tenant, dated February 3, 2000, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 10.16 * Master Agreement dated as of November 30, 2000 among Edward D. Jones & Co., L.P., as Lessee, Construction Agent and 49 Guarantor, Atlantic Financial Group, Ltd., (registered to do business in Arizona as AFG Equity, Limited Partnership) as Lessor, Suntrust Bank and Certain Financial Institutions Parties Hereto, as Lenders, and Suntrust Bank as agent, and joined in by the The Jones Financial Companies, L.L.L.P., incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 10.17 * Master Lease Agreement dated as of November 30, 2000 between Atlantic Financial Group, Ltd. (registered to do business in Arizona as AFG Equity, Limited Partnership), as Lessor, and Edward D. Jones & Co., L.P., as Lessee, incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 10.18 * Master Lease Agreement between Edward D. Jones & Co., L.P. and Fleet Capital Corporation dated as of August 22, 2001, incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 10.19 * Credit Agreement dated as of August 27, 2001 between EDJ Leasing Co., L.P. and Southtrust Bank, incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 10.20 * Master Lease Agreement between EDJ Leasing Co., L.P. and Edward D. Jones & Co., L.P. dated August 27, 2001, incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 10.21 * Master Agreement dated as of September 18, 2001 among Edward D. Jones & Co., L.P., as Lessee, Construction Agent and Guarantor, Atlantic Financial Group, Ltd., (registered to do business in Missouri as Atlantic Financial Group, L.P.) as Lessor, Suntrust Bank and Certain Financial Institutions Parties Hereto, as Lenders, and Suntrust Bank, as Agent and joined in by The Jones Financial Companies, L.L.L.P, incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 10.22 * Master Lease Agreement dated as of September 18, 2001 between Atlantic Financial Group, Ltd. (registered to do business in Missouri as Atlantic Financial Group, L.P.), as Lessor, and Edward D. Jones & Co., L.P., as Lessee, incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 10.23 * Note Purchase Agreement by Edward D. Jones & Co., L.P., for $250,000,000 aggregate principal amount of 7.33% subordinated capital notes due June 12, 2014, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 28, 2002. 50 23.1 Consent of Independent Accountants, filed herewith. 24 * Delegation of Power of Attorney to Managing Partner contained within Exhibit 3.1 99.1 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. * Incorporated by reference to previously filed exhibits.
51 Schedule I THE JONES FINANCIAL COMPANIES, L.L.L.P. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31, December 31, (Amounts in thousands) 2002 2001 - ------------------------------------------------------------------------------------------------------------------ ASSETS: Cash and cash equivalents $ 3,420 $ 3,678 Investment in subsidiaries 701,748 667,352 Other assets 5,907 5,256 -------------- ------------- TOTAL ASSETS $ 711,075 $ 676,286 ============== ============= LIABILITIES AND PARTNERSHIP CAPITAL: Payable to limited partners, accounts payable and accrued expenses $ 1,130 $ 1,570 -------------- ------------- TOTAL LIABILITIES 1,130 1,570 TOTAL PARTNERSHIP CAPITAL 709,945 674,716 -------------- ------------- TOTAL LIABILITIES AND PARTNERSHIP CAPITAL $ 711,075 $ 676,286 ==================================================================================================================
These financial statements should be read in conjunction with the notes to the consolidated financial statements of The Jones Financial Companies, L.L.L.P. 52 Schedule I (continued) THE JONES FINANCIAL COMPANIES, L.L.L.P. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF INCOME
Years Ended ------------------------------------------------------ December 31, December 31, December 31, (Amounts in thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------ NET REVENUE: Subsidiary earnings $ 148,066 $ 147,835 $ 226,225 Management fee income 35,661 32,876 27,905 Other (280) 495 2,032 ------------- ------------- ------------- Total revenue 183,447 181,206 256,162 ------------- ------------- ------------- Interest expense 17,325 17,800 13,501 ------------- ------------- ------------- Net revenue 166,122 163,406 242,661 ------------- ------------- ------------- OPERATING EXPENSES: Compensation and benefits 17,065 14,099 12,584 Payroll and other taxes 115 73 84 Other operating expenses 27 48 170 ------------- ------------- ------------- Total operating expenses 17,207 14,220 12,838 ------------- ------------- ------------- NET INCOME $ 148,915 $ 149,186 $ 229,823 ==================================================================================================================
These financial statements should be read in conjunction with the notes to the consolidated financial statements of The Jones Financial Companies, L.L.L.P. 53 Schedule I (continued) THE JONES FINANCIAL COMPANIES, L.L.L.P. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF CASH FLOWS
Years Ended -------------------------------------------------- December 31, December 31, December 31, (Amounts in thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 148,915 $ 149,186 $ 229,823 Adjustments to reconcile net income to net cash provided by operating activities - Increase in investment in subsidiaries (34,396) (12,760) (168,753) Increase in other assets and liabilities, net (1,091) (2,934) 4,356 ------------- ------------- ------------- Net cash provided by operating activities 113,428 133,492 65,426 ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of partnership interests 13,709 12,450 114,014 Redemption of partnership interests (5,427) (7,316) (4,937) Withdrawals and distributions from partnership capital (121,968) (135,085) (174,953) ------------- ------------- ------------- Net cash used in financing activities (113,686) (129,951) (65,876) ------------- ------------- ------------- Net (decrease) increase in cash and cash equivalents (258) 3,541 (450) CASH AND CASH EQUIVALENTS, Beginning of year 3,678 137 587 ------------- ------------- ------------- End of year $ 3,420 $ 3,678 $ 137 ==================================================================================================================
These financial statements should be read in conjunction with the notes to the consolidated financial statements of The Jones Financial Companies, L.L.L.P. 54 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To The Jones Financial Companies, L.L.L.P.: Our audit of the consolidated financial statements referred to in our report dated March 27, 2003 appearing in the Form 10-K of The Jones Financial Companies, L.L.L.P. also included an audit of the financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP St. Louis, Missouri March 27, 2003 55 The following is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Jones Financial Companies, L.L.L.P. We have audited in accordance with auditing standards generally accepted in the United States, the financial statements included in The Jones Financial Companies, L.L.L.P. Form 10-K for the year ended December 31, 2001, and have issued our report thereon dated February 22, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. Schedule I listed in the index to Item 14 on Form 10-K for the year ended December 31, 2001, is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. Schedule I has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP St. Louis, Missouri, February 22, 2002 56 EX-3.1 3 exh3p1.txt AMENDED AND RESTATED AGREEMENT OF REGISTERED LIMITED LIABILITY LIMITED PARTNERSHIP Exhibit 3.1 THE JONES FINANCIAL COMPANIES, L.L.L.P. THIRTEENTH AMENDED AND RESTATED AGREEMENT OF REGISTERED LIMITED LIABILITY LIMITED PARTNERSHIP Dated as of February 11, 2003 TABLE OF CONTENTS ARTICLE ONE DEFINED TERMS...................................................3 ARTICLE TWO CONTINUATION, NAME AND OFFICE, PURPOSES, TERM AND DISSOLUTION, REGISTERED AGENT, PARTNER LIST........................8 2.1 Continuation..............................................8 2.2 Name, Place of Business and Office........................8 2.3 Purposes..................................................8 2.4 Term and Dissolution......................................8 2.5 Registered Office and Agent...............................8 2.6 Amendment to Certificate of Limited Partnership...........9 ARTICLE THREE PARTNERS AND CAPITAL..........................................9 3.1 General Partners..........................................9 3.2 Admission of Additional General Partners..................9 3.3 Limiteds and Contained Payments to Limited Partners.......9 3.4 Admission of Limiteds....................................10 3.5 Partnership Capital......................................10 3.6 Liability of Limiteds....................................10 3.7 Participation in Partnership Business by Limiteds........10 3.8 Priority Among Limiteds..................................11 ARTICLE FOUR RIGHTS, POWERS AND DUTIES OF THE GENERAL PARTNERS.............11 4.1 Authorized Acts; Management and Control..................11 4.2 Restrictions on Authority of the Managing Partner and Executive Committee......................................12 4.3 Removal or Dismissal of Certain Partners.................12 4.4 Executive Committee......................................13 4.5 Guaranteed Draw; Time and Effort; Independent Activities.14 4.6 Duties and Obligations of the Managing Partner...........15 4.7 Liability for Acts and Omissions; Indemnification........15 4.8 Dealing with an Affiliate................................16 4.9 General Partners' Responsibility.........................16 4.10 Responsibilities of Partnership Leaders..................16 ARTICLE FIVE MEETINGS AND VOTING OF PARTNERS...............................16 5.1 Meetings of General Partners; Voting at Such Meetings....16 5.2 Percentage of Voting Power for Partnership Decisions.....17 5.3 Robert's Rules to Govern.................................17 5.4 Consent of General Partners in Lieu of a Meeting.........17 ARTICLE SIX EVENT OF WITHDRAWAL OF A PARTNER AND CONVERSION OF CLASS II SUBORDINATED LIMITED PARTNER CAPITAL TO CLASS I SUBORDINATED LIMITED PARTNER CAPITAL...........................................18 6.1 Voluntary Event of Withdrawal............................18 6.2 Withdrawal Upon Request..................................18 6.3 Return of Capital and Purchase of Interest...............18 6.4 Death of a Limited.......................................20 6.5 Death or Disability of a General Partner.................20 6.6 General Partner Interest - 56th Birthday.................21 6.7 Restriction on Capital Contribution Return...............22 i 6.8 Liability of a Withdrawn General Partner.................22 6.9 Effect of Event of Withdrawal............................22 6.10 Conversion from Class II to Class I Subordinated Limited Partner..........................................23 ARTICLE SEVEN TRANSFERABILITY OF PARTNER INTERESTS.........................23 7.1 Restrictions on Transfer.................................23 7.2 Substituted Limited Partners.............................24 ARTICLE EIGHT DISTRIBUTIONS AND ALLOCATIONS; LIABILITY OF GENERAL PARTNERS.24 8.1 Distribution of Net Income...............................24 8.2 Distributions Upon Dissolution...........................26 8.3 Distribution of Frozen Appreciation Amount...............26 8.4 Sale of Assets to Third Party............................27 8.5 Other Sales or Dispositions to Third Party...............27 8.6 Allocation of Profits and Losses for Tax Purposes........28 8.7 Liability of General Partners............................30 ARTICLE NINE BOOKS, RECORDS AND REPORTS, ACCOUNTING, TAX ELECTIONS, ETC....30 9.1 Books, Records and Reports...............................30 9.2 Bank Accounts............................................31 9.3 Depreciation and Elections...............................31 9.4 Fiscal Year..............................................31 ARTICLE TEN MEDIATION/ARBITRATION..........................................31 10.1 Mediation/Arbitration....................................31 10.2 Forum Selection..........................................33 10.3 Statute of Limitations...................................33 10.4 Other Agreements.........................................34 ARTICLE ELEVEN GENERAL PROVISIONS..........................................34 11.1 Appointment of Attorneys-in-Fact.........................34 11.2 Word Meanings............................................35 11.3 Binding Provisions.......................................35 11.4 Applicable Law...........................................35 11.5 Counterparts.............................................35 11.6 Entire Agreement.........................................35 11.7 Separability of Provisions...............................35 11.8 Representations..........................................36 11.9 Section Titles...........................................36 11.10 Partition................................................36 11.11 No Third Party Beneficiaries.............................36 11.12 Amendments...............................................36 11.13 Revocable Trusts.........................................36 ii THE JONES FINANCIAL COMPANIES, L.L.L.P. (a Missouri Registered Limited Liability Limited Partnership) THIRTEENTH AMENDED AND RESTATED AGREEMENT OF REGISTERED LIMITED LIABILITY LIMITED PARTNERSHIP THIS THIRTEENTH AMENDED AND RESTATED AGREEMENT OF REGISTERED LIMITED LIABILITY LIMITED PARTNERSHIP of The Jones Financial Companies, L.L.L.P. entered into as of this 11th day of February, 2003, by and among John W. Bachmann as General Partner, and John W. Bachmann as the Attorney-In-Fact for all of the other General Partners, all of the Limited Partners, all of the Class I Subordinated Limited Partners (none at the date of this Agreement) and all of the Class II Subordinated Limited Partners (formerly referred to as the "Subordinated Limited Partners"). W I T N E S S E T H: WHEREAS, the Partnership was formed as a limited partnership under the Missouri Revised Uniform Limited Partnership Act pursuant to an Agreement and Certificate of Limited Partnership dated June 5, 1987; WHEREAS, the Partnership filed on July 15, 1987 its Amended and Restated Agreement and Certificate of Limited Partnership dated July 15, 1987 (the "Restated Agreement"); WHEREAS, the Partnership filed on August 28, 1987, November 16, 1987, August 5, 1988, August 29, 1988, January 31, 1989, March 21, 1989 and August 10, 1989 its Amendments No. 1, 2, 3, 4, 5, 6 and 7 respectively, to its Restated Agreement; WHEREAS, the Partnership filed on June 22, 1989 its Partner List as of May 31, 1989; WHEREAS, the Restated Agreement as amended is hereinafter referred to as the "First Restated Agreement"; WHEREAS, the First Restated Agreement was amended and restated in its entirety pursuant to a Second Amended and Restated Agreement and Certificate of Limited Partnership dated as of January 31, 1990 (the "Second Restated Agreement"); WHEREAS, the Missouri Revised Uniform Limited Partnership Act was amended in August of 1990 and no longer requires certain information in certificates of limited partnership (filed with the Secretary of State) and now requires corresponding amendments to be made to agreements of limited partnership; WHEREAS, the Partnership desired that the aforesaid Second Restated Agreement become two separate documents, namely a Third Amended and Restated Agreement of Limited Partnership (the "Third Restated Agreement") and a separate restated Certificate of Limited Partnership; WHEREAS, the Second Restated Agreement was amended and restated in its entirety pursuant to said Third Restated Agreement dated as of January 31, 1991; WHEREAS, the Third Restated Agreement was amended and restated in its entirety pursuant to the Fourth Amended and Restated Agreement of Limited Partnership (the "Fourth Restated Agreement") dated as of January 1, 1993; WHEREAS, the Fourth Restated Agreement was amended and restated in its entirety pursuant to the Fifth Amended and Restated Agreement of Limited Partnership (the "Fifth Restated Agreement") dated as of May 24, 1993; WHEREAS, the Fifth Restated Agreement was amended and restated in its entirety pursuant to the Sixth Amended and Restated Agreement of Limited Partnership (the "Sixth Restated Agreement") dated as of October 1, 1993; WHEREAS, the Sixth Restated Agreement was amended and restated in its entirety pursuant to the Seventh Amended and Restated Agreement of Limited Partnership (the "Seventh Restated Agreement") dated as of August 31, 1996; WHEREAS, the Seventh Restated Agreement was amended and restated in its entirety to register the Partnership as a registered limited liability partnership pursuant to the Eighth Amended and Restated Agreement of Limited Partnership (the "Eighth Restated Agreement") dated as of November 1, 1996; WHEREAS, the Partnership filed as of February 26, 1998 an Amendment to the Certificate of Limited Partnership changing the Partnership's name from The Jones Financial Companies, L.P., LLP to The Jones Financial Companies, L.L.L.P.; WHEREAS, the Eighth Restated Agreement was amended and restated in its entirety pursuant to the Ninth Amended and Restated Agreement of Registered Limited Liability Limited Partnership (the "Ninth Restated Agreement") dated as of April 1, 1998; and WHEREAS, the Ninth Restated Agreement was amended and restated in its entirety pursuant to the Tenth Amended and Restated Agreement of Registered Limited Liability Limited Partnership (the "Tenth Restated Agreement") dated as of February 25, 1999; and WHEREAS, the Tenth Restated Agreement was amended and restated in its entirety pursuant to the Eleventh Amended and Restated Agreement of Registered Limited Liability Limited Partnership (the "Eleventh Restated Agreement") dated as of May 23, 2000; and WHEREAS, the Eleventh Restated Agreement was amended and restated in its entirety pursuant to the Twelfth Amended and Restated Agreement of Registered Limited Liability Limited Partnership (the "Twelfth Restated Agreement") dated as of June 15, 2001; and WHEREAS, the parties now desire to amend and restate said Twelfth Restated Agreement in its entirety pursuant to this Thirteenth Amended and Restated Agreement of Registered Limited Liability Limited Partnership. 2 NOW, THEREFORE, pursuant to the terms, covenants and conditions set forth herein and the mutual promises contained herein, the parties hereto agree as follows: ARTICLE ONE DEFINED TERMS ------------- The defined terms used in this Agreement shall have the meanings specified below: "Affiliate" of a specified person (the "Specified Person") --------- means any Person (a) who directly or indirectly controls, is controlled by, or is under common control with the Specified Person; (b) who owns or controls ten percent (10%) or more of the Specified Person's outstanding voting securities or equity interests; (c) in whom such Specified Person owns or controls ten percent (10%) or more of the outstanding voting securities or equity interests; (d) who is a director, partner, manager, executive officer or trustee of the Specified Person; (e) in whom the Specified Person is a director, partner, manager, executive officer or trustee; or (f) who has any relationship with the Specified Person by blood, marriage or adoption, not more remote than first cousin. "Agreement" means this Thirteenth Amended and Restated --------- Agreement of Registered Limited Liability Limited Partnership, as amended from time to time. "Capital Account" means an account established by the --------------- Partnership and maintained for each Partner, for federal income tax purposes, which account shall be credited with: (i) the amount of the Partner's Capital Contributions; and (ii) the amount of Partnership income (including income exempt from federal income tax) and gain (or items thereof) allocated to the Partner pursuant to Article Eight hereof; and which shall be debited by: (iii) the amount of Partnership losses and deductions (or items thereof) allocated to the Partner pursuant to Article Eight hereof; (iv) the amount of Partnership expenditures described in Treasury Regulations Section 1.704-1(b)(2)(iv)(i) allocable to the Partner in the same proportion as that in which the Partner bears the economic burden of those expenditures; and (v) the amount of all distributions to the Partner pursuant to Article Eight hereof. In addition, the Capital Account of each Partner shall be adjusted as necessary to comply with Treasury Regulations Section 1.704-1(b)(2)(iv). In the event the Managing Partner shall determine that it is prudent to modify the manner in which the Capital Accounts or any debits or credits thereto are completed in order to comply with such regulations, the Managing Partner may amend this Agreement to reflect such modification, provided that it is not likely to have a material effect on the amounts distributable to the Partners pursuant to Article Eight upon dissolution of the Partnership. 3 If any Partner would otherwise have a negative balance in his Capital Account, the amount of any such negative balance shall be reduced (but not in excess of such negative balance) by the amount of such Partner's share of Partnership Minimum Gain (determined in accordance with Treasury Regulations Section 1.704-1(b)(4)(iv)(f)) after taking into account all increases and decreases to such Partnership Minimum Gain during the taxable year. In the event that the Partnership is deemed to be terminated for federal income tax purposes due to the sale or exchange of fifty percent (50%) or more of the Partnership interests within a twelve (12) month period, appropriate adjustment shall be made to the Capital Accounts to reflect such termination as required by the Internal Revenue Code and applicable Treasury Regulations. In the event that interests in the Partnership are sold, exchanged or otherwise transferred, and the transfer is recognized under Article Six or Article Seven hereof, or by operation of law, the Capital Account of the transferee will equal the Capital Account of the transferor immediately before the transfer. However, if such a sale or exchange, either alone or in combination with other sales or exchanges within a twelve-month period results in a transfer of fifty percent (50%) or more of the Partnership interests causing a termination of the Partnership for federal income tax purposes, the adjustment required by the immediately preceding paragraph shall be made. "Capital Contribution" means the total amount of cash or -------------------- property contributed as equity to the Partnership by each Partner pursuant to the terms of this Agreement. The Capital Contributions of the Partners have been previously set forth on exhibits to this Agreement. From the date hereof, the Capital Contributions of the Partners shall be reflected in the books and records of the Partnership. "Certificate of Limited Partnership" means the document, as ---------------------------------- amended or restated from time to time, filed as a certificate of limited partnership under the Missouri Limited Partnership Act. "Class I Subordinated Limited Partners" means those persons ------------------------------------- whose names are set forth in the books and records of the Partnership as Class I Subordinated Limited Partners, and any other person who becomes a Class I Subordinated Limited Partner of the Partnership as provided herein. "Class II Subordinated Limited Partners" means those persons -------------------------------------- whose names are set forth in the books and records of the Partnership as Class II Subordinated Limited Partners, and any other person who becomes a Class II Subordinated Limited Partner of the Partnership as provided herein. "Dispute" shall have the meaning set forth in Section 10.1A. ------- "EDJ" shall have the meaning set forth in Section 2.3. --- "Event of Withdrawal" means, as to a General Partner, the ------------------- occurrence of death, adjudication of mental incompetence, bankruptcy, dissolution, or voluntary or involuntary withdrawal or removal from the Partnership or any other event of withdrawal set forth in the Missouri Limited Partnership Act. 4 "Frozen Appreciation Amount" means each General Partner's -------------------------- share of the unrealized appreciation of certain real estate (the "Real Estate") owned by EDJ Leasing Co. on the date such General Partner contributes his general partnership interest in EDJ Leasing Co. to the Partnership plus such General Partner's share of the unrealized appreciation of all stock exchange seats (the "Exchange Seats") owned by or for the benefit of Edward D. Jones & Co., L.P. on the date such General Partner contributes his general partnership interest in Edward D. Jones & Co., L.P. to the Partnership. The Frozen Appreciation Amount shall be maintained in the books and the records of the Partnership. The Real Estate currently consists of the land and improvements located at 201 Progress Parkway, 141 Progress Parkway, 158 Progress Parkway, 115 Progress Parkway, 135 Progress Parkway, 9 American Industrial Dr. and 20 American Industrial Dr., all in St. Louis County, Missouri. The Exchange Seats consists of one (1) seat on the New York Stock Exchange, and one (1) seat on the Chicago Stock Exchange or any such seats on successor exchanges. Each year, as of December 31, if in the opinion of the Managing Partner there has been a material diminution in the value of the Real Estate, the Partnership shall appraise (to the extent not previously sold) the Real Estate and the shares of unrealized appreciation shall be appropriately and proportionately adjusted for each General Partner on the books of the Partnership. On each Valuation Date, if needed for the purpose of making a calculation for purposes of this Agreement, the Partnership shall appraise (to the extent not previously sold) the Exchange Seats and the shares of unrealized appreciation shall be appropriately and proportionately adjusted for each General Partner on the books of the Partnership. The unrealized appreciation per each separate tract of Real Estate and per each separate Exchange Seat as set forth on the books of the Partnership may never exceed the amount used in making the original calculation even if a given appraised value later exceeds such amount. When, as and if a given tract of Real Estate or Exchange Seat is sold, the unrealized appreciation then attributable to such tract of Real Estate or Exchange Seat shall no longer be included in the calculation of the Frozen Appreciation Amount on the books of the Partnership. "General Partners" means those persons whose names are set ---------------- forth in the books and records of the Partnership as being General Partners, and any other Person who becomes a successor or additional General Partner of the Partnership as provided herein. "General Partner's Adjusted Capital Contribution" means the ----------------------------------------------- Capital Contribution of the General Partner plus all Net Income thereafter allocated to the account of the General Partner minus (a) all Net Loss thereafter allocated to the account of the General Partner, and (b) any cash or property thereafter distributed to (or for the benefit of) the General Partner. Payments of salaries, bonuses or expenses to a General Partner by the Partnership shall not affect such General Partner's Adjusted Capital Contribution. "General Partner Interest" means a General Partner's entire ------------------------ ownership interest in the Partnership. "General Partner Percentage" means a percentage determined by -------------------------- dividing a General Partner's Adjusted Capital Contribution by the Adjusted Capital Contributions of all of the General Partners. "Grantors" shall have the meaning set forth in Section 11.13. -------- "Internal Revenue Code" means the Internal Revenue Code of --------------------- 1986, as amended from time to time. 5 "Limited Partner Withdrawal Notice" shall have the meaning set --------------------------------- forth in Section 6.1B. "Limited Partners" means those persons whose names are set ---------------- forth in the books and records of the Partnership as being Limited Partners, and any other person who becomes a Limited Partner of the Partnership as provided herein. "Limiteds" means those persons whose names are set forth in -------- the books and records of the Partnership as being the Limited Partners, Class I Subordinated Limited Partners and the Class II Subordinated Limited Partners, and any other person who becomes a Limited of the Partnership as provided herein. "Mandatory Withdrawal Notice" shall have the meaning set forth --------------------------- in Section 6.2. "Missouri Limited Partnership Act" means the Missouri Revised -------------------------------- Uniform Limited Partnership Act, as amended from time to time. "Missouri Partnership Act" means the Missouri Uniform ------------------------ Partnership Law, as amended from time to time. "NASD" shall have the meaning set forth in Section 10.1E. ---- "Net Income or Net Loss" means, with respect to any fiscal ---------------------- period, the net income or the net loss of the Partnership, determined in accordance with generally accepted accounting principles; provided, however, there shall be excluded from such net income or net loss (after deduction of the guaranteed payments required by Section 3.3B hereof and the bonus compensation provided for in Section 4.1B(v) hereof) any unrealized gains or losses on securities or rights or options to acquire securities held by the Partnership (or by any entity whose financial statements are consolidated with the financial statements of the Partnership) as (a) a hedge against fixed rate borrowings or (b) as long term passive investments (usually minority interests) (in the case of both (a) and (b), as opposed to other securities held by the Partnership [or by any entity whose financial statements are consolidated with the financial statements of the Partnership] as inventory for resale in the ordinary course of business). "Notice" means a writing, containing the information required ------ by this Agreement to be communicated to a party, delivered personally or sent by U.S. mail, postage prepaid, to such party at the last known address of such party as shown on the records of the Partnership, the date of personal delivery or the date of mailing thereof being deemed the date of receipt thereof. "Partner" means any General Partner or Limited. ------- 6 "Partnership" means the limited partnership (originally formed ----------- as a limited partnership which is now registered as a registered limited liability limited partnership) continued by this Agreement by the parties hereto, as said limited partnership may from time to time be constituted. "Partnership Minimum Gain" means, for Partnership tax ------------------------ purposes, as set forth in Treasury Regulations Section 1.704-1(b)(4)(iv)(c), the amount of gain, if any, that would be realized by the Partnership if it were to sell or dispose of (in a taxable transaction) property subject to a non-recourse liability of the Partnership, in full satisfaction of such liability. "Party" shall have the meaning set forth in Section 10.1A. ----- "Person" means a natural person, partnership, limited ------ partnership (domestic or foreign), limited liability partnership, limited liability limited partnership, limited liability company, trust, estate, association or corporation. "Premium" shall have the meaning set forth in Section 8.4D. ------- "Price" shall have the meaning set forth in Section 6.3A. ----- "Proceeds of Liquidation" shall have the meaning set forth in ----------------------- Section 8.2A. "Profits and Losses For Tax Purposes" means, for Partnership ----------------------------------- accounting and tax purposes, the various items set forth in Section 702(a) of the Internal Revenue Code and all applicable regulations or any successor law, and shall include, but not be limited to, each item of income, gain, deduction, loss, preference or credit. "Reduced Amount" shall have the meaning set forth in -------------- Section 8.1A(iii). "Requested Withdrawal Amount" shall have the meaning set forth --------------------------- in Section 6.3G. "Retiring Interest" shall have the meaning set forth in ----------------- Section 6.6. "Sale" shall have the meaning set forth in Section 8.4A. ---- "Treasury Rate" shall have the meaning set forth in ------------- Section 8.1A(ii). "Trusts" shall have the meaning set forth in Section 11.13. ------ "Withdrawal Notice" shall have the meaning set forth in ----------------- Section 6.3G. "Valuation Date" means as of the last Friday of each month -------------- except for the month of December in which case it means as of the last day of the month. 7 ARTICLE TWO CONTINUATION, NAME AND OFFICE, PURPOSES, ---------------------------------------- TERM AND DISSOLUTION, --------------------- REGISTERED AGENT, PARTNER LIST ------------------------------ 2.1 Continuation. ------------ The parties hereto hereby continue the Partnership as a registered limited liability limited partnership pursuant to the provisions of the Missouri Limited Partnership Act and the Missouri Partnership Act. 2.2 Name, Place of Business and Office. ---------------------------------- The Partnership shall be conducted under the name of "The Jones Financial Companies, L.L.L.P.". The principal office and place of business shall be 12555 Manchester Road, Des Peres, Missouri 63131. The General Partners may at any time change the location of such principal office. Notice of any such change shall be given to the Partners on or before the date of any such change. 2.3 Purposes. -------- The purposes of the Partnership shall be to act as a limited partner in Edward D. Jones & Co., L.P., ("EDJ") to act as a general partner, limited partner, guarantor, stockholder or holding partnership for any other limited partnership, general partnership, limited liability partnership, limited liability limited partnership, limited liability company, corporation or other entity and to engage in such other activities as may be approved by the General Partners. 2.4 Term and Dissolution. -------------------- A. The Partnership shall continue in full force and effect until December 31, 2199, or until dissolution prior thereto upon the happening of any of the following events: (i) The sale of all of the assets of the Partnership; (ii) An Event of Withdrawal of a General Partner if no General Partner remains; or (iii) The dissolution of the Partnership by the General Partners. B. Upon dissolution of the Partnership, the General Partners shall cause the cancellation of the Partnership's Certificate of Limited Partnership, liquidate the Partnership's assets and apply and distribute the proceeds thereof in accordance with Section 8.2 hereof. 2.5 Registered Office and Agent. --------------------------- The name and address of the Registered Agent and Registered Office for service of process on the Partnership are as set forth in the Certificate of Limited Partnership. 8 2.6 Amendment to Certificate of Limited Partnership. ----------------------------------------------- The Certificate of Limited Partnership shall be amended within thirty days of the admission or withdrawal of a General Partner. ARTICLE THREE PARTNERS AND CAPITAL -------------------- 3.1 General Partners. ---------------- A. The name, last known mailing address and current Capital Contribution of each General Partner are reflected in the books and records of the Partnership. B. Any General Partner, in addition to being a General Partner, may also become a Limited by complying with the provisions of Section 3.4 hereof. In such event, said General Partner shall have all the rights and powers and be subject to all the restrictions of a General Partner, except that, in respect to his Capital Contribution as a Limited, he shall have the rights against the other Partners which he would have had if he were not also a General Partner. C. From time to time, the Managing Partner may allow one or more General Partners to increase their Capital Contributions. Such increased Capital Contributions shall be made in such amount and manner and at such time as determined by the Managing Partner and the General Partner's Percentages shall be appropriately adjusted and transferred. All such changes shall be reflected in the books and records of the Partnership. 3.2 Admission of Additional General Partners. ---------------------------------------- A. The Managing Partner may at any time designate additional General Partners with such interest in the Partnership as the Managing Partner and such additional General Partners may agree upon. The additional General Partner shall make his Capital Contribution to the Partnership in such manner and at such time as determined by the Managing Partner and the General Partner Percentages shall be appropriately adjusted and transferred. All such changes shall be reflected in the books and records of the Partnership. The Managing Partner may admit additional General Partners to the Partnership at any time without the consent of any current General Partner or Limited. B. Each additional General Partner shall agree, as a condition to becoming an additional General Partner, to be bound by the terms and provisions of this Agreement and any other agreement (including cash subordination agreements) as deemed appropriate by the Managing Partner. 3.3 Limiteds and Contained Payments to Limited Partners. --------------------------------------------------- A. There shall be three classes of Limiteds, namely, Limited Partners, Class I Subordinated Limited Partners and Class II Subordinated Limited Partners. The name, last known mailing address and current Capital Contribution of each Limited Partner, Class I Subordinated Limited Partner and Class II Subordinated Limited Partner are reflected in the books and records of the Partnership. 9 B. Each Limited Partner shall be paid 7-1/2% per annum, on the principal amount of his Capital Contribution. Such payments shall be made yearly or more frequently, as determined by the Managing Partner. All such payments shall be treated as guaranteed payments. 3.4 Admission of Limiteds. --------------------- A. The Managing Partner is authorized to admit to the Partnership Limiteds who may be admitted as Limited Partners, Class I Subordinated Limited Partners or as Class II Subordinated Limited Partners, at the discretion of the Managing Partner. B. The Capital Contributions of the Limiteds shall be made in such manner and at such time as determined by the Managing Partner. All such changes shall be reflected in the books and records of the Partnership. C. Each Limited shall agree, as a condition to becoming a Limited, to be bound by the terms and provisions of this Agreement and any other agreements (including cash subordination agreements) as deemed appropriate by the Managing Partner. 3.5 Partnership Capital. ------------------- A. The total capital of the Partnership shall be the aggregate amount of the Capital Contributions of the Partners as provided for herein. B. Except as provided herein, or as otherwise determined by the Managing Partner, no Partner shall be paid interest on any Capital Contribution to the Partnership. C. Except as otherwise provided herein, prior to dissolution of the Partnership, no Partner shall have the right to demand the return of his Capital Contribution. No Partner shall have the right to demand and receive property other than cash in return for his Capital Contribution. D. The General Partners shall have no personal liability for the repayment of the Capital Contribution of any Limited. 3.6 Liability of Limiteds. --------------------- A Limited shall only be liable to make the payment of his Capital Contribution. Except as provided in the Missouri Limited Partnership Act, no Limited shall be liable for any obligations of the Partnership. After his Capital Contributions shall be paid to the Partnership, no Limited shall be required to make any further Capital Contribution or lend any funds to the Partnership, except as otherwise expressly provided in this Agreement. 3.7 Participation in Partnership Business by Limiteds. ------------------------------------------------- No Limited (except one who may also be a General Partner, and then only in his capacity as a General Partner) shall participate in or have any control over the Partnership business (except as required by law) or shall have any authority or right to act for or bind the partnership. The Limiteds hereby consent to the exercise by the Managing Partner and the General Partners of the powers conferred on them by this Agreement. 10 3.8 Priority Among Limiteds. ----------------------- Priorities as between classes of Limiteds as to distributions are set forth in Article Eight hereof. ARTICLE FOUR RIGHTS, POWERS AND DUTIES OF THE GENERAL PARTNERS ------------------------------------------------- 4.1 Authorized Acts; Management and Control. --------------------------------------- A. Subject to the other provisions set forth below, the General Partners have the exclusive right to manage the business of the Partnership and are hereby authorized to take any action (including, but not limited to, the acts authorized by Section 4.1C below) of any kind and to do anything and everything in accordance with the provisions of this Agreement. B. John W. Bachmann is hereby designated by the General Partners as the Managing Partner of the Partnership. As the Managing Partner he shall serve as Chairman of the Executive Committee. As Managing Partner, he shall have the absolute right (subject to Section 4.4C hereof) to manage the business of the Partnership on behalf of the General Partners and is hereby authorized to take on behalf of the Partnership and the General Partners any action (including, but not limited to, the acts authorized by Section 4.1C below) of any kind and to do anything and everything in accordance with the provisions of this Agreement. The Managing Partner shall have all the rights, powers and duties usually vested in the managing partner of a partnership including the administration of this Partnership's business and the determination of its business policies and he shall control the management and conduct of all of the business transacted by the Partnership. In particular, but not in limitation of the foregoing, the Managing Partner for, in the name and on behalf of, the Partnership and the General Partners is hereby specifically authorized (i) to admit to the Partnership any General Partner or Limited; (ii) to dismiss (in accordance with Section 6.2 hereof) from the Partnership any General Partner or Limited; (iii) to determine the General Partner's Adjusted Capital Contribution (and the related General Partner Percentage) that each General Partner (including the Managing Partner) shall be entitled to maintain; (iv) to determine the guaranteed draw (described in Section 4.5A hereof) to be paid to each General Partner (which guaranteed draw shall be set forth on a list to be maintained in the Managing Partner's office which list shall be available for inspection by the General Partners); (v) to determine the amount, if any, of bonus compensation (in addition to the funds provided for in Section 8.1A(iv) to be paid to one or more Partners to assist such Partner(s) in maintaining or making initial or additional Capital Contributions to the Partnership, provided, however, such aggregate bonus compensation in any calendar year shall not exceed $1,500,000; (vi) to determine the amount, if any, of the Capital Contribution that each General Partner or Limited shall be entitled to maintain; (vii) to determine all amounts, if any, to be distributed to the Limiteds pursuant to Section 8.5 hereof; (viii) to convey title to any assets of the Partnership; and (ix) to execute all documents (including, but not limited to, any loan documents or guarantees) on behalf of the Partnership and (x) to sign on behalf of the Partnership and each of its Partners, all documents and forms required by (A) any domestic or foreign jurisdiction where the Partnership is engaged in business so as to qualify as a registered limited liability limited partnership or comparable entity and (B) any governmental agency requiring the Partnership to appoint a registered agent and/or office for service of process in such jurisdictions. 11 C. The General Partners for, in the name and on behalf of, the Partnership are hereby authorized to take any and all actions, and to engage in any kind of activity and to perform and carry out all functions of any kind necessary to, or in connection with, the business of the Partnership (including but not limited to): (i) executing any instruments on behalf of the Partnership; (ii) acquiring or selling assets of the Partnership; (iii) entering into loans, guarantees in connection with the business of the Partnership; (iv) acting as a partner or shareholder of, or adviser to, any other organization; (v) contributing capital, as a limited partner or as a general partner, or purchasing other securities in or otherwise investing in EDJ or any other limited partnership, general partnership, corporation or other entity and taking all actions required as a partner, shareholder or investor in any such entity. D. The special authority granted herein to the Managing Partner shall not be construed to restrict the authority of any General Partner to act as the agent of the Partnership and to execute instruments in the Partnership name for the purpose of carrying on the ordinary business of the Partnership. E. The Managing Partner may delegate to any General Partner the authority from time to time to execute documents or otherwise exercise the authority of the Managing Partner, but such authority shall not include the authority to increase the capital or change the business policies of the Partnership unless such authority is expressly and specifically granted in writing to such General Partner. F. Whenever authority is herein conferred upon the Managing Partner or the General Partners, any person, other than a General Partner, dealing with the Partnership may rely conclusively upon the authority and signature of the Managing Partner or any one other General Partner to exercise such authority without determining that such Managing Partner or such General Partner is acting with the approval of the other General Partners. In addition, third parties dealing with the Partnership may rely upon the certification of the Managing Partner or any other General Partner as to the continued existence of the Partnership, the identity of its current Partners and the authority of any Partner to execute any document. 4.2 Restrictions on Authority of the Managing Partner ------------------------------------------------- and Executive Committee. - ----------------------- In the event that a meeting of General Partners is called by the General Partners in accordance with Section 5.1 hereof to vote upon the removal of the Managing Partner or an Executive Committee member, neither the Managing Partner nor the Executive Committee shall from the time of notice of such meeting until after adjournment thereof: (i) change the General Partner Percentage of any General Partner or (ii) admit or dismiss any General Partner as a Partner. 4.3 Removal or Dismissal of Certain Partners. ---------------------------------------- The Managing Partner may be removed from such office and any General Partner may be dismissed as a General Partner (in accordance with Section 6.2 hereof) by a vote of General Partners holding a majority of the General Partner Percentages in the Partnership. 12 4.4 Executive Committee. ------------------- A. An Executive Committee is hereby created consisting of the Managing Partner and five (5) to nine (9) additional General Partners, the number thereof to be determined from time to time by the Managing Partner. There shall be maintained in the office of the General Counsel of the Partnership a list, certified by the Managing Partner as being true and correct, of the General Partners, who in addition to the Managing Partner, constitute the current Executive Committee of the Partnership. Among the purposes of the Executive Committee is to provide counsel and advice to the Managing Partner in discharging his functions. B. Each member of the Executive Committee shall have one vote. C. Upon the majority vote of the Executive Committee, the Executive Committee may override any determination made by the Managing Partner as to (i) the General Partner's Adjusted Capital Contribution (and the related General Partner Percentage) that each General Partner (including the Managing Partner) shall be entitled to maintain, (ii) the admission of a new General Partner and (iii) the dismissal of a General Partner. D. Upon the majority vote of the Executive Committee, the Managing Partner may be removed from his office as the Managing Partner. E. At any time during which there is no Managing Partner the Executive Committee shall succeed to all of the powers and duties of the Managing Partner. F. Upon the majority vote of the Executive Committee, a new Managing Partner shall be elected whenever the office of the Managing Partner is vacant. Such vote shall be taken within two (2) weeks after such office becomes vacant. G. If the Executive Committee believes that the office of the Managing Partner may become vacant, for any reason whatsoever, including, but not limited, to retirement or resignation of the current Managing Partner, then the Executive Committee may establish procedures (as it shall determine appropriate, in its sole discretion) to review potential candidates and then to choose from such candidates the person to be the new Managing Partner when the office of the Managing Partner becomes vacant. H. The Managing Partner shall have the right to appoint and dismiss any member of the Executive Committee; provided however that the Managing Partner shall not have the right to dismiss any member of the Executive Committee or increase or decrease the number of General Partners on the Executive Committee from the time Notice is given of a meeting of the Executive Committee until the adjournment thereof if the purpose of such meeting is to vote upon one or more of the matters set forth in Sections 4.4C or 4.4D hereof. I. By a vote of the General Partners holding a majority of the General Partner Percentages in the Partnership, the General Partners may remove any Executive Committee member from his position as an Executive Committee member and elect in his place a new Executive Committee member. 13 J. If the General Partners remove any Executive Committee member from his position as an Executive Committee member, the Managing Partner may not appoint such removed Executive Committee member to the Executive Committee for a period of six (6) months thereafter. Any Executive Committee member elected to the Executive Committee by a vote of the General Partners may not be dismissed as an Executive Committee member by the Managing Partner. K. A meeting of the Executive Committee shall be held (i) at any time on call of the Managing Partner after one (1) day's Notice has been delivered to the Executive Committee members or (ii) on at least ten (10) day's Notice in advance to the Executive Committee members, jointly signed by any two (2) Executive Committee members, specifying the date, place, hour and purpose of the meeting. 4.5 Guaranteed Draw; Time and Effort; Independent --------------------------------------------- Activities. - ---------- A. Each General Partner shall receive a guaranteed draw for his services as determined by the Managing Partner in his sole discretion. Such guaranteed draw shall be treated by the Partnership as a guaranteed payment. Such guaranteed draw shall be reduced by any net commissions earned by any such General Partner (and paid to such General Partner by EDJ) who is principally engaged in the sale of securities to the public. If any such General Partner who is principally engaged in the sale of securities to the public at EDJ incurs any reasonable expenses through usual and ordinary means of generating the sales upon which such General Partner is entitled to receive commissions from EDJ, then such General Partner must personally and individually pay, without reimbursement from the Partnership or from EDJ, such expense but such General Partner shall be entitled to deduct such expenses on his personal income tax return, all as permitted by the Internal Revenue Code. B. Each General Partner shall devote his entire time, energy, skill and ability to the duties of operating the Partnership and the entities it owns. General Partners shall not engage in outside business activities without the prior written consent of the Managing Partner. Each General Partner agrees not to use the name or property of the Partnership or any entity it owns for his own private business, nor for any purpose whatsoever except those that may be incidental to the conduct and management of the Partnership, nor shall any General Partner use the name of the Partnership or any entity it owns for the use or accommodation of any other person. No General Partner shall incur any obligation in the name of the Partnership or transfer Partnership property except in connection with Partnership business. C. Each General Partner agrees that he will not, without the written consent of the Managing Partner (i) become a guarantor or surety for any person, firm or corporation; (ii) in the name of the Partnership or any entity it owns or in his own name buy or sell stocks, securities or commodities on margin, either for the account of the Partnership or for his own account; or (iii) pledge or hypothecate any of the property of the Partnership or any entity it owns for any purpose whatsoever. D. Each General Partner shall submit, upon request by the Managing Partner, a copy of any of his current personal income tax returns (for any time period during which such Partner was a Partner of the Partnership) for inspection by independent accountants selected by the Managing Partner. In addition, each General Partner agrees, if requested by the Managing Partner, to have such General Partner's income tax returns prepared by an entity (which could be the 14 Partnership itself or independent accountants) selected by such General Partner and acceptable to the Managing Partner. E. Each Partner is expected, and it is regarded as such Partner's duty, to supplement expenses reimbursable to such Partner by the Partnership by additional expenditures of such Partner's personal funds in the furtherance of the Partnership's business which expenditures such Partner shall be entitled to deduct on his personal income tax return, all as permitted by the Internal Revenue Code. In this connection, as deemed appropriate under the circumstances, such additional expenditures have included in the past and shall include in the future, but shall not be limited to (a) subscribing to professional and business journals, (b) maintaining active memberships in professional associations, other associations, luncheon clubs and other clubs where the Partner will have an opportunity to further the development of, and to maintain the Partnership's relationship with, its customers, (c) providing space, facilities and telephone equipment in the Partner's home in order that the Partner may work on the Partnership's business while at home, (d) purchasing necessary supplies, books, furniture, computers, fax machines, car telephones and other items, (e) providing for transportation to customers' offices, (f) entertaining customers and prospective customers and (g) continuing the Partner's business-related education, including attendance at seminars and obtaining advanced educational degrees. F. In the event any Partner becomes a party in any lawsuit, arbitration or other similar proceeding, such Partner agrees to notify promptly the Managing Partner of such event. 4.6 Duties and Obligations of the Managing Partner. ---------------------------------------------- A. The Managing Partner shall prepare (or cause to be prepared) and file such amendments to this Agreement or any certificate of limited partnership or any certificate of limited liability partnership as are required by law or as he deems necessary to cause this Agreement or any certificate of limited partnership or any certificate of limited liability partnership to reflect accurately the agreement of the Partners, the identity of the Limiteds or the General Partners and the amounts of their respective Capital Contributions. B. The Managing Partner shall prepare (or cause to be prepared) and file such tax returns and other documents, as are required by law or as he deems necessary, for the operation of the Partnership. In addition, in his discretion, the Managing Partner may prepare (or cause to be prepared) and file composite tax returns in various states for all electing non-resident partners (otherwise not required to file a state income tax return in such state) of those states and cause to be paid out of their draw accounts (or any other of their funds being held by the Partnership) the amount of tax attributable to each such non-resident partner and/or to withhold from distributions of profits, if necessary, all such tax amounts for current and former partners of the Partnership and if reimbursement for such taxes to the Partnership is needed from a former Partner, then each Partner hereby agrees that he will if he is then a former Partner reimburse the Partnership for such tax expense and/or if the Partnership currently then holds any funds belonging to such former Partner, then such tax expense may be offset against such funds being held by the Partnership. 4.7 Liability for Acts and Omissions; Indemnification. ------------------------------------------------- Neither the Managing Partner nor any General Partner shall be liable, responsible or accountable in damages or otherwise to any of the Partners for, and the Partnership shall indemnify and save harmless the Managing Partner and any General Partner from any loss or damage incurred 15 by reason of, any act or omission performed or omitted by him in good faith on behalf of the Partnership and in a manner reasonably believed by him to be within the scope of the authority granted to him by this Agreement and in the best interests of the Partnership, provided that the Managing Partner or the General Partner shall not have been guilty of gross negligence or gross misconduct with respect to such acts or omissions and, further, provided that the satisfaction of any indemnification and any saving harmless shall be paid out of and limited to Partnership assets and no Partner shall have any personal liability on account thereof. 4.8 Dealing with an Affiliate. ------------------------- The Managing Partner may for, in the name of and on behalf of, the Partnership enter into such agreements, contracts or the like with any Affiliate of any General Partner or with any General Partner, in an independent capacity, as distinguished from his capacity (if any) as a Partner, to undertake and carry out the business of the Partnership as if such Affiliate or General Partner were an independent contractor; and the Managing Partner may obligate the Partnership to pay reasonable compensation for and on account of any such services. 4.9 General Partners' Responsibility. -------------------------------- Each General Partner shall be responsible and accountable to the Partnership's customers and clients for the rendering of such General Partner's services. No other General Partner, regardless of title or position with the Partnership shall (a) be responsible, liable or accountable to the Partnership's customers and clients for any other Partner's rendering of services to the Partnership's customers or clients or (b) have the right or obligation of direct supervision and control (except as otherwise mandated by the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder and comparable state securities laws) of another Partner while such other Partner is rendering services on behalf of the Partnership. 4.10 Responsibilities of Partnership Leaders. --------------------------------------- The Partnership's officers and committees, including, but not limited to, the Managing Partner, any member of the Executive Committee (or any other member of any other committee of the Partnership), any chairperson, any departmental manager, and any other departmental or Partnership leader (regardless of title), and the Executive Committee (taken as a whole), shall not have, solely by reason of being such an officer or committee or acting (or omitting to act) in such capacity, (a) any responsibility, liability or accountability for any Partner's rendering of services to the Partnership's customers and clients or (b) the right or obligation of direct supervision and control of a Partner while such Partner is rendering services on behalf of the Partnership. ARTICLE FIVE MEETINGS AND VOTING OF PARTNERS ------------------------------- 5.1 Meetings of General Partners; Voting at Such -------------------------------------------- Meetings. - -------- A. A meeting of General Partners shall be held (i) on the call of the Managing Partner after five (5) days Notice thereof has been delivered to the General Partners, or (ii) on at least 10 days Notice in advance to the General Partners, jointly signed by any five (5) General Partners, specifying the date, place, hour and purposes of the meeting. 16 B. Except as otherwise expressly provided, at any meeting of the General Partners, each General Partner shall have voting power equal to his General Partner Percentage at the time of the meeting. A quorum for any purpose at any meeting of the General Partners shall exist if General Partners then holding more than 50% of the voting power of all General Partners are present or voting by proxy. Any General Partner may vote on any matter if not present in person, by general or specific written proxy given to another General Partner. No proxy shall be valid after two (2) months from the date of its execution. General Partners may participate in any meeting by means of conference telephone or similar communications equipment whereby all persons participating in such meeting can hear each other. Participation in a meeting in this manner shall constitute presence in person at the meeting. C. Unless otherwise permitted by the Managing Partner, the only matters to be voted upon by the General Partners at any meeting of the General Partners shall be those matters set forth in Sections 4.3 and 4.4 hereof. 5.2 Percentage of Voting Power for Partnership Decisions. ---------------------------------------------------- A. Except as otherwise specifically provided in this Agreement, the affirmative vote of more than 50% of the voting power of all General Partners shall determine all issues at any meeting of the General Partners. B. Any percentage of voting power of the General Partners required by this Agreement shall relate to the percentage of the total voting power of all General Partners entitled to vote on the issue and not to a percentage of the voting power of the General Partners present at a meeting. 5.3 Robert's Rules to Govern. ------------------------ Except as otherwise specifically provided in this Agreement, all matters of parliamentary procedure at meetings of the General Partners shall be governed by Robert's Rule of order Revised. The Managing Partner may appoint a parliamentarian. 5.4 Consent of General Partners in Lieu of a Meeting. ------------------------------------------------ A. Notwithstanding anything to the contrary contained in this Agreement, any action required or permitted by this Agreement to be taken at any meeting of the General Partners may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by Partners having not less than the minimum voting power that would be necessary to authorize or take such action at a meeting of the Partners. B. Prompt Notice of the taking of any action pursuant to this Section 5.4 by less than unanimous written consent of the General Partners shall be given to those General Partners who have not consented in writing. 17 ARTICLE SIX EVENT OF WITHDRAWAL OF A PARTNER AND CONVERSION OF CLASS II ----------------------------------------------------------- SUBORDINATED LIMITED PARTNER CAPITAL TO CLASS I ----------------------------------------------- SUBORDINATED LIMITED PARTNER CAPITAL ------------------------------------ 6.1 Voluntary Event of Withdrawal. ----------------------------- A. Any General Partner shall have the right to retire or voluntarily withdraw from the Partnership upon 30 days prior written notice to the Managing Partner. In the event that there is only one General Partner, he shall give notice to the Limiteds of his intent to withdraw from the Partnership at least 30 days prior to the date of withdrawal. B. Any Limited shall have the right to retire or voluntarily withdraw from the Partnership effective immediately upon written notice to the Managing Partner (a "Limited Partner Voluntary Withdrawal Notice"). 6.2 Withdrawal Upon Request. ----------------------- The Managing Partner or any number of General Partners holding in the aggregate a majority of the General Partner Percentages, may request in writing that any Partner withdraw from the Partnership (a "Mandatory Withdrawal Notice"), and each Partner agrees that he will so withdraw within 30 days of the receipt of such request. 6.3 Return of Capital and Purchase of Interest. ------------------------------------------ A. In the event of any withdrawal by a General Partner from the Partnership pursuant to Section 6.1 or 6.2 hereof or in the event a General Partner wishes to withdraw some of his Capital Contribution as a General Partner, the Managing Partner may designate all or some of the remaining General Partners, to purchase the General Partner Interest (including Frozen Appreciation Amount) of the withdrawing General Partner, subject to the approval of the Managing Partner. Such purchases shall be consummated (retroactively as of the actual date of his withdrawal) within 60 days after the actual date of such withdrawal. The price (the "Price") of the General Partner Interest of the withdrawing General Partner shall be the value (as shown on the books of the Partnership) of his Frozen Appreciation Amount plus the value of such General Partner's Adjusted Capital Contribution, calculated as of the previous Valuation Date if such withdrawal takes place on or prior to the 15th day of a month or calculated as of the next Valuation Date if such withdrawal takes place on or after the 16th day of a month. Goodwill, if any, and the Partnership name shall not be deemed assets or as having any property value in making the foregoing calculation. B. Unless otherwise determined by the Managing Partner, the Price to be received by the withdrawing General Partner shall be delivered by the withdrawing General Partner to the Partnership and shall (retroactively as of the actual date of his withdrawal) be the Capital Contribution of such former General Partner as that of a Class II Subordinated Limited Partner and such General Partner shall thereupon become or continue to remain a Class II Subordinated Limited Partner as to such Capital Contribution. 18 C. Unless otherwise determined by the Managing Partner, any General Partner Interest (including Frozen Appreciation Amount) not purchased by the remaining General Partners within such 60 day period shall be converted (retroactively as of the actual date of his withdrawal) so as to become the Capital Contribution of such former General Partner as that of a Class II Subordinated Limited Partner and such General Partner shall thereupon become or continue to remain a Class II Subordinated Limited Partner as to such Capital Contribution. D. A withdrawing General Partner shall have no right to become a Limited or to require the conversion of his General Partner Interest (or Price, if applicable) to the Capital Contribution of a Class II Subordinated Limited Partner. The Managing Partner may determine to have the Partnership redeem such General Partner's Interest. In addition the Managing Partner has the right to cause the Partnership to redeem the Capital Contribution of a Class II Subordinated Limited Partner at any time. E. Upon the withdrawal of a General Partner, the General Partner Percentages of the remaining General Partners shall be recalculated (as of the actual date of withdrawal) on the same relative basis so as to aggregate 100% (and the related General Partner Adjusted Capital Contributions shall also be appropriately adjusted). F. In addition, any withdrawing General Partner shall receive (within 75 days after the actual date of his withdrawal) his pro rata share of any cash distributions to which he is entitled as set forth in Section 8.1 hereof, calculated as of the previous Valuation Date if such withdrawal takes place on or prior to the 15th day of a month or calculated as of the next Valuation Date if such withdrawal takes place on or after the 16th day of a month. G. In the event a Class II Subordinated Limited Partner desires to withdraw all or any part of such Class II Subordinated Limited Partner's Capital Contribution, then such Class II Subordinated Limited Partner shall give written notice ("Withdrawal Notice") to the Managing Partner of the amount of Capital Contribution that such Class II Subordinated Limited Partner wishes to withdraw from the Partnership (the "Requested Withdrawal Amount"). The Requested Withdrawal Amount shall be paid (subject to the provisions of Section 6.7 hereof) to such Class II Subordinated Limited Partner in four (4) equal installments with the first installment being paid on the last business day of the month following the month in which the Managing Partner receives the Withdrawal Notice, with the balance of the Requested Withdrawal Amount being paid in three (3) equal installments on the 12th, 24th and 36th month anniversary of the first installment payment. Until the Requested Withdrawal Amount has been fully paid to such Class II Subordinated Limited Partner the unreturned portion thereof shall continue for all purposes to be subject to all provisions of this Agreement including, without limitation, Article Eight and Section 6.7. The Managing Partner, in his sole discretion, may cause the Partnership to accelerate the return of the Requested Withdrawal Amount with respect to the entire Requested Withdrawal Amount or accelerate the payment of any or all installments thereof with respect to any Class II Subordinated Limited Partner. H. In the event of any withdrawal by a Limited Partner from the Partnership, pursuant to Sections 6.1 or 6.2 hereof, the Limited Partner's Capital Contribution (subject to the provisions of Section 6.7 hereof) shall be paid in three (3) equal installments with the first installment being paid on the last business day of the month following the month in which (a) the Managing Partner receives the Limited Partner Voluntary Withdrawal Notice, or (b) the Limited Partner receives a Mandatory Withdrawal Notice, with the balance of the Capital Contribution being paid in two equal installments on the 1st and 2nd anniversary of the first installment payment. In 19 addition, such Limited Partner shall receive (within 75 days after the actual date of his withdrawal) his pro rata share of any cash distributions to which he was entitled as set forth in Section 8.1 hereof, calculated as of the previous Valuation Date if such withdrawal takes place on or prior to the 15th day of a month or calculated as of the next Valuation Date if such withdrawal takes place on or after the 16th day of a month. Until a Limited Partner's Capital Contribution is fully returned to him, the unreturned portion thereof shall continue for all purposes to be subject to all provisions of this Agreement, including without limitation, Article Eight and Section 6.7 and such Limited Partner shall continue to receive all sums due him pursuant to Section 3.3B hereof. The Managing Partner, in his sole discretion, may cause the Partnership to accelerate the return of a Limited Partner's Capital Contribution or accelerate the payment of any or all installments thereof. 6.4 Death of a Limited. ------------------ In the event of the death of any Limited, the Capital Contribution of such deceased Limited shall be returned (subject to the provisions of Section 6.7 hereof) to his estate within six (6) months after the actual date of death of the Limited. The provisions of Section 6.3G shall not be applicable to the Capital Contribution of a deceased Class II Subordinated Limited Partner or to the Capital Contribution of a deceased Class I Subordinated Limited Partner and Section 6.3H shall not be applicable to the Capital Contribution of a deceased Limited Partner. In addition such Limited's estate shall receive (within 75 days after the actual date of death of the Limited) the Limited's pro rata share of any cash distributions to which such deceased Limited was entitled as set forth in Section 8.1 hereof, calculated as of the previous Valuation Date if such withdrawal takes place on or prior to the 15th day of a month or calculated as of the next Valuation Date if such withdrawal takes place on or after the 16th day of a month. Until a deceased Limited's Capital Contribution is returned to his estate, his estate shall continue to receive all sums which would have been due to such Limited pursuant to Section 3.3B hereof. As stated herein, all such payments shall be made to the estate of the deceased Limited unless the Partnership has received evidence, satisfactory to the Partnership, in its sole discretion, that such payments should be made to some other entity or person. 6.5 Death or Disability of a General Partner. ---------------------------------------- A. In the event of the death of a General Partner, the interest of the deceased General Partner in the Partnership shall terminate as of such date. The Managing Partner may designate all or some of the remaining General Partners to purchase the General Partner Interest (including Frozen Appreciation Amount) of the deceased General Partner, subject to the approval of the Managing Partner. Such purchases shall be consummated within 60 days after the date of death of such General Partner. The price of the General Partner Interest of the deceased General Partner shall be the value (as shown on the books of the Partnership) of his Frozen Appreciation Amount plus the value of such General Partner's Adjusted Capital Contribution, calculated as of the previous Valuation Date if such death took place on or prior to the 15th day of a month or calculated as of the next Valuation Date if such death took place on or after the 16th day of a month. Goodwill, if any, and the Partnership name shall not be deemed assets or as having any property value in making the foregoing calculation. In addition, the deceased General Partner shall receive (within 75 days after the date of his death) his pro rata share of any cash distributions to which he is entitled as set forth in Section 8.1 hereof, calculated as of the previous Valuation Date if such death took place on or prior to the 15th day of a month or calculated as of the next Valuation Date if such death took place on or after the 16th day of a month. Any General Partner Interest (including Frozen Appreciation Amount) not purchased by the remaining General Partners within 20 such 60 day period shall be converted (as of the date of his death) to the Capital Contribution of a Class II Subordinated Limited Partner and shall be redeemed (subject to the provisions of Section 6.7 hereof) by the Partnership within six (6) months thereafter, the specific date to be determined by the Managing Partner. The provisions of Section 6.3G shall not be applicable to the Capital Contribution of such deceased Class II Subordinated Limited Partner. Upon the conversion of a General Partner's Interest to that of a Class II Subordinated Limited Partner, the General Partner Percentages of the remaining General Partners shall be recalculated (as of the actual date of withdrawal) on the same relative basis so as to aggregate 100% (and the related General Partner Adjusted Capital Contributions shall also be adjusted). All payments made pursuant to this Section 6.5A shall be made to the estate of the deceased General Partner, unless the Partnership has received evidence, satisfactory to the Partnership, in its sole discretion, that such payments should be made to some other entity or person. B. In the event of full or partial disability (as determined in the absolute discretion of the Managing Partner) of a General Partner under age 65 due to illness, accident, or injury, such General Partner shall be entitled to receive his normal share of Partnership Net Income notwithstanding his inability to perform his normal work functions, for a period of up to six (6) full months following the date he suffered the disability. If the disability continues for a period greater than six (6) months but less than one (1) year, then during such period of time the disabled General Partner shall be entitled to receive one-half (1/2) of his normal share of Partnership Net Income. If the disability continues for a period greater than one (1) year in length, then the disabled General Partner must terminate his status as a General Partner, unless otherwise directed by the Managing Partner. In event of termination, the General Partner Interest (including his Frozen Appreciation Amount) of the disabled General Partner shall be treated in the same manner as that of a deceased General Partner pursuant to Section 6.5A hereof, provided that all such payments required by this Section 6.5B shall be made to the disabled General Partner. 6.6 General Partner Interest - 56th Birthday. ---------------------------------------- A General Partner shall not acquire any additional General Partner Interest after he reaches his 56th birthday. His General Partner Interest (including his Frozen Appreciation Amount) as it exists on his 56th birthday is his "Retiring Interest." On the first business day of the calendar year following the year in which a General Partner's 56th birthday falls and on the first business day of each subsequent calendar year, the General Partner shall sell 1/10th of this Retiring Interest to all or some of the other General Partners, as designated by the Managing Partner, who have not attained 56 years of age and who are willing to purchase such additional interest. The sale price of the Retiring Interest shall be determined in the same manner as set forth in Section 6.5A hereof, with the Valuation Date being the first business day of the appropriate calendar year. Upon payment of the sales price to the selling General Partner by the purchasing General Partner, the books of the Partnership shall be adjusted as of the effective date of sale to show the appropriate reductions and increases in the General Partner Adjusted Capital Contributions (and related General Partner Percentages) of the selling and purchasing General Partners. A General Partner can request that such purchased portion be converted (retroactively as of the first calendar day of the appropriate year) so as to become the Capital Contribution of a Class II Subordinated Limited Partner and if such request is approved by the Managing Partner, then such portion of the retiring interest be so converted. If any portion of a Retiring Interest is not purchased by the other General Partners, then such General Partner can request that such unpurchased portion be converted (retroactively as the first calendar day of the appropriate year) so as to become the Capital 21 Contribution of a Class II Subordinated Limited Partner and if such request is approved by the Managing Partner, then such portion of the Retiring Interest shall be so converted, otherwise such portion of the Retiring Interest shall be redeemed by the Partnership, subject to Section 6.7 hereof. Notwithstanding any other provisions of this Section to the contrary, the Managing Partner may exempt any General Partner from the application of this Section or modify the terms of the sale of any Retiring Interest as he deems advisable. 6.7 Restriction on Capital Contribution Return. ------------------------------------------ It is understood and agreed that the Capital Contributions of the Partners to the Partnership will be used, in part, by the Partnership as part of the Partnership's capital contribution to EDJ, a brokerage firm (which is regulated by the Securities and Exchange Commission and the New York Stock Exchange and other regulatory agencies), and that in order for the Partnership to return to any Partner his Capital Contribution (or any part thereof), the Partnership will have to obtain such funds from EDJ. Therefore, notwithstanding any other provision contained in this Agreement to the contrary, without the written consent of the Managing Partner, no Partner shall have returned to him (under any provision of this Agreement) his Capital Contribution or his General Partner's Adjusted Capital Contribution, if after giving effect thereto, the Partnership or any Affiliate thereof (including, but not limited to, EDJ) would, if such payment had been made directly by EDJ, be in violation of (i) any rule of the New York Stock Exchange Inc., (ii) any rule issued under the Securities Exchange Act of 1934, any agreement (cash subordination or otherwise) which has been entered into by the Partnership or any Affiliate thereof (including, but not limited to, EDJ), (iii) any agreement (including, but not limited to, loan agreements) which has been entered into by the Partnership or any Affiliate thereof (including, but not limited to, EDJ) or (iv) any other law, rule or regulation to which the Partnership or any Affiliate thereof (including, but not limited to, EDJ) is subject. In the event there is returned to any Partner all or any portion of his Capital Contribution or his General Partner's Adjusted Capital Contribution and because of such return the Partnership or any Affiliate thereof (including, but not limited to, EDJ) violated any of the aforementioned rules, agreements or regulations, then such Partner hereby irrevocably agrees (whether or not such Partner had any knowledge or notice of such facts at the time of such return) to repay to the Partnership, its successors or assigns, the sum so returned to such Partner to be held by the Partnership pursuant to the provisions hereof as if such return had never been made; provided, however, that any suit for the recovery of any such return must be commenced within two years of the date of such return. 6.8 Liability of a Withdrawn General Partner. ---------------------------------------- If on the Event of Withdrawal of a General Partner the business of the Partnership shall continue, the General Partner who shall have withdrawn shall be and remain liable for all obligations and liabilities incurred by him as General Partner prior to such Event of Withdrawal, but he shall be free of any obligation or liability incurred on account of the activities of the Partnership from and after the time of such Event of Withdrawal. 6.9 Effect of Event of Withdrawal. ----------------------------- Upon the withdrawal (by reason of death or otherwise) of a Partner the Partnership shall not dissolve and the business of the Partnership shall be continued by the remaining General Partners. 22 6.10 Conversion from Class II to Class I Subordinated ------------------------------------------------ Limited Partner. - --------------- A. In the event a Class II Subordinated Limited Partner has exercised his right pursuant to Section 6.3G, then such Class II Subordinated Limited Partner may request, in writing to the Managing Partner (subject to the other provisions of this Section 6.10), that his Requested Withdrawal Amount be converted to the Capital Contribution of Class I Subordinated Limited Partner and thereafter such Class II Subordinated Limited Partner shall, with respect to such converted amount, be a Class I Subordinated Limited Partner. B. No such conversion shall be permitted unless the Partnership has had Net Income for each of the three (3) proceeding calendar months (for which the Partnership has prepared financial statements) prior to such written request. If a conversion is requested but is not permitted due to the preceding sentence, then such request will be honored (unless withdrawn) as soon as the conditions set forth in the preceding sentence are met by the Partnership. C. The Requested Withdraw Amount of a Class I Subordinated Limited shall be paid to such Class I Subordinated Limited Partner in accordance with the time-table, procedures and restrictions set forth in Section 6.3G which applied to such Requested Withdrawal Amount prior to the conversion referred to in this Section 6.10A. D. On and after the date of conversion of the Requested Withdrawal Amount to the Capital Contribution of a Class I Subordinated Limited Partner, such Requested Withdrawal Amount shall receive Net Income from the Partnership in accordance with Section 8.1A(ii) hereof. E. A Class I Subordinated Limited Partner shall have no right to request the reconversion of his Class I Capital Contribution to the Capital Contribution of a Class II Subordinated Partner. ARTICLE SEVEN TRANSFERABILITY OF PARTNER INTERESTS ------------------------------------ 7.1 Restrictions on Transfer. ------------------------ A. Each Partner agrees that he will not sell, pledge, exchange, transfer or assign his interest in the Partnership to any Person without the express written consent of the Managing Partner. B. Each Partner agrees that he will not sell or exchange any of his interest in the Partnership if the interest sought to be sold or exchanged, when added to the total of all other Partner interests sold or exchanged within the period of 12 consecutive months prior thereto, would, in the opinion of counsel for the Partnership, result in the Partnership being considered to have been terminated within the meaning of Section 708 of the Internal Revenue Code (or any successor statute). C. Each Limited agrees that he will not sell, exchange, transfer or assign any of his interest in the Partnership unless, if required by the Partnership, the Partnership has received an opinion of counsel, satisfactory to the Partnership, that such transfer or assignment may be effected without registration of the Limited's interest under the Securities Act of 1933 or under any applicable state securities law. 23 D. Except as otherwise expressly provided in this Agreement, the death or withdrawal of a Partner shall terminate (as of such date) all his interest in the Partnership and neither the estate of a deceased Partner nor any other third party shall become or have any rights as a Partner. E. Any sale, exchange, assignment or other transfer in contravention of any of the provisions of this Section 7.1 shall be void and ineffectual and shall not bind or be recognized by the Partnership. 7.2 Substituted Limited Partners. ---------------------------- No Limited shall have a power to grant the right to become a substituted Limited to an assignee of any part of such Limited's Partnership Interest. ARTICLE EIGHT DISTRIBUTIONS AND ALLOCATIONS; LIABILITY OF GENERAL PARTNERS ------------------------------------------------------------ 8.1 Distribution of Net Income. -------------------------- A. All Net Income, if any, of the Partnership for each calendar year shall be distributed in the following order of priority: (i) Each Limited Partner shall be paid at least annually (with respect to such Limited Partner's Capital Contribution), from time to time, a total amount of cash equal to the product of Net Income times a percentage, calculated annually, which shall equal the product of the following three factors: (a) one-fourth of one percent (.0025) multiplied by (b) the quotient of $1,900,000 divided by the sum of the General Partners' Adjusted Capital Contributions multiplied by (c) the quotient of the total Capital Contribution of the respective Limited Partner divided by $25,000. This calculation of percentage of participation shall be made at the end of each calendar year and used in distributing Net Income earned during the following year. Notwithstanding the foregoing, for the year 1987 each Limited Partner shall be paid (with respect to such Limited Partner's Capital Contribution) a total amount of cash equal to the product of Net Income times a percentage which shall equal the product of the following three factors: (a) one-fourth of one percent (.0025) multiplied by (b) the quotient of $1,900,000 divided by $24,251,182 multiplied by (c) the quotient of the total Capital Contribution of the respective Limited Partner divided by $25,000. (ii) Each Class I Subordinated Limited Partner shall be paid within 30 days after the end of each calendar quarter (on a non-cumulative basis) an amount of cash equal to 25% of the product of (a) the one year Constant Maturity Treasury Rate as currently disclosed in the Federal Reserve Statistical Released H.15 (the "Treasury Rate") plus 150 basis points times (b) the current Capital Contribution of the Class I Subordinated Limited Partner. The applicable Treasury Bill Rate shall be the Treasury Bill Rate as stated for the week ended just prior to or on the last business day of the preceding calendar year; provided however that no such payment shall be made to any Class I Subordinated Limited Partner if for the prior calendar quarter the Partnership did not have Net Income sufficient to pay the full amount due all Class I Subordinated Limited Partners pursuant to this Section 8.1A(ii). If any payment is not made, as herein above provided, the Partnership shall never be 24 required to make such missed payment in the future. No payment made pursuant to this Section 8.1A(ii) shall be considered a guaranteed payment. (iii) Each Class II Subordinated Limited Partner shall be paid, from time to time, a total amount of cash in each year equal to the product of (a) the then remaining Net Income times (b) a percentage derived by the following formula: (x) 50% of the Capital Contribution of the Class II Subordinated Limited Partner (excluding any undistributed Net Income allocated to the Class II Subordinated Limited Partner) divided by (y) the sum of (aa) 50% of the Capital Contributions of all the Class II Subordinated Limited Partners plus (bb) the Adjusted Capital Contributions of the General Partners (less any Net Income allocated to the General Partners which is not scheduled to be retained by the Partnership). In the event the Capital Contribution of a Class II Subordinated Limited Partner has been reduced by the operation of Section 8.1B hereof (the "Reduced Amount"), then each Class II Subordinated Limited Partner shall have right to make additional cash Capital Contributions to the Partnership from any cash to be distributed to such Class II Subordinated Limited Partner pursuant to this Section 8.1A(ii) up to the Reduced Amount. (iv) There shall be set apart up to 8% of the remaining Net Income. Of such 8%, if any is set apart, there shall be distributed 62.5% thereof among the General Partners on the basis of individual merit as determined by the Managing Partner. Of such 8%, if any is set apart, there shall be distributed 37.5% thereof among the General Partners on the basis of individual need as determined by the Managing Partner. (v) It is intended that a sum equal to 30% of the remaining Net Income will be retained by the Partnership as capital and shall be credited monthly to the Adjusted Capital Contributions of the General Partners in a proportion equal to their then respective General Partner Percentages. Such amount shall not be withdrawn by the General Partners. Notwithstanding the foregoing, the decision of whether to make this retention of capital in accordance with this Section or whether to vary the amount of capital to be retained in any given year, is vested in the Managing Partner, and it is agreed that his decision in this matter shall be final. (vi) The balance of the Net Income remaining, if any, shall be distributed among the General Partners in proportions to their General Partner Percentages. B. In any year in which there is a Net Loss and the Partnership is not dissolved and liquidated in accordance with Section 8.2 hereof, such Net Loss, on the books of the Partnership, shall be borne by the Class II Subordinated Limited Partners to the extent as set forth in the formula described in Section 8.1A(iii) hereof and the balance shall be borne by the General Partners in proportion to their respective General Partner Percentages. Any such Net Losses borne by the Class II Subordinated Limited Partners shall only be applied against and reduce their respective Capital Contributions. The total amount of all such Net Losses to be borne by the Class II Subordinated Limited Partners may never exceed the total amount of the Capital Contributions of the Class II Subordinated Limited Partners as shown on the books of the Partnership. C. Notwithstanding the foregoing, where losses are caused by the willful neglect or default, the gross negligent conduct, or the intentional negligent conduct of any Partner, those losses shall be borne solely and made good by the Partner so causing the loss. This Section 8.1C is for the benefit of the Partners and no other person shall have any rights hereunder. 25 D. Notwithstanding any other provision of this Agreement to the contrary, the aggregate interest of the General Partners in each material item of Partnership income, gain, loss, deduction, preference or credit shall be equal to at least one percent (1%) of each such item at all times during the existence of the Partnership. 8.2 Distributions Upon Dissolution. ------------------------------ A. Upon the dissolution of the Partnership as a result of the occurrence of any of the events set forth in Section 2.4 hereof, the Managing Partner shall proceed to liquidate the Partnership, and the proceeds of liquidation (the "Proceeds of Liquidation") shall be applied and distributed in the following order of priority: (i) To the payment of debts and liabilities of the Partnership, including the expenses of liquidation, but expressly excluding all Capital Contributions of all Partners (General Partners, Class I Subordinated Limited Partners, Class II Subordinated Limited Partners and Limited Partners), the return of all of such Capital Contributions are provided for below and all of which is equity capital of the Partnership. (ii) To the payment of any accrued but unpaid amounts due under Section 8.1 hereof. (iii) To the repayment of the Capital Contributions of the Limited Partners. (iv) To the repayment of the Capital Contributions of the Class I Subordinated Limited Partners. (v) To the repayment of the Capital Contributions of the Class II Subordinated Limited Partners. (vi) To the repayment of the General Partners' Adjusted Capital Contributions. (vii) The balance of the Proceeds of Liquidation, if any, shall be distributed to the General Partners in proportion to their respective General Partner Percentages. B. Notwithstanding the foregoing, in the event the Managing Partner shall determine that an immediate sale of part or all of the Partnership assets would cause undue loss to the Partners, the Managing Partner, in order to avoid such loss, may, after having given Notice to all the Limiteds, either defer liquidation of, and withhold from distribution for a reasonable time, any assets of the Partnership except those necessary to satisfy the Partnership debts and obligations, or distribute the assets to the Partners in kind. C. Net Income generated by transactions in connection with the dissolution and liquidation of the Partnership shall be distributed in accordance with Section 8.1A hereof. 8.3 Distribution of Frozen Appreciation Amount. ------------------------------------------ Notwithstanding the provisions of Section 8.1 or 8.2 hereof, in the event any tract of Real Estate or any Exchange Seat or Edward D. Jones & Co., L.P. or EDJ Leasing Co., L.P. is sold, then there shall be distributed from the net proceeds of such sale (prior to making any distributions pursuant to the provisions of Section 8.1 or 8.2 hereof) to each General Partner an amount equal to 26 his Frozen Appreciation Amount with respect to such tract of Real Estate or Exchange Seat. The balance of any proceeds resulting from any such sale shall then be distributed in accordance with Sections 8.1 or 8.2 hereof or shall otherwise be used or retained by the Partnership as provided herein. 8.4 Sale of Assets to Third Party. ----------------------------- A. In the event the Partnership shall sell or otherwise dispose of, at one time, all, or substantially all, of its assets (a "Sale") to any one Person or to any one Person and its Affiliates and the Partnership is thereafter liquidated within 180 days, then the provisions of Section 8.3 and this Section 8.4 shall be applicable with respect to the order of priority of distribution of the Proceeds of Liquidation. B. For the purposes of this Section 8.4 the term "substantially all" shall be deemed to mean assets of the Partnership or of any of its significant subsidiaries representing 80% or more of the net book value of all of the Partnership's assets (or such significant subsidiary's assets) determined as of the end of the most recently completed fiscal year. C. Prior to making any payments to the General Partners pursuant to Section 8.2A(vii) hereof (but after making all other payments required by Section 8.2A and all payments required by Section 8.3 hereof) the Partnership shall distribute: (i) to the Limited Partners a percentage of the Premium (as hereinafter defined) equal to the same percentage of the Net Income of the Partnership which the Limited Partners shall receive (pursuant to Section 8.1A hereof) from the Partnership for the current fiscal year of the Partnership; and (ii) to the Class II Subordinated Limited Partners an amount equal to the product of the Premium (remaining after the payment required by Section 8.4C(i) hereof) times a fraction the numerator of which is the total Capital Contributions of the Class II Subordinated Limited Partners (on the date of the Sale) and the denominator of which is (X) the total Capital Contributions of the Class II Subordinated Limited Partners (on the date of the Sale) plus (Y) the total of the Adjusted Capital Contributions of the General Partners (on the date of the Sale). No payments shall be made or are intended to be made to Class I Subordinated Limited Partners pursuant to this Section 8.4C. D. "Premium" means the Proceeds of Liquidation remaining after the payment of the items set forth in Sections 8.2A(i), (ii), (iii), (iv), (v) and (vi) hereof. E. Any amounts payable to the Limited Partners and the Class II Subordinated Limited Partners pursuant to this Section 8.4 shall be disbursed pro-rata to the Limited Partners and the Class II Subordinated Limited Partners based on their Capital Contributions on the date of the Sale. F. Neither the Partnership nor the General Partners shall have any obligation to cause a Sale to occur. 8.5 Other Sales or Dispositions to Third Party. ------------------------------------------ In the event the Partnership or any of its significant subsidiaries, in a transaction (dealing with all or substantially all of the business of the Partnership or such significant subsidiary) not covered by Section 8.4 hereof (but similar in scope to such a transaction), sells assets, merges or has a public offering, it is hereby stated that it is the intention of the General Partners that the 27 Limited Partners and the Class II Subordinated Limited Partners shall share in any "profit" or "premium" recognized from such transaction. Because it is impossible at this time to foresee all possible factual situations that may occur with respect to a given transaction, it is equally impossible to determine a fair, just and equitable formula at this time to distribute a portion of such "profit" or "premium" to the Limited Partners and the Class II Subordinated Limited Partners. It is stated, however, at this time, as a matter of policy of the Partnership that it is the intention of the General Partners to allow the Limited Partners and the Class II Subordinated Limited Partners to share a portion of such "profit" or "premium" (assuming any "profit" or "premium" is also actually distributed to the General Partners) in a fair, just and equitable manner in such amount, if any, as determined in the sole and absolute discretion of the Managing Partner at the time of such transaction. In making such determination of such amount, if any, the Managing Partner shall not be bound by the formula set forth in Section 8.4 hereof. Neither the Partnership nor the General Partners shall have any obligation, however, to cause such transaction to occur and no Limited Partners and the Class II Subordinated Limited Partners shall have any right to bring any cause of action against the Partnership or its General Partners by reason of any statement made in this Section 8.5. No payments shall be made or are intended to be made to Class I Subordinated Limited Partners pursuant to this Section 8.5. 8.6 Allocation of Profits and Losses for Tax Purposes. ------------------------------------------------- A. Except as provided in Sections 8.6B, C or D hereof, all Profits And Losses For Tax Purposes of the Partnership shall be allocated as follows: (i) In any calendar year in which the Partnership has a net profit for tax purposes, to the Partners with each Partner sharing therein in the proportion that Net Income distributed to the Partner and/or credited to the Adjusted Capital Contribution of the Partner bears to all Net Income of the Partnership for the calendar year. (ii) In any calendar year in which the Partnership has a net loss for tax purposes, first to the Class II Subordinated Limited Partners with each Class II Subordinated Limited Partner bearing an amount of loss to the extent set forth in the formula described in Section 8.1A(ii) hereof; provided, however, that the total amount of losses allocated to a Class II Subordinated Limited Partner shall not reduce such Partner's Capital Account below zero (determined after taking into account all prior or contemporaneous cash distributions and all prior or contemporaneous allocations of income, gain, loss, deduction or credit and as determined at the close of the taxable year in respect of which such loss or deduction is to be allocated); and any remaining losses shall be allocated to the General Partners in proportion to their respective General Partner percentages. B. The Managing Partner is authorized to allocate Profits and Losses For Tax Purposes arising in any calendar year differently than otherwise provided for in this Section 8.6 to the extent that the Managing Partner determines, in his discretion, that such modifications are appropriate to cause the allocations to comply with the principles of Section 704 of the Internal Revenue Code and such modifications are in the overall best interests of the Partners. Any allocation made pursuant to this Section 8.6B shall be deemed to be a complete substitute for any allocation otherwise provided for in this Article Eight and no amendment of this Agreement or approval of any Partner shall be required. 28 C. Notwithstanding any other provisions of this Agreement to the contrary, if the amount of any Partnership Minimum Gain at the end of any taxable year is less than the amount of such Partnership Minimum Gain at the beginning of such taxable year, there shall be allocated to any Partner having a negative Capital Account at the end of such taxable year (determined after taking into account any adjustments, allocations and distributions described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) gross income and gain (in respect of the current taxable year and any future taxable year) in an amount sufficient to eliminate such negative Capital Account in compliance with Treasury Regulations Section 1.704-1(b)(4)(iv)(e). Such allocation of gross income and gain shall be made prior to any other allocation of profits and losses for tax purposes. Any such allocation of gross income or gain pursuant to this Section 8.6C shall be in proportion with such negative Capital Accounts of the Partners and such allocations of gross income and gain shall be taken into account, to the extent feasible, in computing subsequent allocations of Profits and Losses For Tax Purposes of the Partnership so that the net amount of all items allocated pursuant to each Partner pursuant to this Article Eight shall, to the extent possible, be equal to the net amount that would have been allocated to each such Partner pursuant to the provisions of this Article Eight if the allocations made pursuant to the first sentence of this Section 8.6C had not occurred. D. Notwithstanding any other provisions of this Agreement to the contrary, except as provided in Section 8.6C hereof, if any Limited Partner or Class I Subordinated Limited Partner or Class II Subordinated Limited Partner receives any adjustment, allocations, or distributions described in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) that reduces such Partner's Capital Account below zero or increases the negative balance in such Partner's Capital Account, gross income and gain shall be allocated to such Partner in an amount and manner sufficient to eliminate any negative balance in his Capital Account created by such adjustments, allocations, or distributions as quickly as possible in accordance with Treasury Regulations Section 1.704-1(b)(2)(ii)(d). Any such allocation of gross income or gain pursuant to this Section 8.6D shall be in proportion with such negative Capital Accounts of such Partners. Any allocations of items of gross income or gain pursuant to this Section 8.6D shall (i) not duplicate any allocations of gross income or gain made pursuant to Section 8.6C hereof, and (ii) be taken into account, to the extent feasible, in computing subsequent allocations of Profits and Losses For Tax Purposes of the Partnership, so that the net amount of all items allocated to each Limited Partner, Class I Subordinated Limited Partner and Class II Subordinated Limited Partner pursuant to this Article Eight shall, to the extent possible, be equal to the net amount that would have been allocated to each such Partner pursuant to the provisions of this Article Eight if such adjustments, allocations or distributions had not occurred. E. If and to the extent upon dissolution of the Partnership pursuant to Section 2.4 hereof the allocations under Section 8.6A are inconsistent with the following provision, then such allocations shall be adjusted to conform to the following provision: income and gain (whether ordinary income, gain under Section 1231 of the Internal Revenue Code, or capital gain) from disposition of all remaining Partnership assets shall be allocated among the Partners so that the positive balance of each Partner's Capital Account is equal to the cash to be distributed to such Partner pursuant to Article 8.2 determined after all Capital Accounts have been adjusted to reflect the allocations of Profits and Losses For Tax Purposes of the Partnership and cash distributions made pursuant to Section 8.1 hereof. 29 8.7 Liability of General Partners. ----------------------------- No General Partner shall be liable or accountable, directly or indirectly (including by way of indemnification, contribution, assessment or otherwise), for any debts, obligations or liabilities of, or chargeable to, the Partnership or each other, whether arising in tort, contract, or otherwise, which are created, incurred or assumed by the Partnership (or owing to creditors or Partners during liquidation of the Partnership) while the Partnership is a registered limited liability limited partnership. ARTICLE NINE BOOKS, RECORDS AND REPORTS, --------------------------- ACCOUNTING, TAX ELECTIONS, ETC. ------------------------------- 9.1 Books, Records and Reports. -------------------------- A. Proper and complete records and books of account shall be kept (or caused to be kept) by the Managing Partner in which shall be entered all transactions and other matters relative to the Partnership's business. The Partnership's books and records shall be prepared in accordance with generally accepted accounting principles, consistently applied. The books and records shall at all times be maintained at the principal office of the Partnership and shall be open for examination and inspection by the Partners or by their duly authorized representatives during reasonable business hours. In particular, the following books and records shall be kept: (i) a current list and a past list of the full name and last known mailing address of each Partner, specifying the General Partners and the Limited Partners, the Class I Subordinated Limited Partners and the Class II Subordinated Limited Partners, in alphabetical order, including the date of admission or withdrawal of each Partner. To the extent provided by the Missouri Limited Partnership Act, these lists shall be provided to the Secretary of State of Missouri, without cost, upon his written request; (ii) a copy of the Certificate of Limited Partnership and all Certificates of Amendment thereto, together with executed copies of any Powers of Attorney pursuant to which any Certificate has been executed; (iii) copies of the Partnership's federal, state and local income tax returns and reports, if any, for the three most recent fiscal years; and (iv) copies of any written Partnership Agreements in effect and any financial statements of the Partnership for the three most recent years. B. The Managing Partner shall have prepared at least annually, at the Partnership's expense, financial statements (balance sheet, statement of income or loss, partners' equity, and changes in financial position) prepared in accordance with generally accepted accounting principles which shall fairly reflect the Partnership's financial position at the date shown and its results of operations for the period indicated. Copies of such statements and report shall be made available to the Partners annually. 30 C. The Managing Partner shall have prepared at least annually, at the Partnership's expense, a report containing Partnership information necessary in the preparation of the Partners' federal income tax returns. Copies of such report shall be distributed to each Partner as promptly as possible. 9.2 Bank Accounts. ------------- The bank accounts of the Partnership shall be maintained in such banking institutions as the Managing Partner shall determine, and withdrawals shall be made only in the regular course of Partnership business on such signature or signatures as the Managing Partner may determine. 9.3 Depreciation and Elections. -------------------------- A. All elections required or permitted to be made by the Partnership under the Internal Revenue Code shall be made by the Managing Partner. B. Notwithstanding anything to the contrary in this Section 9.3, the Managing Partner shall not be responsible for initiating any change in accounting methods from the methods initially chosen. C. The Managing Partner is hereby designated as the "Tax Matters Partner" under Section 6231(a)(7) of the Internal Revenue Code. 9.4 Fiscal Year. ----------- The fiscal year of the Partnership shall be the calendar year for tax purposes. ARTICLE TEN MEDIATION/ARBITRATION --------------------- THIS AGREEMENT CONTAINS THE FOLLOWING BINDING ARBITRATION PROVISIONS WHICH MAY BE ENFORCED BY THE PARTNERSHIP AND THE PARTNERS 10.1 Mediation/Arbitration. --------------------- A. Any controversy, claim or dispute between the Partnership and any Partner or former Partner or between Partners and/or former Partners (individually a "Party" and collectively the "Parties"), including, but not limited to, any controversy, claim or dispute arising out of or relating to any provision of this Agreement or the breach, termination or validity thereof or any breach of an actual or implied contract of employment between the Partnership and a Party, or any claim of unjust or tortious discharge (including any claim of fraud, negligence, or intentional or negligent infliction of emotional distress) or any document or agreement or policy of the Partnership (including, but not limited to, Partnership benefit and retirement plans, Partnership office manuals, Partnership affirmative action plans and Partnership policies), equal opportunity employer plans and policies or any claims or violations arising under the Civil Rights Act of 1964, as amended and effective November 21, 1991, including amendment to 42 U.S.C. 2000e et seq., 42 U.S.C. 1981, the Age Discrimination in Employment Act, 29 U.S.C. 621 et seq., the Fair Labor Standards Act of 31 1938, 29 U.S.C. 201 et seq., the Rehabilitation Act of 1973, 29 U.S.C. 701 et seq., or of the Missouri Human Rights Act, 213.010 R.S. Mo. et seq., the Missouri Workers Compensation statute or any violation of the Missouri Service Letter Statute, 290.140 R.S. Mo., or any other relevant federal, state, or local statutes or ordinances, also including without limitation, the application, interpretation, performance or enforcement of any right, obligation or fiduciary duty under this Agreement or such other documents and agreements whether arising before or after the date of this Agreement (collectively, a "Dispute") as to which a Party otherwise would have the right to pursue litigation will be resolved as provided for in this Article Ten, which shall be the sole and exclusive procedures for the resolution of any Dispute. This Article Ten shall survive termination of the partnership relationship established by the Agreement. These procedures are for the settlement of Disputes only and are not to be used for disagreements concerning Partnership policy, organization or practice management. Nothing contained in this Section 10.1 is intended to expand any substantive rights any Party may have under other Sections of this Agreement, and any action of the Partnership taken by a vote of the Partners or the Executive Committee or by the action of the Managing Partner, when taken in accordance with the terms of this Agreement, shall be final, binding and conclusive as so provided in this Agreement. The Parties intend that the foregoing provisions shall encompass any other statutory and common law rights, obligations or duties, whether or not specifically referred to herein, of a similar or dissimilar nature, which are or may be granted to any Party hereto, by the laws of any state or country in which any Party resides or engages in the business of the Partnership. B. If any Party has a Dispute with any other Party, then (if discussions among the Parties have failed) such Party and the other Party may have the Dispute mediated by one person chosen by agreement of such Parties. The mediator, after consultation with the Parties, will determine the mediation procedures to be followed. The fees and expenses of the mediator shall be paid by the Partnership. If no mutual agreement can be reached to mediate or upon the identity of the mediator, then the Dispute will be settled by binding arbitration under the procedures set forth below. C. All Disputes that cannot be resolved by mediation will be settled by binding arbitration under the procedures set forth below. D. Any Party may, if mediation has failed to resolve the Dispute (or if the Parties fail to agree on a mediator), commence arbitration by written notice to the other Party. Thereafter, arbitration shall be conducted in the manner described in Section 10.1F. E. Except as provided in Section 10.1B arbitration, under the Arbitration Code of the National Association of Securities Dealers, Inc. (the "NASD"), shall be the exclusive remedy for any Dispute. Any Party may apply to the Exclusive Venues (as defined in Section 10.2) for injunctive, specific enforcement or other relief in aid of the arbitration proceedings or to enforce judgment of the award in such arbitration proceeding, but not otherwise. Any award issued by the arbitrators pursuant to these provisions may be entered and enforced in the Exclusive Venues and any other appropriate jurisdiction. 32 F. The Parties agree among themselves that the arbitration proceedings shall be conducted as follows: (i) All proceedings conducted shall be deemed private and confidential and shall not be disclosed to the public by either the arbitrators or the Parties to the arbitration. The Parties acknowledge that the Partnership's administrative offices and the books and records (including accounting data) of the Partnership are all located in the St. Louis, Missouri metropolitan area, and, accordingly, the Parties agree to request that the arbitration proceedings and hearings shall be held in the St. Louis, Missouri metropolitan area (unless otherwise agreed by the Parties or decided by the arbitrators). (ii) The exclusive award for any Dispute shall be recovery of compensatory damages (that is, damages which compensate a party for actual damages suffered), and each Partner hereby waives any and all other forms of damages including multiple, punitive or exemplary damages, damages for emotional distress, mental anguish or suffering and consequential damages. (iii) The applicable substantive law of Missouri or the United States (notwithstanding that a Party to a Dispute may be a resident of another state or country), as the case may be, shall be used in rendering any award. Such award shall be final and binding on all Parties and may be entered as a judgment, under seal, and enforced in the appropriate jurisdiction. 10.2 Forum Selection. --------------- If any court or tribunal of competent jurisdiction shall refuse to enforce Section 10.1 or determine a matter is not a Dispute, then, and only then, shall the alternative provisions of this Section 10.2 be applicable. The Partners acknowledge that the Partnership's administrative offices and the books and records (including accounting data) of the Partnership are all located in the St. Louis, Missouri metropolitan area and, accordingly, the Partners agree that it would be more convenient for, and in the best mutual joint interest of, the Partners and the Partnership that, in the event of a Dispute, venue for litigation shall be laid exclusively in the Circuit Court of the County of St. Louis, Missouri or in the United States District Court for the Eastern District of Missouri. Such Circuit Court and United States District Court are together referred to as the "Exclusive Venues" for litigation. The Partnership and each Partner agree not to institute any litigation except in the Exclusive Venues and further agree that specific enforcement of this covenant with respect to Exclusive Venues may be awarded to the Partnership and each Partner by means of all available legal or equitable remedies, including, without limitation, a temporary restraining order. The Partnership and each Partner hereby submit to the personal jurisdiction of the Exclusive Venues and waive any requirement for setting bond for a temporary restraining order. The Firm and each Partner hereby waive any right it or such Partner may have to a jury trial in any litigation brought in accordance with this Agreement. 10.3 Statute of Limitations. ---------------------- The statute of limitations of the State of Missouri applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except no defenses shall be available based upon the passage of time during any mediation conducted pursuant to this Article Ten. 33 10.4 Other Agreements. ---------------- Notwithstanding anything to the contrary contained in any other document or agreement requiring arbitration, including, but not limited to, Form U-4, signed by any Party, the Parties agree that if the matter in controversy is, in whole or in part, a Dispute, then the provisions of this Article shall control such arbitration. ARTICLE ELEVEN GENERAL PROVISIONS ------------------ 11.1 Appointment of Attorneys-in-Fact. -------------------------------- A. Each Partner, by the execution hereof, hereby irrevocably constitutes and appoints John W. Bachmann, Lawrence R. Sobol, and the then Managing Partner (at any time the Managing Partner is not John W. Bachmann), his true and lawful attorney-in-fact, and each of them, with full power and authority in his name, place and stead, to execute or acknowledge (on behalf of such Partner and/or the Partnership) under oath, deliver, file and record at the appropriate public offices such documents as may be necessary or appropriate to carry out the provisions of this Agreement including: (i) All certificates and other instruments (including this Agreement or any certificate of limited partnership or certificate of limited liability partnership and any amendment thereof) which the Managing Partner deems appropriate to qualify or continue the Partnership as a registered limited liability limited partnership under the Missouri Limited Partnership Act and the Missouri Partnership Act (or a partnership in which the Partners will have limited liability comparable to that provided by the Missouri Limited Partnership Act and the Missouri Partnership Act) or under the laws of any other jurisdiction in which the Partnership may conduct business; (ii) All amendments to this Agreement or any certificate of limited partnership or any certificate of limited liability partnership which are required to be filed or which the Managing Partner deems to be advisable to file; (iii) All instruments which the Managing Partner deems appropriate to reflect a change or modification of the Partnership in accordance with the terms of this Agreement; (iv) All conveyances and other instruments which the Managing Partner deems appropriate to reflect the dissolution and termination of the Partnership; and (v) All other instruments, documents or contracts (including, without limiting the foregoing, any deed, lease, mortgage, note, bill of sale, contract, trust agreement, guarantee, partnership agreement, indenture, underwriting agreement or any instrument or documentation which may be required to be filed (or which the Managing Partner deems advisable to file) by the Partnership under the laws of any state or by any governmental agency) requisite to carrying out the intent and purpose of this Agreement and the business of the Partnership and its Affiliates. 34 B. The appointment by all Limited Partners of John W. Bachmann, Lawrence R. Sobol, and the then Managing Partner (at any time the Managing Partner is not John W. Bachmann), as attorney-in-fact, and each of them, shall be deemed to be a power coupled with an interest in recognition of the fact that each of the Partners under this Agreement will be relying upon the power of John W. Bachmann, Lawrence R. Sobol, and the then Managing Partner (at any time the Managing Partner is not John W. Bachmann), and each of them, to act as contemplated by this Agreement in any filing and other action by them on behalf of the Partnership. The foregoing power of attorney shall survive the death, disability or incompetency of a Partner or the assignment by any Partner of the whole or any part of its interest hereunder. 11.2 Word Meanings. ------------- The words such as "herein", "hereinafter", "hereof", and "hereunder" refer to this Agreement as a whole and not merely to a subdivision in which such words appear unless the context otherwise requires. The singular shall include the plural and the masculine gender shall include the feminine and neuter, and vice versa, unless the context otherwise requires. 11.3 Binding Provisions. ------------------ The covenants and agreements contained herein shall be binding upon, and inure to the benefit of the heirs, executors, administrators, successors and assigns of the respective parties hereto. 11.4 Applicable Law. -------------- This Agreement shall be construed and enforced in accordance with the laws of the State of Missouri. 11.5 Counterparts. ------------ This Agreement may be executed in several counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all the parties have not signed the same counterpart, except that no counterpart shall be binding unless signed by the Managing Partner. 11.6 Entire Agreement. ---------------- This Agreement contains the entire agreement between the parties and supersedes all prior writings or representations. 11.7 Separability of Provisions. -------------------------- Each provision of this Agreement shall be considered separable and if for any reason any provision or provisions hereby are determined to be invalid or unenforceable such validity or unenforceability shall not impair the operation of or affect any other portion of this Agreement and this Agreement shall be construed in all respects as if such invalid or unenforceable provision was omitted. 35 11.8 Representations. --------------- Each person who becomes a Limited hereunder does hereby represent and warrant by the signing of a counterpart of this Agreement or an amendment to this Agreement that the Partnership interest acquired by him was acquired for his own account, for investment only, not for the interest of any other person and not for resale to other persons or for further distribution. The Managing Partner has not made and hereby makes no warranties or representations other than those specifically set forth in this Agreement. 11.9 Section Titles. -------------- Paragraph titles are for descriptive purposes only and shall not control or alter the meaning of this Agreement as set forth in the text. 11.10 Partition. --------- The Partners agree that the Partnership's assets are not and will not be suitable for partition. Accordingly, each of the Partners hereby irrevocably waives any and all right he may have to maintain any action for partition of any of the Partnership's assets. 11.11 No Third Party Beneficiaries. ---------------------------- This Agreement is made solely and specifically for the benefit of the Partners and their respective successors and permitted assigns, and no other person whatsoever shall have any rights, interests or claims hereunder or be entitled to any benefits hereunder or on account of this Agreement as a third party beneficiary or otherwise. 11.12 Amendments. ---------- In addition to the amendments otherwise authorized herein, this Agreement may be amended, from time to time, without the consent or approval of (and without prior notice to) any Limited, by the Managing Partner or by the affirmative vote of General Partners holding an aggregate of at least a majority of the total General Partner Percentages. In particular, but without limiting the foregoing, the interests of the Limited Partners and the Class II Subordinated Limited Partners in the Net Income or the Proceeds of Liquidation of the Partnership or in any other allocation or distribution to be received by them from the Partnership pursuant to Article Eight hereof or otherwise may be reduced or increased or otherwise modified in accordance with this Section 11.12 without the consent or approval of (and without prior notice to) any Limited. 11.13 Revocable Trusts. ---------------- Notwithstanding anything to the contrary herein contained, it is recognized that certain of the Partners are not persons but are revocable trusts ("Trusts"), the grantors of which ("Grantors"), except for the transfer of their partnership interests to (or the designation of) such Trusts created by them, would be the Partners. Thus, when used herein the phrases "General Partner", "Limited Partner", "Limited", "Partner", "Class I Subordinated Limited Partner" or "Class II Subordinated Limited Partner" shall be deemed, when the context hereof so requires (such as, without limiting the generality of the foregoing, death, disability or withdrawal of a Partner, gross negligent conduct of a General Partner, a General Partner receiving a guaranteed draw for services 36 rendered, General Partner required submission of tax returns, sale by a General Partner of Retiring Interests after his 56th birthday) to be a reference to the Grantor of such Trust. In addition, to the extent that any General Partner has obligations or liabilities imposed upon such General Partner pursuant to this Agreement, then, if such General Partner is a Trust, such General Partner, by such General Partner's signature hereto (and the Grantor of such Trust by such Grantor's signature hereto), hereby agrees that said obligations and liabilities are also obligations and liabilities of such Grantor. IN WITNESS WHEREOF, the undersigned has executed this Thirteenth Amended and Restated Agreement of Registered Limited Liability Limited Partnership effective as of the day and year first above written. THIS AGREEMENT CONTAINS THE FOLLOWING BINDING ARBITRATION PROVISIONS WHICH MAY BE ENFORCED BY THE PARTNERSHIP AND THE PARTNERS GENERAL PARTNER: /s/ John W. Bachmann ------------------------------ GENERAL PARTNERS AS SHOWN IN THE BOOKS AND RECORDS OF THE PARTNERSHIP* LIMITED PARTNERS AS SHOWN IN THE BOOKS AND RECORDS OF THE PARTNERSHIP* CLASS II SUBORDINATED LIMITED PARTNERS AS SHOWN IN THE BOOKS AND RECORDS OF THE PARTNERSHIP* *By: /s/ John W. Bachmann ------------------------- Attorney-In-Fact Note: At the time of the signing of this Agreement there are no Class I Subordinated Limited Partners. 37 EX-23.1 4 exh23p1.txt CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-2 (No. 33-61049) and Form S-8 (No. 333-48233, No. 333-36258, No. 333-55729, No. 33-35247 and No. 33-62734) of The Jones Financial Companies, L.L.L.P. of our report dated March 27, 2003 relating to the financial statements and financial statement schedules, which appears in this Form 10-K. St. Louis, Missouri March 27, 2003 EX-99.1 5 exh99p1.txt CERTIFICATIONS OF CHIEF FINANCIAL OFFICER AND CHIEF EXECUTIVE OFFICER Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of The Jones Financial Companies, L.L.L.P. on Form 10-K for the year ending December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven Novik, Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Steven Novik ------------------------------------------ Chief Financial Officer The Jones Financial Companies, L.L.L.P. March 27, 2003 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of The Jones Financial Companies, L.L.L.P. on Form 10-K for the year ending December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John W. Bachmann, Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John W. Bachmann ------------------------------------------ Chief Executive Officer The Jones Financial Companies, L.L.L.P. March 27, 2003 -----END PRIVACY-ENHANCED MESSAGE-----