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