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, 2003 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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [ ] NO [X] As of March 27, 2004 there were no voting securities held by non-affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE None 1 PART I ITEM 1. BUSINESS The Jones Financial Companies, L.L.L.P. (the "Registrant" and also referred to herein as the "Partnership") is organized under the Revised Uniform Limited Partnership Act of the State of Missouri. The terms "Registrant" and "Partnership" used throughout, refer to The Jones Financial Companies, L.L.L.P. and any or all of its consolidated subsidiaries. The Partnership is the successor to Whitaker & Co., which was established in 1871 and dissolved on October 1, 1943, said date representing the organization date of Edward D. Jones & Co., L.P. ("EDJ"), the Partnership's principal subsidiary. EDJ was reorganized on August 28, 1987, which date represents the organization date of The Jones Financial Companies, L.L.L.P. The Partnership's principal operating subsidiary, EDJ, is a registered broker-dealer primarily serving individual investors. EDJ derives its revenues from the sale of listed and unlisted securities and insurance products, investment banking, principal transactions and is a distributor of mutual fund shares. EDJ conducts business throughout the United States of America, Canada and the United Kingdom with its customers, various brokers and dealers, clearing organizations, depositories and banks. The Partnership is a member firm of the New York, Chicago and London exchanges, a participating organization in the Toronto exchange, and is a registered broker-dealer with the National Association of Securities Dealers, Inc. ("NASD"). As of January 30, 2004, the Partnership was composed of 275 general partners, 5,021 limited partners and 146 subordinated limited partners. At December 31, 2003, the Partnership is organized as follows: The Partnership owns 100% of the outstanding common stock of EDJ Holding Company, Inc., a Missouri corporation and 100% of the outstanding common stock of LHC, Inc. ("LHC"), a Missouri corporation. The Partnership also holds all of the partnership equity of Edward D. Jones & Co., L.P., a Missouri limited partnership and EDJ Leasing Co., L.P., a Missouri limited partnership. EDJ Holding Company, Inc. and LHC, Inc. are the general partners of Edward D. Jones & Co., L.P. and EDJ Leasing Co., L.P., respectively. In addition, the Partnership owns 100% of the outstanding common stock of Conestoga Securities, Inc., a Missouri corporation and also owns, as a limited partner, 49.5% of Passport Research Ltd., a Pennsylvania limited partnership, which acts as an investment advisor to a money market mutual fund. The Partnership owns 100% of the partnership equity of Edward Jones, an Ontario, Canada limited partnership and all of the common stock of Edward D. Jones & Co. Canada Holding Co., Inc., an Ontario, Canada corporation, its general partner. Through its Canadian entities, the Partnership owns all of the partnership equity of Edward Jones Insurance Agency, an Ontario, Canada limited partnership, all of the common stock of Edward D. Jones & Co. Agency Holding Co., Inc., an Ontario, Canada corporation, its general partner, and 100% of the common stock of Edward Jones Insurance Agency (Quebec) Inc., a Canada corporation. The Partnership also owns 100% of the equity of Edward Jones Limited, a U.K. private limited company, which owns 100% of the equity of Edward Jones Nominees Limited. The Partnership owns 100% of the equity of Boone National Savings and Loan Association, F.A., (the "Association"), a federally chartered stock savings and loan association. The Partnership also owns 100% of the equity of EJ Mortgage L.L.C., a Missouri limited liability company. EJ Mortgage L.L.C. owns 50% of Edward Jones Mortgage, a joint venture. The Partnership holds all of the partnership equity in a Missouri limited partnership, EDJ Ventures, Ltd. Conestoga Securities, Inc., is the general partner of EDJ Ventures, Ltd. The Partnership is the sole member of Edward Jones Insurance Agency Holding, L.L.C., a Missouri limited liability company; California Agency Holding, L.L.C., a California limited liability company and Edward Jones Insurance Agency of New Mexico, L.L.C., a New Mexico limited liability company. Edward Jones Insurance Agency Holding, L.L.C. is the sole member of Edward Jones Insurance Agency 2 PART I of Wyoming, L.L.C., a Wyoming limited liability company and Edward Jones Insurance Agency of Michigan, L.L.C., a Michigan limited liability company. The Partnership and Edward Jones Insurance Agency Holding, L.L.C. are members of Edward Jones Insurance Agency of Massachusetts, L.L.C., a Massachusetts limited liability company; and Edward Jones Insurance Agency of Montana, L.L.C., a Montana limited liability company. Edward Jones Insurance Agency Holding, L.L.C. and California Agency Holding, L.L.C. are members of Edward Jones Insurance Agency of California, L.L.C., a California limited liability company. All of the insurance agencies engage in general insurance brokerage activities. The Partnership holds all of the partnership equity of Unison Investment Trusts, L.P., d/b/a Unison Investment Trusts, Ltd., a Missouri limited partnership, which has sponsored unit investment trusts. The general partner of Unison Investment Trusts, L.P., Unison Capital Corp., Inc., a Missouri corporation, is wholly owned by LHC. EDJ owns 100% of the outstanding common stock of Cornerstone Mortgage Investment Group II, Inc., a Delaware limited purpose corporation which has structured and sold secured mortgage bonds. EDJ also owns 50% of issued common stock of S-J Capital Corp., a Missouri corporation. Conestoga owns 100% of the outstanding stock of CIP Management, Inc., which is the managing general partner of CIP Management, L.P. CIP Management, L.P. is the managing general partner of Community Investment Partners II, L.P., Community Investment Partners III, L.P., L.L.L.P., Community Investment Partners IV, L.P., L.L.L.P., and Community Investment Partners V, L.P., L.L.L.P., business development companies. EDJ owns 7% of the Customer Account Protection Company Holdings, Inc. ("CAPCO"), a captive insurance group. During 2002, the Partnership's affiliates, Edward Jones Insurance Agency of Nevada, Inc., Edward Jones Insurance Agency of Alabama, L.L.C., EJ Insurance Agency of Ohio, and EDJ Insurance Agency of Texas, Inc., were dissolved. The Partnership's affiliates, Edward Jones Nominees PEP Limited and Edward Jones Nominees ISA Limited, both 100% owned by Edward Jones Limited, a U.K. private limited company, were also dissolved in 2002. During 2003, the Partnership's affiliate, Edward Jones Insurance Agency of Montana, L.L.C., was dissolved. None of these had conducted active businesses. Within the past five years, the Registrant has added several new legal entities. During 2000, Edward Jones Nominees Limited, Edward Jones Nominees PEP Limited, and Edward Jones Nominee ISA Limited, all three of which are U.K. private limited companies, were organized and subsequently dissolved in 2002. During 2002, Edward Jones Insurance Agency (Quebec) Inc., a Canada corporation, was organized. During 2003, Community Investment Partners V, L.P., L.L.L.P., a business development company, was organized. 3 PART I REVENUES BY SOURCE. The following table sets forth, for the past three years, the sources of the Partnership's revenues by dollar amounts (all amounts in thousands): 2003 2002 2001 - --------------------------------------------------------------------------------- Commissions Listed $ 214,431 $ 214,247 $ 219,359 Mutual Funds 1,087,599 831,652 740,209 Over-the-Counter 49,804 50,429 77,618 Insurance 226,376 213,496 216,009 Other 612 753 667 Principal Transactions 350,662 403,329 370,327 Investment Banking 43,817 41,055 24,676 Interest and Dividends 132,114 137,579 181,032 Sub-Transfer Agent Revenue 137,729 119,307 95,022 Mutual Fund & Insurance Revenue 91,842 87,298 79,107 Money Market Revenue 72,708 75,707 73,594 IRA Custodial Service Fees 58,537 48,695 38,554 Other Revenue 72,631 48,349 38,213 Gain on Investments - 8,186 - ------------- ------------- ------------- Total Revenue $ 2,538,862 $ 2,280,082 $ 2,154,387 ============= ============= ============= Because of the interdependence of the activities and departments of the Partnership's investment business and the arbitrary assumptions involved in allocating overhead, it is impractical to identify and specify expenses applicable to each aspect of the Partnership's operations. Furthermore, the net income of firms principally engaged in the securities business, including the Partnership's, is affected by interest savings as a result of customer and other credit balances and interest earned on customer margin accounts. LISTED BROKERAGE TRANSACTIONS. A portion of the Partnership's revenue is derived from customer transactions in which the Partnership acts as agent in the purchase and sale of listed corporate securities. These securities include common and preferred stocks and corporate debt securities traded on and off the securities exchanges. Revenue from brokerage transactions is highly influenced by the volume of business and securities prices. Customer transactions in securities are effected on either a cash or a margin basis. In a margin account, the Partnership lends the customer a portion of the purchase price up to the limits imposed by the margin regulations of the Federal Reserve Board ("Regulation T"), New York Stock Exchange, Inc. ("NYSE") margin requirements, or the Partnership's internal policies, which may be more stringent than the regulatory minimum requirements. Such loans are secured by the securities held in customer margin accounts. These loans provide a source of income to the Partnership since it is able to lend to customers at rates which are higher than the rates at which it is able to borrow on a secured basis. The Partnership is permitted to use as collateral for the borrowings securities owned by margin customers having an 4 PART I aggregate market value generally up to 140% of the debit balance in margin accounts. The Partnership may also use funds provided by free credit balances in customer accounts to finance customer margin account borrowings. In permitting customers to purchase securities on margin, the Partnership assumes the risk of a market decline which could reduce the value of its collateral below a customer's indebtedness before the collateral is sold. Under the NYSE rules, the Partnership requires, in the event of a decline in the market value of the securities in a margin account, the customer to deposit additional securities or cash so that, at all times, the loan to the customer is no greater than 75% of the value of the securities in the account (or to sell a sufficient amount of securities in order to maintain this percentage). The Partnership, however, imposes a more stringent maintenance requirement. Variations in revenues from listed brokerage commissions between periods is largely a function of market conditions. MUTUAL FUNDS. The Partnership distributes mutual fund shares in continuous offerings and new underwritings. As a dealer in mutual fund shares, the Partnership receives a dealer's discount which generally ranges from 1% to 5 3/4% of the purchase price of the shares, depending on the terms of the dealer agreement and the amount of the purchase. The Partnership earns service fees which are generally based on 15 to 25 basis points of its customer assets which are held by the mutual funds. The Partnership also earns revenue sharing from certain mutual fund vendors. The particular revenue sharing agreements involving the Partnership vary among fund families, with the investment advisers or distributors of some families providing a percentage of average assets held by the Partnership's customers. Other fund families provide a payment to the Partnership of the underlying fund management fees based on the underlying assets of the Partnership's customers. In addition, the Partnership may receive profit sharing participation or the revenue sharing agreement may pay the Partnership a flat dollar amount. The underlying management fees vary by fund within each fund family. In addition, certain revenue sharing agreements may also include payments based on current year sales. These arrangements vary and are based on either a percentage of the underwriter's concession retained by the fund distribution company or a specified number of basis points on the Partnership's current year fund sales. The Partnership does not manage any mutual fund, although it is a limited partner of Passport Research, Ltd., an advisor to a money market mutual fund. OVER-THE-COUNTER TRANSACTIONS. Partnership activities in unlisted (over-the-counter) transactions are essentially similar to its activities as a broker in listed securities. In connection with customer orders to buy or sell securities, the Partnership charges a commission for both principal and agency transactions. INSURANCE. The Partnership has executed agency agreements with various national insurance companies. EDJ is able to offer life insurance, long term care insurance, fixed and variable annuities and other types of insurance to its customers through substantially all of its investment representatives who hold insurance sales licenses. As an agent for the insurance company, the Partnership receives commission on the purchase price of the policy. The Partnership also earns service fees which are generally based on its customer assets held by the insurance companies. The Partnership also earns revenue sharing from certain insurance vendors. The revenue sharing agreements vary, with amounts generally based on assets held by the Partnership's customers or based on current year sales. PRINCIPAL TRANSACTIONS. The Partnership makes a market in over-the-counter corporate securities, municipal obligations, U.S. Government obligations, including general obligations and revenue bonds, unit investment trusts and mortgage-backed securities. The Partnership's market-making activities are conducted with other dealers in the "wholesale" market and "retail" market wherein the Partnership acts as a dealer buying from and selling to its customers. In making markets in principal and over-the-counter 5 PART I securities, the Partnership exposes its capital to the risk of fluctuation in the market value of its security positions. It is the Partnership's policy not to trade for its own account. As in the case of listed brokerage transactions, revenue from over-the-counter and principal transactions is highly influenced by the volume of business and securities prices, as well as by the increasing number of investment representatives employed by the Partnership over the periods indicated. INVESTMENT BANKING. The Partnership's investment banking activities are performed by its Syndicate and Underwriting Departments. The principal service which the Partnership renders as an investment banker is the underwriting and distribution of securities either in a primary distribution on behalf of the issuer of such securities, or in a secondary distribution on behalf of a holder of such securities. The distributions of corporate and municipal securities are, in most cases, underwritten by a group or syndicate of underwriters. Each underwriter has a participation in the offering. Unlike many larger firms against which the Partnership competes, the Partnership does not presently engage in other investment banking activities such as assisting in mergers and acquisitions, arranging private placement of securities issues with institutions or providing consulting and financial advisory services to corporations. The Syndicate and Underwriting Departments are responsible for the largest portion of the Partnership's investment banking business. In the case of an underwritten offering managed by the Partnership, these departments may form underwriting syndicates and work closely with the branch office network for sales of the Partnership's own participation and with other members of the syndicate in the pricing and negotiation of other terms. In offerings managed by others in which the Partnership participates as a syndicate member, these departments serve as active coordinators between the managing underwriter and the Partnership's branch office network. The underwriting activity of the Partnership involves substantial risks. An underwriter may incur losses if it is unable to resell the securities it is committed to purchase or if it is forced to liquidate all or part of its commitment at less than the agreed upon purchase price. Furthermore, the commitment of capital to an underwriting may adversely affect the Partnership's capital position and, as such, its participation in an underwriting may be limited by the requirement that it must at all times be in compliance with the Securities and Exchange Commission's Uniform Net Capital Rule. The Securities Act of 1933 and other applicable laws and regulations impose substantial potential liabilities on underwriters for material misstatements or omissions in the prospectus used to describe the offered securities. In addition, there exists a potential for possible conflict of interest between an underwriter's desire to sell its securities and its obligation to its customers not to recommend unsuitable securities. In recent years, there has been an increasing incidence of litigation in these areas. These lawsuits are frequently brought for the benefit of large classes of purchasers of underwritten securities. Such lawsuits often name underwriters as defendants and typically seek substantial amounts in damages. INTEREST AND DIVIDENDS. Interest and dividend income is earned primarily on margin account balances, inventory securities and investment securities. Interest is also earned by the Association on its loan portfolio. The Partnership is exposed to market risk for changes in interest rates. MONEY MARKET FEES, IRA CUSTODIAL SERVICE FEES AND OTHER REVENUES. Other revenue sources include money market fees, IRA custodial services fees, sub-transfer agent accounting services, revenue sharing, gains from sales of certain assets, and other product and service fees. 6 PART I The Partnership charges a fee to certain mutual funds for sub-accounting services. Additionally, under certain agreements, non-commission revenue is received from companies whose mutual funds and insurance products the Partnership distributes. The Partnership has a minority partnership interest in the investment advisor to the Edward Jones Money Market Fund. The Partnership does not have management responsibility for the advisor. Revenue from this source has increased over the years due to growth in the fund, both in dollars invested and number of accounts. EDJ is also the custodian for its IRA accounts and charges customers an annual fee for its services. The Partnership has registered an investment advisory program with the Securities and Exchange Commission ("SEC") under the Investment Advisors Act of 1940. This service is offered firmwide and involves income and estate tax planning and analysis for clients. Revenues from this source are immaterial and are included under "Other Revenue". The Partnership offers trust services to its customers through the Edward Jones Trust Company, a division of the Association. The Partnership offers a co-branded credit card with a major credit card company and receives revenue from this service. The Partnership offers mortgage loans to its customers through a joint venture. RESEARCH DEPARTMENT. The Partnership maintains a Research Department to provide specific investment recommendations and market information for retail customers. The Department supplements its own research with the services of various independent research services. CUSTOMER ACCOUNT ADMINISTRATION AND OPERATIONS. Operations associates are responsible for activities relating to customer securities and the processing of transactions with other broker-dealers, exchanges and clearing organizations. These activities include receipt, identification, and delivery of funds and securities, internal financial controls, accounting and personnel functions, office services, storage of customer securities and the handling of margin accounts. The Partnership processes substantially all of its own transactions for its United States and United Kingdom entities. In Canada, the Partnership has entered into an introducing/carrying arrangement with National Bank of Canada. It is important that the Partnership maintain current and accurate books and records from both a profit viewpoint as well as for regulatory compliance. To expedite the processing of orders, the Partnership's branch office system is linked to the St. Louis headquarters office through an extensive communications network. Orders for all securities are captured at the branch electronically, routed to St. Louis and forwarded to the appropriate market for execution. The Partnership's processing of paperwork following the execution of a security transaction is automated, and operations are generally on a current basis. There is considerable fluctuation during any one year and from year to year in the volume of transactions the Partnership processes. The Partnership records transactions and posts its books on a daily basis. Operations personnel monitor day-to-day operations to determine compliance with applicable laws, rules and regulations. Failure to keep current and accurate books and records can render the Partnership liable to disciplinary action by governmental and self-regulatory organizations. The Partnership has a computerized branch office communication system which is principally utilized for entry of security orders, quotations, messages between offices, research of various customer account information, and cash and security receipts functions. The Partnership clears and settles virtually all of its listed and over the counter equities, municipal bond, corporate bond and mutual fund transactions through the National Securities Clearing Corporation ("NSCC"), New York, New York. NSCC effects clearing of securities on the New York, American and Chicago Stock Exchanges. 7 PART I In conjunction with clearing and settling transactions with NSCC, the Partnership holds customer securities on deposit with the Depository Trust Company ("DTC") in lieu of maintaining physical custody of the certificates. The Partnership also uses a major bank for custody and settlement of treasury securities and Government National Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA"), and Federal Home Loan Mortgage Corporation ("FHLMC") issues. The Partnership's United Kingdom operation clears and settles virtually all of its listed transactions through CREST. CREST effects clearing of securities on the London Stock Exchange. In conjunction with clearing and settling transactions with CREST, the Partnership's United Kingdom operation holds customer securities on deposit with CREST in lieu of maintaining physical custody of the certificates. The Partnership's United Kingdom operation also uses DTC for custody of United States securities, a major independent brokerage firm for custody of non-United Kingdom and non-United States securities, and individual unit trust vendors for custody of unit trust holdings. In Canada, the Partnership has entered into an introducing/carrying arrangement with National Bank of Canada. As the carrying broker, National Bank of Canada ("NBF") handles the routing and settlement of customer transactions. Transactions are settled through the Canadian Depository for Securities ("CDS"), of which National Bank of Canada is a member. CDS effects clearing of securities on the Toronto, Montreal and TSX Venture stock exchanges. Customer securities on deposit are also held with CDS. The Partnership is substantially dependent upon the operational capacity and ability of NSCC/DTC/CREST/NBF. Any serious delays in the processing of securities transactions encountered by NSCC/DTC/CREST/NBF may result in delays of delivery of cash or securities to the Partnership's customers. These services are performed for the Partnership under contracts which may be changed or terminated at will by either party. Automated Data Processing, Inc., ("ADP"), ADP Wilco (a subsidiary of ADP) and National Bank of Canada provide automated data processing services for customer account activity and related records for the United States, United Kingdom and Canada, respectively. The Partnership does not employ its own floor broker for transactions on exchanges. The Partnership has arrangements with other brokers to execute the Partnership's transactions in return for a commission based on the size and type of trade. If, for any reason, any of the Partnership's clearing, settling or executing agents were to fail, the Partnership and its customers would be subject to possible loss. To the extent that the Partnership would not be able to meet the obligations of the customers, such customers might experience delays in obtaining the protections afforded them. Customers are protected from firm insolvency by the Securities Investors Protection Corporation ("SIPC") in the United States, Investors Compensation Scheme ("ICS") in the United Kingdom and Canadian Investor Protection Fund ("CIPF") in Canada, and through excess insurance coverage maintained by the Partnership in The United States and the United Kingdom. As of February 16, 2004, excess coverage in the United States is provided by CAPCO, of which the Partnership is a 7% owner. SIPC provides protection for customer accounts for up to $500,000, including up to $100,000 for cash claims. ICS covers 100% of the first (pound)30,000 and 90% for the next (pound)20,000, for a maximum protection of (pound)48,000 for all investment business. CIPF limits coverage to $1,000,000 total, which can be any combination of securities and cash. The coverage provided by SIPC, ICS and CIPF, and protection in excess limits thereof, would be available to customers of the Partnership in the event of insolvency. The Partnership believes that its internal controls and safeguards concerning the risks of securities thefts are adequate. Although the possibility of securities thefts is a risk of the industry, the Partnership has not 8 PART I had, to date, a significant problem with such thefts. The Partnership maintains fidelity bonding insurance which, in the opinion of management, provides adequate coverage. EMPLOYEES. Including its 275 general partners, the Partnership has approximately 29,200 full and part-time employees. This includes 9,426 registered salespeople as of January 30, 2004. The Partnership's salespersons are generally compensated on a commission basis and may, in addition, be entitled to bonus compensation based on their respective branch office profitability and the profitability of the Partnership. The Partnership has no formal bonus plan for its non-registered employees. The Partnership has, however, in the past paid bonuses to its non-registered employees on an informal basis, but there can be no assurance that such bonuses will be paid for any given period or will be within any specific range of amounts. Employees of the Partnership are bonded under a blanket policy as required by NYSE rules. The annual aggregate amount of coverage is $50,000,000 subject to a $2,000,000 deductible provision, per occurrence. The Partnership maintains a training program for prospective salespeople which includes nine weeks of concentrated instruction and on-the-job training in a branch office. During the first phase, the trainee spends 60 days studying Series 7 examination materials and taking the examination. After passing the examination, trainees spend one week in a comprehensive training program in St. Louis followed by three weeks at a designated location to conduct market research and prepare for opening the office. The trainee then spends three weeks of on-the-job training in a branch location reviewing investments, office procedures and sales techniques. Next, the trainee returns to his or her designated location for one week to continue building a prospect base. One final week is then spent in a central location to complete the initial training program. Two and four months later, the investment representative attends additional training classes in St. Louis, and subsequently, EDJ offers periodic continuing training to its experienced sales force. EDJ's basic brokerage payout is similar to its competitors. The Partnership considers its employee relations to be good and believes that its compensation and employee benefits which include medical, life and disability insurance plans and profit sharing and deferred compensation retirement plans, are competitive with those offered by other firms principally engaged in the securities business. BRANCH OFFICE NETWORK. The Partnership operates 9,063 branch offices as of January 30, 2004, primarily staffed by a single investment representative. The Partnership operates 8,419 offices in the United States located in all 50 states, predominantly in communities with populations of under 50,000 and metropolitan suburbs. The Partnership also operates in Canada (through 554 offices as of January 30, 2004) and the United Kingdom (through 90 offices as of January 30, 2004). COMPETITION. The Partnership is subject to intensive competition in all phases of its business from other securities firms, many of which are substantially larger than the Partnership in terms of capital, brokerage volume and underwriting activities. In addition, the Partnership encounters competition from other organizations such as banks, insurance companies, and others offering financial services and advice. The Partnership also competes with a number of firms offering discount brokerage services, usually with lower levels of service to individual customers. In recent periods, many regulatory requirements prohibiting non-securities firms from engaging in certain aspects of brokerage firms' business have been eliminated and further removal of such prohibitions is anticipated. With minor exceptions, customers are free to transfer their business to competing organizations at any time. There is intense competition among securities firms for salespeople with good sales production records. In recent periods, the Partnership has experienced increasing efforts by competing firms to hire away its registered representatives, although the 9 PART I Partnership believes that its rate of turnover of investment representatives is not higher than that of other firms comparable to the Partnership. REGULATION. The securities industry in the United States is subject to extensive regulation under both federal and state laws. The SEC is the federal agency responsible for the administration of the federal securities laws. The Partnership's principal subsidiary is registered as a broker-dealer and investment advisor with the SEC. Much of the regulation of broker-dealers has been delegated to self-regulatory organizations, principally the NASD, and national securities exchanges such as the NYSE, which has been designated by the SEC as the Partnership's primary regulator. These self-regulatory organizations adopt rules (which are subject to approval by the SEC) that govern the industry and conduct periodic examinations of the Partnership's operations. Securities firms are also subject to regulation by state securities administrators in those states in which they conduct business. EDJ or an affiliate is registered as a broker-dealer in 50 states, Puerto Rico, Canada and the United Kingdom. Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of customer funds and securities, capital structure of securities firms, record-keeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the mode of operation and profitability of broker-dealers. The SEC, self-regulatory organizations and state securities commissions may conduct administrative proceedings which can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or employees. The principal purpose of regulation and discipline of broker-dealers is the protection of customers and the securities markets, rather than protection of the creditors and stockholders of broker-dealers. In addition, EDJ conducts business in Canada through a subsidiary partnership which is regulated by the Investment Dealers Association of Canada and in the United Kingdom through a subsidiary which is regulated by The Financial Services Authority. As a federally chartered savings and loan, the Association is subject to regulation by the Office of Thrift Supervision ("OTS"). UNIFORM NET CAPITAL RULE. As a broker-dealer and a member firm of the NYSE, the Partnership is subject to the Uniform Net Capital Rule ("Rule") promulgated by the SEC. The Rule is designed to measure the general financial integrity and liquidity of a broker-dealer and the minimum Net Capital deemed necessary to meet the broker-dealer's continuing commitments to its customers. The Rule provides for two methods of computing Net Capital and the Partnership has adopted what is generally referred to as the alternative method. Minimum required Net Capital under the alternative method is equal to 2% of the customer debit balances, as defined. The Rule prohibits withdrawal of equity capital whether by payment of dividends, repurchase of stock or other means, if Net Capital would thereafter be less than 5% of customer debit balances. Additionally, certain withdrawals require the consent of the SEC to the extent they exceed defined levels even though such withdrawals would not cause Net Capital to be less than 5% of aggregate debit items. In computing Net Capital, various adjustments are made to exclude assets which are not readily convertible into cash and to provide a conservative statement of other assets such as a company's securities owned. Failure to maintain the required Net Capital may subject a firm to suspension or expulsion by the NYSE, the SEC and other regulatory bodies and may ultimately require its liquidation. The Partnership has, at all times, been in compliance with the Uniform Net Capital Rule. The firm has other operating subsidiaries, including the Association and broker-dealer subsidiaries in Canada and the United Kingdom. These wholly owned subsidiaries are required to maintain specified levels of liquidity and capital standards. Each subsidiary is in compliance with the applicable regulations as of December 31, 2003. 10 PART I ITEM 2. PROPERTIES The Partnership conducts its United States headquarters operations from three locations in St. Louis County, Missouri and one location in Tempe, Arizona, comprising a total of 26 separate buildings. Twenty-two buildings are owned by the Partnership and four buildings are leased through long-term operating leases. In addition, the Partnership leases its Canadian home office facility in Mississauga, Ontario through an operating lease and has an operating lease for its United Kingdom home office located in London, England. The Partnership also maintains facilities in 9,063 branch locations (as of January 30, 2004) which are located in the United States, Canada and the United Kingdom and are rented under predominantly cancelable leases. The Partnership believes that its properties are both suitable and adequate to meet the current and future growth projections of the organization. ITEM 3. LEGAL PROCEEDINGS In the normal course of business, the Partnership has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation. Certain of these legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. The Partnership is involved, from time to time, in investigations and proceedings by governmental and self-regulatory agencies, certain of which may result in adverse judgements, fines or penalties. Recently, the number of investigations has increased with a focus on mutual fund issues among many firms in the financial services industry, including the Partnership. MUTUAL FUND MATTERS. Beginning in 2003, mutual fund and annuity products have come under increased scrutiny from various state and federal regulatory authorities in connection with several industry wide issues including market timing, late trading, the failure of broker-dealers to provide breakpoint discounts to mutual fund purchasers and the manner in which mutual fund and annuity companies compensate broker-dealers. In connection with various investigations, the Partnership has received information requests and subpoenas from various state government regulators, the SEC, the NYSE, the NASD, and the U.S. Attorney for the Eastern District of Missouri, regarding the Partnership's revenue sharing arrangements, mutual fund sales practices and other mutual fund issues. The following summarizes the most significant of such actions that currently are directed at the Partnership. In January 2004, the staff of the SEC informed the Partnership that it is considering recommending enforcement action in connection with the Partnership's mutual fund sales practices. The staff advised the Partnership that the proposed action against it would be based upon, among other things, the adequacy of the Partnership's disclosures regarding revenue sharing arrangements with specified investment companies and the Partnership's alleged favored sale or distribution of shares of those investment companies based upon considerations received. Similarly, in January of 2004, the staff of the NASD informed the Partnership that it is considering recommending enforcement action in connection with the Partnership's mutual fund sales practices. The staff advised the Partnership that the proposed action would be predicated upon, among other things, (1) the disclosures regarding revenue sharing arrangements with specified investment companies and entities affiliated with certain variable annuity investments were violative of NASD rules; and (2) the receipt of certain directed brokerage commissions by the Partnership and its sponsorship of certain award promotions were violative of other rules of the NASD. 11 PART I On or about January 20, 2004, a class action captioned Enriquez, et. al. v. Edward D. Jones & Co., L.P., et. al. was filed in the Circuit Court of St. Louis, Missouri on behalf of all purchasers of recommended mutual funds at any time. The complaint alleges that the Partnership's alleged failure to adequately disclose revenue sharing arrangements constituted a breach of common law fiduciary duty and constitutes unjust enrichment under state law. On February 17, 2004, this case was removed to the U.S. District Court for the Eastern District of Missouri. On or about January 23, 2004, a securities class action captioned Spahn IRA, et. al. v. Edward D. Jones & Co., L.P., et. al. was filed in the U.S. District Court for the Eastern District of Missouri against the Partnership and members of its Executive Committee on behalf of purchasers of recommended mutual funds from January 25, 1999 to January 9, 2004. The complaint alleges that the Partnership failed to adequately disclose revenue sharing arrangements in connection with the sale of the subject mutual funds. The complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder. On or about January 26, 2004, a class action captioned Bressler, et. al. v. Edward D. Jones & Co. was filed in the Superior Court for Los Angeles, California against the Partnership on behalf of California purchasers of recommended mutual funds over an indeterminate period of time. The complaint alleges that the Partnership violated Section 17200 of the California Business and Professions Code by receiving inadequately disclosed revenue sharing payments from the subject mutual funds and that the Partnership breached a fiduciary duty that it was allegedly obliged to disclose such arrangements to holders of the mutual funds. On February 24, 2004, this case was removed to the U.S. District Court for the Central District of California. On or about January 29, 2004, a securities class action captioned Howard, et. al. v. Edward D. Jones & Co., L.P., et. al. was filed in the U.S. District Court for the Eastern District of Missouri against the Partnership and members of its Executive Committee on behalf of purchasers of recommended mutual funds from January 29, 1999 to January 9, 2004. The complaint alleges that the Partnership failed to adequately disclose revenue sharing arrangements in connection with the sale of the subject mutual funds. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 10b-5 thereunder. On or about February 3, 2004, a securities class action captioned Potter, et. al. v. Edward D. Jones & Co., L.P., was filed in the Superior Court for Los Angeles, California against the Partnership on behalf of purchasers of recommended mutual funds over an indeterminate period of time. The complaint alleges that the Partnership violated Section 17200 of the California Business and Professions Code by receiving inadequately disclosed revenue sharing payments from the subject mutual funds and that the Partnership breached a fiduciary duty alleging it was obliged to disclose such arrangements to holders of the mutual funds. On or about February 10, 2004, a securities class action captioned Corbi, et. al. v. Edward D. Jones & Co., L.P., et. al. was filed in the U.S. District Court for the Southern District of New York against the Partnership and members of its Executive Committee on behalf of purchasers of recommended mutual funds from January 25, 1999 to January 9, 2004. The complaint alleges that the Partnership failed to adequately disclose revenue sharing arrangements in connection with the sale of the subject mutual funds. The complaint alleges violations of Section 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder. 12 PART I On or about February 13, 2004, a securities class action captioned Gadway, et. al. v. Edward D. Jones & Co., L.P., et. al. was filed in the U.S. District Court for the Southern District of New York against the Partnership and members of its Executive Committee on behalf of purchasers of recommended mutual funds from January 25, 1999 to January 9, 2004. The complaint alleges that the Company failed to adequately disclose revenue sharing arrangements in connection with the sale of the subject mutual funds. The complaint alleges violations of Section 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder. On or about March 2, 2004, a securities class action captioned Pasik, et. al. v. Edward D. Jones & Co. was filed in the U.S. District Court for the Eastern District of Missouri against the Partnership on behalf of purchasers of recommended mutual funds from February 27, 1999 to January 9, 2004. The complaint alleges that the Partnership failed to adequately disclose revenue sharing arrangements in connection with the sale of the subject mutual funds in violations of Section 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder, as well as Rule 2830 of the NASD. On or about March 8, 2004, a securities class action captioned Gerding et. al. v. Edward D. Jones & Co., L.P., et. al., was filed in the U.S. District Court for the Eastern District of Missouri against the Partnership and members of its Executive Committee on behalf of purchasers of recommended mutual funds from January 25, 1999 to January 9, 2004. The complaint alleges that the Partnership failed to adequately disclose revenue sharing arrangements in connection with the sale of the subject mutual funds. The complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder. In addition to the foregoing, other state and self-regulatory authorities have initiated inquiries concerning aspects of the Partnership's mutual fund transactions. To date, each of these inquiries are informal and the Partnership is voluntarily cooperating with each inquiry. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages or actions which are in very preliminary stages, the Partnership cannot predict with certainty the eventual loss or range of loss related to such matters. The Partnership believes, based on current knowledge and after consultation with counsel, that the outcome of these actions will not have a material adverse effect on the consolidated financial condition of the Partnership, although the outcome could be material to the Partnership's future operating results for a particular period or periods. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for the Limited or Subordinated Limited Partnership interests and their assignment is prohibited. ITEM 6. SELECTED FINANCIAL DATA The following information sets forth, for the past five years, selected financial data. (All dollars in thousands, except per unit information.) Summary Consolidated Income Statement Data: 2003 2002 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------ Total revenue $2,538,862 $2,280,082 $2,154,387 $2,227,842 $1,797,020 Net income $ 203,310 $ 148,915 $ 149,186 $ 229,823 $ 187,331 Net income per weighted average $1,000 equivalent limited partnership unit outstanding $ 108.08 $ 87.44 $ 96.89 $ 179.21 $ 173.81 Weighted average $1,000 equivalent limited partnership units outstanding 224,389 230,970 236,696 175,436 150,670 Net income per weighted average $1,000 equivalent subordinated limited partnership unit outstanding $ 208.90 $ 167.16 $ 181.70 $ 333.92 $ 325.21 Weighted average $1,000 equivalent subordinated limited partnership units outstanding 103,782 95,053 82,273 63,770 51,741 - ------------------------------------------------------------------------------------------------------------------ 14 PART II ITEM 6. SELECTED FINANCIAL DATA Summary Consolidated Balance Sheet Data: 2003 2002 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Total assets $3,723,159 $3,258,245 $3,158,408 $3,170,385 $2,693,241 ============ ============ ============ ============ ============ Long-term debt $ 39,691 $ 49,363 $ 46,285 $ 29,618 $ 34,540 Other liabilities exclusive of subordinated liabilities 2,490,032 2,070,062 2,231,807 2,252,961 1,908,117 Subordinated liabilities 408,150 428,875 205,600 232,325 259,050 Total partnership capital 785,286 709,945 674,716 655,481 491,534 ------------ ------------ ------------ ------------ ------------ Total liabilities and partnership capital $3,723,159 $3,258,245 $3,158,408 $3,170,385 $2,693,241 ============ ============ ============ ============ ============ 15 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table summarizes the increase (decrease) in major categories of revenues and expenses for the last two years (dollar amounts in thousands). 2003 vs. 2002 2002 vs. 2001 ------------------------------- ------------------------------- Amount Percentage Amount Percentage - ----------------------------------------------------------------------------------------------------------------- Revenue: Commissions $ 268,245 20 % $ 56,715 5 % Principal transactions (52,667) (13) 33,002 9 Investment banking 2,762 7 16,379 66 Interest and dividends (5,465) (4) (43,453) (24) Gain on investments (8,186) - 8,186 - Other 54,091 14 54,866 17 ----------- ---------- Total revenue 258,780 11 125,695 6 Interest expense 2,304 4 (11,463) (17) ----------- ---------- Net revenue 256,476 12 137,158 7 ----------- ---------- Operating Expenses: Compensation and benefits 169,116 13 85,059 7 Communications and data processing 133 - 29,527 13 Occupancy and equipment 18,971 9 7,151 3 Payroll and other taxes 9,019 11 8,413 11 Floor brokerage and clearance fees (35) - (383) (3) Advertising (2,533) (6) 321 1 Other operating expenses 7,410 4 7,341 5 ----------- ---------- Total operating expenses 202,081 10 137,429 7 ----------- ---------- Net Income $ 54,395 37 % $ (271) - % - ----------------------------------------------------------------------------------------------------------------- 16 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Partnership broadly categorizes its revenues as trade revenue (revenue from buy or sell transactions of securities) or net fee revenue (sources other than trade revenue including asset fees, account and activity fees and net interest income). In the Partnership's Consolidated Statements of Income, trade revenue is included in commissions, principal transactions and investment banking. Net fee revenue comprises the asset fee component of commissions, interest and dividends net of interest expenses, and other revenues. The following table reconciles the components of net revenue discussed here in the Results of Operations to the components reported in the Consolidated Statements of Income. Account, Net Interest 2003: Trade Asset Activity & Dividend Gain on Net Revenue Fees & Other Income Investments Revenue ------------- ----------- ----------- ------------ ------------ -------------- Commissions $ 1,269,605 $ 309,217 $ - $ - $ - $ 1,578,822 Principal Transactions 351,802 - (1,140) - - 350,662 Investment Banking 43,817 - - - - 43,817 Interest and Dividends - - - 132,114 - 132,114 Other - 155,248 278,199 - - 433,447 Interest Expense - - - (58,313) - (58,313) ------------- ----------- ----------- ------------ ------------ ------------- Net Revenue $ 1,665,224 $ 464,465 $ 277,059 $ 73,801 $ - $ 2,480,549 ============= =========== =========== ============ ============ ============= Account, Net Interest 2002: Trade Asset Activity & Dividend Gain on Net Revenue Fees & Other Income Investments Revenue ------------- ----------- ----------- ------------ ------------ -------------- Commissions $ 1,034,719 $ 275,858 $ - $ - $ - $ 1,310,577 Principal Transactions 402,182 - 1,147 - - 403,329 Investment Banking 41,055 - - - - 41,055 Interest and Dividends - - - 137,579 - 137,579 Gain on Investments - - - - 8,186 8,186 Other - 153,886 225,470 - - 379,356 Interest Expense - - - (56,009) - (56,009) ------------- ----------- ----------- ------------ ------------ ------------- Net Revenue $ 1,477,956 $ 429,744 $ 226,617 $ 81,570 $ 8,186 $ 2,224,073 ============= =========== =========== ============ ============ ============= Account, Net Interest 2001: Trade Asset Activity & Dividend Gain on Net Revenue Fees & Other Income Investments Revenue ------------- ----------- ----------- ------------ ------------ -------------- Commissions $ 975,625 $ 278,237 $ - $ - $ - $ 1,253,862 Principal Transactions 371,558 - (1,231) - - 370,327 Investment Banking 24,676 - - - - 24,676 Interest and Dividends - - - 181,032 - 181,032 Other - 138,641 185,849 - - 324,490 Interest Expense - - - (67,472) - (67,472) ------------- ----------- ----------- ------------ ------------ ------------- Net Revenue $ 1,371,859 $ 416,878 $ 184,618 $ 113,560 $ - $ 2,086,915 ============= =========== =========== ============ ============ ============= 17 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (2003 VERSUS 2002) For 2003, net revenue increased 12% ($256.5 million) to $2.481 billion, while net income increased $54.4 million and the profit margin increased to 8.0% from 6.5%. Year over year, the Partnership's net revenue and net income increased due primarily to an increase in customer activity as well as growth in customers' assets and accounts. Additionally, the underlying trends between the years have been different. For 2002, customer activity and customer asset values became progressively weaker throughout the year as securities prices and interest rates declined. In 2003, customer activity and customer asset values increased throughout the year due to a more favorable securities market as the year progressed. Operating expenses increased in 2003 due primarily to growth in sales compensation related to the increase in net revenues and to additional costs as the Partnership continued to expand its branch office network. The Partnership added 237 Investment Representatives ("IRs") during 2003, ending the year with 9,409 IRs, an increase of 3%. Trade revenue comprised 67% of net revenue for 2003, up from 66% for 2002. Conversely, net fee revenue comprised 33% of net revenue for 2003, down from 34% in 2002. Trade revenue increased 13% ($187.3 million) during 2003 due primarily to an increase in customer dollars invested (customers' buy and sell transactions generating trade revenue), and to higher gross margins earned on customer dollars invested compared to the prior year. Total customer dollars invested were $58.7 billion during 2003, a 9% ($4.9 billion) increase from 2002. The firm's margin earned on each $1,000 invested increased to $27.40 in 2003 from $26.60 in 2002 due primarily to a shift in product mix. Year over year, customer dollars invested shifted to higher margin mutual fund products, primarily from fixed income products. Commissions revenue, excluding the asset fee component of commissions, increased 23% ($234.9 million) during 2003. Commissions revenue increased year over year due primarily to a 23% increase in customer dollars invested in mutual funds, insurance and individual equities to $38.5 billion in 2003 from $31.2 billion in 2002. Underlying the increase in commissions revenues, mutual fund commissions increased 37% ($226.9 million), while insurance commissions increased 6% ($8.6 million). Principal transactions revenue decreased 13% ($52.7 million) during 2003 due to a decrease in customer dollars invested in fixed income products. Customers invested $19.1 billion in principal transactions in 2003 compared to $21.1 billion in 2002, a decrease of 9%. Revenue from municipal bonds decreased 14% ($24.5 million), government bonds decreased 31% ($18.0 million), while collateralized mortgage obligations decreased 14% ($6.2 million). Net fee revenue increased 9% ($69.2 million) during 2003. Net fee revenue in 2003 includes a business interruption insurance claim of $7.0 million pertaining to September 11, 2001, which is included in other revenue. Net fee revenue in 2002 includes an $8.2 million gain from the sale of the Partnership's London Stock Exchange and Toronto Stock Exchange holdings. Asset fees increased 8% ($34.7 million) due to the favorable impact of market conditions increasing customers' mutual fund and insurance assets generating asset fees. Average customer mutual fund and insurance assets increased $16.3 billion to $130.9 billion in 2003 compared to $114.6 billion in 2002. Account, activity and other fees increased 19% ($43.5 million) year over year, excluding the business interruption insurance claim in 2003. The major elements of the increase were sub-transfer agent fees and retirement account fees. Revenue received from sub-transfer agent services performed for mutual fund companies increased 16% ($18.9 million) due to a 22% increase in the number of customer accounts the Partnership provides mutual fund sub-transfer agent services for. The number of retirement accounts increased by 16%, resulting in custodial fee revenue growth of 18% ($8.9 million). 18 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net interest and dividend income decreased 10% ($7.8 million) during 2003 as the interest rates charged on customers' margin loans continued to decrease, and the source of funds borrowed shifted. Interest income from customer loans outstanding decreased 6% ($6.7 million). The average rate earned on customer loan balances decreased to approximately 5.07% during 2003 from approximately 5.62% during 2002. Average customer margin loan balances were $1.985 billion in 2003, compared to $1.911 billion in 2002, an increase of 4%. Subordinated debt interest expense increased 26% ($6.4 million) due to the issuance of $250 million of subordinated debt in June 2002. Partially offsetting these decreases to net interest income is a $1.8 million decrease in bank loan interest expense due to reduced bank borrowings and a $1.6 million increase in interest income from investing excess funds in reverse repurchase agreements. The firm has been in a net investing position for substantially all of 2003 compared with a net borrowing position in 2002 prior to the issuance of the subordinated debt in June 2002. Operating expenses increased 10% ($202.1 million) during 2003. Compensation and benefits costs increased 13% ($169.1 million). Within compensation and benefits costs, sales compensation increased 11% ($86.6 million) due to increased revenue. Variable compensation, including bonuses and profit sharing paid to IRs, branch office assistants and headquarters associates, which expands and contracts in relation to revenues, net income and the firm's profit margin, increased 53% ($40.5 million). Payroll expense increased 10% ($43.1 million) due to increased costs for existing personnel and additional support in the branches as the firm grows its sales force. On a full time equivalent basis, the Partnership had 3,887 headquarters associates and 9,567 branch staff associates as of December 31, 2003, compared to 3,938 headquarters associates and 9,177 branch staff associates as of December 31, 2002. Occupancy and equipment expenses increased 9% ($19.0 million) due primarily to growth in the number of branch offices as the firm expands its sales force. MUTUAL FUND MATTERS Recently, mutual fund and variable annuity products have come under increased scrutiny from various state and federal regulatory authorities in connection with several industry wide issues including market timing, late trading, the failure of broker-dealers to provide breakpoint discounts to mutual fund purchasers and the manner in which mutual fund and annuity companies compensate broker-dealers. During 2003, a task force organized by the Securities and Exchange Commission (SEC), The National Association of Securities Dealers, Inc. (NASD), the Securities Industry Association, and the Investment Company Institute examined the ability of broker-dealers to deliver breakpoint discounts in the sale of front-end sales load mutual fund shares commonly known as A shares. The task force recommended significant changes in procedures for gathering information from clients and sharing information with mutual funds to better enable broker-dealers to meet their obligations to deliver breakpoint discounts to clients purchasing A shares. The NASD issued a notice to its members in August 2003 requiring restitution where member firms were aware that customers did not receive the breakpoint discounts to which they were entitled. As of December 31, 2003, the Partnership paid $18,000 in restitution to mutual fund purchasers. After issuing the August notice, the NASD further directed almost 450 securities firms, including the Partnership, to notify its customers who purchased Class A mutual funds since January 1, 1999, that they may be due refunds as a result of the firms' failure to provide breakpoint discounts. Subsequent to December 31, 2003, the Partnership notified its customers that they may not have received breakpoint discounts to which they may have been entitled. Through February 27, 2004, the Partnership has made $0.5 million in additional restitution payments. While the Partnership cannot determine with certainty the ultimate liability that may result from its failure to deliver breakpoint discounts, the Partnership does not anticipate that any additional restitution payments will be significant, nor are they expected to exceed reserves established by the Partnership for potential refunds. 19 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In response to various inquires during 2003 by both the SEC and NASD, the Partnership furnished information about revenue sharing arrangements it has in place with selected mutual fund and insurance companies. These revenue sharing arrangements provide the Partnership with additional compensation related to the initial sale or the ongoing maintenance of customers' assets in these companies' investment products. Under these revenue sharing arrangements, the Partnership received aggregate payments of $89.9 million in 2003 and $85.9 million in 2002. In January 2004, the staff of the SEC informed the Partnership that it is considering recommending enforcement action in connection with the Partnership's mutual fund sales practices. The staff advised the Partnership that the proposed action against it would be based upon, among other things, the adequacy of the Partnership's disclosures regarding revenue sharing arrangements with specified investment companies and the Partnership's alleged favored sale or distribution of shares of those investment companies based upon considerations received. Similarly, in January of 2004, the staff of the NASD informed the Partnership that it is considering recommending enforcement action in connection with the Partnership's mutual fund sales practices. The staff advised the Partnership that the proposed action would be predicated upon, among other things, (1) the disclosures regarding revenue sharing arrangements with specified investment companies and entities affiliated with certain variable annuity investments were violative of NASD rules; and (2) the receipt of certain directed brokerage commissions by the Partnership and its sponsorship of certain award promotions were violative of other rules of the NASD. In addition to the foregoing, the Partnership has received information requests and subpoenas from various regulatory authorities including the U.S. Attorney for the Eastern District of Missouri regarding the Partnership's revenue sharing arrangements, mutual fund sales practices and other mutual fund issues. The Partnership is voluntarily cooperating with each inquiry. Also, the Partnership has been named as a defendant in various class actions on behalf of purchasers of recommended mutual funds. See Item 3 - Legal Proceedings. In addition to the regulatory actions directed at the firm, there are various regulatory and legislative proposals being considered that could significantly impact the compensation that broker-dealers derive from mutual funds and annuity products. It is likely in the future that broker-dealers will be required to provide more disclosure to their clients with respect to payments received by them from the sales of these products. It is also possible that such payments may be restricted by law or regulation. The Partnership derived 57% of its total revenue from sales and services related to mutual fund and annuity products in 2003 and 52% in 2002. Any reduction in the revenues from these products could have a material adverse impact on the Partnership. RESULTS OF OPERATIONS (2002 VERSUS 2001) For 2002, net revenue increased 7% ($137.2 million) to $2.224 billion, while net income decreased $0.3 million and the profit margin decreased to 6.5% from 6.9%. Year over year, the Partnership's net revenue increased due primarily to growth in trade revenue. Net fee revenue increased over prior year, but has been negatively impacted by lower customer asset values and lower interest rates. Net income decreased as the growth in net revenue was exceeded by the increase in operating expenses. Operating expenses have increased as the Partnership continues to expand its branch office network. The Partnership added 656 Investment Representatives ("IRs") during 2002, ending the year with 9,172 IRs, an increase of 8%. Trade revenue comprised 66% of net revenue for 2002 and 2001. Conversely net fee revenue comprised 34% for 2002 and 2001. 20 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Trade revenue increased 8% ($106.1 million) during 2002 due primarily to an increase in customer dollars invested (customers' buy and sell transactions generating trade revenue), and to a higher gross margin earned on customer dollars invested compared to the prior year. Total customer dollars invested were $53.8 billion during 2002, representing a 6% ($3.0 billion) increase from 2001. The firm's margin earned on each $1,000 invested increased to $26.60 in 2002 from $26.30 in 2001 due primarily to a shift in product mix. Year over year, customer purchases shifted to higher margin fixed income and mutual fund products, from individual equities. Commissions revenue, excluding the service fee component, increased 6% ($59.1 million) during 2002. Commissions revenue increased year over year due primarily to an 18% increase in customer dollars invested in mutual funds. Year to date, mutual fund commissions increased 18% ($93.6 million), while insurance commissions decreased 2% ($2.5 million) and individual equity agency commissions decreased 11% ($32.3 million). Principal transactions revenue increased 9% ($33.0 million) during 2002 due to a 14% increase in customer dollars invested in bonds. Customers invested $22.6 billion in fixed income products in 2002 compared to $19.7 billion in 2001. Revenue from government bonds increased 75% ($25.0 million), municipal bonds increased 12% ($17.9 million), while corporate bonds decreased 14% ($14.8 million). Net fee revenue increased 4% ($31.1 million) during 2002. Excluding an $8.2 million investment gain from the sale of the Partnership's London Stock Exchange and Toronto Stock Exchange holdings, net fee revenue increased 3% ($22.9 million). Asset fees increased 3% ($12.9 million). Within asset fees, service fees decreased 1% ($2.4 million) due to the impact of market conditions on the value of customer assets. Average customer mutual fund and insurance assets were $114.6 billion in 2002 compared to $115.0 billion 2001. Fees from revenue sharing agreements with mutual funds and insurance companies increased 20% ($12.6 million). Account, activity and other fees increased 23% ($42.0 million) during 2002. Revenue received from money market and sub-transfer agent services increased 26% ($25.2 million). The number of retirement accounts increased, resulting in custodial fee revenue growth of 26% ($10.1 million). Net interest and dividend income decreased 28% ($32.0 million) during 2002 due primarily to the impact of lower interest rates charged on customers' margin loans, and to a shift in source of funds borrowed. Interest income from customer loans outstanding decreased 27% ($39.8 million). The average rate earned on customer loan balances decreased to approximately 5.62% in 2002 from approximately 7.70% in 2001. Average customer margin loan balances increased 2% to $1.911 billion in 2002. Interest expense from bank loans decreased 82% ($10.6 million), due to lower bank loans outstanding and lower interest rates. Average bank loans decreased 65% to $102.7 million in 2002. Partially offsetting the decrease in bank loan interest was a $7.8 million increase in subordinated debt interest due to issuance of $250 million subordinated debt in June 2002. Operating expenses increased 7% ($137.4 million) during 2002. Compensation and benefits costs increased 7% ($85.1 million). Within compensation and benefits costs, sales compensation increased 6% ($43.9 million) due to increased revenue, and payroll expense increased 15% ($54.7 million) due to existing personnel and additional support at both the headquarters and in the branches as the firm grows its sales force. On a full time equivalent basis, the Partnership had 3,938 headquarters associates and 9,177 branch staff associates as of December 31, 2002, compared to 3,748 headquarters associates and 8,321 branch staff associates as of December 31, 2001. Variable compensation, including bonuses and profit sharing paid to IRs, branch office assistants and headquarters associates, which expands and 21 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contracts in relation to revenues, net income and the firm's profit margin, decreased 14% ($12.2 million) due to the decrease in the Partnership's net income and profit margin. Communications and data processing expenses increased 13% ($29.5 million) in 2002. Occupancy and equipment expenses increased 3% ($7.2 million). Underlying the increased expenses is the opening in November 2001 of the Partnership's Southwest campus in Tempe, Arizona, which contains a second data center. Additionally, the Partnership added facilities in Tempe for branch training and in St. Louis for headquarters support. Payroll and other taxes increased 11% ($8.4 million) due to growth in the sales force, headquarters associates and branch staff. LIQUIDITY AND CAPITAL RESOURCES The Partnership's equity capital at December 31, 2003, excluding the reserve for anticipated withdrawals, was $727.3 million, compared to $681.4 million at December 31, 2002. Equity capital has increased primarily due to the retention of General Partner earnings ($43.4 million) and the issuance, net of redemptions, of Subordinated Limited Partner interests ($8.6 million), offset by redemption of Limited Partner interests ($6.2 million). At December 31, 2003, the Partnership had $188.0 million in cash and cash equivalents. Lines of credit are in place aggregating $1.16 billion ($1.11 billion of which is through uncommitted lines of credit). Actual borrowing availability is based on securities owned and customers' margin securities which serve as collateral for the loans. No amounts were outstanding under these lines at December 31, 2003. The Association had loans from The Federal Home Loan Bank of $23.7 million as of December 31, 2003, which are secured by mortgage loans. The Partnership also participates in securities loaned transactions, under which it receives collateral in the form of cash or other collateral in an amount in excess of the market value of securities loaned. Securities loaned outstanding were $10.0 million at December 31, 2003, for which the Partnership received cash collateral. The Partnership believes that the liquidity provided by existing cash balances, other highly liquid assets, and borrowing arrangements will be sufficient to meet the Partnership's capital and liquidity requirements. Depending on conditions in the capital markets and other factors, the Partnership will, from time to time, consider the issuance of debt, the proceeds of which could be used to meet growth needs or for other purposes. The Partnership's growth in recent years has been financed through sales of limited partnership interests to its employees, retention of earnings, private placements of subordinated debt, long-term secured debt and operating leases under which the firm rents facilities, furniture, fixtures, computers and communication equipment. During June 2002, the Partnership privately placed $250 million of subordinated debt with institutional investors. The debt bears interest at 7.33% and has an average maturity of ten years, with annual payments of $50 million per year commencing in year eight. The proceeds of the placement were used for general partnership purposes. During the second quarter of 2003, the Partnership purchased two buildings for $60.4 million, one in Tempe, Arizona and one in St. Louis, Missouri. Both buildings were previously occupied by the Partnership and leased under synthetic operating leases. The purchases were funded from Partnership working capital. The following table summarizes the Partnership's financing commitments and obligations, as of December 31, 2003, excluding customer accounts due on demand. Subsequent to December 31, 2003, these commitments and obligations could fluctuate based on the changing business environment. 22 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Payments Due by Period ---------------------- Total 2004 2005 2006 2007 2008 Thereafter ----------------------------------------------------------------------------------- Bank Loans $ 23,656 $ 5,800 $ 2,435 $ 2,975 $ 660 $ 1,000 $ 10,786 Securities loaned 9,953 9,953 - - - - - Long-term debt 39,691 7,857 8,080 9,321 3,582 1,759 9,092 Liabilities subordinated to - claims of general creditors 408,150 20,725 43,225 45,700 23,200 14,200 261,100 Rental commitments 381,896 118,020 58,644 40,963 27,693 17,652 118,924 - --------------------------------------------------------------------------------------------------------------------- Total financing commitments and obligations $ 863,346 $ 162,355 $ 112,384 $ 98,959 $ 55,135 $ 34,611 $ 399,902 =================================================================================== For the year ended December 31, 2003, cash and cash equivalents increased $12.0 million. Cash provided by operating activities was $291.7 million. The primary sources of cash from operating activities include net income adjusted for depreciation, a decrease in inventory levels, an increase in accrued compensation and employee benefits, and an increase in customer credit balances. Cash used in investing activities was $121.3 million consisting primarily of capital expenditures attributable to the Partnership's expansion of its headquarters and branch facilities required as the Partnership grows its sales force, including $60.4 million paid for two headquarter buildings previously leased under synthetic operating leases. Cash used in financing activities was $158.4 million, consisting primarily of partnership withdrawals ($130.4 million) and repayment of subordinated debt ($20.7 million). For the year ended December 31, 2002, cash and cash equivalents decreased $20.6 million. Cash used in operating activities was $52.1 million. Cash used for operating activities includes lower securities loaned and higher inventory as of December 31, 2002. Securities loaned decreased $122.1 million due to a shift in borrowing to subordinated debt. Securities owned, net, increased $100.3 million year over year. The primary source of cash from operating activities is net income of $148.9 million. Cash used in investing activities was $81.1 million consisting primarily of capital expenditures ($89.4 million) attributable to the Partnership's expansion of its headquarters and branch facilities required as the Partnership grows its sales force. Cash provided by financing activities was $112.7 million, consisting primarily of the issuance of subordinated debt ($250.0 million) partially offset by Partnership withdrawals ($122.0 million). As a result of its activities as a broker-dealer, EDJ, the Partnership's principal subsidiary, is subject to the Net Capital provisions of Rule 15c3-1 of the Securities Exchange Act of 1934 and the capital rules of the NYSE. Under the alternative method permitted by the rules, EDJ must maintain minimum Net Capital, as defined, equal to the greater of $250 or 2% of aggregate debit items arising from customer transactions. The Net Capital rule also provides that partnership capital may not be withdrawn if resulting Net Capital would be less than 5% of aggregate debit items. Additionally, certain withdrawals require the consent of the SEC to the extent they exceed defined levels even though such withdrawals would not cause Net Capital to be less than 5% of aggregate debit items. At December 31, 2003, EDJ's Net Capital of $579.0 million was 27.8% of aggregate debit items and its Net Capital in excess of the minimum required was $537.3 million. Net Capital as a percentage of aggregate debits after anticipated withdrawals was 27.3%. Net Capital and the related capital percentage may fluctuate on a daily basis. CRITICAL ACCOUNTING POLICIES The Partnership's financial statements are prepared in accordance with accounting principles generally 23 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS accepted in the United States of America, which may require judgement and involve estimation processes to determine its assets, liabilities, revenues and expenses which affect its results of operations. The Partnership believes that of its significant accounting policies, the following critical policies may involve a higher degree of judgement and complexity. Customers' transactions are recorded on a settlement date basis with the related revenue and expenses recorded on a trade date basis. The Partnership may be exposed to risk of loss in the event customers, other brokers and dealers, banks, depositories or clearing organizations are unable to fulfill contractual obligations. For transactions in which it extends credit to customers, the Partnership seeks to control the risks associated with these activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. Securities owned and sold, not yet purchased, including inventory securities and investment securities, are valued at market value which is determined by using quoted market or dealer prices. The following significant accounting policies require estimates that involve a higher degree of judgement and complexity. The Partnership provides for potential losses that may arise out of litigation, regulatory proceedings and other contingencies to the extent that such losses can be estimated, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies." See Item 3 - Legal Proceedings, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Mutual Fund Matters and Note 16 to the consolidated financial statements for further discussion of these items. The Partnership regularly monitors its exposures for potential losses. The Partnership's total liability with respect to litigation represents the best estimate of probable losses after considering, among other factors, the progress of each case, the Partnership's experience and the opinions and views of legal counsel. The Association's periodic evaluation of the adequacy of its allowance for loan losses is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current economic conditions. The Partnership's periodic evaluation of the estimated useful lives of equipment, property and improvements is based on the original life determined at the time of purchase and any events or changes in circumstances that would result in a change in the useful life. Included in management's discussion and analysis of financial condition and results of operations, and in the quantitative and qualitative disclosures about market risk, and in the notes to the financial statements (See Note 1 to the consolidated financial statements), are additional discussions of the Partnership's accounting policies. THE EFFECTS OF INFLATION The Partnership's net assets are primarily monetary, consisting of cash, securities inventories and receivables less liabilities. Monetary net assets are primarily liquid in nature and would not be 24 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS significantly affected by inflation. Inflation and future expectations of inflation influence securities prices, as well as activity levels in the securities markets. As a result, profitability and capital may be impacted by inflation and inflationary expectations. Additionally, inflation's impact on the Partnership's operating expenses may affect profitability to the extent that additional costs are not recoverable through increased prices of services offered by the Partnership. NEW ACCOUNTING STANDARDS In May 2003, the Financial Accounting Standard Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are applicable to the Partnership's financial statements effective for the quarter ended March 26, 2004. Under the provisions of SFAS No. 150, the obligation to redeem a partner's capital in the event a partner dies is one of the Statement's criteria requiring equity capital to be classified as a liability. Since the Partnership is obligated to redeem a partner's capital upon a partner's death, the Statement will require all of the Partnership's equity capital to be classified as a liability. The classification of all of the Partnership's equity capital as a liability will not alter or modify its treatment as equity capital for any other purposes, including its subordination to the claims of general and subordinated creditors, nor will SFAS No. 150 have any effect on, or change the presentation of, the Partnership's subsidiaries' financial statements. The Partnership intends to adopt SFAS No. 150 as required in fiscal 2004 with no expected significant impact on its consolidated financial condition, results of operations, or cash flows. FORWARD-LOOKING STATEMENTS Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of federal securities laws. Actual results are subject to risks and uncertainties, including both those specific to the Partnership and those specific to the industry which could cause results to differ materially from those contemplated. The risks and uncertainties include, but are not limited to, general economic conditions, actions of competitors, regulatory actions, changes in legislation and technology changes. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. The Partnership does not undertake any obligation to publicly update any forward-looking statements. 25 PART II ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The SEC issued market risk disclosure requirements to enhance disclosures of accounting policies for derivatives and other financial instruments and to provide quantitative and qualitative disclosures about market risk inherent in derivatives and other financial instruments. Various levels of management within the Partnership manage the firm's risk exposure. Position limits in trading and inventory accounts are established and monitored on an ongoing basis. Credit risk related to various financing activities is reduced by the industry practice of obtaining and maintaining collateral. The Partnership monitors its exposure to counterparty risk through the use of credit exposure information, the monitoring of collateral values and the establishment of credit limits. The Partnership is exposed to market risk from changes in interest rates. Such changes in interest rates impact the income from interest earning assets, primarily receivables from customers on margin balances, and may have an impact on the expense from liabilities that finance these assets. At December 31, 2003, amounts receivable from customers were $2.135 billion. Liabilities include amounts payable to customers and other interest and non-interest bearing liabilities. The Partnership performed an analysis of its financial instruments and assessed the related interest rate risk and materiality in accordance with the rules. Under current market conditions and based on current levels of interest earning assets and the liabilities that finance these assets, the Partnership estimates that a 100 basis point increase in interest rates could increase its annual net interest income by approximately $15.4 million. Conversely, the Partnership estimates that a 100 basis point decrease in interest rates could decrease the Partnership's annual net interest income by up to $24.0 million. A decrease in interest rates has a more significant impact on net interest income because under the current low interest rate environment the Partnership's interest bearing liabilities are less sensitive compared to its interest earning assets. Based on its analysis, in the opinion of management, the risk associated with the Partnership's financial instruments at December 31, 2003 will not have a material adverse effect on the consolidated financial position or results of operations of the Partnership. 26 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Statements Included in this Item Page No. Report of Independent Auditors .................................. 28 Consolidated Statements of Financial Condition as of December 31, 2003 and 2002 ...................................... 29 Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001 ................................ 31 Consolidated Statements of Changes in Partnership Capital for the years ended December 31, 2003, 2002 and 2001............. 32 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001................................. 33 Notes to Consolidated Financial Statements....................... 34 27 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS To The Jones Financial Companies, L.L.L.P. In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, of changes in partnership capital, and of cash flows present fairly, in all material respects, the consolidated financial position of The Jones Financial Companies, L.L.L.P. and subsidiaries (the "Partnership") at December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The consolidated financial statements of the Partnership for the year ended December 31, 2001 were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those statements in their report dated February 22, 2002. PricewaterhouseCoopers LLP St. Louis, Missouri March 19, 2004 28 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA THE JONES FINANCIAL COMPANIES, L.L.L.P. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ASSETS December 31, December 31, (Dollars in thousands) 2003 2002 - ---------------------------------------------------------------------------------- Cash and cash equivalents $ 187,980 $ 175,953 Securities purchased under agreements to resell 290,000 65,000 Receivable from: Customers 2,134,655 1,909,376 Brokers, dealers and clearing organizations 155,083 99,848 Mortgages and loans 126,060 112,959 Securities owned, at market value Inventory securities 115,775 204,970 Investment securities 145,238 175,249 Equipment, property and improvements, at cost, net of accumulated depreciation 330,626 298,129 Other assets 237,742 216,761 ------------- ------------- TOTAL ASSETS $ 3,723,159 $ 3,258,245 ============= ============= The accompanying notes are an integral part of these consolidated financial statements. 29 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA THE JONES FINANCIAL COMPANIES, L.L.L.P. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION LIABILITIES AND PARTNERSHIP CAPITAL December 31, December 31, (Dollars in thousands) 2003 2002 - ---------------------------------------------------------------------------------- Bank loans $ 23,656 $ 13,828 Payable to: Customers 1,924,882 1,622,595 Brokers, dealers and clearing organizations 33,598 20,334 Depositors 107,988 109,724 Securities loaned 9,953 10,149 Securities sold, not yet purchased, at market value 20,318 15,536 Accounts payable and accrued expenses 120,908 120,846 Accrued compensation and employee benefits 248,729 157,050 Long-term debt 39,691 49,363 ------------- ------------- 2,529,723 2,119,425 ------------- ------------- Liabilities subordinated to claims of general creditors 408,150 428,875 ------------- ------------- Commitments and contingencies (Note 15 and Note 16) - - Partnership capital net of reserve for anticipated withdrawals: Limited partners 222,500 228,666 Subordinated limited partners 103,938 95,299 General partners 400,842 357,406 ------------- ------------- 727,280 681,371 Reserve for anticipated withdrawals 58,006 28,574 ------------- ------------- TOTAL PARTNERSHIP CAPITAL 785,286 709,945 ------------- ------------- TOTAL LIABILITIES AND PARTNERSHIP CAPITAL $ 3,723,159 $ 3,258,245 ============= ============= The accompanying notes are an integral part of these consolidated financial statements. 30 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA THE JONES FINANCIAL COMPANIES, L.L.L.P. CONSOLIDATED STATEMENTS OF INCOME Years Ended --------------------------------------------------------- (Dollars in thousands, December 31, December 31, December 31, except per unit information) 2003 2002 2001 - -------------------------------------------------------------------------------------------------------- Revenue: Commissions $ 1,578,822 $ 1,310,577 $ 1,253,862 Principal transactions 350,662 403,329 370,327 Investment banking 43,817 41,055 24,676 Interest and dividends 132,114 137,579 181,032 Gain on investments - 8,186 - Other 433,447 379,356 324,490 ------------- ------------- ------------- Total revenue 2,538,862 2,280,082 2,154,387 Interest expense 58,313 56,009 67,472 ------------- ------------- ------------- Net revenue 2,480,549 2,224,073 2,086,915 ------------- ------------- ------------- Operating expenses: Compensation and benefits 1,454,400 1,285,284 1,200,225 Communications and data processing 262,884 262,751 233,224 Occupancy and equipment 237,509 218,538 211,387 Payroll and other taxes 91,537 82,518 74,105 Floor brokerage and clearance fees 13,958 13,993 14,376 Advertising 41,438 43,971 43,650 Other operating expenses 175,513 168,103 160,762 ------------- ------------- ------------- Total operating expenses 2,277,239 2,075,158 1,937,729 ------------- ------------- ------------- Net income $ 203,310 $ 148,915 $ 149,186 ============= ============= ============= Net income allocated to: Limited partners $ 24,252 $ 20,196 $ 22,935 Subordinated limited partners 21,680 15,889 14,949 General partners 157,378 112,830 111,302 ------------- ------------- ------------- $ 203,310 $ 148,915 $ 149,186 ============= ============= ============= Net income per weighted average $1,000 equivalent partnership unit outstanding: Limited partners $ 108.08 $ 87.44 $ 96.89 ============= ============= ============= Subordinated limited partners $ 208.90 $ 167.16 $ 181.70 ============= ============= ============= Weighted average $1,000 equivalent parnership units outstanding: Limited partners 224,389 230,970 236,696 ============= ============= ============= Subordinated limited partners 103,782 95,053 82,273 ============= ============= ============= The accompanying notes are an integral part of these consolidated financial statements. 31 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA THE JONES FINANCIAL COMPANIES, L.L.L.P. CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 Subordinated Limited Limited General Partnership Partnership Partnership (Dollars in thousands) Capital Capital Capital Total - -------------------------------------------------------------------------------------------------------------------- TOTAL PARTNERSHIP CAPITAL $ 260,717 $ 76,203 $ 318,561 $ 655,481 Reserve for anticipated withdrawals (20,573) (5,798) (26,020) (52,391) ----------- ----------- ----------- ----------- Parnership capital net of reserve for anticipated withdrawals, December 31, 2000 240,144 70,405 292,541 603,090 Issuance of partnership interests - 12,450 - 12,450 Redemption of partnership interests (6,916) (400) - (7,316) Net Income 22,935 14,949 111,302 149,186 Withdrawals and distributions (8,445) (10,750) (63,499) (82,694) ----------- ----------- ----------- ----------- TOTAL PARTNERSHIP CAPITAL 247,718 86,654 340,344 674,716 Reserve for anticipated withdrawals (14,490) (4,199) (17,083) (35,772) ----------- ----------- ----------- ----------- Partnership capital net of reserve for anticipated withdrawals, December 31, 2001 233,228 82,455 323,261 638,944 Issuance of partnership interests - 13,709 - 13,709 Redemption of partnership interests (4,562) (865) - (5,427) Net Income 20,196 15,889 112,830 148,915 Withdrawals and distributions (9,023) (12,766) (64,407) (86,196) ----------- ----------- ----------- ----------- TOTAL PARTNERSHIP CAPITAL 239,839 98,422 371,684 709,945 Reserve for anticipated withdrawals (11,173) (3,123) (14,278) (28,574) ----------- ----------- ----------- ----------- Partnership capital net of reserve for anticipated withdrawals, December 31, 2002 228,666 95,299 357,406 681,371 Issuance of partnership interests - 9,829 - 9,829 Redemption of partnership interests (6,166) (1,190) - (7,356) Net Income 24,252 21,680 157,378 203,310 Withdrawals and distributions (8,907) (13,212) (79,749) (101,868) ----------- ----------- ----------- ----------- TOTAL PARTNERSHIP CAPITAL 237,845 112,406 435,035 785,286 Reserve for anticipated withdrawals (15,345) (8,468) (34,193) (58,006) ----------- ----------- ----------- ----------- Partnership capital net of reserve for anticipated withdrawals, December 31, 2003 $ 222,500 $ 103,938 $ 400,842 $ 727,280 Included in Total Partnership Capital as of December 31, 2003, 2002, and 2001 is a Reserve for Anticipated Withdrawals, which the Partnership distributed to its General and Limited Partners subsequent to year end. The accompanying notes are an integral part of these consolidated financial statements. 32 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA THE JONES FINANCIAL COMPANIES, L.L.L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended ------------------------------------------ Dec. 31, Dec. 31, Dec. 31, (Dollars in thousands) 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 203,310 $ 148,915 $ 149,186 Adjustments to reconcile net income to net cash provided by/(used in) operating activities - Depreciation and amortization 88,785 89,295 77,237 Gain on sales of investments - (8,186) - Changes in assets and liabilities: Securities purchased under agreements to resell (225,000) 15,000 (80,000) Net receivable from customers 77,008 (8,486) 348,086 Net receivable from brokers, dealers and clearing organizations (41,971) (41,416) 20,260 Receivable from mortgages and loans (13,101) (12,177) (1,836) Securities owned, net 123,988 (100,343) 39,597 Other assets (20,981) 5,514 13,351 Bank loans 9,828 149 (204,635) Securities sold under agreements to repurchase - - (24,969) Payable to depositors (1,736) 5,774 16,400 Securities loaned (196) (122,082) (8,365) Accounts payable and accrued expenses 62 (712) (4,561) Accrued compensation and employee benefits 91,679 (23,372) (52,571) ----------- ----------- ----------- Net cash provided by/(used in) operating activities 291,675 (52,127) 287,180 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment, property and improvements, net (121,282) (89,352) (127,019) Proceeds from sales of investments - 8,257 - ----------- ----------- ----------- Net cash used in investing activities (121,282) (81,095) (127,019) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of long-term debt - 13,100 25,000 Repayment of long-term debt (9,672) (10,022) (8,333) Issuance of subordinated liabilities - 250,000 - Repayment of subordinated liabilities (20,725) (26,725) (26,725) Issuance of partnership interests 9,829 13,709 12,450 Redemption of partnership interests (7,356) (5,427) (7,316) Withdrawals and distributions from partnership capital (130,442) (121,968) (135,085) ----------- ----------- ----------- Net cash (used in)/provided by financing activities (158,366) 112,667 (140,009) ----------- ----------- ----------- Net increase/(decrease) in cash and cash equivalents 12,027 (20,555) 20,152 CASH AND CASH EQUIVALENTS, Beginning of year 175,953 196,508 176,356 End of year $ 187,980 $ 175,953 $ 196,508 =========== =========== =========== Cash paid for interest $ 58,813 $ 60,201 $ 67,523 The accompanying notes are an integral part of these consolidated financial statements. 33 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA THE JONES FINANCIAL COMPANIES, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per unit information) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE PARTNERSHIP'S BUSINESS AND BASIS OF ACCOUNTING. The accompanying consolidated financial statements include the accounts of The Jones Financial Companies, L.L.L.P. and all wholly owned subsidiaries (collectively, the "Partnership"). All material intercompany balances and transactions have been eliminated in consolidation. Investments in nonconsolidated companies which are at least 20% owned are accounted for under the equity method. The Partnership's principal operating subsidiary, Edward D. Jones & Co., L.P. ("EDJ"), comprises three registered broker-dealers primarily serving individual investors. EDJ derives its revenues from the sale of listed and unlisted securities and insurance products, investment banking and principal transactions and as a distributor of mutual fund shares. EDJ conducts business throughout the United States of America, Canada and the United Kingdom with its customers, various brokers, dealers, clearing organizations, depositories and banks. Boone National Savings and Loan Association, F.A. (the "Association"), a wholly owned subsidiary of the Partnership, makes commercial, real estate, and other loans primarily to customers in Central Missouri. Additionally, the Association offers trust services to EDJ customers through its division, the Edward Jones Trust Co. The financial statements have been prepared under the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America which requires the use of certain estimates by management in determining the Partnership's assets, liabilities, revenues and expenses. Actual results could differ from these estimates. Substantially all of the Partnership's short-term financial assets and liabilities are carried at fair value or contracted amounts which approximate fair value. Assets which are recorded at contracted amounts approximating fair value consist largely of short-term receivables. TRANSACTION RISK. The Partnership's securities activities involve execution, settlement and financing of various securities transactions for customers. The Partnership may be exposed to risk of loss in the event customers, other brokers and dealers, banks, depositories or clearing organizations are unable to fulfill contractual obligations. For transactions in which it extends credit to customers, the Partnership seeks to control the risks associated with these activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. REVENUE RECOGNITION. Customers' transactions are recorded on a settlement date basis and the related commissions, principal transactions and investment banking revenues are recorded on a trade date basis. All other forms of revenue are recorded on an accrual basis. CASH AND CASH EQUIVALENTS. The Partnership considers all highly liquid investments, including money market securities, with original maturities of three months or less to be cash equivalents. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. The Partnership participates in short-term resale agreements and repurchase agreements collateralized by U.S. government and agency securities. The market value of the underlying collateral as determined daily, plus accrued interest thereon, must equal or exceed 102% of the carrying amount of the 34 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA transaction. It is the Partnership's policy to have such underlying resale agreement collateral deposited in its accounts at its custodian banks. Repurchase transactions require the Partnership to deposit collateral with the lender. Resale and repurchase agreements are carried at the amount at which the securities will be subsequently resold/repurchased as specified in the agreements. SECURITIES-LENDING ACTIVITIES. Securities borrowed and securities loaned transactions are reported as collateralized financings. Securities borrowed transactions require the Partnership to deposit cash or other collateral with the lender. In securities loaned transactions, the Partnership receives collateral in the form of cash or other collateral. Collateral for both securities borrowed and securities loaned is based on 102% of the market value of the underlying securities loaned. The Partnership monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral being obtained or refunded as necessary. COLLATERAL. The Partnership reports as assets collateral it has pledged in secured borrowings and other arrangements when the secured party cannot sell or repledge the assets or the Partnership can substitute collateral or otherwise redeem it on short notice. The Partnership does not report as an asset collateral it has received in secured lending and other arrangements when the debtor has the right to redeem or substitute the collateral on short notice. SECURITIES OWNED AND SOLD, NOT YET PURCHASED. Securities owned and sold, not yet purchased, including inventory securities and investment securities, are valued at market value which is determined by using quoted market or dealer prices. EQUIPMENT, PROPERTY AND IMPROVEMENTS. Equipment, including furniture and fixtures, is recorded at cost and depreciated using straight-line and accelerated methods over estimated useful lives of two to twelve years. Buildings are depreciated using the straight-line method over their useful lives, which are estimated at thirty years. Property improvements are amortized based on the remaining life of the property or economic useful life of the improvement, whichever is less. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts. The cost of maintenance and repairs is charged against income as incurred, whereas significant enhancements are capitalized. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be fully recoverable. If impairment is indicated, the asset value is written down to its fair market value. SEGREGATED CASH. Cash of $51 and $53, respectively, was segregated in a special reserve bank account for the benefit of customers, and is included in Cash and Cash Equivalents as of December 31, 2003 and 2002 under rule 15c3-3 of the Securities and Exchange Commission ("SEC"). INCOME TAXES. Income taxes have not been provided for in the consolidated financial statements since The Jones Financial Companies, L.L.L.P. is organized as a partnership and each partner is liable for their own tax payments. NEW ACCOUNTING STANDARDS. In May 2003, The Financial Accounting Standard Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are applicable to the Partnership's financial statements effective for the quarter ended March 26, 2004. Under the provisions of SFAS No. 150, the obligation to redeem a partner's capital in the event a partner dies is one of the Statement's criteria requiring equity capital to be classified as a liability. Since the Partnership is obligated to redeem a partner's capital upon a partner's death, the classification of all of the Partnership's equity capital as a liability will not alter or modify its treatment as equity capital for any other purposes, 35 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA including its subordination to the claims of general and subordinated creditors, nor will SFAS No. 150 have any effect on, or change the presentation of, the Partnership's subsidiaries' financial statements. The Partnership intends to adopt SFAS No. 150 as required in fiscal 2004 with no expected significant impact on its consolidated financial condition, results of operations, or cash flows. NOTE 2 - RECEIVABLE FROM AND PAYABLE TO CUSTOMERS Accounts receivable from and payable to customers include margin balances and amounts due on cash transactions. The value of securities owned by customers and held as collateral for these receivables is not reflected in the consolidated financial statements. Substantially all amounts payable to customers are subject to withdrawal upon customer request. The Partnership pays interest on certain credit balances in customer accounts. NOTE 3 - RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS The components of receivable from and payable to brokers, dealers and clearing organizations are as follows: 2003 2002 --------- -------- Receivable from clearing organizations $ 131,911 $ 74,805 Securities failed to deliver 9,929 15,601 Dividends receivable 5,653 6,303 Deposits paid for securities borrowed 4,307 1,601 Other 3,283 1,538 --------- -------- Total receivable from brokers, dealers and clearing organizations $ 155,083 $ 99,848 ========= ======== Securities failed to receive $ 23,855 $ 18,067 Other 9,743 2,267 --------- -------- Total payable to brokers, dealers and clearing organizations $ 33,598 $ 20,334 ========= ======== Receivable from clearing organizations represents balances and deposits with clearing organizations and the Partnership's Canadian carrying broker. Securities failed to deliver/receive represent the contract value of securities which have not been received or delivered by settlement date. NOTE 4 - RECEIVABLE FROM MORTGAGES AND LOANS Receivable from mortgages and loans is composed of the Association's primarily adjustable rate mortgage loans, commercial and other loans, net of discounts, deferred origination fees and the allowance for loan losses. The carrying amounts of the receivables approximate their fair values. 36 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTE 5 - SECURITIES OWNED AND SOLD, NOT YET PURCHASED Securities owned and sold, not yet purchased, are summarized as follows (at market value): 2003 2002 ---------------------------- --------------------------- Securities Securities Sold, Sold, Securities not yet Securities not yet Owned Purchased Owned Purchased --------- ---------- ---------- --------- Inventory securities: Certificates of deposit $ 7,487 $ 3,241 $ 3,340 $ 730 U.S. and Canadian government and U.S. agency obligations 13,251 7,319 68,571 2,899 State and municipal obligations 60,605 519 124,299 383 Corporate bonds and notes 22,996 3,995 5,585 9,238 Equities 2,872 5,141 1,545 250 Collateralized mortgage obligations 4,771 - 480 - Other 3,793 103 1,150 2,036 --------- -------- --------- -------- $ 115,775 $ 20,318 $ 204,970 $ 15,536 ========= ======== ========= ======== Investment securities: U.S. government and agency obligations $ 145,238 $ 175,249 ========= ========= The Partnership attempts to reduce its exposure to market price fluctuations of its inventory securities through the sale of U.S. government securities and, to a limited extent, the sale of fixed income futures contracts. The amount of the securities purchased or sold will fluctuate on a daily basis due to changes in inventory securities owned, interest rates and market conditions. The futures contracts are settled daily, and any gain or loss is recognized in principal transactions revenue. The notional amount of futures contracts sold was $12,000 and $10,000 at December 31, 2003 and 2002, respectively. NOTE 6 - EQUIPMENT, PROPERTY AND IMPROVEMENTS Equipment, property and improvements are summarized as follows: 2003 2002 --------- --------- Land $ 12,915 $ 12,915 Buildings and improvements 312,025 238,641 Equipment, furniture and fixtures 588,235 539,038 --------- --------- Total equipment, property and improvements 913,175 790,594 Accumulated depreciation and amortization (582,549) (492,465) --------- --------- Equipment, property and improvements, net $ 330,626 $ 298,129 ========= ========= 37 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Depreciation expense on equipment, property and improvements is included in the consolidated statements of income under Communications and Data Processing and Occupancy and Equipment. During 2003, the Partnership purchased, for a cost of $60,400, two buildings, one in Tempe, Arizona and one in St, Louis, Missouri. Both buildings were previously occupied by the Partnership under operating leases. NOTE 7 - BANK LOANS The Partnership borrows from banks on a short-term basis primarily to finance customer margin balances and inventory securities. As of December 31, 2003, the Partnership had bank lines of credit aggregating $1,160,000 of which $1,110,000 were through uncommitted facilities. Actual borrowing availability is primarily based on the value of securities owned and customers' margin securities. At December 31, 2003, collateral with a market value $1,963,000 was available to support bank loans of EDJ. There were no bank loans outstanding under these lines as of December 31, 2003 or 2002. Additionally, the Association had loans from The Federal Home Loan Bank of $23,656 and $13,828 as of December 31, 2003 and 2002, respectively, which are collateralized by mortgage loans. Bank loans outstanding approximate their fair value. Interest is at a fluctuating rate based on short-term lending rates. During 2003, EDJ had bank loans outstanding for one day of $50,000 at an interest rate of 1.98%. During 2003, the Association's average aggregate short-term bank loans outstanding were $19,000 and the average interest rate was 4.58%. During 2002 and 2001, the average of the aggregate short-term bank loans outstanding was $179,000 and $272,000 and the average interest rate was 2.7% and 4.6%, respectively. NOTE 8 - PAYABLE TO DEPOSITORS Amounts payable to depositors are composed of the Association's various savings instruments offered to its customers, which include transaction accounts and certificates of deposit with maturities ranging from 90 days to 72 months. The carrying amounts of the deposits approximate their fair values. 38 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTE 9 - LONG-TERM DEBT Long-term debt is composed of the following: 2003 2002 -------- ------- Note payable, collateralized by equipment, interest paid quarterly at a variable rate (2.90% at December 31, 2003 and 3.53% at December 31, 2002) based on LIBOR plus applicable margin, due in annual installments of $5,000, with a final installment of $6,000 on September 30, 2006. $ 16,000 $ 21,000 Note payable, collateralized by real estate, fixed rate of 7.28%, principal and interest due in monthly installments, with a final installment on June 1, 2017. 12,335 12,854 Notes payable, collateralized by real estate, fixed rates of either 8.23% or 6.82%, principal and interest due in monthly installments, with a final installment on April 5, 2008. 11,356 13,486 Notes payable, collateralized by real estate, fixed rates of either 8.72% or 6.52%, principal and interest due in monthly installments, with a final installment on June 5, 2003. - 2,023 -------- -------- $ 39,691 $ 49,363 ======== ======== Scheduled annual principal payments, as of December 31, 2003, are as follows: Principal Year Payment ---------- --------- 2004 $ 7,857 2005 8,080 2006 9,321 2007 3,582 2008 1,759 Thereafter 9,092 -------- $ 39,691 ======== The real estate notes payable of $23,691 at December 31, 2003 is collateralized by land and buildings with a cost basis of $70,300 and a carrying value of $46,400 at December 31, 2003. The $16,000 equipment note payable as of December 31, 2003 is collateralized by equipment with a cost basis of $26,300 and a carrying value of $8,400 at December 31, 2003. Certain notes payable agreements contain restrictions that among other things, require maintenance of a fixed charge coverage ratio of 1.0 to 1.0 and minimum net capital of $14,000, as defined in the agreement. The Partnership is in compliance with all 39 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA debt covenants and restrictions as of December 31, 2003 and 2002. The Partnership has estimated the fair value of the long-term debt to be approximately $41,200 and $51,000 as of December 31, 2003 and 2002, respectively. NOTE 10 - LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS Liabilities subordinated to claims of general creditors consist of: 2003 2002 --------- --------- Capital notes, 7.33%, due in annual installments of $50,000 commencing on June 12, 2010, with a final installment on June 12, 2014. $ 250,000 $ 250,000 Capital notes, with rates ranging from 7.51% to 7.79%, due in annual installments ranging from $3,700 to $25,000, commencing on August 15, 2005, with a final installment of $3,700 on August 15, 2011. 75,000 75,000 Capital notes, 8.18%, due in annual installments of $10,500, with a final installment on September 1, 2008. 52,500 63,000 Capital notes, 7.95%, due in annual installments of $10,225, with a final installment of $10,200 on April 15, 2006. 30,650 40,875 --------- --------- $ 408,150 $ 428,875 ========= ========= Required annual principal payments, as of December 31, 2003, are as follows: Principal Year Payment ---------- --------- 2004 $ 20,725 2005 43,225 2006 45,700 2007 23,200 2008 14,200 Thereafter 261,100 --------- $ 408,150 ========= The capital note agreements contain restrictions which, among other things, require maintenance of certain financial ratios, restrict encumbrance of assets and creation of indebtedness and limit the withdrawal of partnership capital. As of December 31, 2003, the Partnership was required, under the note 40 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA agreements, to maintain minimum partnership capital of $400,000 and Net Capital as computed in accordance with the Uniform Net Capital rule of 5% of aggregate debit items, or $104,288 (see Note 12). The subordinated liabilities are subject to cash subordination agreements approved by the New York Stock Exchange, Inc. and, therefore, are included in the Partnership's computation of Net Capital under the SEC's Uniform Net Capital Rule. The Partnership has estimated the fair value of the subordinated capital notes to be approximately $428,800 and $466,000 as of December 31, 2003 and 2002, respectively. NOTE 11 - PARTNERSHIP CAPITAL The limited partnership capital, consisting of 222,500 and 228,666 $1,000 units at December 31, 2003 and 2002, respectively, is held by current and former employees and general partners of the Partnership. Each limited partner receives interest at seven and one-half percent on the principal amount of capital contributed and a varying percentage of the net income of the Partnership. Interest expense includes $16,868, $17,307 and $17,754, for the years ended December 31, 2003, 2002 and 2001, respectively, paid to limited partners on capital contributed. The subordinated limited partnership capital of $103,938 and $95,299 at December 31, 2003 and 2002, respectively, is held by current and former general partners of the Partnership. Each subordinated limited partner receives a varying percentage of the net income of the Partnership. The subordinated limited partner capital is subordinated to the limited partnership capital. Under the Partnership agreement, a withdrawing limited partner's capital is payable in three equal annual installments; a withdrawing subordinated limited partner's or general partner's capital is payable in four equal annual installments. The repayments of withdrawing limited, subordinated limited and general partners' capital commence at their withdrawal dates. The Partnership is obligated to redeem a partner's capital upon a partner's death. NOTE 12 - NET CAPITAL REQUIREMENTS As a result of its activities as a broker-dealer, EDJ is subject to the Net Capital provision of Rule 15c3-1 of the Securities Exchange Act of 1934 and the capital rules of the New York Stock Exchange, Inc. Under the alternative method permitted by the rules, EDJ must maintain minimum Net Capital equal to the greater of $250 or 2% of aggregate debit items arising from customer transactions. The Uniform Net Capital Rule also provides that partnership capital may not be withdrawn if resulting Net Capital would be less than 5% of aggregate debit items. Additionally, certain withdrawals require the consent of the SEC to the extent they exceed defined levels, even though such withdrawals would not cause Net Capital to be less than 5% of aggregate debit items. At December 31, 2003, EDJ's Net Capital of $578,965 was 27.8% of aggregate debit items and its Net Capital in excess of the minimum required was $537,250. Net Capital as a percentage of aggregate debits after anticipated withdrawals was 27.3%. Net Capital and the related capital percentage may fluctuate on a daily basis. At December 31, 2003, the Partnership's foreign broker-dealer subsidiaries were in compliance with regulatory capital requirements in the jurisdictions in which they operate. 41 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTE 13 - OTHER REVENUE / GAIN ON INVESTMENTS During 2003, the Partnership received a business interruption insurance claim of $6,950 pertaining to September 11, 2001, which is included in other revenue. During 2002, the Partnership sold all of the shares it received from its memberships in the London Stock Exchange and Toronto Stock Exchange when they demutualized. The Partnership realized an $8,186 gain on the sale of these shares. NOTE 14 - EMPLOYEE BENEFIT PLANS The Partnership maintains profit sharing plans covering all eligible employees. Contributions to the plans are at the discretion of the Partnership. Additionally, participants may contribute on a voluntary basis. Approximately $47,900, $35,600 and $36,000 were provided by the Partnership for its contributions to the plans for the years ended December 31, 2003, 2002 and 2001, respectively. NOTE 15 - COMMITMENTS The Partnership leases headquarters office space, furniture, computers and communication equipment under various operating leases. Additionally, branch offices are leased generally for terms of three to five years. Rent expense was $183,500, $179,400 and $162,200 for the years ended December 31, 2003, 2002 and 2001, respectively. The Partnership's noncancelable lease commitments greater than one year, as of December 31, 2003, are summarized below: Year ---------- 2004 $118,020 2005 58,644 2006 40,963 2007 27,693 2008 17,652 Thereafter 118,924 -------- $381,896 ======== NOTE 16 - CONTINGENCIES In the normal course of business, the Partnership has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation. Certain of these legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. The Partnership is involved, from time to time, in investigations and proceedings by governmental and self-regulatory agencies, certain of which may result in adverse judgements, fines or penalties. Recently, the number of investigations has increased with a focus on mutual fund issues among many firms in the financial services industry, including the Partnership. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, or actions which are in very preliminary stages, the 42 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Partnership cannot predict with certainty the eventual loss or range of loss related to such matters. The Partnership believes, based on current knowledge and after consultation with counsel, that the outcome of these actions will not have a material adverse effect on the consolidated financial condition of the Partnership, although the outcome could be material to the Partnership's future operating results for a particular period or periods. NOTE 17 - RELATED PARTIES EDJ has a minority partnership interest in the investment advisor to the Edward Jones Money Market Fund (the "Money Market Fund"). The Partnership does not have management responsibility for the advisor. Other than the Money Market Fund, the Partnership does not distribute any other proprietary funds. Approximately 3% of the Partnership's revenues were derived from the advisor and the Money Market Fund during 2003, 2002 and 2001. NOTE 18 - QUARTERLY INFORMATION (Unaudited) Quarters Ended -------------- March 29, June 28, September 27, December 31, --------- -------- ------------- ------------ 2002 Total revenue $ 576,005 $ 617,404 $ 546,923 $ 531,565 Net income 41,629 50,095 31,357 25,834 Net income per weighted average $1,000 equivalent partnership unit outstanding: Limited partners $ 24.46 $ 29.45 $ 18.43 $ 15.10 Subordinated limited partners 48.16 56.53 34.60 27.87 March 28, June 27, September 26, December 31, --------- -------- ------------- ------------ 2003 Total revenue $ 542,661 $ 637,213 $ 652,396 $ 706,592 Net income 24,742 53,918 53,772 70,878 Net income per weighted average $1,000 equivalent partnership unit outstanding: Limited partners $ 13.15 $ 28.67 $ 28.58 $ 37.68 Subordinated limited partners 26.47 56.74 55.11 70.58 43 PART III ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On July 11, 2002, the Partnership dismissed Arthur Andersen LLP ("Arthur Andersen") as its independent accountants. The reports of Arthur Andersen on the financial statements for the two years ended December 31, 2001 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. In connection with its audits for the two years prior to and through July 11, 2002 there were no disagreements with Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Arthur Andersen would have caused them to make reference thereto in their report on the financial statements for such years. Prior to and through July 11, 2002, there were no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)). The Partnership has provided Arthur Andersen a copy of the foregoing disclosure. The Partnership requested that Arthur Andersen furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the foregoing statements as reported in the Partnership's July 11, 2002 Form 8K. The Partnership was notified by Arthur Andersen that they are no longer issuing such acknowledgements. The Partnership engaged PricewaterhouseCoopers LLP ("PwC") as its new independent accountants as of July 11, 2002. Prior to and through July 11, 2002, the Partnership had not consulted with PwC regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Registrant's financial statements, and either a written report was provided to the Partnership or oral advice was provided that PwC concluded was an important factor considered by the Partnership in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K, or a reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K. ITEM 9a. CONTROLS AND PROCEDURES Based upon an evaluation performed as of the end of the period covered by this report, the Partnership's certifying officers, the Chief Executive Officer and the Chief Financial Officer, have concluded that the Partnership's disclosure controls and procedures were effective. There have been no significant changes in internal controls or other factors that significantly affect these controls subsequent to the date of the evaluation. 44 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Jones Financial Companies, L.L.L.P., organized as a partnership, does not have individuals associated with it designated as officers or directors. As of January 30, 2004, the Partnership was composed of 275 general partners, 5,021 limited partners and 146 subordinated limited partners. Under the terms of the Partnership Agreement, Douglas E. Hill is designated Managing Partner and in said capacity has primary responsibility for administering the Partnership's business, determining its policies, controlling the management and conduct of the Partnership's business and has the power to appoint and dismiss general partners of the Partnership and to fix the proportion of their respective interests in the Partnership. Subject to the foregoing, the Partnership is managed by its 275 general partners. Effective January 1, 2004, John W. Bachmann retired as Managing Partner of the Partnership. Also, effective January 1, 2004, Douglas E. Hill assumed the role of Managing Partner. He has been a partner for 29 years. The Executive Committee of the Partnership is composed of Douglas E. Hill, Michael R. Holmes, Rich L. Malone, Steven Novik, Darryl L. Pope and Lawrence R. Sobol. The purpose of the Executive Committee is to provide counsel and advice to the Managing Partner in discharging his functions. Furthermore, in the event the position of Managing Partner is vacant, the Executive Committee shall succeed to all of the powers and duties of the Managing Partner. None of the general partners are appointed for any specific term nor are there any special arrangements or understandings pursuant to their appointment other than as contained in the Partnership Agreement. No general partner is or has been individually, nor in association with any prior business, the subject of any action under any insolvency law or criminal proceeding or has ever been enjoined temporarily or permanently from engaging in any business or business practice. Following is a listing of the names of the Executive Committee, ages, dates of becoming a general partner and area of responsibility for each as of March 9, 2004: Name Age Partner Area of responsibility - ------------------------------------------------------------------------- Douglas E. Hill 59 1974 Managing Partner Michael R. Holmes 45 1996 Human Resources Rich L. Malone 55 1979 Information Systems Steven Novik 54 1983 Finance & Accounting Darryl L. Pope 64 1971 Service Division Lawrence R. Sobol 53 1977 General Counsel - ------------------------------------------------------------------------- Each member of the Executive Committee has been a general partner of the Partnership for more than five preceding years. Rich L. Malone is a director of F5 Networks, Inc., Seattle, Washington. 45 PART III ITEM 11. EXECUTIVE COMPENSATION The following table identifies the compensation of the firm's Managing Partner and the four highest compensated individuals of the Partnership during the three most recent years (including respective shares of profit participation). (1) (2) (3) Net Income Deferred Allocated Compen- to General Total Year Salaries sation Partners (1)(2)(3) - ------------------------------------------------------------------------------------------------------------- John W. Bachmann* 2003 $225,000 $7,160 $1,447,872 $1,680,032 2002 206,250 5,620 1,043,042 1,254,912 2001 200,000 5,202 1,449,260 1,654,462 Douglas E. Hill 2003 200,000 7,160 4,287,876 4,495,036 2002 181,250 5,620 3,119,026 3,305,896 2001 175,000 5,202 3,097,686 3,277,888 Rich L. Malone 2003 175,000 7,160 4,192,168 4,374,328 2002 163,750 5,620 3,012,976 3,182,346 2001 160,000 5,202 2,995,288 3,160,490 Gary D. Reamey 2003 150,000 7,160 4,054,043 4,211,203 2002 138,750 5,620 2,998,277 3,142,647 2001 135,000 5,202 2,969,546 3,109,748 James D. Weddle 2003 175,000 7,160 3,897,020 4,079,180 2002 163,750 5,620 2,795,363 2,964,733 2001 160,000 5,202 2,764,750 2,929,952 ============================================================================================================= <FN> * Effective January 1, 2004, retired as Managing Partner. (1) Each non-selling general partner receives a salary generally ranging from $90,000 - $225,000 annually. Selling general partners do not receive a specified salary, rather, they receive the net sales commissions earned by them (none of the five individuals listed above earned any such commissions). Additionally, general partners who are principally engaged in sales are entitled to office bonuses based on the profitability of their respective branch office, on the same basis as the office bonus program established for all investment representative employees. (2) Each general partner is a participant in the Partnership's profit sharing plan which covers all eligible employees. Contributions to the plan, which are within the discretion of the Partnership, are made annually and have historically been determined based on approximately twenty-four percent of the Partnership's net income. Allocation of the Partnership's contribution among participants is determined by each participant's relative level of eligible earnings, including in the case of general partners, their net income participation. 46 PART III ITEM 11. EXECUTIVE COMPENSATION (3) Each general partner is entitled to participate in the annual net income of the Partnership based upon the respective percentage interest in the Partnership of each partner. Interests in the Partnership held by each general partner ranged from 0.03% to 3.0% in 2003, 0.03% to 3.1% in 2002, and 0.03% to 3.1% in 2001. At the discretion of the Managing Partner, the partnership agreement provides that, generally, the first eight percent of net income allocable to general partners be distributed on the basis of individual merit or otherwise as determined by the Managing Partner. Thereafter, the remaining net income allocable to general partners is distributed based upon each individual's percentage interest in the Partnership. Net income allocated to general partners excludes income required to be reinvested under the Partnership Agreement. Net income allocable to general partners is the amount remaining after payment of interest and earnings on capital invested to limited partners and subordinated limited partners. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Being organized as a limited partnership, management is vested in the general partners thereof and there are no other outstanding "voting" or "equity" securities. It is the opinion of the Partnership that the general partnership interests are not securities within the meaning of federal and state securities laws primarily because each of the general partners participates in the management and conduct of the business. In connection with outstanding limited and subordinated limited partnership interests (non-voting securities), 219 of the general partners also own limited partnership interests and 52 of the general partners also own subordinated limited partnership interests, as noted in the table below. As of January 30, 2004: Name of Amount of Beneficial Beneficial % of Title of Class Owner Ownership Class - -------------------------------------------------------------------------------------------- Limited Partnership All General Interests Partners as a Group $26,788,000 12% Subordinated All General Limited Partnership Partners as Interests a Group $45,933,927 40% - -------------------------------------------------------------------------------------------- 47 PART III ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In the ordinary course of its business the Partnership has extended credit to certain of its partners and employees in connection with their purchase of securities. Such extensions of credit have been made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with non-affiliated persons, and did not involve more than the normal risk of collectability or present other unfavorable features. The Partnership also, from time to time and in the ordinary course of business, enters into transactions involving the purchase or sale of securities from or to partners or employees and members of their immediate families, as principal. Such purchases and sales of securities on a principal basis are effected on substantially the same terms as similar transactions with unaffiliated third parties. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The following table presents fees paid by the Partnership to its auditors, PricewaterhouseCoopers LLP. (Dollars in thousands) 2003 2002 ------- ------- Fees paid by the Partnership: Audit fees $ 897 $ 859 Audit-related fees (1) 375 234 Tax fees (2) 488 520 All other (3) 133 196 ------- ------- Total fees $ 1,893 $ 1,809 ======= ======= <FN> (1) Audit-related fees consist primarily of fees for internal control reviews, attestation/agreed-upon procedures, employee benefit plan audits, and consultations concerning financial accounting and reporting standards. (2) Tax fees consist of fees for tax compliance, consultation on tax matters, and other tax planning and advice. (3) All other fees consist primarily of information technology advisory services. The audit committee pre-approved all audit and non-audit related services in fiscal year 2003. No services were provided under the deminimis fee exception to the audit committee pre-approval requirements. 48 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Page No. INDEX (a) (1) The following financial statements are included in Part II, Item 8: Report of Independent Auditors.......................................28 Consolidated Statements of Financial Condition as of December 31, 2003 and 2002...........................................29 Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001.....................................31 Consolidated Statements of Changes in Partnership Capital for the years ended December 31, 2003, 2002 and 2001.................32 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001.....................................33 Notes to Consolidated Financial Statements ..........................34 (2) The following financial statements are included in Schedule I: Parent Company Only Condensed Statements of Financial Condition as of December 31, 2003 and 2002........................................57 Parent Company Only Condensed Statements of Income for the years ended December 31, 2003, 2002 and 2001...............................58 Parent Company Only Condensed Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001.........................59 Report of Independent Auditors.......................................60 Schedules are omitted because they are not required, inapplicable, or the information is otherwise shown in the consolidated financial statements or notes thereto. (b) Report on Form 8-K No reports on Form 8-K were filed in the fourth quarter of 2003. (c) Exhibits Reference is made to the Exhibit Index hereinafter contained. 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: (Registrant) THE JONES FINANCIAL COMPANIES, L.L.L.P. ---------------------------------------- By (Signature and Title) /s/ Douglas E. Hill ---------------------------------------- Douglas E. Hill, Chief Executive Officer Date March 19, 2004 ---------------------------------------- By (Signature and Title) /s/ Steven Novik ---------------------------------------- Steven Novik, Chief Financial Officer Date March 19, 2004 ---------------------------------------- SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. There have been no annual reports sent to security holders covering the registrant's last fiscal year nor have there been any proxy statements, form of proxy or other proxy soliciting material sent to any of registrant's security holders. 50 CHIEF EXECUTIVE OFFICER CERTIFICATION I, Douglas E. Hill, certify that: 1. I have reviewed this annual report on Form 10-K of The Jones Financial Companies, L.L.L.P. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report. 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Partnership as of, and for, the periods presented in this annual report. 4. The Partnership's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Partnership and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Partnership, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the Partnership's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the Partnership's internal control over financial reporting that occurred during the Partnership's fourth quarter that has materially affected, or is reasonable likely to materially affect, the Partnership's internal control over financial reporting; and 5. The Partnership's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Partnership's auditors and the Executive Committee: a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Partnership's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other associates who have a significant role in the Partnership's internal control over financial reporting. /s/ Douglas E. Hill --------------------------------------- Chief Executive Officer The Jones Financial Companies, L.L.L.P. March 19, 2004 51 CHIEF FINANCIAL OFFICER CERTIFICATION I, Steven Novik, certify that: 1. I have reviewed this annual report on Form 10-K of The Jones Financial Companies, L.L.L.P. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report. 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Partnership as of, and for, the periods presented in this annual report. 4. The Partnership's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Partnership and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Partnership, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the Partnership's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the Partnership's internal control over financial reporting that occurred during the Partnership's fourth quarter that has materially affected, or is reasonable likely to materially affect, the Partnership's internal control over financial reporting; and 5. The Partnership's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Partnership's auditors and the Executive Committee: a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Partnership's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other associates who have a significant role in the Partnership's internal control over financial reporting. /s/ Steven Novik --------------------------------------- Chief Financial Officer The Jones Financial Companies, L.L.L.P. March 19, 2004 52 EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003 Exhibit Number Page Description 3.1 Fourteenth Amended and Restated Agreement of Registered Limited Liability Limited Partnership of The Jones Financial Companies, L.L.L.P., dated as of January 1, 2004. 3.2 * Form of Limited Partnership Agreement of Edward D. Jones & Co., L.P. 10.1 * Form of Cash Subordination Agreement between the Registrant and Edward D. Jones & Co., incorporated herein by reference to Exhibit 10.1 to the Company's registration statement of Form S-1 (Reg. No. 33-14955). 10.2 * Agreements of Lease between EDJ Leasing Company and Edward D. Jones & Co., L.P., dated August 1, 1991, incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report or Form 10-K for the year ended September 27, 1991. 10.3 * Edward D. Jones & Co., L.P. Note Purchase Agreement dated as of May 8, 1992, incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 26, 1992. 10.4 * Purchase and Sale Agreement by and between EDJ Leasing Co., L.P. and the Resolution Trust Corporation incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.5 * Master Lease Agreement between EDJ Leasing Company and Edward D. Jones & Co., L.P., dated March 9, 1993, and First Amendment to Lease dated March 9, 1994, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1994. 10.6 * Mortgage Note and Amendment to Deed of Trust between EDJ Leasing Co., L.P. and Nationwide Insurance Company dated March 9, 1994, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1994. 10.7 * Mortgage Note; Deed of Trust and Security Agreement; Assignment of Leases, Rents and Profits; and Subordination and Attornment Agreement between EDJ Leasing Co., L.P. and 53 Nationwide Insurance Company dated April 6, 1994, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1994. 10.8 * Note Purchase Agreement by Edward D. Jones & Co., L.P., for $92,000,000 aggregate principal amount of 7.95% subordinated capital notes due April 15, 2006, incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 24, 1994. 10.9 * Master Lease Agreement and Addendum by and between Edward D. Jones & Co., L.P. and General Electric Capital Corporated dated April 21, 1994, incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 24, 1994. 10.10 * Agreement and Plan of Acquisition between The Jones Financial Companies and Boone National Savings and Loan Association, F.A., incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. 10.11 * Mortgage Note; South Second Deed of Trust and Security Agreement between EDJ Leasing Co., L.P. and Nationwide Life Insurance Company dated August 31, 1995, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 29, 1995. 10.12 * Mortgage Note; North Second Deed of Trust and Security Agreement between EDJ Leasing Co., L.P. and Nationwide Life Insurance Company dated August 31, 1995, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 29, 1995. 10.13 * Note Purchase Agreement by Edward D. Jones & Co., L.P. for $94,500,000 aggregate principal amount of 8.18% subordinated capital notes due September 1, 2008, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 27, 1996. 10.14 * Note Purchase Agreement by Edward D. Jones & Co., L.P. for $75,000,000 aggregate principal amount of subordinated capital notes with rates ranging from 7.51% to 7.79% due September 15, 2011, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 24, 1999. 10.15 * Lease between Eckelkamp Office Center South, L.L.C., a Missouri Limited Liability Company, as Landlord and Edward D. Jones & Co., L.P., a Missouri Limited Partnership, as Tenant, 54 dated February 3, 2000, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 10.16 * Master Agreement dated as of November 30, 2000 among Edward D. Jones & Co., L.P., as Lessee, Construction Agent and Guarantor, Atlantic Financial Group, Ltd., (registered to do business in Arizona as AFG Equity, Limited Partnership) as Lessor, Suntrust Bank and Certain Financial Institutions Parties Hereto, as Lenders, and Suntrust Bank as agent, and joined in by The Jones Financial Companies, L.L.L.P., incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 10.17 * Master Lease Agreement dated as of November 30, 2000 between Atlantic Financial Group, Ltd. (registered to do business in Arizona as AFG Equity, Limited Partnership), as Lessor, and Edward D. Jones & Co., L.P., as Lessee, incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 10.18 * Master Lease Agreement between Edward D. Jones & Co., L.P. and Fleet Capital Corporation dated as of August 22, 2001, incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 10.19 * Credit Agreement dated as of August 27, 2001 between EDJ Leasing Co., L.P. and Southtrust Bank, incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 10.20 * Master Lease Agreement between EDJ Leasing Co., L.P. and Edward D. Jones & Co., L.P. dated August 27, 2001, incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 10.21 * Master Agreement dated as of September 18, 2001 among Edward D. Jones & Co., L.P., as Lessee, Construction Agent and Guarantor, Atlantic Financial Group, Ltd., (registered to do business in Missouri as Atlantic Financial Group, L.P.) as Lessor, Suntrust Bank and Certain Financial Institutions Parties Hereto, as Lenders, and Suntrust Bank, as Agent and joined in by The Jones Financial Companies, L.L.L.P., incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 10.22 * Master Lease Agreement dated as of September 18, 2001 between Atlantic Financial Group, Ltd. (registered to do business in Missouri as Atlantic Financial Group, L.P.), as Lessor, and Edward D. Jones & Co., L.P., as Lessee, incorporated herein by 55 reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 10.23 * Note Purchase Agreement by Edward D. Jones & Co., L.P., for $250,000,000 aggregate principal amount of 7.33% subordinated capital notes due June 12, 2014, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 28, 2002. 23.1 Consent of Independent Auditors, filed herewith. 24 * Delegation of Power of Attorney to Managing Partner contained within Exhibit 3.1. 99.1 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. <FN> * Incorporated by reference to previously filed exhibits. 56 Schedule I THE JONES FINANCIAL COMPANIES, L.L.L.P. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF FINANCIAL CONDITION December 31, December 31, (Dollars in thousands) 2003 2002 - ------------------------------------------------------------------------------------ ASSETS: Cash and cash equivalents $ 4,364 $ 3,420 Investment in subsidiaries 769,985 701,748 Others assets 11,744 5,907 ----------- ----------- TOTAL ASSETS $ 786,093 $ 711,075 =========== =========== LIABILITIES AND PARTNERSHIP CAPITAL: Payable to limited partners, accounts payable and accrued expenses $ 807 $ 1,130 ----------- ----------- TOTAL LIABILITIES 807 1,130 TOTAL PARTNERSHIP CAPITAL 785,286 709,945 ----------- ----------- TOTAL LIABILITIES AND PARTNERSHIP CAPITAL $ 786,093 $ 711,075 =========== =========== These financial statements should be read in conjunction with the notes to the consolidated financial statements of The Jones Financial Companies, L.L.L.P. 57 Schedule I (continued) THE JONES FINANCIAL COMPANIES, L.L.L.P. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF INCOME Years Ended -------------------------------------------- (Dollars in thousands, December 31, December 31, December 31, except per unit information) 2003 2002 2001 - ------------------------------------------------------------------------------------------------ NET REVENUE Subsidiary earnings $ 200,978 $ 148,066 $ 147,835 Management fee income 36,265 35,661 32,876 Other 645 (280) 495 ----------- ----------- ----------- Total revenue 237,888 183,447 181,206 Interest expense 16,880 17,325 17,800 ----------- ----------- ----------- Net revenue 221,008 166,122 163,406 ----------- ----------- ----------- OPERATING EXPENSES Compensation and benefits 17,532 17,065 14,099 Payroll and other taxes 75 115 73 Other operating expenses 91 27 48 ----------- ----------- ----------- Total operating expenses 17,698 17,207 14,220 ----------- ----------- ----------- ----------- ----------- ----------- NET INCOME $ 203,310 $ 148,915 $ 149,186 =========== =========== =========== These financial statements should be read in conjunction with the notes to the consolidated financial statements of The Jones Financial Companies, L.L.L.P. 58 Schedule I (continued) THE JONES FINANCIAL COMPANIES, L.L.L.P. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF CASH FLOWS December 31, December 31, December 31, (Dollars in thousands) 2003 2002 2001 - ----------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 203,310 $ 148,915 $ 149,186 Adjustments to reconcile net income to net cash provided by operating activities - Increase in investment in subsidiaries (68,237) (34,396) (12,760) Increase in other assets and liabilities, net (6,160) (1,091) (2,934) ----------- ----------- ----------- Net cash provided by operating activities 128,913 113,428 133,492 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of partnership interests 9,829 13,709 12,450 Redemption of partnership interests (7,356) (5,427) (7,316) Withdrawals and distributions from partnership capital (130,442) (121,968) (135,085) ----------- ----------- ----------- Net cash used in financing activities (127,969) (113,686) (129,951) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 944 (258) 3,541 CASH AND CASH EQUIVALENTS, Beginning of year 3,420 3,678 137 ----------- ----------- ----------- End of year $ 4,364 $ 3,420 $ 3,678 =========== =========== =========== These financial statements should be read in conjunction with the notes to the consolidated financial statements of The Jones Financial Companies, L.L.L.P. 59 REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES To The Jones Financial Companies, L.L.L.P.: Our audit of the consolidated financial statements referred to in our report dated March 19, 2004 appearing in the Form 10-K of The Jones Financial Companies, L.L.L.P. also included an audit of the financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP St. Louis, Missouri March 19, 2004 60 The following is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Jones Financial Companies, L.L.L.P. We have audited in accordance with auditing standards generally accepted in the United States, the financial statements included in The Jones Financial Companies, L.L.L.P. Form 10-K for the year ended December 31, 2001, and have issued our report thereon dated February 22, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. Schedule I listed in the index to Item 14 on Form 10-K for the year ended December 31, 2001, is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. Schedule I has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP St. Louis, Missouri, February 22, 2002 61