United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 26, 2004 Commission file number 0-16633
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THE JONES FINANCIAL COMPANIES, L.L.L.P.
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(Exact name of registrant as specified in its Partnership Agreement)
MISSOURI 43-1450818
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12555 Manchester Road
Des Peres, Missouri 63131
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (314) 515-2000
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Securities registered pursuant to Section 12(b) of the act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
NONE NONE
- -------------------------------------- -----------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
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 the filing date, there were no voting securities held by
non-affiliates of the registrant.
THE JONES FINANCIAL COMPANIES, L.L.L.P.
INDEX
Page
Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition.................3
Consolidated Statements of Income..............................5
Consolidated Statements of Changes in Partnership Capital......6
Consolidated Statements of Cash Flows..........................7
Notes to Consolidated Financial Statements.....................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk....19
Item 4. Controls and Procedures.......................................19
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..............................20
Signatures....................................................21
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
(Unaudited)
March 26, December 31,
(Dollars in thousands) 2004 2003
- -------------------------------------------------------------------- --------------
Cash and cash equivalents $ 196,621 $ 187,980
Securities purchased under agreements to resell 193,000 290,000
Receivable from:
Customers 2,247,370 2,134,655
Brokers, dealers and clearing organizations 202,779 155,083
Mortgages and loans 129,908 126,060
Securities owned, at market value
Inventory securities 72,515 115,775
Investment securities 143,206 145,238
Equipment, property and improvements, at cost,
net of accumulated depreciation 315,226 330,626
Other assets 234,960 237,742
------------ ------------
TOTAL ASSETS $3,735,585 $3,723,159
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES AND PARTNERSHIP CAPITAL
(Unaudited)
March 26, December 31,
(Dollars in thousands) 2004 2003
- -------------------------------------------------------------------------------------------------------
Bank loans $ 26,655 $ 23,656
Payable to:
Customers 1,938,346 1,924,882
Brokers, dealers and clearing organizations 21,144 33,598
Depositors 108,361 107,988
Securities loaned 5,315 9,953
Securities sold, not yet purchased, at market value 12,532 20,318
Accounts payable and accrued expenses 132,596 120,908
Accrued compensation and employee benefits 247,460 248,729
Long-term debt 38,997 39,691
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2,531,406 2,529,723
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Liabilities subordinated to claims of general creditors 408,150 408,150
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Partnership capital subject to mandatory redemption,
net of reserve for anticipated withdrawals 750,195 -
Reserve for anticipated withdrawals 45,834 -
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Total partnership capital subject to mandatory redemption 796,029 -
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Total liabilities 3,735,585 2,937,873
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Partnership capital net of reserve for anticipated withdrawals - 727,280
Reserve for anticipated withdrawals - 58,006
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Total partnership capital - 785,286
------------ ------------
TOTAL LIABILITIES AND PARTNERSHIP CAPITAL $3,735,585 $3,723,159
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
-------------------------------
(Dollars in thousands, March 26, March 28,
except per unit information) 2004 2003
- ---------------------------------------------------------------------------------------------
Revenue:
Commissions $405,274 $250,369
Asset fees 141,272 104,234
Principal transactions 65,604 80,786
Account fees 74,432 59,991
Interest and dividends 33,200 30,919
Investment banking 4,524 14,293
Other revenue 723 2,069
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Total revenue 725,029 542,661
Interest expense 13,967 14,587
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Net revenue 711,062 528,074
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Operating expenses:
Compensation and benefits 426,896 304,178
Communications and data processing 68,169 64,679
Occupancy and equipment 61,794 57,541
Payroll and other taxes 31,915 24,050
Floor brokerage and clearance fees 3,135 3,301
Advertising 11,072 10,399
Other operating expenses 47,142 39,184
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Total operating expenses 650,123 503,332
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Income before allocations to partners 60,939 24,742
Allocations to partners:
Limited partners 6,405 -
Subordinated limited partners 6,722 -
General partners 47,812 -
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Net Income $ - $ 24,742
========== ==========
Net income allocated to:
Limited partners $ - $ 2,990
Subordinated limited partners - 2,741
General partners - 19,011
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$ - $ 24,742
========== ==========
Income before allocations to partners/net
income per weighted average $1,000
equivalent limited partnership unit outstanding $ 28.89 $ 13.15
========== ==========
Weighted average $1,000 equivalent
limited partnership units outstanding 221,703 227,376
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
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5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL
THREE MONTHS ENDED MARCH 26, 2004 AND MARCH 28, 2003
(Unaudited)
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Dollars in thousands) Capital Capital Capital Total
- -----------------------------------------------------------------------------------------------------------------------
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 - 9,274 - 9,274
Redemption of partnership interests (1,929) (941) - (2,870)
Net income 2,990 2,741 19,011 24,742
Withdrawals and distributions (4) (96) (612) (712)
----------- ----------- ----------- -----------
TOTAL PARTNERSHIP CAPITAL 229,723 106,277 375,805 711,805
Reserve for anticipated withdrawals (2,986) (2,644) (13,152) (18,782)
----------- ----------- ----------- -----------
Partnership capital net of reserve for
anticipated withdrawals,
March 28, 2003 $ 226,737 $ 103,633 $ 362,653 $ 693,023
=========== =========== =========== ===========
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
Required reclassification of partnership
capital pursuant to SFAS No. 150 (See Notes) (222,500) (103,938) (400,842) (727,280)
----------- ----------- ----------- -----------
Partnership capital net of reserve for
anticipated withdrawals,
March 26, 2004 $ - $ - $ - $ -
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
6
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
-------------------------
March 26, March 28,
(Dollars in thousands) 2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ - $ 24,742
Adjustments to reconcile net income to net
cash provided by operating activities -
Income before allocations to partners 60,939 -
Depreciation and amortization 24,277 21,344
Changes in assets and liabilities:
Securities purchased under agreements to resell 97,000 (135,000)
Net receivable from customers (99,251) 13,030
Net receivable from brokers, dealers and
clearing organizations (60,150) (18,038)
Receivable from mortgages and loans (3,848) (979)
Securities owned, net 37,506 99,808
Other assets 2,782 13,026
Bank loans 2,999 (51)
Payable to depositors 373 (2,660)
Securities loaned (4,638) 1,855
Accounts payable and accrued expenses 11,688 10,080
Accrued compensation and employee benefits (1,269) (13,209)
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Net cash provided by operating activities 68,408 13,948
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, property and improvements, net (8,877) (18,585)
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Net cash used in investing activities (8,877) (18,585)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (694) (1,644)
Issuance of partnership interests 10,878 9,274
Redemption of partnership interests (1,159) (2,870)
Withdrawals and distributions from partnership capital (59,915) (29,286)
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Net cash used in financing activities (50,890) (24,526)
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Net increase/(decrease) in cash and cash equivalents 8,641 (29,163)
CASH AND CASH EQUIVALENTS,
Beginning of period 187,980 175,953
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End of period $196,621 $ 146,790
========== ===========
Cash paid for interest $ 10,988 $ 11,903
========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
7
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per unit information)
BASIS OF PRESENTATION
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
unconsolidated companies which are at least 20% owned are accounted for
under the equity method.
The Partnership's principal operating subsidiary, Edward D. Jones & Co.,
L.P. ("EDJ"), is composed of three registered broker-dealers primarily
serving individual investors. EDJ derives its revenues from the sale of
listed and unlisted securities, 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.
Certain prior year balances have been reclassified to conform with the
current period presentation.
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.
Under the terms of the Partnership agreement, a partner's capital will be
redeemed by the Partnership in the event of the partner's death, resignation
or termination. In the event of the partner's death, the Partnership must
redeem the partner's capital within six months. Limited partners withdrawing
from the Partnership due to termination or resignation are repaid their
capital in three equal annual installments beginning the month after their
resignation or termination.
Subordinated limited partners are repaid their capital in four equal annual
installments beginning the month after their resignation or termination. The
capital of general partners resigning or terminated from the Partnership may
be converted to subordinated limited partnership capital and is subject to
repayment in four equal annual installments.
The Partnership's managing partner has the discretion to waive these
withdrawal restrictions. All current and future partnership capital is
subordinate to all current and future liabilities of the Partnership,
including the liabilities subordinated to claims of general creditors.
8
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The interim financial information included herein is unaudited. However, in
the opinion of management, such information includes all adjustments,
consisting primarily of normal recurring accruals, which are necessary for a
fair presentation of the results of interim operations. Certain prior period
amounts have been reclassified to conform with the current year
presentation.
The results of operations for the three months ended March 26, 2004 and
March 28, 2003 are not necessarily indicative of the results to be expected
for the full year.
REVENUE RECOGNITION. Customer 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.
Commissions comprise charges to customers for the sale of securities,
insurance products and mutual fund shares.
Asset fees revenue is composed primarily of service fees and other revenues
received under agreements with mutual fund and insurance companies based on
the underlying value of the Partnership's customers' assets invested in
those companies' products. The asset based portion of the Partnership's
revenues related to its interest in the Edward Jones Money Market Fund is
also included in asset revenues.
Principal transactions revenue is the result of the Partnership's
participation in market-making activities 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.
Account fees revenue includes fees received from mutual fund companies for
sub-transfer agent accounting services performed by the Partnership and
self-directed IRA custodian account fees. Account revenue also includes
other (non-commission) transaction fee revenues charged to customers or
received from mutual fund and insurance companies.
Interest and dividend income is earned primarily on margin account balances,
inventory securities and investment securities.
Investment banking revenues are derived from the Partnership's underwriting
and distribution of securities on behalf of issuers or existing holders of
securities.
NEW ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards ("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 have been adopted in the Partnership's
financial statements 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 after a partner's
death, the Statement requires all of the Partnership's equity capital to be
classified as a liability. Income allocable to limited, subordinated limited
and general partners was previously classified on the Partnership's
statement of income as net income. In accordance with SFAS No. 150, these
allocations are now considered interest expense and are classified as a
reduction of income before allocations to partners, which results in a
presentation of $0 net
9
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
income for the quarter ended March 26, 2004. The financial statement
presentations required to comply with SFAS No. 150 do not alter the
Partnership's treatment of income, income allocations or equity capital for
any other purposes. In addition, SFAS No. 150 does not have any effect on,
nor is it applicable to, the Partnership's subsidiaries' financial
statements.
Net income, as defined in the Partnership Agreement, is now equivalent to
income before allocations to partners on the Consolidated Statements of
Income. Such income, if any, for each calendar year is allocated to the
Partnership's three classes of capital in accordance with the formulas
prescribed in the Partnership Agreement. First, limited partners are
allocated net income (as defined in the Partnership Agreement) in accordance
with the prescribed formula for their share of net income. Limited partners
do not share in the net loss (as defined in the Partnership Agreement) in
any year in which there is net loss and the Partnership is not dissolved or
liquidated. Thereafter, subordinated limited partners and general partners
are allocated any remaining net income based on formulas in the Partnership
Agreement. It is the Partnership's practice to retain approximately 30% of
income allocated to general partners.
Limited partners are guaranteed a minimum 7.5% return on the face amount of
their capital. Such payments to limited partners were $4.2 million and
$4.3 million for the quarters ended March 26, 2004 and March 28, 2003,
respectively, and are included as a component of interest expense. The
7.5% return is paid to limited partners regardless of the Partnership's
earnings.
10
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PARTNERSHIP CAPITAL
As more fully described under "New Accounting Standards," the firm's
partnership capital has now been classified as a liability under SFAS No.
150 as "Partnership capital subject to mandatory redemption." The firm's
partnership capital subject to mandatory redemption, net of reserve for
anticipated withdrawals consists of $221,391 of limited partnership capital
issued in $1,000 units, $114,766 of subordinated limited partnership capital
and $414,038 of general partnership capital as of March 26, 2004. The
following table shows the activity in the firm's partnership capital subject
to mandatory redemption during the quarter along with the amount of
partnership capital anticipated to be withdrawn subsequent to March 26,
2004.
Subordinated
Limited Limited General
Partnership Partnership Partnership
Capital Capital Capital Total
------------------------------------------------------------------
Partnership capital subject to mandatory
redemption, January 1, 2004 $222,500 $103,938 $400,842 $727,280
Issuance of partnership interests - 10,878 - 10,878
Redemption of partnership interests (1,109) (50) - (1,159)
Income allocated to partners 6,405 6,722 47,812 60,939
Withdrawals and distributions (8) (252) (1,649) (1,909)
------------------------------------------------------------------
Total partnership capital subject to
mandatory redemption 227,788 121,236 447,005 796,029
Reserve for anticipated withdrawals (6,397) (6,470) (32,967) (45,834)
------------------------------------------------------------------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, March 26, 2004 $221,391 $114,766 $414,038 $750,195
==================================================================
11
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NET CAPITAL REQUIREMENTS
As a result of its activities as a broker-dealer, EDJ is subject to the Net
Capital provisions of Rule 15c3-1 of the Securities Exchange Act of 1934 and
the capital rules of the New York Stock Exchange, 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 the resulting Net Capital would be less than
5% of aggregate debit items. Additionally, certain withdrawals require the
consent of the Securities and Exchange Commission ("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 March 26, 2004, EDJ's Net Capital of $623,297 was 28.33% of aggregate
debit items and its Net Capital in excess of the minimum required was
$579,301. Net Capital as a percentage of aggregate debits after anticipated
withdrawals was 27.39%. Net Capital and the related capital percentage may
fluctuate on a daily basis.
At March 26, 2004, the Partnership's foreign broker-dealer subsidiaries were
in compliance with regulatory capital requirements in the jurisdictions in
which they operate.
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 judgments, 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
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.
12
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THE JONES FINANCIAL COMPANIES, L.L.L.P.
MANAGEMENT'S FINANCIAL DISCUSSION
BASIS OF PRESENTATION
Due to the adoption of SFAS No. 150 on January 1, 2004, we are providing
certain non-GAAP financial measures in this discussion of our results of
operations, including a measure of income before allocations to partners. We
believe that these figures are helpful in allowing the reader to more
accurately assess the ongoing nature of our operations and measure our
performance more consistently. We use the presented non-GAAP financial
measures internally to understand and assess the performance of our
business. Therefore, we believe that this information is meaningful in
addition to the information contained in the GAAP presentation of financial
information. The presentation of this additional non-GAAP financial
information is not intended to be considered in isolation or as a substitute
for the financial information prepared and presented in accordance with
GAAP. See New Accounting Standards note to the consolidated financial
statements for further discussion of these items.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 26, 2004 AND
MARCH 28, 2003
For the first three months of 2004, net revenue increased 35% ($183.0
million) to $711.1 million, while income before allocations to partners
increased 146% ($36.2 million) to $60.9 million. The Partnership's profit
margin based on income before allocations to partners increased to 8.4% in
the first quarter of 2004, from 4.6% in the first quarter of 2003. The
Partnership's net revenue, income before allocations to partners and profit
margin increased due primarily to an increase in customer activity, growth
in customer asset values and higher account and activity fees. Operating
expenses increased due primarily to growth in compensation related to the
increase in net revenue and to additional costs as the Partnership continued
to expand its branch office network. The Partnership added 251 (3%)
Investment Representatives ("IRs") during the twelve months ended March 26,
2004, ending the quarter with 9,382 IRs.
The Partnership broadly categorizes its revenues as trade revenue (revenue
from buy or sell transactions on securities) and 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 composed of commissions, principal transactions and
investment banking. Net fee revenue is composed of asset fees, account fees,
interest and dividends net of interest expense, and other revenues.
Trade revenue comprised 67% of net revenue for the first quarter of 2004, up
from 66% for the first quarter of 2003. Conversely net fee revenue comprised
33% for the first quarter of 2004, down from 34% in the corresponding
period.
13
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Trade revenue of $475.5 million increased 37% ($129.3 million) during the
first quarter of 2004 due primarily to an increase in customer dollars
invested (the principal amount of customers' buy and sell transactions
generating trade revenue), partially offset by a lower gross margin earned
on customer dollars invested compared to the first quarter of 2003. Total
customer dollars invested were $17.1 billion during the first quarter of
2004, a 40% ($4.9 billion) increase from the first quarter of 2003. The
Partnership's margin earned on each $1,000 invested decreased to $26.60 in
the first quarter of 2004 from $27.50 in the first quarter of 2003. Year
over year, customer dollars invested shifted to mutual funds and individual
equities, primarily from fixed income products.
Commissions revenue increased 62% ($154.9 million) during the first quarter
of 2004 to $405.3 million. Commissions revenue increased year over year due
primarily to an 83% ($5.9 billion) increase in customer dollars invested to
$13.0 billion. Underlying the increase in commissions revenues, mutual fund
commissions increased 68% ($111.1 million), individual equity agency
commissions increased 60% ($31.4 million) and insurance commissions
increased 37% ($12.5 million). The following table summarizes commissions
revenue quarter over quarter:
Quarter ended
---------------------------
March 26, March 28,
(in thousands) 2004 2003
---------- ----------
Mutual Funds $275.7 $164.6
Individual Equity Agency Commissions 83.8 52.4
Insurance 45.7 33.2
Corporate Bond Agency Commissions 0.1 0.2
---------- ----------
$405.3 $250.4
========== ==========
Principal transactions revenue decreased 19% ($15.2 million) to
$65.6 million during the first quarter of 2004 due primarily to the overall
shift in customer dollars invested from fixed income products to mutual
funds and individual equities. Customers invested $3.9 billion in principal
transactions in the first quarter of 2004 compared to $4.7 billion in the
first quarter of 2003, a decrease of 17%. Revenue from municipal bonds
decreased 46% ($16.7 million), collateralized mortgage obligations decreased
39% ($4.3 million), while corporate bonds increased 25% ($4.2 million). The
following table summarizes principal transaction revenue quarter over
quarter:
Quarter ended
---------------------------
March 26, March 28,
(in thousands) 2004 2003
---------- ----------
Corporate Bonds $20.8 $16.6
Municipal Bonds 19.5 36.2
Government Bonds 8.6 8.8
Collateralized Mortgage Obligations 6.8 11.1
Unit Investment Trusts 6.3 5.5
Other 3.6 2.6
---------- ----------
$65.6 $80.8
========== ==========
14
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Investment banking revenue decreased 68% ($9.8 million) during the first
quarter of 2004 to $4.5 million, due primarily to a decrease in syndicate
corporate debt offerings in the current quarter.
Net fee revenue increased 30% ($53.7 million) during the first quarter of
2004. Asset fees increased 36% ($37.0 million) to $141.3 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 $52.5 billion or 47% to $164.6 billion in the
first quarter of 2004 compared to $112.1 billion in the first quarter of
2003.
Account, activity and other fees of $75.0 million increased 23% ($13.8
million) year over year. Revenue received from sub-transfer agent services
performed for mutual fund companies increased 22% ($7.4 million) to $40.2
million, due to a 25% increase in the number of customer accounts for which
the Partnership provides mutual fund sub-transfer agent services. The number
of retirement accounts for which the Partnership is custodian increased by
17%, resulting in custodial fee revenue growth of 16% ($2.6 million) to
$19.1 million.
Net interest and dividend income increased 18% ($2.9 million) to $19.2
million during the first quarter of 2004 due to an increase in customer
margin loans outstanding. Interest income from customer loans increased 10%
($2.5 million). Average customer margin loan balances were $2.2 billion in
the first quarter of 2004, compared to $1.9 billion in the first quarter of
2003, an increase of 15%. The average rate earned on customer loan balances
decreased to approximately 4.94% during the first quarter of 2004 from
approximately 5.20% during the first quarter of 2003.
Operating expenses increased 29% ($146.8 million) to $650.1 million during
the first quarter of 2004. Compensation and benefits costs increased 40%
($122.7 million) to $426.9 million. Within compensation and benefits costs,
sales compensation increased 34% ($62.7 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, income before allocations to partners and
the Partnership's related profit margin, increased $49.1 million. Payroll
expense increased 10% ($10.8 million) due to increased costs for existing
personnel and additional support at both the headquarters and in the
branches as the Partnership grows its sales force. On a full time equivalent
basis, the Partnership had 4,019 headquarters associates and 9,599 branch
staff associates as of March 26, 2004, compared to 3,937 headquarters
associates and 9,276 branch staff associates as of March 28, 2003.
Payroll and other taxes increased 33% ($7.9 million) due to higher sales
compensation, variable compensation and payroll expense as well as the
increased number of full time equivalent associates. Occupancy and equipment
expenses increased 7% ($4.3 million) and communications and data processing
increased 5% ($3.5 million) due primarily to growth in the number of branch
offices as the Partnership expands its sales force. Other operating expenses
increased due to growth in the Partnership's business and additional costs
associated with regulatory matters.
MUTUAL FUND MATTERS
Recently, mutual fund and annuity products have come under increased
scrutiny from various state and federal regulatory authorities in connection
with several industry issues including market timing, late trading, the
failure of various broker-dealers to provide breakpoint discounts to mutual
fund purchasers and the manner in which mutual fund and annuity companies
compensate broker-dealers.
In addition to the foregoing, the Partnership has received information
requests and subpoenas from various regulatory and enforcement authorities
regarding the Partnership's revenue sharing arrangements,
15
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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. For additional discussions, refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the December 31, 2003 Form 10-K.
In addition to the regulatory actions directed at the Partnership, 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 62% of its total revenue from sales and services related
to mutual fund and annuity products in the first quarter of 2004 and 54% in
the first quarter of 2003. Significant reductions in the revenues from these
products could have a material adverse impact on the Partnership.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's capital subject to mandatory redemption at March 26, 2004,
excluding the reserve for anticipated withdrawals, was $750.2 million,
compared to partnership equity capital, excluding the reserve for
anticipated withdrawals, of $727.3 million at December 31, 2003. The
increase is primarily due to the retention of General Partner earnings
($13.2 million) and the issuance, net of redemptions, of Subordinated
Limited Partner interests ($10.8 million), offset by redemption of Limited
Partner interests ($1.1 million).
At March 26, 2004, the Partnership had $196.6 million in cash and cash
equivalents. Lines of credit are in place aggregating $1.160 billion ($1.110
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 March 26, 2004. The Association had loans from The Federal
Home Loan Bank of $26.7 million as of March 26, 2004 which were 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 $5.3 million at March 26, 2004
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 Partnership rents facilities, furniture,
fixtures, computers and communication equipment. There were no significant
changes in the Partnership's financial commitments and obligations for the
three months ended March 26, 2004.
For the three months ended March 26, 2004, cash and cash equivalents
increased $8.6 million. Cash provided by operating activities was $68.4
million. The primary sources of cash from operating activities include a
decrease in securities purchased under agreements to resell, a decrease in
inventory, and income before allocations to partners. These increases to
cash and cash equivalents were partially offset by growth in both customer
margin loans and receivable from brokers, dealers and clearing
organizations.
16
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cash used in investing activities was $8.9 million consisting primarily of
capital expenditures supporting the growth of the Partnership's operations.
Cash used in financing activities was $50.9 million, consisting primarily of
partnership withdrawals ($59.9 million) offset by issuance of Subordinated
Limited Partner interests ($10.9 million).
As a result of its activities as a broker-dealer, EDJ, the Partnership's
principal subsidiary, is subject to the Net Capital provisions of Rule
15c3-1 of the Securities Exchange Act of 1934 and the capital rules of the
New York Stock Exchange. Under the alternative method permitted by the
rules, EDJ must maintain minimum Net Capital, as defined, equal to the
greater of $250 or 2% of aggregate debit items arising from customer
transactions. The Net Capital rule also provides that partnership capital
may not be withdrawn if resulting Net Capital would be less than 5% of
aggregate debit items. Additionally, certain withdrawals require the consent
of the SEC to the extent they exceed defined levels even though such
withdrawals would not cause Net Capital to be less than 5% of aggregate
debit items. At March 26, 2004, EDJ's Net Capital of $623.3 million was
28.33% of aggregate debit items and its Net Capital in excess of the minimum
required was $579.3 million. Net Capital as a percentage of aggregate debits
after anticipated withdrawals was 27.39%. Net capital and the related
capital percentage may fluctuate on a daily basis.
CRITICAL ACCOUNTING POLICIES
The Partnership's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America,
which may require judgment 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 judgment 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 judgment 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." 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.
17
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 considers any events or changes in
circumstances that would result in a change in the useful life.
For additional discussions of the Partnership's accounting policies, refer
to "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Critical Accounting Policies" included in the December 31,
2003 Form 10-K.
THE EFFECTS OF INFLATION
The Partnership's net assets are primarily monetary, consisting of cash,
securities inventories and receivables less liabilities. Monetary net assets
are primarily liquid in nature and would not be significantly affected by
inflation. Inflation and future expectations of inflation influence
securities prices, as well as activity levels in the securities markets. As
a result, profitability and capital may be impacted by inflation and
inflationary expectations. Additionally, inflation's impact on the
Partnership's operating expenses may affect profitability to the extent that
additional costs are not recoverable through increased prices of services
offered by the Partnership.
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 Quarterly Report on Form 10-Q. The Partnership does not undertake any
obligation to publicly update any forward-looking statements.
18
PART I. FINANCIAL INFORMATION
ITEM 3. 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 Partnership'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
March 26, 2004, amounts receivable from customers were $2.247 billion.
Liabilities include amounts payable to customers and other interest and
non-interest bearing liabilities.
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 $26.1 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.
There were no material changes in the Partnership's exposure to market risk
and changes in interest rates during the three months ended March 26, 2004
that would have a material adverse effect on the consolidated financial
position or results of operations of the Partnership.
ITEM 4. 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.
19
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31. Certification pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32. Certification pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the first quarter of 2004.
20
SIGNATURES
Pursuant to the requirements 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.
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By (Signature and Title) /s/ Douglas E. Hill
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Douglas E. Hill, Chief Executive Officer
Date May 4, 2004
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By (Signature and Title) /s/ Steven Novik
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Steven Novik, Chief Financial Officer
Date May 4, 2004
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21