-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KO2Gs4IZ1ia3vx6CW9mkTv4qLiHNj0YqZpaYUVjPgKLOpUExTFgfZ7SvbqyIirJk Wjd8HQzhuCsMu66eYnsfpA== 0000950114-98-000115.txt : 19980319 0000950114-98-000115.hdr.sgml : 19980319 ACCESSION NUMBER: 0000950114-98-000115 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980318 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: JONES FINANCIAL COS LP CENTRAL INDEX KEY: 0000815917 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 431450818 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16633 FILM NUMBER: 98568231 BUSINESS ADDRESS: STREET 1: 12555 MANCHESTER CITY: ST LOUIS STATE: MO ZIP: 63131 BUSINESS PHONE: 3148512000 FORMER COMPANY: FORMER CONFORMED NAME: JONES FINANCIAL COMPANIES L P DATE OF NAME CHANGE: 19920703 10-K 1 THE JONES FINANCIAL COMPANIES, L.P., LLP FORM 10-K 1 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, 1997 Commission file number 0-16633 ----------------- ------- THE JONES FINANCIAL COMPANIES, L.P., LLP - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its Partnership Agreement) MISSOURI 43-1450818 - ------------------------------------------------------------------------------ (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 12555 Manchester Road Des Peres, Missouri 63131 - ------------------------------------------------------------------------------ (Address and principal executive office) (Zip Code) Registrant's telephone number, including area code (314) 515-2000 ----------------------- Securities registered pursuant to Section 12(b) of the act: Name of each exchange Title of each class on which registered ------------------- --------------------- NONE NONE - ---------------------------------- ---------------------------------- Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Interests - ------------------------------------------------------------------------------ (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] As of March 17, 1998 there were no voting securities held by non-affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE None 1 2 PART I ITEM 1. BUSINESS The Jones Financial Companies, L.P., LLP (the "Registrant" and also referred to herein as the "Partnership") is organized under the Revised Uniform Limited Partnership Act of the State of Missouri. On February 26, 1998, the registrant changed its name to The Jones Financial Companies, L.L.L.P., a Missouri Limited Liability Partnership. The terms "Registrant" and "Partnership" used throughout, refer to The Jones Financial Companies, L.P., LLP 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.P., LLP. 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 and in Canada with its customers, various brokers and dealers, clearing organizations, depositories and banks. The Partnership is a member firm of the New York, American, Midwest, Toronto and Montreal exchanges, and is a registered broker/dealer with the National Association of Securities Dealers, Inc., ("NASD"). As of February 28, 1998, the Partnership was comprised of 154 general partners, 2,541 limited partners and 76 subordinated limited partners. At December 31, 1997, the Partnership is organized as follows: The Partnership owns 100 percent of the outstanding common stock of EDJ Holding Company, Inc., a Missouri corporation and 100 percent of the outstanding common stock of LHC, Inc., a Missouri corporation. The Partnership also holds all of the partnership equity of Edward D. Jones & Co., L.P., a Missouri limited partnership and EDJ Leasing Co., L.P. a Missouri limited partnership. EDJ Holding Company, Inc. and LHC, Inc. are the general partners of Edward D. Jones & Co., L.P. and EDJ Leasing Co., L.P., respectively. In addition, the Partnership owns 100 percent of the outstanding common stock of Conestoga Securities, Inc., a Missouri corporation and also owns, as a limited partner, 49.5 percent of Passport Research Ltd., a Pennsylvania limited partnership, which acts as an investment advisor to a money market mutual fund. The Partnership owns 100% of the equity of Edward D. Jones & Co., an Ontario limited partnership and its general partner, Edward D. Jones & Co. Canada Holding Co. Inc.. The Partnership also owns 100% of Edward Jones Limited, a U.K. limited partnership. The Partnership owns 100% of the equity of Boone National Savings and Loan Association, F.A., ("Association"), a federally chartered stock savings and loan association. The Partnership has an equity position in several entities formed to act as general partners of various direct participation programs sponsored by the Nooney Corporation as follows: Nooney Income Investments Inc. (a Missouri corporation), 100% of outstanding Class B non-voting stock; Nooney Income Investments Two, Inc. (a Missouri corporation), 100% of outstanding Class B non-voting stock. The Partnership holds all of the partnership equity in a Missouri limited partnership, EDJ Ventures, Ltd.. Conestoga Securities, Inc., also a wholly owned subsidiary, is the general partner of EDJ Ventures, Ltd. 2 3 PART I ITEM 1. Business The Partnership is a limited partner of Edward Jones Insurance Agency of Idaho, L.L.C., an Idaho limited liability corporation; Edward Jones Insurance Agency of Oklahoma, L.L.C., an Oklahoma limited liability corporation; EDJ Insurance Agency of Montana, a Montana limited partnership; EDJ Insurance Agency of New Mexico, L.L.C., a New Mexico limited liability corporation; and is a general partner in EDJ Insurance Agency of California, L.L.C., a California limited liability corporation; each of which engage in general insurance brokerage activities. Affiliates of the Partnership include EDJ Insurance Agency of Nevada, EDJ Insurance Agency of Texas, Inc., EDJ Insurance Agency of Alabama, EDJ Insurance Agency of Ohio, Inc., EDJ Insurance Agency of Florida, EDJ Insurance Agency of Wyoming, and EDJ Insurance Agency of Massachusetts. 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 trust programs. The general partner of Unison Investment Trusts, L.P.,Unison Capital Corp., Inc., a Missouri corporation, is wholly owned by LHC. EDJ owns 100% of the outstanding common stock of Cornerstone Mortgage Investment Group, Inc., a Delaware limited purpose corporation which has issued and sold collateralized mortgage obligation bonds, and Cornerstone Mortgage Investment Group II, Inc., a Delaware limited purpose corporation which has structured and sold secured mortgage bonds. Conestoga owns 100% of the outstanding stock of CIP Management, Inc., which is the managing general partner of CIP Management, L.P. CIP Management, L.P. is the managing general partner of Community Investment Partners, L.L.P. Community Investment Partners II, L.L.P. and Community Investment Partners III, L.L.P., business development companies. Other affiliates of the Partnership include Patronus, Inc. and EDJ Investment Advisory Services. Neither has conducted an active business. Within the past five years, the Registrant has added several new legal entities. In 1994, Edward D. Jones & Co., an Ontario limited partnership and its general partner Edward D. Jones & Co. Canada Holding Co., Inc. were established as subsidiaries of EDJ. These Canadian subsidiaries allowed expansion of the Registrant into Canada. In 1995, Boone National Savings and Loan Association, F.A. was purchased. This purchase has allowed EDJ to offer trust services to its customers in all 50 states. During 1997, Edward Jones Limited, a UK Limited Partnership, was organized. During 1998, the Registrant anticipates beginning brokerage operations in the United Kingdom under this entity. Due to state laws and regulations, certain states require separate legal entities to transact insurance business in these states. During 1997, several changes were made to these insurance entities as a result of changes in state laws and regulations. The following entities were added: Edward Jones Insurance Agency of Idaho, L.L.C., an Idaho limited liability corporation and Edward Jones Insurance Agency of Oklahoma, L.L.C., an Oklahoma limited liability corporation. The following entities were dissolved due to states no longer requiring a separate entity to transact insurance in the state: EDJ Insurance Agency of Arizona, an Arizona limited partnership, EDJ Insurance Agency of Utah, a Utah limited partnership, EDJ Insurance Agency of Arkansas, an Arkansas limited partnership, EDJ Insurance Agency of New Jersey, a New Jersey limited partnership. The following entities were reorganized as limited liability corporations: Edward Jones Insurance Agency of Alabama, L.L.C., an Alabama limited liability corporation, Edward Jones Insurance Agency Holding, L.L.C., a Florida limited liability corporation, Edward Jones Insurance Agency of Wyoming, L.L.C., a Wyoming limited liability corporation, Edward Jones Insurance Agency of California, L.L.C., a California limited liability corporation, Edward Jones Insurance Agency of New Mexico, L.L.C., a New Mexico limited liability corporation, and Edward Jones Insurance Agency of Massachusetts, L.L.C., a Massachusetts limited liability corporation. 3 4 PART I ITEM 1. Business 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):
1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Commissions Listed $ 138,199 $102,905 $ 86,589 Mutual Funds 407,430 319,091 227,832 O-T-C 64,488 49,728 30,929 Insurance 161,800 139,860 105,497 Other 110 1,986 1,105 Principal Transactions 166,209 171,903 142,916 Investment Banking 13,865 15,719 18,324 Interest & Dividends 92,938 72,726 62,246 Money Market Fees 35,831 30,187 17,437 IRA Custodial Service Fees 12,200 8,927 7,247 Other Revenues 42,209 39,036 22,663 ---------- -------- -------- Total Revenues $1,135,279 $952,068 $722,785 ================================================================================================================
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 effected by interest savings as a result of customer and other credit balances and interest earned on customer margin accounts. LISTED BROKERAGE TRANSACTIONS. A portion of the Partnership's revenue is derived from customers' transactions in which the Partnership acts as agent in the purchase and sale of listed corporate securities. These securities include common and preferred stocks and corporate debt securities traded on and off the securities exchanges. Revenue from brokerage transactions is highly influenced by the volume of business and securities prices. Customers' transactions in securities are effected on either a cash or a margin basis. In a margin account, the Partnership lends the customer a portion of the purchase price up to the limits imposed by the margin regulations of the Federal Reserve Board ("Regulation T"), New York Stock Exchange ("NYSE") margin requirements, or the Partnership's internal policies, which may be more stringent than the regulatory minimum requirements. Such loans are secured by the securities held in customers' margin accounts. These loans provide a source of income to the Partnership since it is able to lend to customers at rates which are higher than the rates at which it is able to borrow on a secured basis. The Partnership is permitted to use as collateral for the borrowings, securities owned by margin customers having an aggregate market value generally up to 140 percent of the debit balance in margin accounts. The Partnership may also use funds provided by free credit balances in customers' accounts to finance customers' margin account borrowings. In permitting customers to purchase securities on margin, the Partnership assumes the risk of a market decline which could reduce the value of its collateral below a customer's indebtedness before the collateral is sold. Under the NYSE rules, the Partnership is required in the event of a decline in the market value of the securities in a margin account to require the customer to deposit additional securities or cash so that at all times the loan to the customer is no greater than 75 percent of the value of the securities in 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. 4 5 PART I ITEM 1. Business Variations in revenues from listed brokerage commissions between periods is largely a function of market conditions; however, some portion of the overall increases in recent years is due to the growth in the number of registered representatives over these periods. MUTUAL FUNDS. The Partnership distributes mutual fund shares in continuous offerings and new underwritings. As a dealer in mutual fund shares, the Partnership receives a dealers' discount which generally ranges from 1 percent to 5 3/4 percent of the purchase price of the shares, depending on the terms of the dealer agreement and the amount of the purchase. The Partnership also earns service fees which are generally based on 15 to 25 basis points of its customers' assets which are held by the mutual funds. The Partnership does not manage any mutual fund, although it is a limited partner of Passport Research, Ltd., an advisor to a money market mutual fund. OVER-THE-COUNTER TRANSACTIONS. Partnership activities in unlisted (over-the-counter) transactions are essentially similar to its activities as a broker in listed securities. In connection with customers' orders to buy or sell securities, the Partnership charges a commission for both principal and agency transactions. PRINCIPAL TRANSACTIONS. The Partnership makes a market in over-the-counter corporate securities, municipal obligations, U.S. Government obligations, including general obligations and revenue bonds, unit investment trusts and mortgage-backed securities. The Partnership's market-making activities are conducted with other dealers in the "wholesale" market and "retail" market wherein the Partnership acts as a dealer buying from and selling to its customers. In making markets in principal and over-the-counter securities, the Partnership exposes its capital to the risk of fluctuation in the market value of its security positions. It is the Partnership's policy not to trade for its own account. As in the case of listed brokerage transactions, revenue from over-the-counter and principal transactions is highly influenced by the volume of business and securities prices, as well as by the varying number of registered representatives employed by the Partnership over the periods indicated. INSURANCE. The Partnership has executed agency agreements with various national insurance companies. EDJ is able to offer life insurance, long term care insurance, and fixed and variable annuities to its customers through substantially all of its investment representatives who hold insurance sales licenses. As an agent for the insurance company, the Partnership receives commission on the purchase price of the policy. The Partnership also earns service fees which are generally based on its customer assets held by the insurance companies. INVESTMENT BANKING. The Partnership's investment banking activities are performed by its Syndicate and Underwriting Departments. The principal service which the Partnership renders as an investment banker is the underwriting and distribution of securities either in a primary distribution on behalf of the issuer of such securities or in a secondary distribution on behalf of a holder of such securities. The distributions of corporate and municipal securities are, in most cases, underwritten by a group or syndicate of underwriters. Each underwriter has a participation in the offering. Unlike many larger firms against which the Partnership competes, the Partnership does not presently engage in other investment banking activities such as assisting in mergers and acquisitions, arranging private placement of securities issues with institutions or providing consulting and financial advisory services to corporations. The Syndicate and Underwriting Departments are responsible for the largest portion of the Partnership's investment banking business. In the case of an underwritten offering managed by the Partnership, these departments may form underwriting syndicates and work closely with the branch office system for sales of the Partnership's own participation and with other members of the syndicate in the pricing and negotiation of other terms. In offerings managed by others in which the Partnership participates as a syndicate member, these departments serve as active coordinators between the managing underwriter and the Partnership's branch office system. 5 6 PART I ITEM 1. Business The underwriting activity of the Partnership involves substantial risks. An underwriter may incur losses if it is unable to resell the securities it is committed to purchase or if it is forced to liquidate all or part of its commitment at less than the agreed purchase price. Furthermore, the commitment of capital to underwriting may adversely affect the Partnership's capital position and, as such, its participation in an underwriting may be limited by the requirement that it must at all times be in compliance with the Securities and Exchange Commission's uniform Net Capital Rule. The Securities Act of 1933 and other applicable laws and regulations impose substantial potential liabilities on underwriters for material misstatements or omissions in the prospectus used to describe the offered securities. In addition, there exists a potential for possible conflict of interest between an underwriter's desire to sell its securities and its obligation to its customers not to recommend unsuitable securities. In recent years there has been an increasing incidence of litigation in these areas. These lawsuits are frequently brought for the benefit of large classes of purchasers of underwritten securities. Such lawsuits often name underwriters as defendants and typically seek substantial amounts in damages. INTEREST AND DIVIDENDS. Interest and dividend income is earned primarily on margin account balances and securities held. Interest is also earned by the Association on its loan portfolio. MONEY MARKET FEES, IRA CUSTODIAL SERVICE FEES AND OTHER REVENUES. Other revenue sources include money market management fees, IRA custodial services fees, gains from sales of certain assets, and other product and service fees. Also included is non-commission revenue received from mutual funds the Partnership distributes. The Partnership has an interest in the investment advisor to its money market fund, Daily Passport Cash Trust. Revenue from this source has increased over the periods due to growth in the fund, both in dollars invested and number of accounts. EDJ is also the custodian for its IRA accounts and charges customers an annual service fee for its services. The Partnership has registered an investment advisory program with the SEC under the Investment Advisors Act of 1940. This service is offered firmwide and involves income and estate tax planning and analysis for clients. Revenues from this source are insignificant and included under "Other Revenues." The Partnership also offers trust services to its customers through the Edward Jones Trust company, a division of the Association. In 1997, an Edward Jones credit card was developed for use by customers of the Partnership. The Partnership has entered into a co-bonded partnership with a major credit card processing company and receives revenue on new card openings, card renewals, and a portion of sales transactions on the credit card. In 1998, the partnership plans to offer mortgage loans to its customers through a joint venture program with a large super regional bank. The Partnership also plans to offer loans to small businesses through a joint venture with another regional bank. RESEARCH DEPARTMENT. The Partnership maintains a Research Department to provide specific investment recommendations and market information for retail customers. The Department supplements its own research with the services of various independent research services. The Partnership competes with many other securities firms with substantially larger research staffs in its research activities. CUSTOMER ACCOUNT ADMINISTRATION AND OPERATIONS. Operations associates are responsible for activities relating to customers' securities and the processing of transactions with other broker/dealers. These activities include receipt, identification, and delivery of funds and securities, internal financial controls, accounting and personnel functions, office services, storage of customer securities and the handling of margin accounts. The Partnership processes substantially all of its own transactions. It is important that the Partnership maintain current and accurate books and records from both a profit viewpoint as well as for regulatory compliance. 6 7 PART I ITEM 1. Business To expedite the processing of orders, the Partnership's branch office system is linked to the St. Louis headquarters office through an extensive communications network. Orders for all securities are captured at the branch electronically, routed to St. Louis and forwarded to the appropriate market for execution. The Partnership's processing of paperwork following the execution of a security transaction is automated, and operations are generally on a current basis. There is considerable fluctuation during any one year and from year to year in the volume of transactions the Partnership processes. The Partnership records transactions and posts its books on a daily basis. Operations personnel monitor day-to-day operations to determine compliance with applicable laws, rules and regulations. Failure to keep current and accurate books and records can render the Partnership liable to disciplinary action by governmental and self-regulatory organizations. The Partnership has a computerized branch office communication system which is principally utilized for entry of security orders, quotations, messages between offices, research of various customer account information, and cash and security receipts functions. The Partnership clears and settles virtually all of its listed transactions through the National Securities Clearing Corporation ("NSCC"), New York, New York. NSCC effects clearing of securities on the New York, American and Midwest Stock Exchanges. In conjunction with clearing and settling transactions with NSCC, the Partnership holds customers' securities on deposit with the Depository Trust Company ("DTC") in lieu of maintaining physical custody of the certificates. The Partnership also uses Participant Trust Company for custody of GNMA securities and a major bank for custody of treasury securities. The Partnership is substantially dependent upon the operational capacity and ability of NSCC/DTC. Any serious delays in the processing of securities transactions encountered by NSCC/DTC may result in delays of delivery of cash or securities to the Partnership's customers. These services are performed for the Partnership under contracts which may be changed or terminated at will by either party. Automated Data Processing, Inc., ("ADP") and First Marathon Securities, Limited provide automated data processing services for customer account activity and records for U.S. and Canadian subsidiaries, 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. While the coverages provided by the Securities Investors Protection Corporation ("SIPC") and protection in excess of SIPC limits would be available to customers of the Partnership, to the extent that the Partnership would not be able to meet the obligations of the customers, such customers might experience delays in obtaining the protections afforded them by the SIPC and the Partnership's insurance carrier. The Partnership believes that its internal controls and safeguards concerning the risks of securities thefts are adequate. Although the possibility of securities thefts is a risk of the industry, the Partnership has not had, to date, a significant problem with such thefts. The Partnership maintains fidelity bonding insurance which, in the opinion of management, provides adequate coverage. 7 8 PART I ITEM 1. Business EMPLOYEES. Including its general partners, the Partnership has approximately 13,691 full and part-time employees. This also includes 4,016 registered salespeople as of February 28, 1998. The Partnership's salespersons are compensated on a commission basis and may, in addition, be entitled to bonus compensation based on their respective branch office profitability and the profitability of the Partnership. The Partnership has no formal bonus plan for its non-registered employees. The Partnership has, however, in the past paid bonuses to its non-registered employees on an informal basis, but there can be no assurance that such bonuses will be paid for any given period or will be within any specific range of amounts. Employees of the Partnership are bonded under a blanket policy as required by NYSE rules. The annual aggregate amount of coverage is $50,000,000 subject to a $2,000,000 deductible provision, per occurrence. The Partnership maintains a training program for prospective salespeople which includes nine weeks of concentrated instruction and on-the-job training in a branch office. The first phase of training is spent studying Series 7 examination materials and preparing for and taking the examination. The first week of training after passing the examination is spent in a comprehensive training program in St. Louis. The next three weeks include on-the-job training in branch locations reviewing investments, office procedures and sales techniques. The salesperson is then sent to a designated location, for four weeks, to establish the EDJ office, conduct market research and prepare for opening the office. After the salesperson has opened a branch office, one final week is spent in a central location to complete the initial training program. Two and four months later, the investment representative attends additional training classes in St. Louis, and subsequently, EDJ offers periodic continuing training to its experienced sales force. EDJ's basic brokerage payout is similar to its competitors. The Partnership considers its employee relations to be good and believes that its compensation and employee benefits which include medical, life, and disability insurance plans and profit sharing and deferred compensation retirement plans, are competitive with those offered by other firms principally engaged in the securities business. BRANCH OFFICE NETWORK. The Partnership operates 3,790 branch offices as of February 28, 1998, primarily staffed by a single registered representative. The offices are located in all 50 states, predominantly in communities with populations of under 50,000 and metropolitan suburbs. The partnership is currently exploring branch office operations in foreign countries with current operations in Canada (through 106 offices as of February 28, 1998) and expects to commence operations in the UK in 1998. COMPETITION. The Partnership is subject to intensive competition in all phases of its business from other securities firms, many of which are substantially larger than the Partnership in terms of capital, brokerage volume and underwriting activities. In addition, the Partnership encounters competition from other organizations such as banks, insurance companies, and others offering financial services and advice. The Partnership also competes with a number of firms offering discount brokerage services, usually with lower levels of service to individual customers. In recent periods, many regulatory requirements prohibiting non-securities firms from engaging in certain aspects of brokerage firms' business have been eliminated and further removal of such prohibitions is anticipated. With minor exceptions, customers are free to transfer their business to competing organizations at any time. There is intense competition among securities firms for salespeople with good sales production records. In recent periods, the Partnership has experienced increasing efforts by competing firms to hire away its registered representatives although the Partnership believes that its rate of turnover of investment representatives is not higher than that of other firms comparable to the Partnership. 8 9 PART I ITEM 1. Business 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 and Canada. Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of customers' funds and securities, capital structure of securities firms, record-keeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the mode of operation and profitability of broker-dealers. The SEC, self-regulatory organizations and state securities commissions may conduct administrative proceedings which can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or employees. The principal purpose of regulation and discipline of broker-dealers is the protection of customers and the securities markets, rather than protection of the creditors and stockholders of broker-dealers. In addition, EDJ conducts business in Canada, through a subsidiary partnership which is regulated by the Investment Dealers Association of Canada. 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 inventories. Failure to maintain the required Net Capital may subject a firm to suspension or expulsion by the NYSE, the SEC and other regulatory bodies and may ultimately require its liquidation. The Partnership has, at all times, been in compliance with the Net Capital Rule. ITEM 2. PROPERTIES The Partnership conducts its headquarters operations from three locations in St. Louis County, Missouri, comprising 19 separate buildings. Two of the locations are owned by the Partnership and are used to secure loans of the Partnership. The third location is leased through a long-term operating lease. In addition, the Partnership leases its Canadian headquarters facility in Mississauga, Ontario through an operating lease. In 1997, the Partnership entered into a long-term operating lease for its United Kingdom headquarters located in London, England. The Partnership also maintains facilities in 3,840 branch locations (as of December 31, 1997) which are located in the United States and Canada 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. 9 10 PART II ITEM 3. LEGAL PROCEEDINGS In recent years there has been an increasing incidence of litigation involving the securities industry. Such suits often seek to benefit large classes of industry customers; many name securities dealers as defendants along with exchanges in which they hold membership and seek large sums as damages under federal and state securities laws, anti-trust laws, and common law. Various legal actions are pending against the Partnership, with certain cases claiming substantial damages. These actions are in various stages and the results of such actions cannot be predicted with certainty. In the opinion of management, after consultation with legal counsel, the ultimate resolution of these actions is not expected to have a material adverse impact on the Partnership's operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no market for the Limited or Subordinated Limited Partnership interests and their assignment is prohibited. 10 11 PART II ITEM 6. SELECTED FINANCIAL DATA The following information sets forth, for the past five years, selected financial data. (All amounts in thousands, except per unit information.) Summary Income Statement Data:
1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- Revenues $1,135,279 $ 952,068 $ 722,785 $ 661,258 $643,315 Net income $ 114,184 $ 92,888 $ 58,186 $ 53,857 $ 66,211 Net income per weighted average $1,000 equivalent limited partnership unit outstanding $ 176.06 $ 170.63 $ 125.01 $ 127.59 $ 194.62 Weighted average $1,000 equivalent limited partnership units outstanding 93,962 96,879 67,345 63,165 50,381 Net income per weighted average $1,000 equivalent subordinated limited partnership unit outstanding $ 320.61 $ 301.44 $ 225.00 $ 237.83 $ 350.32 Weighted average $1,000 equivalent subordinated limited partnership units outstanding 37,332 30,543 27,720 21,789 16,936 - ----------------------------------------------------------------------------------------------------------------------------
11 12 Item 6. Selected Financial Data Summary Balance Sheet Data:
1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $1,554,798 $1,380,416 $1,045,501 $ 953,359 $800,478 ========== ========== ========== ========== ======== Long-term debt $ 53,350 $ 67,190 $ 70,127 $ 41,779 $ 33,317 Other liabilities, exclusive of subordinated liabilities 979,797 826,609 605,080 585,057 514,386 Subordinated liabilities 216,500 216,500 122,000 136,000 73,000 Total partnership capital 305,151 270,117 248,294 190,523 179,775 ---------- ---------- ---------- ---------- -------- Total liabilities and partnership capital $1,554,798 $1,380,416 $1,045,501 $ 953,359 $800,478 ========== ========== ========== ========== ========
12 13 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table summarizes the changes in major categories of revenues and expenses for the last two years (dollar amounts in thousands).
1997 vs. 1996 1996 vs. 1995 Increase - (Decrease) Amount Percentage Amount Percentage - ------------------------------------------------------------------------------------------------------------------------ Revenues Commissions $158,457 26% $161,618 36% Principal transactions (5,694) (3) 28,987 20 Investment banking (1,854) (12) (2,605) (14) Interest and dividends 20,212 28 10,480 17 Other 12,090 15 30,803 65 -------- --- -------- --- 183,211 19 229,283 32 -------- --- -------- --- Expenses Compensation and benefits 99,300 18 137,713 34 Occupancy and equipment 28,617 27 20,621 24 Communications and data processing 6,085 9 15,763 29 Interest 7,665 21 4,316 13 Payroll and other taxes 5,407 18 5,896 25 Floor brokerage and clearance fees 1,021 14 1,334 23 Other operating expenses 13,820 21 8,938 15 -------- --- -------- --- 161,915 19 194,581 29 -------- --- -------- --- Net income $ 21,296 23% $ 34,702 60% ========================================================================================================================
RESULTS OF OPERATIONS (1997 VERSUS 1996) The Partnership experienced a record year in 1997 in terms of both revenue and net income. Revenue exceeded $1 billion and net income exceeded $100 million for the first time in the Partnership's history. Revenues of $1.135 billion increased by 19% ($183.2 million) and expenses of $1.021 billion increased by 19% ($161.9 million) compared to 1996. As a result, net income increased 23% ($21.3 million) over 1996 to $114.2 million. 13 14 PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Partnership also progressed on other significant objectives in 1997, which include growth of its sales force, expansion of the products and services offered to customers, and implementation of new technology. During 1997, the Partnership added 428 (12%) Investment Representatives ("IRs") to its sales force, ending the year with 3,954 IRs in the United States and Canada. The Partnership is awaiting regulatory approval to expand into the United Kingdom. The Partnership continued to expand its offering of products and services through the co-issuance of a credit card. Additionally, its trust services, which commenced in 1996, were expanded to all 50 states The Partnership plans to offer additional financial services in 1998. The Partnership completed its conversion to client server technology in all of its branch offices during mid-1997. This conversion marked the beginning of a new technological infrastructure for the Partnership which will support growth in the number of offices and the ability to offer more products and services to meet the needs of the individual investor. Looking at the financial results of 1997, strong securities markets, coupled with growth in the number of IRs and continued maturity of existing IRs, helped to increase revenues 19% in 1997. The Partnership segments its revenues between Trade Revenues (revenues resulting from a customer trade) and Fee Revenue (revenue sources which are not transaction oriented). Trade Revenue accounted for 72% of total revenues versus 74% of total revenues in 1996. Fee Revenue sources, such as Service Fees, management fees, IRA fees, and interest income, accounted for the remaining 28% of revenue in 1997. Trade Revenues increased 16% ($111.7 million) to $818.2 million in 1997. This increase is a result of increased IRs, and increased customer dollars invested, offset by a decrease in the commission earned on every dollar invested and one less selling day in 1997 compared to 1996. Total customer dollars invested of $32.6 billion increased 19% ($5.3 billion) over 1996 due to the strong financial markets and the continued maturity and growth of the sales force. These positive factors were offset slightly by a shift in the product mix sold. The shift in customer demand to lower commission equity products resulted in a 3% decrease in the revenue earned per $1,000 dollars invested from $25.90 in 1996 to $25.10 in 1997. Fee Revenue sources, which include service fees, revenue sharing agreements with mutual funds and insurance companies, interest income, and IRA custodial fees and other fees, increased 30% ($72.2 million) to $317.1 million. These revenues are directly related to the value of Customers' Assets. New Customer Assets were accumulated through securities transactions in 1997 and strong markets continued to help increase existing assets. Total Customers' Assets increased 29% to $144 billion in 1997. Loans to EDJ customers, which is the base for a significant portion of interest income, increased 46% to $878 million at the end of 1997. Focusing on changes in major revenue categories, Commissions increased 26% ($158.5 million) for the period. Mutual fund commissions increased 28% ($88.3 million) due to increased transaction revenue (67% of the increase) and increased service fees paid on Customers' Assets (33% of the increase). Listed and Over-the-Counter (OTC) agency commissions increased 33% ($50.1 million) due to increased transactions resulting from a shift in the overall product mix to equities throughout 1997. Insurance and Annuity commissions increased 16% ($21.9 million) due to increased transaction revenue (62% of overall increase) and increased service fees (38% of increase). Principal Transaction revenues decreased 3% ($5.7 million) as customers invested more in equities and mutual fund products in 1997. CD revenue declined 37% ($15.8 million) and was the primary reason for the decreased revenue. This decline was offset by increases in Equity Unit Investment Trusts of 109% ($5.4 million) and Municipal Bonds of 7% ($3.4 million). 14 15 PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Interest and dividend income increased 28% ($20.2 million) to $92.9 million primarily due to increased loans to customers. Interest from customer loans increased 37% ($18.0 million) due to growth in the loan base throughout 1997. The remaining increase is due to interest earned on product inventories held for sale to the Partnership's customers. Other Revenues increased 15% (12.1 million) over 1996; however, 1996 included a $7.0 million gain from the sale of the Partnership's minority interest in a mutual fund company. Excluding this gain, Other Revenues increased 27% ($19.1 million) over 1996. Revenues from money market management fees and fee revenue received from mutual fund and insurance products increased 20% ($5.9 million) and 37% ($8.8 million), respectively. These increases are attributable to increased Customers' Assets. Custodial fees from IRA accounts increased 37% ($3.3 million) due to the result of increased numbers of accounts. The remaining increase is due to increased services offered to customers of the Partnership. Expenses increased 19% ($161.9 million) to $1.021 billion in 1997. Increased compensation costs account for 61% ($99.3 million) of the expense increases. Sales Compensation increased 18% ($58.2 million) due to increased revenues and IRs. The Partnership also has a variable compensation structure which expands and contracts in relation to revenues, net income, and profit margin. Since revenues and net income increased significantly over 1996, the variable compensation increased as well. Bonuses paid to IRs increased 21% ($9.7 million) as a result of the strong revenues and profits compared to 1996. Profit Sharing increased 22% ($5.3 million) as a result of increased net income over 1996. The remaining increase in Compensation costs is attributable to increased payroll costs of existing and additional support personnel in both the Headquarters and individual branch offices. The Partnership continued to build the infrastructure necessary to support a larger sales force which included investments in technology and expansion of the branch network. Occupancy and equipment and Communications and data processing costs increased 27% ($28.6 million) and 9% ($6.1 million), respectively over 1996 levels. These increases are due to growth in the branch office network and the implementation of client server technology. The addition of client server and other equipment added $20.0 million in lease and depreciation expense (70% of the increased Occupancy and Communications increase). The remaining increase is due to growth in the number of offices and other client server related expenditures not captured in depreciation or lease expenses. Interest expense increased 21% ($7.7 million) to $44.0 million. In late 1996, the Partnership issued $94.5 million in Subordinated Debt. Also, the Partnership pays interest on certain customer balances of EDJ. The additional debt and growth in the average customer balances resulted in the increased interest expense in 1997. Of the remaining expenses, increases were primarily related to costs necessary to support a larger organization. RESULTS OF OPERATIONS (1996 VERSUS 1995) In 1996, favorable conditions in the securities markets produced record revenues and net income for the Partnership. Revenues of $952.1 million increased 32% ($229.3 million) compared to 1995 with expenses increasing to $859.2 million or 29% ($194.6 million). Net income increased 60% to $92.9 million. 15 16 PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Partnership segments its revenues between securities transaction revenues (revenues resulting from customers' trades) and non-transaction or other revenues. Securities transaction revenues of $706.4 million increased 31% over 1995. The primary factors influencing securities transaction revenues were increased customer dollars handled, either buy or sell dollars for which a commission was charged; the growth in the number of IRs; and, the product mix which affects the gross commission percentage. The total buy and sell dollars generating revenues were $27.4 billion, up 33% from $20.6 million in 1995. An increase of 11% in the number of IRs coupled with the favorable trend in securities prices in 1996 contributed to the growth in customer buy and sell dollars. A shift in the product mix from fixed income to mutual fund and CDs resulted in reducing the gross revenue realized on each $1,000 handled from $26.20 per thousand in 1995 to $25.80 in 1996. The other major segment of the Partnership's revenues, non-securities transaction revenues, includes revenues from service fees, management fees, IRA fees and interest income. The Partnership's non-transaction revenues increased $61.3 million or 33% over 1995. The primary drivers of non-transaction revenues are customers' assets under control, loans to customers (margin loans), the number of IRA accounts, and other fees. Customers' Assets increased 24% to $112 billion at the end of the year. These assets provide the base for fees, including service fees and other management fee revenues received from mutual fund and insurance companies. Loans to customers increased to $603 million at year end, an increase of 27% compared to 1995's year end balances. Early in 1996, the Partnership undertook efforts to increase the awareness of the sales force and customers of margin loans to meet customers' borrowing needs for a variety of purposes. The program to increase awareness was coordinated with a 25 basis point interest rate reduction. Expenses increased 29% in 1996. Compensation of IRs increased due to increased revenue and an increased number of IRs. The Partnership has a variable compensation program for IRs which expands and contracts as a result of changes in revenues, net income and profit margin. Similarly, a portion of non-sales personnel compensation may be paid in the form of bonuses and profit sharing which expands and contracts based on net income. Revenues, net income and the profit margin increased significantly compared to 1995, increasing compensation for IRs and non-sales personnel. Also, the Partnership continued to build the infrastructure to support an increased number of IRs. Migrating from the Partnership's mainframe technology to a new client server platform began in 1996. To implement new technology, the Partnership incurred expenses for the addition of headquarters personnel, computer hardware, software, and network infrastructure. The Partnership expects to complete this conversion in 1997. Focusing on changes in major revenue categories, Commission revenues increased 36% ($161.6 million) for the period. Mutual fund commissions rose 40% ($91.2 million) and insurance and annuity commissions increased 35% ($36.7 million). Listed and Over-The-Counter (O-T-C) agency commission revenues increased 30% ($35.1 million). Commission revenues benefited from rising securities prices in 1996. Principal transaction revenues increased 20% ($29.0 million) to $171.9 million for the year. This increase was reflected in certificate of deposit revenues (149% or $25.5 million), municipal bond principal revenues (10% or $4.8 million) and corporate bond principal revenues (23% or $4.5 million). Government bond principal revenues decreased 35% ($5.9 million) and mortgage backed product revenues declined 8% ($2.2 million). Investment banking revenues decreased 14% ($2.6 million). Municipal bond origination revenues declined 46% ($2.0 million). Syndicate equity origination revenues also decreased 16% ($.5 million). 16 17 PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Interest and dividend income increased 17% ($10.4 million) to $72.7 million primarily from interest income earned on investments, margin loans, and loans at the Association. During 1996, the Partnership's short-term investments increased, which resulted in $4.3 million in additional interest income. Also, the Association, which was purchased in mid-1995, earned $4.0 million more in revenue, primarily as a result of a full year of activity. Additionally, the Partnership increased its customer loan base which resulted in a $2.2 million increase in interest income from customer loans. Other Revenues increased 65% ($30.8 million) for the year. Other revenue includes money market management fees, IRA custodial fees, and non-commission revenue received from mutual fund and insurance products. Revenues generated from money market management fees and fee revenue received from mutual fund and insurance products increased 73% ($12.7 million) and 71% ($9.0 million), respectively. These increases are due primarily to increased customer assets. The number of non-bank custodian IRA accounts continued to increase, which resulted in a 23% ($1.7 million) increase in revenue. Additionally in 1996, the Partnership realized a $7.0 million gain from the sale of the Partnership's minority investment in a mutual fund company. Expenses increased 29% ($194.6 million). Compensation costs increased 34% ($137.7 million) and account for the majority of the increased expenses. IR compensation increased 37.4% ($101.0 million), which is attributable to the variable compensation program and an increased number of IRs. The remaining increase in compensation relates to additional personnel necessary to support the systems conversion and expansion of the sales force, both in the headquarters and the branch offices. Occupancy and equipment expense and communications and data processing expenses increased 24% ($20.6 million) and 29% ($15.8 million), respectively. The Partnership continues to make an investment in the infrastructure and technology necessary to support the planned expansion of its sales force in future years. Interest expense increased $4.3 million (13%). This resulted from the subordinated debt offering and the Association's full year of activity. Other operating expenses increased $9.0 million (15%) and were primarily related to increased headquarters and branch expenses necessary to support a growing sales force. LIQUIDITY AND CAPITAL RESOURCES The Partnership's equity capital at December 31, 1997, was $305.2 million compared to $270.1 million at December 31, 1996. Equity capital increased 13%, primarily due to the retention of earnings. Capital reserved for anticipated withdrawals increased $6.0 million or 27%. These amounts were withdrawn subsequent to year end. At December 31, 1997, the Partnership had a $61.7 million balance of cash and cash equivalents. Lines of credit are in place at ten banks aggregating $575 million ($500 million through uncommitted facilities). Actual borrowing availability is primarily based on securities owned and customers' margin securities. The Partnership believes that the liquidity provided by existing cash balances and borrowing arrangements will be sufficient to meet the Partnership capital and liquidity requirements. A substantial portion of the Partnership's assets are primarily liquid, consisting mainly of cash and assets readily convertible into cash. These assets are financed primarily by customer credit balances, equity capital, bank lines of credit and other payables. 17 18 PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations For the year ended December 31, 1997, cash and cash equivalents decreased $3.1 million. Cash flows from operating activities provided $127.2 million, primarily attributable to net income adjusted for depreciation and amortization and a decrease in securities purchased under agreements to resell. The primary use of operating funds was increased net receivables from customers, related to more loans to customers. Investing activities used $53.6 million for the purchase of fixed assets primarily related to the purchase of client server equipment. Cash flows from financing activities used $76.7 million primarily for withdrawals and distributions from partnership capital, to decrease bank loans and to repay long-term debt. For the year ended December 31, 1996, cash and cash equivalents increased $20.7 million. Cash flows from operating activities provided $137.6 million, primarily attributable to net income adjusted for depreciation and amortization, decreased net receivables from customers, decreased securities owned, and increased accounts payable and other accrued expenses. Investing activities used $107.6 million primarily for the purchase of fixed assets and investment securities. Financing activities which provided cash were the issuance of long-term debt, subordinated liabilities and partnership interests. Cash flows from financing activities used $9.3 million primarily for withdrawals and distributions from partnership capital, to decrease bank loans and to repay long-term debt. For the year ended December 31, 1995, cash and cash equivalents increased $7.4 million. Cash flows from operating activities provided $161 million, primarily attributable to net income, adjusted for depreciation and amortization, decreased securities owned, decreased net receivables from customers and increased accounts payable. Investing activities used $28.3 million primarily for the purchase of fixed assets. Cash flows from financing activities used $125.2 million primarily to decrease bank loans, repay subordinated liabilities and fund withdrawals and distributions from partnership capital. Financing activities providing cash were the issuance of long-term debt and partnership capital. As a result of its activities as a broker/dealer, EDJ, the Partnership's principal subsidiary, is subject to the Net Capital provisions of Rule 15c3-1 of the Securities Exchange Act of 1934 and the capital rules of the New York Stock Exchange. Under the alternative method permitted by the rules, EDJ must maintain minimum Net Capital, as defined, equal to the greater of $250,000 or 2% of aggregate debit items arising from customer transactions. The Net Capital Rule also provides that partnership capital may not be withdrawn if resulting Net Capital would be less than 5% of aggregate debit items. Additionally, certain withdrawals require the consent of the SEC to the extent they exceed defined levels even though such withdrawals would not cause Net Capital to be less than 5% of aggregate debit items. At December 31, 1997, EDJ's Net Capital of $258.9 million was 30% of aggregate debit items and its net capital in excess of the minimum required was $241.4 million. Net Capital as a percentage of aggregate debits after anticipated withdrawals was 28%. Net Capital and the related capital percentage may fluctuate on a daily basis. There were no material changes in the Partnership's overall financial condition during the year ended December 31, 1997, compared with the year ended December 31, 1996. The Partnership's consolidated statement of financial condition is comprised primarily of cash and assets readily convertible into cash. Securities inventories are carried at market value and are readily marketable. Customer margin accounts are collateralized by marketable securities. Other customer receivables and receivables and payables with other broker/dealers normally settle on a current basis. Liabilities, including amounts payable to customers, checks and accounts payable and accrued expenses are sources of funds to the Partnership. These liabilities, to the extent not utilized to finance assets, are available to meet liquidity needs and provide funds for short-term investments, which favorably impacts profitability. The Partnership's growth in recent years has been financed through sales of limited partnership interests to its employees, retention of earnings and private placements of long-term and subordinated debt. 18 19 PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations YEAR 2000 SYSTEM ISSUES In 1996, the Partnership began the process of identifying the many software applications and hardware devices expected to be impacted by the Year 2000 system issue. Certain systems are in the process of being replaced to not only comply with the Year 2000 issue, but to also update current functionality. Also, modifications are being made to certain existing systems and all program changes are being reviewed to ensure compliance with the Year 2000. In addition, the Partnership outsources many of its customer record keeping activities and relies on outside vendors for many sources of information. The Partnership believes that its vendors are actively addressing the problems associated with the Year 2000 issues. The Partnership does not believe the costs of addressing these issues will have a material impact on the Partnership's results of operations or its financial position. ITEM 7A . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable until 1998 Form 10-K. 19 20 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Statements Included in this Item
Page No. Report of Independent Public Accountants 21 Consolidated Statements of Financial Condition as of December 31, 1997 and 1996 22 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 24 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 25 Consolidated Statements of Changes in Partnership Capital for the years ended December 31, 1997, 1996 and 1995 26 Notes to Consolidated Financial Statements 27
20 21 PART II ITEM 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Jones Financial Companies, L.P., LLP: We have audited the accompanying consolidated statements of financial condition of The Jones Financial Companies, L.P., LLP (a Missouri Limited Partnership and a Missouri Registered Limited Liability Partnership) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, cash flows and changes in partnership capital for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Jones Financial Companies, L.P., LLP and subsidiaries as of December 31, 1997 and 1996, and the results of their operations, their cash flows and the changes in their partnership capital for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP St. Louis, Missouri, February 20, 1998 21 22 PART II ITEM 8. Financial Statements and Supplementary Data THE JONES FINANCIAL COMPANIES, L.P., LLP CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ASSETS
December 31, December 31, (Amounts in thousands) 1997 1996 - ----------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 61,738 $ 64,858 Securities purchased under agreements to resell 1,450 145,000 Receivable from: Customers (Note 2) 894,509 615,399 Brokers or dealers and clearing organizations (Note 3) 26,449 21,699 Mortgages and loans (Note 4) 70,545 66,116 Securities owned, at market value (Note 5): Inventory securities 63,407 58,373 Investment securities 171,087 171,177 Equipment, property and improvements (Note 6) 187,540 173,719 Other assets 78,073 64,075 ---------- ---------- TOTAL ASSETS $1,554,798 $1,380,416 ================================================================================================================= The accompanying notes are an integral part of these statements.
22 23 PART II ITEM 8. Financial Statements and Supplementary Data THE JONES FINANCIAL COMPANIES, L.P., LLP CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION LIABILITIES AND PARTNERSHIP CAPITAL
December 31, December 31, (Amounts in thousands) 1997 1996 - ----------------------------------------------------------------------------------------------------------------- Bank loans (Note 7) $ 19,000 $ 2,750 Payable to: Customers (Note 2) 664,874 594,737 Brokers or dealers and clearing organizations (Note 3) 34,100 12,999 Depositors (Note 8) 67,588 63,125 Securities sold but not yet purchased, at market value (Note 5) 17,198 13,215 Accounts payable and accrued expenses 59,472 51,309 Accrued compensation and employee benefits 117,565 88,474 Long-term debt (Note 9) 53,350 67,190 ---------- ---------- 1,033,147 893,799 ---------- ---------- Liabilities subordinated to claims of general creditors (Note 10) 216,500 216,500 Partnership capital (Notes 11 and 13): Limited partners 92,965 95,807 Subordinated limited partners 37,446 29,178 General partners 146,817 123,172 ---------- ---------- 277,228 248,157 Partners' capital reserved for anticipated withdrawals 27,923 21,960 ---------- ---------- TOTAL PARTNERS' CAPITAL 305,151 270,117 ---------- ---------- TOTAL LIABILITIES AND CAPITAL $1,554,798 $1,380,416 ================================================================================================================= The accompanying notes are an integral part of these statements.
23 24 PART II ITEM 8. Financial Statements and Supplementary Data THE JONES FINANCIAL COMPANIES, L.P., LLP CONSOLIDATED STATEMENTS OF INCOME
Years Ended --------------------------------------------------- (Amounts in thousands, December 31, December 31, December 31, except per unit information) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Revenues: Commissions $ 772,027 $613,570 $451,952 Principal transactions 166,209 171,903 142,916 Investment banking 13,865 15,719 18,324 Interest and dividends 92,938 72,726 62,246 Other 90,240 78,150 47,347 ---------- -------- -------- Total Revenues 1,135,279 952,068 722,785 ---------- -------- -------- Expenses: Compensation and benefits (Note 14) 643,025 543,725 406,012 Occupancy and equipment (Notes 6 and 15) 134,133 105,516 84,895 Communications and data processing 76,403 70,318 54,555 Interest (Notes 2, 7, 8, 9, 10 and 11) 43,974 36,309 31,993 Payroll and other taxes 34,964 29,557 23,661 Floor brokerage and clearance fees 8,105 7,084 5,750 Other operating expenses 80,491 66,671 57,733 ---------- -------- -------- Total Expenses 1,021,095 859,180 664,599 ---------- -------- -------- Net income $ 114,184 $ 92,888 $ 58,186 ========== ======== ======== Net income allocated to: Limited partners $ 16,543 $ 16,530 $ 8,419 Subordinated limited partners 11,969 9,207 6,237 General partners 85,672 67,151 43,530 ---------- -------- -------- $ 114,184 $ 92,888 $ 58,186 ========== ======== ======== Net income per weighted average $1,000 equivalent partnership units outstanding: Limited partners $ 176.06 $ 170.63 $ 125.01 ========== ======== ======== Subordinated limited partners $ 320.61 $ 301.44 $ 225.00 ========== ======== ======== Weighted average $1,000 equivalent partnership units outstanding: Limited partners 93,962 96,879 67,345 ========== ======== ======== Subordinated limited partners 37,332 30,543 27,720 ========== ======== ======== ================================================================================================================ The accompanying notes are an integral part of these statements.
24 25 PART II ITEM 8. Financial Statements and Supplementary Data THE JONES FINANCIAL COMPANIES, L.P., LLP CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended --------------------------------------------------- December 31, December 31, December 31, (Amounts in thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income $ 114,184 $ 92,888 $ 58,186 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 39,741 30,880 22,340 Decrease (increase) in securities purchased under agreements to resell 143,550 (145,000) -- (Increase) decrease in net receivable from customers (208,973) 102,799 80,342 Decrease (increase) in net receivable from/payable to brokers or dealers and clearing organizations 16,351 11,437 (9,084) Increase in receivable from mortgages and loans (4,429) (7,280) (3,011) (Increase) decrease in securities owned, net (961) 24,709 287 Increase in payable to depositors 4,463 1,936 2,464 Increase in accounts payable and other accrued expenses 37,254 25,429 17,390 Other assets (13,998) (176) (7,988) --------- --------- --------- Net cash provided by operating activities 127,182 137,622 160,926 --------- --------- --------- CASH FLOWS USED BY INVESTING ACTIVITIES: Purchase of equipment, property and improvements (53,562) (59,504) (40,199) (Purchase) maturity of investment securities -- (48,117) 14,006 Purchase of Boone National Savings and Loan Association, F.A., net of cash acquired (Note 12) -- -- (2,103) --------- --------- --------- Net cash used by investing activities (53,562) (107,621) (28,296) --------- --------- --------- CASH FLOWS USED BY FINANCING ACTIVITIES: Increase (decrease) in bank loans 16,250 (29,753) (135,505) Issuance of long-term debt -- 7,993 30,512 Repayment of long-term debt (13,840) (10,930) (5,792) Issuance of subordinated liabilities -- 94,500 -- Repayment of subordinated liabilities -- -- (14,000) Issuance of partnership interests 8,833 3,365 50,523 Redemption of partnership interests (3,407) (5,733) (7,565) Withdrawals and distributions from partnership capital (84,576) (68,697) (43,373) --------- --------- --------- Net cash used by financing activities (76,740) (9,255) (125,200) --------- --------- --------- Net (decrease) increase in cash and cash equivalents (3,120) 20,746 7,430 CASH AND CASH EQUIVALENTS, beginning of year 64,858 44,112 36,682 --------- --------- --------- end of year $ 61,738 $ 64,858 $ 44,112 ========= ========= ========= Cash paid for interest $ 43,823 $ 33,982 $ 32,892 ============================================================================================================================ The accompanying notes are an integral part of these statements.
25 26 PART II Item 8. Financial Statements and Supplementary Data THE JONES FINANCIAL COMPANIES, L.P., LLP CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Subordinated Limited Limited General Partnership Partnership Partnership (Amounts in thousands) Capital Capital Capital Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1994 $ 62,374 $ 22,020 $ 91,450 $175,844 Issuance of partnership interests 39,681 10,842 -- 50,523 Redemption of partnership interests (3,646) (3,919) -- (7,565) Net income 8,419 6,237 43,530 58,186 Withdrawals and distributions (2,856) (3,656) (22,182) (28,694) Reserved for anticipated withdrawals (5,562) (2,581) (9,333) (17,476) -------- -------- -------- -------- Balance, December 31, 1995 98,410 28,943 103,465 230,818 Issuance of partnership interests -- 3,365 -- 3,365 Redemption of partnership interests (2,603) (3,130) -- (5,733) Net income 16,530 9,207 67,151 92,888 Withdrawals and distributions (5,337) (6,713) (39,171) (51,221) Reserved for anticipated withdrawals (11,193) (2,494) (8,273) (21,960) -------- -------- -------- -------- Balance, December 31, 1996 95,807 29,178 123,172 248,157 Issuance of partnership interests -- 8,833 -- 8,833 Redemption of partnership interests (2,842) (565) -- (3,407) Net income 16,543 11,969 85,672 114,184 Withdrawals and distributions (6,388) (8,262) (47,966) (62,616) Reserved for anticipated withdrawals (10,155) (3,707) (14,061) (27,923) -------- -------- -------- -------- Balance, December 31, 1997 $ 92,965 $ 37,446 $146,817 $277,228 ==================================================================================================================================== The accompanying notes are an integral part of these statements.
26 27 PART II Item 8. Financial Statements and Supplementary Data THE JONES FINANCIAL COMPANIES, L.P., LLP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 (Amounts in thousands) NOTE 1 - SUMMARY OF ACCOUNTING POLICIES THE PARTNERSHIP'S BUSINESS AND BASIS OF ACCOUNTING. The accompanying consolidated financial statements include the accounts of The Jones Financial Companies, L.P., LLP, and all wholly owned subsidiaries (the "Partnership"). All material intercompany balances and transactions have been eliminated. Investments in nonconsolidated companies which are at least 20% owned are accounted for under the equity method. The Partnership's principal operating subsidiary, Edward D. Jones & Co., L.P. ("EDJ"), is engaged in business as a registered broker/dealer primarily serving individual investors. The Partnership derives its revenues from the sale of listed and unlisted securities and insurance products, investment banking and principal transactions, and is a distributor of mutual fund shares. The Partnership conducts business throughout the United States and in Canada with its customers, various brokers and dealers, clearing organizations, depositories and banks. The Partnership acquired Boone National Savings and Loan Association, F.A. ("Association") on July 21, 1995 (Note 12). The Association operates primarily in Central Missouri and provides trust services to EDJ customers. The financial statements have been prepared under the accrual basis of accounting which requires the use of certain estimates by management in determining the Partnership's assets, liabilities, revenues and expenses. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL. The Partnership invests in short-term resale agreements collateralized by U.S. government and agency securities. The market value of the underlying collateral as determined daily, plus accrued interest thereon, must equal or exceed 102% of the carrying amount of the transaction. It is the Partnership's policy to have such underlying collateral deposited in its accounts at its custodian banks. Resale agreements are carried at the amount at which the securities will be subsequently resold as specified in the agreements. TRANSACTIONS. The Partnership's securities activities involve execution, settlement and financing of various securities transactions for customers. These transactions (and related revenue and expense) are recorded on a settlement-date basis, generally representing the third business day following the transaction date, which is not materially different than a trade-date basis. The Partnership may be exposed to risk of loss in the event customers, other brokers and dealers, banks, depositories or clearing organizations are unable to fulfill contractual obligations. For transactions in which it extends credit to customers, the Partnership seeks to control the risks associated with these activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. The Association makes commercial, real estate, and other loans to individuals primarily to customers in Central Missouri. SECURITIES OWNED. Securities owned are valued at current market prices. Unrealized gains or losses are reflected in principal transactions revenue. 27 28 PART II Item 8. Financial Statements and Supplementary Data EQUIPMENT, PROPERTY AND IMPROVEMENTS. Equipment, including furniture and fixtures, is depreciated using straight-line and accelerated methods over estimated useful lives of five to ten years. Buildings are depreciated using the straight-line method over their useful lives, which are estimated between thirty and thirty-two years. Property improvements are amortized based on the remaining life of the property or economic useful life of the improvement, whichever is less. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged against income as incurred, whereas significant renewals and betterments are capitalized. SEGREGATED CASH AND SECURITIES OWNED. Cash and securities of $43,474 and $36,063 were segregated in a special bank account for the benefit of customers as of December 31, 1997 and 1996, respectively, under rule 15c3-3 of the Securities and Exchange Commission. INCOME TAXES. Income taxes have not been provided for in the consolidated financial statements since The Jones Financial Companies, L.P., LLP, is organized as a partnership, and partners are liable for their own tax payments. NOTE 2 - RECEIVABLE FROM AND PAYABLE TO CUSTOMERS Accounts receivable from and payable to customers include margin balances and amounts due on uncompleted transactions. Values of securities owned by customers and held as collateral for these receivables are not reflected in the financial statements. Substantially all amounts payable to customers are subject to withdrawal upon customer request. The Partnership pays interest on certain credit balances in customer accounts. NOTE 3 - RECEIVABLE FROM AND PAYABLE TO BROKERS OR DEALERS AND CLEARING ORGANIZATIONS The components of receivable from and payable to brokers or dealers and clearing organizations are as follows:
1997 1996 - ------------------------------------------------------------------------------------ Securities failed to deliver $ 4,851 $ 4,835 Deposits paid for securities borrowed 10,985 7,231 Deposits with clearing organizations 2,318 2,320 Other 8,295 7,313 ------- ------- Total receivable from brokers or dealers and clearing organizations $26,449 $21,699 ======= ======= Securities failed to receive $10,873 $ 6,156 Deposits received for securities loaned 23,207 6,820 Other 20 23 ------- ------- Total payable to brokers or dealers and clearing organizations $34,100 $12,999 ====================================================================================
"Fails" represent the contract value of securities that have not been received or delivered by settlement date. 28 29 PART II Item 8. Financial Statements and Supplementary Data NOTE 4 - RECEIVABLE FROM MORTGAGES AND LOANS Receivable from mortgages and loans is comprised of the Association's mortgage loans, which are primarily adjustable rate, commercial, and other loans, net of discounts, deferred origination fees and the allowance for loan losses. The carrying amounts of the receivables approximate their fair values. NOTE 5 - SECURITIES OWNED Securities owned are summarized as follows (at market value):
1997 1996 ----------------------- ------------------------ Securities Securities Sold but Sold but Securities not yet Securities not yet Owned Purchased Owned Purchased - ------------------------------------------------------------------------------------------------------------------- Inventory Securities: Certificates of deposit $ 7,921 $ 1,392 $ 3,783 $ -- U.S. and Canadian government and U.S. agency obligations 9,338 8,599 9,796 7,450 State and municipal obligations 32,319 190 31,765 72 Corporate bonds and notes 8,689 4,881 8,140 3,299 Corporate stocks 5,140 2,136 4,889 2,394 -------- ------- -------- ------- $ 63,407 $17,198 $ 58,373 $13,215 ======== ======= ======== ======= Investment Securities: U.S. government and agency obligations $171,087 $171,177 ======== ========
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 futures contracts. The amount of the securities purchased or sold will fluctuate on a daily basis due to changes in interest rates and market conditions. Any gain or loss on the hedging activities is recognized in Principal transaction revenue. NOTE 6 - EQUIPMENT, PROPERTY AND IMPROVEMENTS Equipment, property and improvements are summarized as follows:
1997 1996 - ------------------------------------------------------------------------------------ Land $ 13,671 $ 13,671 Buildings and improvements 94,561 93,726 Equipment 173,614 139,085 Furniture and fixtures 86,502 72,322 --------- --------- Total equipment, property and improvements 368,348 318,804 Accumulated depreciation and amortization (180,808) (145,085) --------- --------- Equipment, property and improvements, net $ 187,540 $ 173,719 ========= =========
29 30 PART II Item 8. Financial Statements and Supplementary Data NOTE 7 - BANK LOANS EDJ borrowed $15,000 as of December 31, 1997 from banks on a short-term basis primarily to finance customer margin balances and inventory securities. As of December 31, 1997, the Partnership had bank lines of credit aggregating $575,000 of which $500,000 were through uncommitted facilities. Actual borrowing availability is primarily based on securities owned and customers' margin securities. At December 31, 1997 and 1996, collateral with a market value of $766,264 and $584,636, respectively, was available to support secured bank loans of EDJ. The Association had loans from The Federal Home Loan Bank of $4,000 and $2,750 as of December 31, 1997 and 1996, respectively, which are secured by mortgage loans. All loans outstanding approximate their fair value. Interest is at a fluctuating rate (weighted average rate of 6.6% and 5.5% at December 31, 1997 and 1996, respectively) based on short-term lending rates. The average of the aggregate short-term bank loans outstanding was $10,424, $3,025 and $97,527 and the average interest rate (computed on the basis of the average aggregate loans outstanding) was 6.0%, 6.7%, and 6.8% for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE 8 - PAYABLE TO DEPOSITORS Amounts payable to depositors is comprised of the Association's various savings instruments offered to its customers, which include transaction accounts and certificates of deposit with maturities ranging from 90 days to 72 months. The carrying amounts of the deposits approximate their fair values. NOTE 9 - LONG-TERM DEBT Long-term debt is comprised of the following:
1997 1996 - -------------------------------------------------------------------------------------------------------------- Notes payable, secured by equipment, interest at variable rates ranging from 6.95% to 8.5% at December 31, 1997, due in installments of principal plus interest, maturing from July 30, 2000 through December 6, 2000. $ 9,250 $17,062 Notes payable, secured by property, interest rates ranging from 7.59% to 8.72% at December 31, 1997, principal and interest due in monthly installments, maturing from June 5, 2003 through April 5, 2008. 40,403 44,227 Notes payable, secured by the Association's capital and a letter of credit, interest at variable rates ranging from 5.97% to 7.6% at December 31, 1997, annual principal due plus interest, maturing from July 24, 1998 through June 30, 2000. 3,697 5,901 ------- ------- $53,350 $67,190 ======== =======
30 31 PART II Item 8. Financial Statements and Supplementary Data Required annual principal payments, as of December 31, 1997, are as follows:
Year Principal Payment ---------- ----------------- 1998 $ 8,944 1999 7,967 2000 9,610 2001 5,329 2002 5,791 Thereafter 15,709 ------- $53,350 =======
The Partnership has land, buildings and equipment and the Associaton's capital, with carrying values at December 31, 1997 of $62,283 and $10,086, respectively, which are subject to security agreements which collateralize various notes payable. Certain agreements contain restrictions that among other things, require maintenance of certain financial ratios, levels of indebtedness and limit the withdrawal of partnership capital. The Partnership has estimated the fair value of the long-term debt to be approximately $51,407 and $68,057 as of December 31, 1997 and 1996, respectively. NOTE 10 - LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS Liabilities subordinated to the claims of general creditors consist of:
1997 1996 ------------------------------- Capital notes, 8.18%, due in annual installments of $10,500 commencing on September 1, 2000, with a final installment on September 1, 2008. $ 94,500 $ 94,500 Capital notes, 7.95%, due in annual installments of $10,225 commencing on April 15, 1998, with a final installment of $10,200 due on April 15, 2006. 92,000 92,000 Capital notes, 8.96%, due in annual installments of $6,000 commencing on May 1, 1998, with a final installment on May 1, 2002 30,000 30,000 -------- -------- $216,500 $216,500 ======== ========
31 32 PART II Item 8. Financial Statements and Supplementary Data Required annual principal payments, as of December 31, 1996, are as follows: 1998 $ 16,225 1999 16,225 2000 26,725 2001 26,725 2002 26,725 Thereafter 103,875 -------- $216,500 ========
The capital note agreements contain restrictions that among other things, require maintenance of certain financial ratios, restrict encumbrance of assets and creation of indebtedness and limit the withdrawal of partnership capital. As of December 31, 1997, the Partnership was required, under the note agreements, to maintain minimum partnership capital of $165,000 and Net Capital as computed in accordance with the uniform Net Capital Rule of 7.5% of aggregate debit items, or $65,439 (See Note 13). The subordinated liabilities are subject to cash subordination agreements approved by the New York Stock Exchange and, therefore, are included in the Partnership's computation of Net Capital under the Securities and Exchange Commission's uniform Net Capital Rule. The Partnership has estimated the fair value of the subordinated capital notes to be approximately $226,655 and $222,396 as of December 31, 1997 and 1996, respectively. NOTE 11 - PARTNERSHIP CAPITAL The limited partnership capital, consisting of 92,965 and 95,807 $1,000 units at December 31, 1997 and 1996, 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 $7,054, $7,271 and $5,055, for the years ended December 31, 1997, 1996 and 1995, respectively, paid to limited partners on capital contributed. The subordinated limited partnership capital, consisting of 37,446 and 29,178 $1,000 units at December 31, 1997 and 1996, 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 terms of the Partnership Agreement, general and subordinated limit partner capital withdrawals are paid out in four equal installments over a three year period. NOTE 12 - ACQUISITION The Partnership purchased Boone National Savings and Loan Association, F.A., in a stock purchase transaction for approximately $8.6 million in July, 1995. The acquisition was accounted for as a purchase, and accordingly, the operating results of the Association have been included in the Partnership's consolidated results since the effective acquisition date. The acquisition was funded with $5 million of long-term debt and a $3.6 million note held by the sellers. As of December 31, 1997, the total assets of the Association were approximately $83.1 million. 32 33 PART II Item 8. Financial Statements and Supplementary Data NOTE 13 - CAPITAL REQUIREMENTS As a result of its activities as a broker/dealer, EDJ, is subject to the Net Capital provisions of Rule 15c3-1 of the Securities Exchange Act of 1934 and the capital rules of the New York Stock Exchange. Under the alternative method permitted by the rules, EDJ must maintain minimum Net Capital, as defined, equal to the greater of $250 or 2% of aggregate debit items arising from customer transactions. The Net Capital Rule also provides that partnership capital may not be withdrawn if resulting Net Capital would be less than 5% of aggregate debit items. Additionally, certain withdrawals require the consent of the SEC to the extent they exceed defined levels even though such withdrawals would not cause Net Capital to be less than 5% of aggregate debit items. At December 31, 1997, EDJ's Net Capital of $258,865 was 30% of aggregate debit items and its Net Capital in excess of the minimum required was $241,415. Net Capital and the related capital percentage may fluctuate on a daily basis. The Association is required under federal regulation to maintain specified levels of liquidity and capital standards. The Association has been in compliance with these regulations at all times. NOTE 14 - EMPLOYEE BENEFIT PLAN The Partnership maintains a profit sharing plan covering all eligible employees. Contributions to the plan are at the discretion of the Partnership. Additionally, participants may contribute on a voluntary basis. Approximately $29,014, $23,634, and $14,951 were provided by the Partnership for its contributions to the plan for the years ended December 31, 1997, 1996 and 1995, respectively. No post retirement benefits are provided. NOTE 15 - COMMITMENTS Furniture, fixtures, computer and communication equipment are rented under various operating leases. Additionally, branch offices are leased on a three to five year basis and are cancellable at the option of the Partnership. Rent expense was $73,146, $55,959, and $43,923 for the years ended December 31, 1997, 1996 and 1995, respectively. The Partnership's non-cancelable lease commitments greater than one year are summarized below: 1998 $40,919 1999 37,590 2000 29,480 2001 26,943 2002 16,203 Thereafter 15,220
NOTE 16 - CONTINGENCIES Various legal actions are pending against the Partnership with certain cases claiming substantial damages. These actions are in various stages and the results of such actions cannot be predicted with certainty. In the opinion of management, after consultation with legal counsel, the ultimate resolution of these actions is not expected to have a material adverse impact on the Partnership's results of operations or financial condition. 33 34 PART II ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Jones Financial Companies, L.P., LLP, being organized as a partnership, does not have individuals associated with it designated as officers or directors. As of February 28, 1998, the Partnership was comprised of 154 general partners, 2,541 limited partners and 76 subordinated limited partners. Under the terms of the Partnership Agreement, John W. Bachmann is designated Managing Partner and in said capacity has primary responsibility for administering the Partnership's business, determining its policies, controlling the management and conduct of the Partnership's business and has the power to appoint and dismiss general partners of the Partnership and to fix the proportion of their respective interests in the Partnership. Subject to the foregoing, the Partnership is managed by its 154 general partners. The Management Committee of the Partnership is comprised of John W. Bachmann, Douglas E. Hill, Michael R. Holmes, Richie L. Malone, Steven Novik, Darryl L. Pope, Gary D. Reamey, Connie M. Silverstein, Robert Virgil, Jr., and James D. Weddle. The purpose of the Management 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 Management 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. A listing of the names of the management committee, ages, dates of becoming a general partner and area of responsibility for each as of February 28, 1998:
Name Age Partner Area of Responsibility - ------------------------------------------------------------------------------------ John W. Bachmann 59 1970 Managing Partner Douglas E. Hill 53 1974 Marketing Michael R. Holmes 39 1996 Human Resources Richie L. Malone 49 1979 Information Systems Steven Novik 48 1983 Finance & Accounting Darryl L. Pope 58 1971 Operations Gary D. Reamey 42 1984 Canada Division Connie M. Silverstein 42 1988 Banking Services Robert Virgil, Jr. 63 1993 Headquarters Administration James D. Weddle 44 1984 Sales Management - ------------------------------------------------------------------------------------
Each member of the management committee has been a general partner of the Partnership for more than five preceding years, except for Robert Virgil, Jr. and Michael R. Holmes. Prior to 1993, Robert Virgil, Jr. served as dean of the John M. Olin school of Business at Washington University. Prior to 1996, Michael R. Holmes served as the Human Resource Officer for Automatic Data Processing. John W. Bachmann is a director of Trans World Airlines, St. Louis, Missouri. Robert Virgil, Jr. is a director of CPI Corp., St. Louis, Missouri, General American Life Insurance Company, St. Louis, Missouri, and OmniQuip International, Inc., Port Washington, Wisconsin. 34 35 PART III ITEM 11. EXECUTIVE COMPENSATION The following table sets forth all compensation paid by the Partnership during the three most recent years to the five general partners receiving the greatest compensation (including respective shares of profit participation).
Returns to General Partner Capital ------------------------------ Net income General Partner Deferred allocated invested Compen- to General Capital at Total Year Salaries sation Partners 12/31 - ----------------------------------------------------------------------------------------------------- John W. Bachmann 1997 175,000 7,976 2,528,085 4,894,502 2,711,061 1996 120,000 7,104 2,356,162 4,719,726 2,483,266 1995 120,000 6,077 1,721,341 4,500,612 1,847,418 Douglas E. Hill 1997 135,000 7,976 2,843,359 5,506,315 2,986,335 1996 118,000 7,104 2,426,261 4,978,341 2,551,365 1995 118,000 6,077 1,631,400 4,241,956 1,755,477 Ron Larimore 1997 135,000 7,976 2,403,970 4,665,072 2,546,946 1996 118,000 7,104 2,414,599 4,978,341 2,539,703 1995 118,000 6,077 1,641,246 4,293,687 1,765,323 Richie L. Malone 1997 135,000 7,976 2,764,542 5,353,361 2,907,518 1996 118,000 7,104 2,426,261 4,978,341 2,551,365 1995 118,000 6,077 1,610,391 4,293,687 1,734,468 Darryl L. Pope 1997 135,000 7,976 2,488,675 4,818,025 2,631,651 1996 118,000 7,104 2,182,717 4,525,765 2,307,821 1995 118,000 6,077 1,629,819 4,241,956 1,753,896 ===================================================================================================== Each non-selling general partner receives a salary generally ranging from $90,000 - $175,000 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. 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. 35 36 PART III Item 11. Executive Compensation 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. These interests in the Partnership held by each general partner currently range from .05% to 3.60% in 1997 (.05% to 3.85% in 1996 and .1% to 4.65% in 1995). At the discretion of the Managing Partner, the partnership agreement provides that, generally, the first eight percent of net income allocable to general partners be distributed on the basis of individual merit or otherwise as determined by the Managing Partner. Thereafter, the remaining net income allocable to general partners is distributed based upon each individual's percentage interest in the Partnership. Net income allocable to general partners is the amount remaining after payment of interest and earnings on capital invested to limited partners and subordinated limited partners. Ron Larimore resigned as a general partner effective January 1, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Being organized as a limited partnership, management is vested in the general partners thereof and there are no other outstanding "voting" or "equity" securities. It is the opinion of the Partnership that the general partnership interests are not securities within the meaning of federal and state securities laws primarily because each of the general partners participates in the management and conduct of the business. In connection with outstanding limited and subordinated limited partnership interests (non-voting securities), 111 of the general partners also own limited partnership interests and 36 of the general partners also own subordinated limited partnership interests, as noted in the table below. As of February 28, 1998:
Name of Amount of Beneficial Beneficial Percent of Title of Class Owner Ownership Class - ------------------------------------------------------------------------------- Limited Partnership All General Interests Partners as a Group $ 9,792,000 11% Subordinated All General Limited Partnership Partners as Interests a Group $17,074,000 39% - -------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In the ordinary course of its business the Partnership has extended credit to certain of its partners and employees in connection with their purchase of securities. Such extensions of credit have been made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with non-affiliated persons, and did not involve more than the normal risk of collectibility or present other unfavorable features. The Partnership also, from time to time and in the ordinary course of business, enters into transactions involving the purchase or sale of securities from or to partners or employees and members of their immediate families, as principal. Such purchases and sales of securities on a principal basis are effected on substantially the same terms as similar transactions with unaffiliated third parties. 36 37 PART III ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K INDEX (a) (1) The following financial statements are included in Part II, Item 8: Page No. Report of Independent Public Accountants 21 Consolidated Statements of Financial Condition as of December 31, 1997 and 1996 22 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 24 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 25 Consolidated Statements of Changes in Partnership Capital for the years ended December 31, 1997, 1996 and 1995 26 Notes to Consolidated Financial Statements 27 All schedules are omitted because they are not required, inapplicable, or the information is otherwise shown in the financial statements or notes thereto. (b) Report on Form 8-K No reports on Form 8-K were filed in the fourth quarter of 1997. (c) Exhibits Reference is made to the Exhibit Index hereinafter contained. 37 38 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.P., LLP -------------------------------------------------- By (Signature and Title) /s/ John W. Bachmann -------------------------------------------------- John W. Bachmann, Managing Partner Date March 17, 1998 -------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacity and on the date indicated. By (Signature and Title) /s/ John W. Bachmann -------------------------------------------------- John W. Bachmann, Managing Partner Date March 17, 1998 -------------------------------------------------- By (Signature and Title) /s/ Steven Novik -------------------------------------------------- Steven Novik, Chief Financial Officer Date March 17, 1998 -------------------------------------------------- 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. 38 39 EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
Exhibit Number Page Description 3.1 Eighth Amended and Restated Limited Partnership Agreement of The Jones Financial Companies, L.P., LLP, dated November 1, 1996, incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 27, 1996. 3.2 Form of Limited Partnership Agreement of Edward D. Jones & Co., L.P. 10.1 Form of Cash Subordination Agreement between the Registrant and Edward D. Jones & Co., incorporated herein by reference to Exhibit 10.1 to the Company's registration statement of Form S-1 (Reg. No. 33-14955). 10.2 Master Lease Agreement dated as of October 17, 1988, between Edward D. Jones & Co., L.P., and BancBoston Leasing, incorporated herein by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1988. 10.3 Satellite Communications Agreement dated as of September 12, 1988, between Hughes Network Systems and Edward D. Jones & Co., L.P., incorporated herein by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended September 30, 1988. 10.4 Agreements of Lease between EDJ Leasing Company and Edward D. Jones & Co., L.P., dated August 1, 1991, incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report or Form 10-K for the year ended September 27, 1991. 10.5 Edward D. Jones & Co., L.P. Note Purchase Agreement dated as of May 8, 1992, incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 26, 1992. 10.6 Purchase and Sale Agreement by and between EDJ Leasing Co., L.P. and the Resolution Trust Corporation incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. Incorporated by reference to previously filed exhibits. 39 40 10.7 Master Lease Agreement between EDJ Leasing Company and Edward D. Jones & Co., L.P., dated March 9, 1993, and First Amendment to Lease dated March 9, 1994, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1994. 10.8 Purchase Agreement by and between Edward D. Jones & Co., L.P. and Genicom Corporation dated November 25, 1992, incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.9 Mortgage Note and Deed of Trust and Security Agreement between EDJ Leasing Co., L.P. and Nationwide Insurance Company dated March 9, 1993, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 24, 1993. 10.10 Mortgage Note and Amendment to Deed of Trust between EDJ Leasing Co., L.P. and Nationwide Insurance Company dated March 9, 1994, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1994. 10.11 Mortgage Note; Deed of Trust and Security Agreement; Assignment of Leases, Rents and Profits; and Subordination and Attornment Agreement between EDJ Leasing Co., L.P. and Nationwide Insurance Company dated April 6, 1994, incorporated by reference to exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1994. 10.12 Note Purchase Agreement by Edward D. Jones & Co., L.P., for $92,000,000 aggregate principal amount of 7.95% subordinated capital notes due April 15, 2006, incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 24, 1994. 10.13 Equipment Lease Agreement between IFA Incorporated and Edward D. Jones & Company, L.P., dated June 8, 1994, incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 24, 1994. 10.14 Master Lease Agreement and Addendum by and between Edward D. Jones & Co., L.P. and General Electric Capital Corporated dated April 21, 1994, incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 24, 1994. 10.15 Equipment Lease by and between Edward D. Jones & Co., L.P., and EDJ Leasing Co., L.P. dated April 1, 1994, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 24, 1994. 40 41 10.16 $8,200,000 Promissory Note to Commerce Bank National Association by EDJ Leasing Co., L.P., dated April 5, 1994, incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 24, 1994. 10.17 Agreement and Plan of Acquisition between The Jones Financial Companies and Boone National Savings and Loan Association, F.A., incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. 10.18 Credit Agreement between EDJ Leasing Co., L.P. and Southtrust Bank of Alabama, N.A. dated October 26, 1994 incorporated herein by reference to the company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.19 Master Lease Agreement between EDJ Leasing Company and Edward D. Jones & Co., L.P. dated October 26, 1994. 10.20 Lease Financing Line of Credit Agreement and Term Note Agreement between EDJ Leasing Co., L.P. and Enterprise Bank dated December 6, 1994 incorporated herein by reference to the company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.21 Master Lease Agreement between EDJ Leasing Co. and Edward D. Jones & Co., L.P., dated December 6, 1994 incorporated herein by reference to the company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.22 Purchase Agreement by and between Edward D. Jones & Co., L.P. and Tektronix, Inc. dated February 28, 1995 incorporated herein by reference to the company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.23 Loan Agreement between Edward D. Jones & Co., L.P. and Boatmen's Bank dated April 28, 1995, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1995. 10.24 Conforming Systems Agreement between Tri-Tek Information Systems, Inc. and Edward D. Jones & Co.., L.P., dated May 31, 1995, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. 10.25 Mortgage Note; South Second Deed of Trust and Security Agreement between EDJ Leasing Co., L.P. and Nationwide Life Insurance Company dated August 31, 1995, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 29, 1995. 41 42 10.26 Mortgage Note; North Second Deed of Trust and Security Agreement between EDJ Leasing Co., L.P. and Nationwide Life Insurance Company dated August 31, 1995, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 29, 1995. 10.27 Note Purchase Agreement by Edward D. Jones & Co., L.P. for $94,500,000 aggregate principal amount of 8.18% subordinated capital notes due September 1, 2008, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 27, 1996. 21 Subsidiaries of the Registrant, filed herewith. 23.1 43 Consent of Independent Public Accountants. 25 Delegation of Power of Attorney to Managing Partner contained within Exhibit 3.1 27 Financial Data Schedule (provided for the Securities and Exchange Commission only).
42 EX-23.1 2 CONSENT OF EXPERT 1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, in The Jones Financial Companies, L.P., LLP's previously filed S-2 Registration Statement File No. 33-61049 and S-8 Registration Statements File No. 33-35247 and No. 33-62734. ARTHUR ANDERSEN LLP St. Louis, Missouri March 17, 1998 43 EX-27 3 FINANCIAL DATA SCHEDULE
BD This schedule contains summary financial information extracted from the financial statements for The Jones Financial Companies for the 12 months ended December 31, 1997 and is qualified in its entirety by reference to such financial statements 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 61,738 980,518 1,450 10,985 234,494 187,540 1,554,798 19,000 743,355 0 23,207 17,198 269,850 0 0 0 277,228 1,554,798 0 92,938 938,236 13,865 90,240 43,974 643,025 114,184 114,184 0 0 114,184 0 0
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