UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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_______________________
FORM 10-K
(Mark
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission file number 0-16633
THE JONES FINANCIAL COMPANIES, L.L.L.P.
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(Exact name of registrant as specified in its Partnership Agreement)
MISSOURI 43-1450818
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12555 Manchester Road
Des Peres, Missouri 63131
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (314) 515-2000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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NONE NONE
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| (State or other jurisdiction of | (IRS Employer Identification No.) | |
| incorporation or organization) | | |
| | | |
| 12555 Manchester Road | | |
| Des Peres, Missouri | 63131 | |
| | | |
| (Address of principal executive offices) | (Zip Code) | |
| | | |
| | | |
| Registrant's telephone number, including area code | (314) 515-2000 | |
| | |
| Securities registered pursuant to Section 12(b) of the Act: | | |
| Name on each exchange | |
| Title of each class | on which registered | |
| ____________________ | ____________________ | |
| | |
| NONE | NONE | |
| ____________________ | ____________________ | |
| | |
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
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(Title
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined byin Rule 405 of the Securities Act. YES [ ] NO [ X ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES [ ] NO [ X ]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X[X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer",filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ X ] (DoSmaller reporting company [ ]
(do not check if a smaller reporting company) Smaller reporting company [ ]
Indicate
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES[Yes [ ] NO [X]
No [ X ]
As of March 28,June 27, 2008, there were489,558 units of limited partnership interest ("Units") are outstanding, each representing $1,000 of limited partner capital. There is no voting securities held by non-affiliates
of the registrant.
public or private market for such Units.
DOCUMENTS INCORPORATED BY REFERENCE None
THE JONES FINANCIAL COMPANIES, L.L.L.P.
TABLE OF CONTENTS
The Jones Financial Companies, L.L.L.P. ("the Partnership"(the "Partnership") is organized under the Revised Uniform Limited Partnership Act of the State of Missouri. Unless expressly stated otherwise or the context otherwise requires, the terms "Registrant" and "Partnership" refer to The Jones Financial Companies, L.L.L.P. and any or all of its consolidated subsidiaries. The Partnership is the successor to Whitaker & Co., which was established in 1871 and dissolved on October 1, 1943, the organization date of Edward D. Jones & Co., L.P. ("Edward Jones"), the Partnership's principal subsidiary. Edward Jones was reorganized on August 28, 1987, which date represents the organization date of The Jones Financial Companies, L.L.L.P.
The Partnership's principal operating subsidiary, Edward Jones, is a registered broker-dealer primarily serving individual investors. Edward Jones primarily derives its revenues from the retail brokerage business through the sale of listed and unlisted securities and insurance products, investment banking, principal transactions and as a distributor of mutual fund shares, and revenue related to assets held by and account services provided to its clients.customers. Edward Jones conducts business throughout the United States of America, Canada and the United Kingdom ("U.K.") with its customers, various brokers and dealers, clearing organizations, depositories and banks.
The Partnership is a member firm of the New York, Chicago and London stock
exchanges, a participating organization in the Toronto stock exchange and is a registered broker-dealer with the Financial Industry Regulatory Authority, Inc. ("FINRA"). As of February 29, 2008,27, 2009, the Partnership was composed of 326337 general partners, 11,22010,852 limited partners and 187206 subordinated limited partners.
ORGANIZATIONAL STRUCTURE
At December 31, 2007,2008, the Partnership was organized as follows: The Partnership owns 100% of the outstanding common stock of EDJ Holding Company, Inc., and 100% of the outstanding common stock of LHC, Inc. ("LHC"), each of which is a Missouri corporation. EDJ Holding Company, Inc. is the sole general partner of Edward Jones and LHC, Inc. areis the sole general partnerspartner of Edward D. Jones & Co., L.P. ("Edward Jones") and EDJ Leasing Co., L.P. ("Leasing"), respectively. The Partnership also holds all of the limited partnership equity of Edward D. Jones & Co., L.P., and EDJ
Leasing, Co., L.P., each of which is a Missouri limited partnership. The Partnership owns 100% of the equity of Edward Jones Trust Company ("EJTC").
Edward Jones owns 100% of the limited partnership equity of Edward Jones, an Ontario, Canada limited partnership ("Edward Jones Canada"), and all of the common stock of Edward D. Jones & Co. Canada Holding Co., Inc., an Ontario, Canada corporation, its sole general partner.partner of Edward Jones Canada. Edward Jones Canada owns all of the partnership equity of Edward Jones Insurance Agency, an Ontario, Canada limited partnership, all of the common stock of Edward D. Jones & Co. Agency Holding Co., Inc., an Ontario, Canada corporation, its general partner, and 100% of the common stock of Edward Jones Insurance Agency (Quebec) Inc., a Canada corporation. Edward Jones owns 100% of the equity of Edward Jones Limited ("EJL"), a U.K. private limited company, which owns 100% of the equity of Edward Jones Nominees Limited.
Edward Jones owns 100% of the equity of EJ Mortgage L.L.C., a Missouri limited liability company. EJ Mortgage L.L.C. owns 49.9% of Edward Jones Mortgage, a joint venture. Edward Jones owns 100% of the outstanding common stock of Conestoga Securities, Inc., a Missouri corporation. Conestoga owns 100% of the outstanding stock of CIP Management, Inc., which is the managing general partner of CIP Management, L.P. CIP Management, L.P. is the
PART I
Item 1. Business, continued
managing general partner of Community Investment Partners II, L.P.
, L.L.L.P., Community Investment Partners III, L.P., L.L.L.P., Community Investment Partners IV,
3
PART I
Item 1. Business, continued L.P., L.L.L.P. and Community Investment Partners V, L.P., L.L.L.P., business development companies. Edward Jones holds all of the limited partnership equity in EDJ Ventures, Ltd., a Missouri limited partnership, EDJ Ventures, Ltd.partnership. Conestoga Securities, Inc., is the general partner of EDJ Ventures, Ltd. Edward Jones owns, as a limited partner, 49.5% of Passport Research Ltd., a Pennsylvania limited partnership, which acts as an investment advisor to a money market mutual fund. Edward Jones owns 8%7% of the Customer Account Protection Company Holdings, Inc. ("CAPCO"(“CAPCO”), a captive insurance group.
Edward Jones is the sole member of Edward Jones Insurance Agency Holding, L.L.C., a Missouri limited liability company;company, California Agency Holding, L.L.C., a California limited liability company;company and Edward Jones Insurance Agency of New Mexico, L.L.C., a New Mexico limited liability company. Edward Jones and Edward Jones Insurance Agency Holding, L.L.C. are members of Edward Jones Insurance Agency of Massachusetts, L.L.C., a Massachusetts limited liability company. Edward Jones Insurance Agency Holding, L.L.C. and California Agency Holding, L.L.C. are members of Edward Jones Insurance Agency of California, L.L.C., a California limited liability company. All of the insurance agencies engage in general insurance brokerage activities.
During 2002, Edward Jones' affiliates, Edward Jones Insurance Agency of
Nevada, Inc., Edward Jones Insurance Agency of Alabama, L.L.C., EJ Insurance
Agency of Ohio and Edward Jones Insurance Agency of Texas, Inc., were
dissolved. Edward Jones' affiliates, Edward Jones Nominees PEP Limited and
Edward Jones Nominees ISA Limited, both 100% owned by Edward Jones Limited, a
U.K. private limited company, were also dissolved. Edward Jones Insurance
Agency (Quebec) Inc., a Canada corporation, was organized. During 2003,
Community Investment Partners V, L.P., L.L.L.P., a business development
company, was organized, and an Edward Jones affiliate, Edward Jones Insurance
Agency of Montana, L.L.C., was dissolved.
During 2004, Passport Research II Ltd., a Pennsylvania limited partnership, was organized and Edward Jones ownsowned 49.5% of the limited partnership interest. The Edward Jones affiliates, Edward
Jones Insurance Agency of Michigan, L.L.C. and Cornerstone Mortgage Investment
Group II, Inc., were dissolved. During 2004, S-J Capital Corp., a Missouri Corporation of which Edward Jones owned 50% of the issued common stock was dissolved.
During 2006, the Edward Jones affiliates, Unison Investment Trusts, L.P., d/b/a Unison Investment Trusts, Ltd. and Unison Capital Corp., Inc. were dissolved. The Edward Jones affiliate, Passport Research II Ltd. was sold.sold in 2006. The Partnership's subsidiary Boone National Savings and Loan Association F.A., was renamed Edward Jones Trust Company.
During 2007, an Edward Jones affiliate, Edward Jones Insurance Agency of Wyoming, LLC, was dissolved.
4
PART I
Item 1. Business, continued
REVENUES BY SOURCE.
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):
2007 2006 2005
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Commissions
Mutual funds $ 1,257,939 $ 1,109,905 $ 1,035,330
Listed securities 271,014 259,676 260,369
Insurance 272,352 232,281 210,887
Over-the-counter securities 56,882 61,818 62,307
Asset fees 1,098,621 877,771 716,904
Account and activity fees 441,027 378,905 335,105
Principal transactions 384,609 267,038 238,884
Interest and dividends 309,357 253,607 209,734
Investment banking 34,723 32,505 32,892
Other revenue 20,343 44,249 94,038
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Total revenue $ 4,146,867 $ 3,517,755 $ 3,196,450
============= ============= =============
| | | 2008 | | | 2007 | | | 2006 | |
| Commissions | | | | | | | | | |
| Mutual funds | | $ | 958,435 | | | $ | 1,257,939 | | | $ | 1,109,905 | |
| Listed securities | | | 282,812 | | | | 271,014 | | | | 259,676 | |
| Insurance | | | 300,834 | | | | 272,352 | | | | 232,281 | |
| Over-the-counter securities | | | 44,519 | | | | 56,882 | | | | 61,818 | |
| Asset fees | | | 1,067,934 | | | | 1,098,621 | | | | 877,771 | |
| Principal transactions | | | 527,569 | | | | 384,609 | | | | 267,038 | |
| Account and activity fees | | | 473,088 | | | | 441,027 | | | | 378,905 | |
| Interest and dividends | | | 188,939 | | | | 309,357 | | | | 253,607 | |
| Investment banking | | | 52,747 | | | | 34,723 | | | | 32,505 | |
| Other revenue | | | (37,842 | ) | | | 20,343 | | | | 44,249 | |
| Total revenue | | $ | 3,859,035 | | | $ | 4,146,867 | | | $ | 3,517,755 | |
| | | | | | | | | | | | | |
involved in
allocatingrequired to allocate overhead, it is impractical to identify and specify expenses applicable to each aspect of the Partnership's operations. Furthermore, the net income of firms principally engaged in the securities business, including the Partnership's, is affected by net interest savingsearnings as a result of customer and other credit balances and interest earned on customer margin accounts.
Customer transactions in securities are effected on either a cash or a margin basis. In a margin account, the Partnership lends the customer a portion of the purchase price up to the limits imposed by the margin regulations of the Federal Reserve Board ("Regulation T"T''), New York Stock Exchange, Inc. ("NYSE") margin requirements, or the Partnership's internal policies, which may be more stringent than the regulatory minimum requirements. Such loans are secured by the securities held in customer margin accounts. These loans provide a source of income to the Partnership since it is able to lend to customers at rates which are higher than the rates at which it is able to borrow on a secured basis. The Partnership is permitted to use securities owned by margin customers having an aggregate market value generally up to 140% of the debit balance in margin accounts as collateral for the borrowings. The Partnership may also use funds provided by free credit balances in customer accounts to finance customer margin account borrowings.
In permitting customers to purchase securities on margin, the Partnership assumes the risk of a market decline which could reduce the value of its collateral below a customer's indebtedness before the collateral is sold. Under the NYSE rules, the Partnership requires, in the event of a decline in the market value of the securities in a margin account, the customer to deposit additional securities or cash so that, at all times, the loan to the customer is no greater than 75% of the value of the securities in the account (or to sell a sufficient amount of securities in order to maintain this percentage). The Partnership, however, imposes a more stringent maintenance requirement.
5
PART I
Item 1. Business, continued
COMMISSIONS
Commissions
Commissions revenue is primarily comprisescomprised of charges to customers for the purchase or sale of securities, mutual fund shares and insurance products. The following briefly describes the Partnership'sPartnership’s sources of commissions revenue.
MUTUAL FUNDS.
Mutual Funds. The Partnership distributes mutual fund shares in continuous offerings and new underwritings. As a dealer in mutual fund shares, the Partnership receives a dealer'sdealer’s discount which generally ranges from 1% to 5
3/4%5% of the purchase price of the shares, depending on the terms of the dealer agreement and the amount of the purchase. Growth in mutual fund commission
revenue is attributable to increased customer purchases of mutual funds and
growth in the Partnership's overall customer base.
LISTED SECURITIES TRANSACTIONS.
Listed Securities Transactions. A portion of the Partnership's revenue is derived from customer transactions in which the Partnership acts as an 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. Variations in
revenues from listed securities commissions between periods is largely a
function of market conditions.
INSURANCE.
Insurance. The Partnership has executed agency agreements with various national insurance companies. Edward Jones is able to offer life insurance, long-term care insurance, fixed and variable annuities and other types of insurance to its customers through its financial advisors who hold insurance sales licenses. As an agent for the insurance company, the Partnership receives commission on the purchase price of the policy.
OVER-THE-COUNTER SECURITIES TRANSACTIONS.
Over-the-Counter Securities Transactions. Partnership activities in unlisted (over-the-counter) securities transactions are essentially similar to its activities as a broker in listed securities. In connection with customer orders to buy or sell securities, the Partnership charges a commission for agency transactions.
ASSET FEES
Asset Fees
The Partnership earns service fees which are generally based on 15 to 25 basis points of its customer assets which are held by the mutual fund companies and insurance companies.
The Partnership also earns revenue sharing from certain mutual fund and insurance vendors. The revenue sharing agreements vary, with the investment advisersadvisors or distributors of some products providing a percentage of average assets held by the Partnership'sPartnership’s customers or the revenue sharing agreementwhile others may pay the Partnership a flat dollar amount. (See Item 3 - Legal Proceedings
for the current status of revenue sharing litigation as it relates to the
Partnership.)
The Partnership does not manage any mutual funds, although it is a limited partner of Passport Research, Ltd., anthe advisor to acertain money market mutual fund.
The Partnership does not have management responsibility for the advisor.funds made available to Edward Jones customers. Revenue from this source is primarily based on customer assets in the funds.
The Partnership has registered an investment advisory program with the Securities and Exchange Commission ("SEC") under the Investment Advisors Act of 1940. The registered investment advisory service is a managed account program that offers a single comprehensive fee structure to qualifying customers through independent investment managers.
Revenues from this source,
although not significant, have grownDuring 2008, the Partnership introduced a new program, Advisory Solutions, which provides investment advisory services to its customers for a monthly fee based upon their monthly asset values in
recent years.
6
the program. This advisory program consists of an Edward Jones managed account invested in mutual funds, exchange-traded funds (ETFs) and money market funds.
PART I
Item 1. Business, continued
The
In addition to the managed account program and Advisory Solutions investment advisory programs mentioned above, the Partnership also offers trust and investment advisory services to its customers through EJTC.
ACCOUNT AND ACTIVITY FEES
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, mortgage-backed securities and certificates of deposit. The Partnership's market-making activities are conducted with other dealers in the "wholesale" market and "retail" market where the Partnership acts as a dealer buying from and selling to its customers. In making markets in securities, the Partnership exposes its capital to the risk of fluctuation in the fair value of its security positions. It is the Partnership's practice not to trade for its own account.
Account and Activity Fees
Revenue sources include sub-transfer agent accounting services, IRAIndividual Retirement Account ("IRA") custodial services fees, and other product fees.
The Partnership charges fees to certain mutual funds for sub-transfer agent accounting services. Such fees are received for maintaining customer account information and providing other administrative services for the mutual funds. Edward Jones is also the custodian for its IRA accounts and charges customers an annual fee for its services. Account and activity fees also include sales based revenue sharing fees pursuant to arrangements with certain mutual fund and insurance vendors, which are based on a specified number of basis points on the Partnership'sPartnership’s current year fund sales. The Partnership receives revenue from offering mortgage loans to its customers through a joint venture and through a co-branded credit card with a major credit card company. In addition, the Partnership earns transaction fee revenue relating to customer purchases and sales of securities.
PRINCIPAL TRANSACTIONS
The Partnership makes a market in over-the-counter corporate securities,
municipal obligations, U.S. government obligations, including general
obligations
Interest and revenue bonds, unit investment trusts, mortgage-backed
securities and certificates of deposit. The Partnership's market-making
activities are conducted with other dealers in the "wholesale" market and
"retail" market where 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 practice
not to trade for its own account.
As in the case of listed securities transactions, revenue from
over-the-counter and principal transactions is highly influenced by the volume
of business and securities prices, as well as by the increasing number of
financial advisors employed by the Partnership over the periods indicated.
INTEREST AND DIVIDENDS
Dividends
Interest and dividend income is earned primarily on margin account balances,
cash equivalents, cash segregated under federal and other regulations, securities purchased under agreement to resell,
cash equivalents, inventory securities and investment securities. The Partnership is exposed to market risk for changes in interest rates. The Partnership's interest income is impacted by the level of interest rates it charges its customers,
the interest rate earned on overnight investments and the level of customers' loan balances and credit balances.
7
PART I
Item 1. Business, continued
INVESTMENT BANKING
Investment Banking
The Partnership's investment banking activities are performed primarily by its Syndicate and Investment Banking 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.
PART I
Item 1. Business, continued
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 Investment Banking 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 departmentsthe Syndicate and Investment Banking Departments may form underwriting syndicates and work closely with the branch office network for sales of the Partnership's own participation and with other members of the syndicate in the pricing and negotiation of other terms. In offerings managed by others in which the Partnership participates as a syndicate member, these departments serve as active coordinators between the managing underwriter and the Partnership's branch office network.
The underwriting activity of the Partnership involves substantial risks. An underwriter may incur losses if it is unable to resell the securities it is committed to purchase or if it is forced to liquidate all or part of its commitment at less than the agreed upon purchase price. Furthermore, the commitment of capital to an underwriting may adversely affect the Partnership's capital position and, as such, its participation in an underwriting may be limited by the requirement that it must at all times be in compliance with the SEC'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.
Rule.
BUSINESS OPERATIONS
RESEARCH DEPARTMENT.
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 an independent research service.
CUSTOMER ACCOUNT ADMINISTRATION AND OPERATIONS.
Customer Account Administration and Operations. Operations associates are responsible for activities relating to customer securities and the processing of transactions with other broker-dealers, exchanges and clearing organizations. These activities include receipt, identification, and delivery of funds and securities, internal financial controls, accounting and personnel functions, office services, storage of customer securities and the handling of margin accounts. The Partnership processes substantially all of its own transactions for its United States and United Kingdom entities. In Canada, the Partnership has entered into anplans to terminate its introducing/carrying broker arrangementagreement with National Bank Correspondent Network ("NBCN") and National Bank Financial ("NBF") and plans to convert to self-clearing in 2009. The Partnership has an agreement with Broadridge Financial Solutions, Inc. ("Broadridge") to provide the securities processing systems that are currently provided by NBCN. In a self-clearing environment, the Partnership will no longer rely on NBCN and NBF for processing customer transactions and maintaining the related customer books and records. The Partnership will become the custodian for customer securities and manage all related securities and cash processing, such as trades, dividends, corporate actions, customer cash receipts and disbursements, customer tax reporting, and statements. Trades will be executed by the Partnership directly with the Toronto Stock Exchange ("TSX"), as partand the firm will become a member of the National BankCanadian Depository of Canada groupSecurities ("CDS") and FundServ for clearing and settlement of companies.
8
PART I
Item 1. Business, continued
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. To expedite the processing of orders, the Partnership's branch office system is linked to the St. Louisa headquarters office through an extensive communications network. Orders for securities are generally captured at the branch electronically, routed to St. Louisheadquarters and forwarded to the appropriate market for execution.
PART I
Item 1. Business, continued
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. 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. 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 ("SROs").
The Partnership clears and settles virtually all of its listed and over-the-counter equities, municipal bond, corporate bond, mutual fund and annuity transactions for its U.S. broker-dealer through the National Securities Clearing Corporation ("NSCC"), Fixed Income Clearing Corporation ("FICC") and Depository Trust Company ("DTC"), which are located in New York, New York.
In conjunction with clearing and settling transactions with NSCC, the Partnership holds customer securities on deposit with the DTC in lieu of maintaining physical custody of the certificates. The Partnership also uses a major bank for custody and settlement of treasury securities and Government National Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") issues.
The Partnership's United Kingdom operation clears and settles virtually all of its listed transactions through Euroclear UK & Ireland, ("Euroclear"). Euroclear effects clearing of securities on the London Stock Exchange. In conjunction with clearing and settling transactions with Euroclear, the Partnership's United Kingdom operation holds customer securities on deposit with Euroclear in lieu of maintaining physical custody of the certificates. The Partnership's United Kingdom operation also uses DTC for custody of United States securities, a major independent brokerage firm for custody of non-United Kingdom and non-United States securities, and individual unit trust vendors for custody of unit trust holdings.
As the carrying broker in Canada, NBCN handles the routing and settlement of customer transactions. Transactions are settled through the Canadian
Depository for Securities ("CDS"),CDS, of which NBCN is a member. CDS effects clearing of securities on the Toronto, Montreal and TSX Venture stock exchanges. Customer securities on deposit are also held with CDS.
The Partnership is substantially dependent upon the operational capacity and ability of NBCN, NSCC, DTC, Euroclear, NBCN,FICC, and CDS. Any serious delays in the processing of securities transactions encountered by these clearing and depository companies may result in delays of delivery of cash or securities to the Partnership's customers.
Broadridge
Financial Solutions, Inc. along with its U.S. business, Securities Processing Solutions, U.S. and its international business, Securities Processing Solutions, International and NBCN provide automated data processing services for customer account activity and related records for the United States, United Kingdom and Canada, respectively.
9
PART I
Item 1. Business, continued
The Partnership does not employ its own floor broker for transactions on exchanges. The Partnership has arrangements with other
PART I
Item 1. Business, continued
brokers to execute the Partnership's transactions in return for a commission based on the size and type of trade. If, for any reason, any of the Partnership's clearing, settling or executing agents were to fail, the Partnership and its customers would be subject to possible loss. To the extent that the Partnership would not be able to meet the obligations of the customers, such customers might experience delays in obtaining the protections afforded them.
Customers
In the event of a Partnership insolvency, customers are protected from the loss of securities and cash in the event of a
firm insolvencyheld by Edward Jones through the Securities Investors Protection Corporation ("SIPC"(SIPC") in the United States, Financial Services Compensation Scheme ("FSCS") in the United KingdomU.K. and Canadian Investor Protection Fund ("CIPF") in Canada, and
through excess coverage maintained by the PartnershipCanada. For customers in the United States, and
the United Kingdom. Excess SIPC and excess FSCS coverage is provided by
Customer Asset Protection Company ("CAPCO"), of which the Partnership is an 8%
owner. SIPC provides protection$500,000 of coverage for customer accounts for up to $500,000,securities, including up to $100,000 for claims of cash claims.awaiting investment. For customers in the U.K., FSCS covers 100% of the first (pound)30,000£30,000 and 90% for the next (pound)20,000,£20,000, for a maximum protection of (pound)48,000£48,000 for all investment business. CAPCO protects each client's
account net equityFor customers in excess of the SIPC and FSCS coverage.Canada, CIPF limits coverage to CAD$1,000,000 in total, which can be any combination of securities and cash.
Throughout 2008, the Partnership maintained additional protection for U.S. and U.K. customers provided by CAPCO, of which the Partnership is an 7% owner. CAPCO protected each customer's account net equity in excess of the SIPC and FSCS coverage. CAPCO announced it will no longer provide additional account protection to the securities industry effective February 16, 2009. Consequently, the Partnership has contracted with Underwriters at Lloyd's to provide additional account protection effective December 10, 2008. This new policy covers theft, misplacement, destruction, burglary, embezzlement or abstraction of customer securities up to an aggregate limit of $1 billion for all claims of customers of Edward Jones and its U.K. subsidiary, EJL. Market losses are not covered by SIPC or the additional protection.
The Partnership believes that its internal controls and safeguards concerning the risks of securities thefts are adequate. Although theThe possibility of securities thefts is a risk of the industry, theindustry. The Partnership has not had, to date, a significant problem with such thefts.thefts, other than that included in Item 3 – Legal Proceedings. The Partnership maintains fidelity bonding insurance which, in the opinion of management, provides adequate coverage.
EMPLOYEES.
Employees. Including its 326337 general partners, the Partnership has approximately 38,10040,000 full and part-time employees. This includes 11,29212,148 financial advisors as of February 29, 2008.27, 2009. The Partnership's financial advisors are generally compensated on a commission basis and may, in addition, be entitled to bonus compensation based on their respective branch office profitability and the profitability of the Partnership. The Partnership has in the past paid bonuses to its non-registered employees on a discretionary 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 an initial training program for prospective financial advisors that spans four months which includes preparation for regulatory exams, concentrated instruction in the classroom and on-the-job training in a branch office. During the first phase, the trainee spends 60 days studying Series 7 examination materials and taking the examination. Subsequently, the trainee prepares for and takes either the Series 66 or 63 examinations.examination. After passing the requisite examinations, trainees spend one week in a comprehensive training
PART I
Item 1. Business, continued
program in one of the Partnership's headquarter training facilities followed by
three weeks at their designated
location to conduct market research and prepare for opening the office. The
trainee then spends sixseven weeks of on-the-job training in
their market and in a
nearby branch
locationlocation. This training includes reviewing investments, office procedures and understanding
client needs. Next,
the trainee returns to his or her designated location for one week to continue
buildingcustomer needs, plus establishing a
prospect base.base of potential customers. One final week is then spent in a headquarter training facility to complete the initial training program.
FourFive months later, the financial advisor attends an additional training class in a headquarter location, and subsequently, Edward Jones offers periodic continuing training to its experienced financial advisors for the entirety of their career. Training programs for the more experienced financial advisors focus on meeting
clientcustomer needs and effective management of the branch office.
10
PART I
Item 1. Business, continued
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.
Branch Office Network. The Partnership operates 10,191operated 10,878 branch offices as of February 29, 2008,27, 2009, primarily staffed by a single financial advisor and a branch office assistant. The Partnership operates 9,3369,978 offices in the United States located in all 50 states, predominantly in communities with populations of under 50,000 and metropolitan suburbs. The Partnership also operates in Canada (through 605602 offices as of February 29, 2008)27, 2009) and the United Kingdom (through 250298 offices as of February, 29, 2008)27, 2009).
COMPETITION.
Competition. The Partnership is subject to intense 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 personalized service to individual customers. With minor exceptions, customers are free to transfer their business to competing organizations at any time.time, although a fee may be charged to do so. There is intense competition among firms for financial advisors with good
sales production records. In recent periods, the Partnership has experienced increasing efforts by competing firms to hire away its financial advisors, although the Partnership believes that its rate of turnover of financial advisors is not higher than that of other firms comparable to the Partnership.
REGULATION. firms.
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 SROs, principally FINRA. FINRA is the securities industry's new self-regulated body as a result of the consolidation of the NASD and NYSE Member Regulation effective July 30, 2007, which has been designated by the SEC as the Partnership's primary regulator. FINRA adopts rules (which are subject to approval by the SEC) that govern the industry and conductconducts 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. Edward Jones or an affiliate is registered as a broker-dealer in all 50 states, Puerto Rico, Canada and the United Kingdom. Edward Jones conducts business in Canada through a subsidiary partnership which is regulated by the Investment Dealers AssociationIndustry Regulatory Organization of Canada and in the United Kingdom through a subsidiary which is regulated by
PART I
Item 1. Business, continued
the Financial Services Authority.Authority ("FSA"). EJTC is subject to regulation by the Office of Thrift Supervision.
Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of customer funds and securities, customer payment and margin requirements, 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 SROs, and/or changes in the interpretation or enforcement of existing laws and rules, may directly affect the operations and profitability of broker-dealers.
Given recent market activity, there is a substantial likelihood that the U.S. government will enact changes in regulation for the financial services industry which may affect Edward Jones. The SEC, SROs 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 recent years, the Partnership has been the subject of significant regulatory actions by various agencies that have the authority to regulate its activities
(See(see Item 3
-– Legal Proceedings for more information).
11
PART I
Item 1. Business, continued
UNIFORM NET CAPITAL RULE.
Uniform Net Capital Rule. As a broker-dealer and a member firm of the NYSE, the PartnershipEdward Jones is subject to the Uniform Net Capital rule ("Rule")Rule promulgated by the SEC. The Uniform Net Capital Rule is designed to measure the general financial integrity and liquidity of a broker-dealer and the minimum Net Capitalnet capital deemed necessary to meet the broker-dealer's continuing commitments to its customers. The Uniform Net Capital Rule provides for two methods of computing Net Capitalnet capital and the PartnershipEdward Jones has adopted what is generally referred to as the alternative method. Minimum required Net Capitalnet capital under the alternative method is equal to the greater of $0.25 million or 2% of the aggregate debit items, as defined. The Uniform Net Capital Rule prohibits withdrawal of equity capital whether by payment of dividends, repurchase of stock or other means, if Net Capitalnet capital would thereafter 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
Capitalnet capital to be less than 5% of aggregate debit items. In computing Net Capital,net capital, various adjustments are made to exclude assets which are not readily convertible into cash and to provide a conservative valuation of other assets, such as a company's securities owned. Failure to maintain the required Net
Capitalnet 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
PartnershipEdward Jones has, at all times, been in compliance with the Uniform Net Capital Rule.
The firmPartnership has other operating subsidiaries, including EJTC and broker-dealer subsidiaries in Canada and the United Kingdom. These wholly ownedwholly-owned subsidiaries are required to maintain specified levels of liquidity and capital standards.regulatory capital. Each subsidiary was in compliance with the applicable capital requirements in the jurisdictions in which they operate during the years ended December 31, 20072008 and 2006.
2007. The U.K. subsidiary of Edward Jones is subject to an FSA supervisory review of its Internal Capital Adequacy Assessment Process, which establishes a measure of required capital for its business operations. At this time the Partnership cannot determine the amount of additional regulatory capital, if any, that may be required to meet future U.K. capital requirements.
The Partnership is subject to a number of risks potentially impacting its business, financial condition, results of operations and cash flows. As a financial services organization, certain elements of risk are inherent in transactions and business decisions the Partnership makes. Thus, the Partnership encounters risk as part of the normal course of business and develops policies and risk management processes to help manage these risks.
NATURE OF BUSINESS -- THE PARTNERSHIP IS IN THE SECURITIES INDUSTRY, WHICH IS
SUBJECT TO DRAMATIC AND UNPREDICTABLE SWINGS THAT HAVE HAD AND, COULD IN THE
FUTURE HAVE, A SIGNIFICANT NEGATIVE EFFECT ON REVENUES AND PROFITABILITY.
Nature of Business—The Partnership is in the securities industry, which is subject to dramatic and unpredictable swings that in the past have had and, could in the future have, a significant negative effect on revenues and profitability.
Risk factors common to the securities industry as a whole include the state of world affairs and the national economy. General political and economic conditions such as a new federal administration, an economic recession, natural disasters, terrorist attacks, war, local economic and political conditions, regulatory changes or changes in the law or interest rate or currency rate fluctuations could create a downturn in the securities market. In addition, another terrorist attack in a major financial center in the U.S. could have a disproportionate effect on the domestic securities industry in which the Partnership operates.
The securities industry, including the Partnership, is highly dependent upon market prices and volumes which are highly unpredictable and volatile in nature. Events over the past several months including the global recession, frozen credit markets, institutional failures and government-sponsored bailouts of a number of large financial services companies have made the capital markets increasingly volatile. The operating resultsPartnership has not been immune to the continued weakening of global economic conditions of the Partnership are exposedcurrent year.
Due to substantial
riskthe acceleration of loss due to market volatility. Aseconomic turmoil over the past several months and its very negative impact on the securities markets, the Partnership has seenrecently experienced significant declines in its net revenues adversely impacting the past, a material reductionfirm's overall financial results. Furthermore, in volume and lower securities prices may result in
lower commission revenues, reduced asset fees due to the lower value of client
assets, reduced investment banking income and losses in dealer inventory
accounts and syndicate positions, all of which may reduce the profitability of
its operations. Furthermore,an economic recession, the Partnership, principally through Edward Jones, is subject to thean increased risk of customer inabilitycustomers being unable to meet commitments (such as margin obligations). If customers are unable to meet the commitments (including margin obligations), customer
fraudthe Partnership has an increased risk of losing money on margin transactions and employee misconduct and errors.incurring additional expenses defending or pursuing claims. Developments such as lower revenues and declining profit margins and losses from trading and investment activities could reduce or eliminate firm profitability.
On the
cash available to make payments on debt,
including debt incurred from investing in capital expenditures. In addition,other hand, significantly increased volume may result in operational problems such as a higher incidence of failures to deliver and receive securities and errors in processing
transactions.
Risk factors commontransactions, and may also result in increased personnel and related processing costs. Edward Jones is not able to
the securities industry include the state of world
affairscontrol such occurrences, and
the national economy. General politicalthere is no assurance that it will not encounter such problems and
economic conditions
such as recession, natural disasters, terrorist attacks, war or interest rate
or currency rate fluctuations, could create a downswingresulting losses in
the securities
market.
12
future periods. In addition, if Edward Jones fails to keep current and accurate books and records it would be exposed to disciplinary action by governmental agencies and SROs.
PART I
Item 1A. Risk factors,Factors, continued
OPERATIONAL SYSTEMS -- THE PARTNERSHIP RECENTLY REPLACED ITS SATELLITE BASED
COMMUNICATIONS SYSTEMS AND IS ENGAGED IN OTHER SIGNIFICANT TECHNOLOGY
INITIATIVES WHICH WILL BE COSTLY AND COULD LEAD TO DISRUPTIONS; ANY
SUBSTANTIAL DISRUPTION TO THESE SYSTEMS COULD LEAD TO FINANCIAL LOSS AND HARM
RELATIONS WITH CLIENTS.
Interest Rate Changes — The Partnership's net income could be impacted by significant interest rate changes.
The Partnership is exposed to market risk from changes in interest rates. Such changes impact the interest income earned from customers' margin loans, the investment of excess funds, securities owned, as well as any interest expense incurred on liabilities financing these assets. A decrease in short-term interest rates such as that which has been experienced since late 2007 significantly negatively impacts net interest income. The Partnership’s interest bearing liabilities are less sensitive to changes in short-term interest rates compared to its interest earning assets, resulting in interest income being more sensitive to rate changes than interest expense.
Impact of Cyclical Nature of Business on Our Growth Rate — The instability of the securities markets can contribute to difficulty for the Partnership to achieve its hiring and training goals and to volatility in attrition rates for its financial advisors.
It may be more difficult to attract qualified applicants for financial advisor positions due to recent market downturns. In addition, the Partnership relies heavily on referrals from current financial advisors in recruiting new financial advisors. During an economic downturn, the Partnership's financial advisors can be less effective in recruiting potential new financial advisors through referrals. As a result from 2002 through 2006, the Partnership was not able to achieve its hiring goals or train as many new financial advisors as expected. While the Partnership was able to achieve its hiring and training goals in 2007 and 2008, there can be no assurance the Partnership will be able to hire at desired rates in future periods or that it will be able to attract comparable numbers of quality applicants in the future. Furthermore, during an economic recession, the Partnership may be exposed to higher rates of attrition as some financial advisors are unable to meet performance objectives. In the event of the failure to achieve hiring and training goals and with higher attrition rates, the result may be a decline in the revenue the Partnership receives from commissions and other securities related revenues.
Technological and Operational Systems —The Partnership replaced its satellite based communications systems and may engage in other significant technology initiatives in the future which will be costly and could lead to disruptions; any substantial disruption to these systems could lead to financial loss and harm relations with customers.
The Partnership's business is highly dependent on the ability to process, on a daily basis, a large number of transactions.transactions as well as the need to communicate internally and with customers. Consequently, there is reliancethe Partnership relies heavily on the mainframe system and client server based computer system, communications, and software systems. In order to support the Partnership's branch offices at current and projected growth rates, and to achieve the speed, response time and level of access to the Internet that our financial advisors desire, the Partnership updated these systems are being updated. As of December 31, 2007, all branch offices have
beensystems. All branches converted to a new terrestrial communications network from a satellite network.network in 2006 and 2007. In addition to the new terrestrial communication network, the Partnership anticipates a significant upgrade or replacement to branch video and telephony systems.systems in the future. The Partnershiptiming of any upgrade or replacement has not yet finalized the specific
design and solution for replacing the video and telephony systems, but
anticipate relying on third parties to implement these replacements and cannot
assure their timely completion. The Partnership has limited experience in such
large-scale information technology projects, as such, it is expected that
there could be a risk of unforeseen problems and costs.
The full replacement of all voice, data and telephony systems, is projected to
require capital expenditures of $145 million and the Partnership projects the
new system to result in increased firm operation costs of approximately $55-65
million each year once fully implemented in all of it's offices. While the
terrestrial network was completed in 2007 and required capital expenditures of
$35 million, the Partnership has not yet experienced the full magnitude of the
expected cost increases since not all branches were converted at the beginning
of the year and the video and voice solution has not yet been determined.
Accordingly, the Partnership expects the financial results of future periods
to be impacted by these cost increases.
decided,
If the Partnership's communications systems or equipment do not operate properly, are disabled or fail to perform due to increased demand (which might occur during market upswings or downturns), or if a new system or system upgrade contains a major problem, the Partnership
PART I
Item 1A. Risk Factors, continued
could experience unanticipated disruptions in service, slower response times, decreased customer service and customer satisfaction and delays in the introduction of new products and services, any of which could result in financial losses, liability to clients,customers, regulatory intervention or reputational damage. Further, the inability of the systems to accommodate an increasing volume of transactions could also constrain the Partnership's ability to expand business.
The Partnership's computer system and network are also vulnerable to damage or interruption from human error, natural disasters, power loss, sabotage,
terrorist attack, computer viruses, intentional acts of vandalism and similar events. The Partnership has established a second data center in Tempe,
Arizona whichArizona. This data center operates as a backup of the primary data center located in St. Louis, Missouri
andin which the Partnership expects to be able to resume service during a system disruption contained to St. Louis
withfollowing a short-term interruption in service. However, the staff at the Tempe facility is not sufficient to operate the systems in the event of a prolonged disruption to the St. Louis systems. In such event, the Partnership would need to re-locate staff to the Tempe facility, which might result in a delay in service during the transition and substantial additional costs and expenses.
BRANCH OFFICE SYSTEM -- THE PARTNERSHIP'S SYSTEM OF ONE-FINANCIAL ADVISOR
BRANCH OFFICES MAY EXPOSE THE PARTNERSHIP TO A GREATER RISK OF LOSS OR
LIABILITY FROM THE ACTIVITIES OF THE FINANCIAL ADVISORS THAN IF A MORE
TRADITIONAL OFFICE SYSTEM IS MAINTAINED.
13
Item 1A. Risk factors, continued
Branch Office System — The Partnership's system of one-financial advisor branch offices may expose the Partnership to a greater risk of loss or liability from the activities of the financial advisors than if a more traditional office system is maintained.
Pursuant to our business plan, we have been increasing our number of branch offices and financial advisors, along with the home office and branch office staff and equipment to support them. Our business plan is dependent upon our ability to grow our number of branch offices and financial advisors.
Most securities firms typically staff several financial advisors and one or more managers or other supervisory personnel in each of their branch offices. In contrast, most of the Partnership's branch offices are staffed by a single financial advisor with primary supervisory activity being conducted from its headquarters office,office; a method of supervision which the Partnership believes
compliesis designed to comply with all applicable industry and regulatory requirements. However, as a result of such method of supervision it is possible that the Partnership is potentially exposed to a greater risk of loss arising from alleged imprudent or illegal actions of its financial advisors due to the lack of direct supervisory oversighton site supervision within each office. Furthermore, more time may elapse for such supervisory personnel
Actions By Regulatory Agencies— The securities industry is highly regulated, and as a result the Partnership is subject to detect problem activity thanvarious regulatory inquiries and investigations, which could lead to formal proceedings, and if managers were maintained within each
office, thereby exposing possible losses.
ACTIONS BY REGULATORY AGENCIES -- THE SECURITIES INDUSTRY IS HIGHLY REGULATED,
AND AS A RESULT THE PARTNERSHIP IS SUBJECT TO VARIOUS LEGAL ACTIONS AND OTHER
PROPOSED INVESTIGATIONS, WHICH, IF ADVERSELY DETERMINED, COULD MATERIALLY
ADVERSELY AFFECT BUSINESS.
In recent years mutual funds, annuities and other investment products, as well
as sales practices inadversely determined, could materially affect the brokerage industry generally, have come under
increased scrutiny from various state, federal and SROs in connection with
several industry issues including market timing, late trading, the failure of
various broker-dealers to provide breakpoint discounts to mutual fund
purchasers, the sale of certain mutual fund share classes, mutual fund net
asset value transfer programs and the manner in which mutual fund and annuity
companies compensate broker-dealers. business.
From time to time the Partnership may receive information requests or subpoenas from various regulatory and enforcement authorities in connection with industry-wide sweeps or other inquiries or investigations. These inquiries or requests for information may at times result in additional inquiries by the regulators or more specific investigation of the Partnership.
REGULATORY INITIATIVES- RECENTLY PROPOSED REGULATIONS MAY SIGNIFICANTLY ALTER
OR RESTRICT THE HISTORIC BUSINESS PRACTICES, WHICH COULD NEGATIVELY AFFECT THE
OPERATING RESULTS.
PART I
Item 1A. Risk Factors, continued
Like all broker-dealers and investment advisors, Edward Jones is from time to time subject to examinations and investigations of which it may not be presently aware and such matters could lead to formal actions which may impact Edward Jones' business. In view of the inherent difficulty of predicting the outcome of the matters, particularly in cases in which agencies may seek substantial or indeterminate fines or penalties, or actions which are in very preliminary stages, Edward Jones cannot predict with certainty the eventual loss or range of loss related to such matters.
Regulatory Initiatives — Recently proposed regulations may significantly alter or restrict the Partnership's historic business practices, which could negatively affect its operating results.
The Partnership is subject to extensive regulation by federal and state regulatory agencies and by SROs within the industry. The Partnership operates in a regulatory environment that is subject to ongoing change and has seen significant increased regulation in recent years. The Partnership may be adversely affected as a result of new or revised legislation or regulations, changes in federal, state or foreign tax laws and regulations, or by changes in the interpretation or enforcement of existing laws and regulations. In the present environment, it is likely that there will be some substantial changes in both law and regulation as well as the architecture of the regulatory organizations.
The International Accounting Standards Board ("IASB") developed a core set of accounting standards to act as a framework for financial reporting known as the International Financial Reporting Standards ("IFRS"). By 2007, the majority of listed European Union companies, including banks and insurance companies, use IFRS to prepare financial statements. In contrast, the majority of public companies in the United States prepare financial statements under the general accepted accounting principles in the U.S. ("GAAP").
The SEC has proposed a mandatory adoption of IFRS starting in 2014 with early adoption permitted before this date. It is unclear at this time how the SEC will propose GAAP and IFRS be harmonized if the proposed change is adopted. Similarly, the Partnership is currently unable to determine what if any impact IFRS would have in calculating net income of the Partnership which, pursuant to the Partnership Agreement, is calculated in accordance with GAAP. When adopted, IFRS could significantly impact the way the Partnership determines net income and could adversely impact the Partnership's net income, allocations and returns.
In addition, switching to IFRS will be a complex endeavor for the Partnership. The Partnership will need to develop new systems and controls around the principles of IFRS. Since this is a new endeavor, the specific costs associated with this conversion are uncertain; however, the Partnership would expect such costs to be significant.
The Partnership receives various payments in connection with the purchase, sale and holding of mutual fund shares by its clients.customers. Those payments include "Rule 12b-1 fees" and expense reimbursements. Rule 12b-1 allows a mutual fund to pay distribution and marketing expenses out of the fund'sfund’s assets. Although the SEC does not limit the size of Rule 12b-1 fees that funds may pay, FINRA does impose such limitations. All of the Partnership's preferred mutual fund families, as well as some non-preferred mutual funds, pay such fees.
In February 2005, the SEC reopened for comment proposed rules that would require broker/broker-
PART I
Item 1A. Risk Factors, continued
dealers to provide their customers with information regarding the costs and conflicts of interest that arise from the sales of mutual fund shares, including point-of-sale disclosures in both written and oral form.
Additionally, inIn 2007, the SEC solicited additional public comments and held public forums and discussions on the issues as they relate to Rule 12b-1 fees. Similarly, a Congressional subcommittee held hearings in July 2007 centered on Rule 12b-1 fees. If rules with regard to 12b-1 fees are
proposed,adopted, these rules could adversely impact or restrict
ourthe Partnership's business practices with respect to receipt and disclosure of Rule 12b-1 fees.
With the change in administration of the SEC it is unclear what priority this effort will be given. In addition, if the SEC, FINRA or any state regulatory agencies limit or eliminate such fees, it could have a material impact on the Partnership's operating results for future periods, including
14
Item 1A. Risk factors, continued
reducing or eliminating the Partnership's net income, general and limited partnership returns, and compensation to the Partnership's financial advisors (including bonuses and profit sharing). ThisAll of which could negatively affect the Partnership's ability to recruit and retain financial advisors.There is continued uncertainty in the industry as to the status of regulations affecting whether an individual financial advisor is acting in certain circumstances as a broker as opposed to an investment adviser.advisor. In light of this and other Partnership business initiatives, including the offering of certain financial planning services to the Partnership's clients,customers, the Partnership has required that all financial advisors be registered both as general securities representatives and as investment advisor representatives ("IARs"(“IARs”) in states where the IAR registration is required, and if the financial advisor engages in offering services, where the IAR registration is necessary. AnEngaging in the conduct of an IAR is consideredmay create a fiduciary relationship and could subject the Partnership's financial advisors and the Partnership to more stringent standards, inhibit certain types of proprietary transactions, and increase disclosure requirements and increase potential liability for suchthe Partnership and its financial advisors and the Partnership.
The Pension Protection Act of 2006 (the "PPA") enacted August 3, 2006 provides
for enhanced Individual Retirement Account ("IRA") requirements and made
permanent a variety of provisions relating to IRAs that would otherwise have
expired. A temporary increase to IRA annual contribution limits was made
permanent, as was another reform that allows eligible individuals who make
contributions to an IRA or qualified pension plan to receive a federal "match"
in the form of an income tax credit for the first $2,000 of annual
contributions. The PPA also directs the Internal Revenue Service ("IRS") to
permit taxpayers who are due a federal income tax refund to choose to have the
IRS deposit a portion of that refund directly to an IRA chosen by the
taxpayer. The option would be made when the individual files his or her tax
return. The PPA furthermore directed the Department of Labor to enact
regulations relating to IRAs, and it is expected that such regulations will be
proposed in the coming year. Since approximately 50% of the accounts we open
are IRAs, this law and the impending regulations could affect our business and
customer accounts.
The Partnership is also subject to federal and state regulations like other
businesses and must evaluate and adapt to new regulations as they are adopted.
While we believe we are in compliance with these regulations, these
regulations could impact our future revenues or results of operations.
advisors.
Any of the foregoing regulatory initiatives could adversely affect ourthe Partnership's business operations and our business model by reducing or eliminating certain fees that are significant components of ourits revenues.
COMPETITION -- THE PARTNERSHIP IS SUBJECT TO INTENSE COMPETITION FOR CLIENTS
AND PERSONNEL, AND MANY OF THE COMPETITORS HAVE GREATER RESOURCES.
Today's environment calls into question the present regulatory structure and the laws and rules enforced thereunder. As such, it is likely that rules and architecture with which the Partnership must comply will change. No one can predict this change but it may well affect future revenues and results.
Competition — The Partnership is subject to intense competition for customers and personnel, and many of its competitors have greater resources.
All aspects of the Partnership's business are highly competitive. The Partnership competes directly with other securities firms and increasingly with other types of organizations and other businesses offering financial services. In addition, the Partnership encounters competition from other organizations such as banks, insurance companies, and others offering financial services. Many of these entities have substantially greater capital and otheradditional resources, and some entities offer a wider range of financial services. In recent years,Recently, there has been significant consolidation of firms in the securitiesfinancial services industry, forcing the Partnership to compete with larger firms with greater capital and resources, brokerage volume and underwriting activities. Theactivities, and more competitive pricing. Also, the Partnership also competescontinues to compete with a number of
PART I
Item 1A. Risk Factors, continued
firms offering discount brokerage services, usually with lower levels of
personalized service to individual customers.
With minor exceptions, customers
are free to transfer their business to competing organizations at any time.
15
Item 1A. Risk factors, continued
Competition among financial services firms also exists for financial advisors and other personnel. The Partnership's continued ability to expand its business and to compete effectively depends on the ability of the Partnership to attract qualified employees and to retain and motivate current employees. If the profitability of the Partnership decreases, then bonuses paid to financial advisors and other personnel, along with profit-sharing contributions, may be decreased or eliminated, increasing the risk that personnel could be hired away by competitors. In addition, the Partnership has recently faced increased competition from larger firms in its non-urban markets, and from a broad range of firms in the urban and suburban markets in which it competes.
LITIGATION -- LITIGATION SEEKING SUBSTANTIAL DAMAGES FROM SECURITIES FIRMS HAS
INCREASED IN RECENT YEARS, AND IT IS EXPECTED TO CONTINUE TO INCREASE AS
MARKET FLUCTUATIONS CONTINUE.
Litigation — Litigation involving civil plaintiffs seeking substantial damages from securities firms, including the Partnership, has increased over time, and it is expected to continue to increase.
Many aspects of the Partnership's business involve substantial risks of liability. In recent
years,The Partnership is from time to time subject to examinations and informal inquiries. Such matters could lead to formal actions, which may impact the Partnership's business. Over time, there has been increasing litigation involving the securities industry
generally and the Partnership, including class action suits that generally seek substantial damages. Edward Jones, like other broker/dealers, is also
from time to time the subject of arbitrations and other litigation. We would
expect litigation to remain at this high level or continue to increase to the
extent the market experiences further downturns.
Additionally, due to the system of home office supervision, the Partnership
may be exposed to an enhanced risk of legal actions instituted by customers
resulting from alleged imprudent or illegal actions undertaken by the
financial advisors.
The Partnership has experiencedincurred significant expenses incurred to defend and/or settle claims over the last few years. There can be no assurance that material
losses arising fromyears, and anticipates the defense and satisfactionnumber of legalclaims against the Partnership will increase in light of the current economic recession. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages or in actions will not
occur in future periods.which are at very preliminary stages, the Partnership cannot predict with certainty the eventual loss or range of loss related to such matters. See Item 3- Legal Proceedings for more information.
UNDERWRITING -- THE PARTNERSHIP ENGAGES IN UNDERWRITING ACTIVITIES, WHICH CAN
EXPOSE THE PARTNERSHIP TO MATERIAL LOSSES AND LIABILITY.
Underwriting, Syndicate and Trading Position Risks — The Partnership engages in underwriting activities, which can expose the Partnership to material losses and liability.
Participation as a manager or syndicate member in the underwriting of fixed income and equity securities will subject the Partnership to substantial risks. As an underwriter, the Partnership is subject to risk of substantial liability, expense and adverse publicity resulting from possible claims against the underwriters under federal and state securities laws. 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.
An underwriter may incur losses, if it is unable to resell the securities it is committed to purchase or if it is forced to liquidate all or part of its commitment at less than the agreed upon purchase price. Furthermore, the commitment of capital to an underwriting may adversely affect the
PART I
Item 1A. Risk Factors, continued
capital position and, as such,
ourthe Partnership's participation in an underwriting may be limited by the requirement that
weit must at all times be in compliance with the SEC's Uniform Net Capital Rule, discussed below. In maintaining
trading positionsinventory in fixed income and equity securities, the Partnership is exposed to a substantial risk of loss, depending upon the nature and extent of fluctuations in market prices.
16
Item 1A. Risk factors, continued
RELIANCE ON ORGANIZATIONS -- THE PARTNERSHIP DEPENDS ON THIRD-PARTY
ORGANIZATIONS, WHICH EXPOSES THE PARTNERSHIP TO DISRUPTION IF THEIR PRODUCTS
AND SERVICES ARE NO LONGER OFFERED, SUPPORTED OR DEVELOP DEFECTS.
Reliance on Organizations — The Partnership's dependence on third-party organizations exposes the Partnership to disruption if its products and services are no longer offered, supported or develop defects.
The Partnership incurs obligations to its customers which are supported by obligations from firms within the industry, especially those firms with which the Partnership maintains relationships throughby which securities transactions are executed. The inability of an organization, or to a lesser extent, any securities firm with which the Partnership does a large volume of business, to promptly meet its obligations could result in substantial losses to the Partnership.
The Partnership is particularly dependent on Broadridge Financial Solutions,
Inc. ("Broadridge") in the United States. Broadridge acts as ourthe Partnership's primary vendor for providing customer accounting and record-keeping in the United States and ourthe Partnership's communications and information systems are integrated with the information systems of Broadridge. There are relatively few alternative providers to Broadridge and although we havethe Partnership has analyzed the feasibility of performing Broadridge'sBroadridge’s functions internally, the Partnership may not be able to do it in a cost-effective manner or otherwise. Consequently, any new computer systems or software packages implemented by Broadridge which are not compatible with ourthe Partnership's systems, or any other interruption or the cessation of service by Broadridge as a result of systems limitations or failures, could cause unanticipated disruptions in ourthe Partnership's business which may result in financial losses to us and/or disciplinary action by governmental agencies and/or SROs.
Furthermore,
The Partnership recently entered into an agreement with Broadridge was spun offto support the firm becoming self-clearing in 2007 from its parent company,
Automated Data Processing, Inc.,Canada. The targeted implementation date is May 2009. With any large conversion, there is the risk of business disruption during the process. In addition, operating in a self-clearing environment will increase the Partnership's operational risk related to processing customer transactions and wemaintaining customer books and records. The Partnership is taking measures to ensure appropriate systems and controls are uncertain ofin place both during and after the effect this
spin-off could ultimatelyconversion.
It is unclear what, if any, impact the current economic downturn, particularly in the financial services industry, will have on Broadridge as an independent company, and its ability to meet its service level commitments to the services we receive from Broadridge.Partnership. The Partnership experiences similar risks in foreign countries where ourits subsidiaries operate. Such foreign subsidiaries currently rely on, or will soon rely on Broadridge and other
entitiesaffiliates for providing clearing, settlement and customer accounting and/or record keeping.
The Partnership
Edward Jones does not employ its own floor brokers for transactions on exchanges. The PartnershipEdward Jones has arrangements with other brokers to execute its transactions in return for a commission based on the size and type of trade. If, for any reason, any of these clearing, settling, or executing agents were to fail, the PartnershipEdward Jones and its customers would be subject to possible loss. To the extent that the PartnershipEdward Jones would not be able to meet the obligations of theits customers, such customers might experience delays in obtaining the protections afforded them.
INTERNATIONAL EXPANSION -- THE PARTNERSHIP'S FOREIGN OPERATIONS ARE NOT YET
PROFITABLE; THEY MAY REQUIRE SIGNIFICANT INFUSIONS OF CAPITAL AND MAY NEVER
BECOME PROFITABLE.
PART I
Item 1A. Risk Factors, continued
International Expansion — The Partnership's foreign operations are not yet profitable; they will require significant infusions of capital and may never become profitable.
The Partnership's branch system has expanded into Canada and the United Kingdom. Operations are at substantial deficits in these two countries, and it is anticipated that it will be a substantial number of years before the Partnership's expansion in these foreign jurisdictionscountries will reach a sufficient scale of operations to yieldachieve profitability. Additional investments will be incurred in the interim;
however, there can be no assurance that such operationsinterim, which will be successful
even with additional investments. While annual losses forsubstantial. Despite the substantial past and prospective investment in the foreign branch system, the Partnership's Canadian and U.K. operations are not yet profitable, nor is there any assurance at this time that either operation have decreased since it's early start up years,will ultimately attain profitability.
Capital Limitations; Uniform Net Capital Rule — The Uniform Net Capital Rule imposes minimum net capital requirements and could limit the losses for the
U.K. operation have increased significantlyPartnership's ability to engage in recent years.
CAPITAL LIMITATIONS; UNIFORM NET CAPITAL RULE -- THE UNIFORM NET CAPITAL RULE
IMPOSES MINIMUM NET CAPITAL REQUIREMENTS AND COULD LIMIT THE PARTNERSHIP'S
ABILITY TO ENGAGE IN CERTAIN ACTIVITIES WHICH ARE CRUCIAL TO ITS BUSINESS.
certain activities which are crucial to its business.
Adequacy of capital is vitally important to
broker/dealers,broker-dealers, and lack of sufficient capital may limit Edward Jones' ability to compete effectively. In particular, lack of sufficient capital, or compliance with the
SEC's Uniform Net Capital
Rules,Rule (Rule 15c3-1) as promulgated by the SEC under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) and incorporated into the rules of FINRA, may limit Edward Jones' ability to commit to certain securities
17
Item 1A. Risk factors, continued activities such as underwriting and trading, which use significant amounts of capital, its ability to expand margin account balances, as well as its commitment to new activities requiring an investment of capital. Consequently, a significant operating loss or an extraordinary charge against net capital could adversely affect Edward Jones'Jones’ ability to expand or even maintain its present levels of business. Further, many of the Partnership's competitors
have substantially greater capital and other resources.
Every registered broker/dealer doing business with the public is subject to
the Uniform Net Capital Rule (Rule 15c3-1), promulgated by the SEC under the
Securities and Exchange Act of 1934, as amended (the "Exchange Act") and
incorporated into the rules of the NYSE. Rule 15c3-1 is designed to ensure financial soundness and liquidity through minimum net capital requirements.requirements deemed necessary to meet the broker-dealer's continuing commitments to its customers and other broker-dealers. Edward Jones has elected to use the Rule'sUniform Net Capital Rule’s alternative method of computation to calculate its net capital, which requires that "net capital"net capital be not less than the greater of $0.250$0.25 million or 2% of our "aggregateaggregate debit items," computed in accordance with the Formula for Determination of Reserve Requirements for Brokers and Dealers
(ExchangeExchange Act Rule 15c3-3)15c3-3 (primarily receivables and other amounts due from or on behalf of customers). Rule 15c3-1 prohibits withdrawal of equity capital, whether by distribution, loan, repurchase or otherwise, if net capital would thereafter be less than 5% of aggregate debit items. Additionally, certain withdrawals require the consent of the SEC to the extent they exceed certain defined levels, even though such withdrawals would not cause net capital to be less than 5% of aggregate debit items. As a member of
the NYSE,Under FINRA regulations Edward Jones will also be required to restrict withdrawal of subordinated debt and equity capital if its net capital becomes less than 4% of its aggregate debit items. In addition, if Edward Jones' net capital becomes less than 5% of its aggregate debit items, it would not be able to expand its business operations, including opening new branch offices or hiring additional financial advisors. Rule 15c3-1 further provides that the total outstanding principal amount of a broker/dealer'sdealer’s indebtedness under certain subordination agreements, the proceeds of which are includable in net capital, may not exceed 70% of the sum of the total outstanding principal amounts of all subordinated indebtedness included in net capital and equity capital accounts for periods in excess of 90 days.
In computing "netnet capital," various deductions are made from net worth and qualifying subordinated debt which exclude assets not readily convertible into cash and which
PART I
Item 1A. Risk Factors, continued
conservatively reduce the value of certain other assets (such as securities owned by Edward Jones) to reflect the possibility of a market decline pending their disposition. At December 31, 2007,2008, Edward Jones'Jones’ net capital of $798.1$801.2 million was 42.9%43.9% of aggregate debit items and its net capital in excess of the minimum required was $761.0$764.7 million. Net capital as a percentage of aggregate debit items after anticipated withdrawals was 42.9%also 43.9%. Net capital and the related capital percentage may fluctuate on a daily basis. See Note 1211 to the Consolidated Financial Statements in Part II.
In addition to this U.S. regulatory requirement of the U.S. broker-dealer, the Partnership’s foreign broker-dealer subsidiaries and EJTC are subject to regulatory capital requirements in the United States of America, Canada and the United Kingdom. These subsidiaries were in compliance with their respective regulatory requirements as of December 31, 2008. Failure to maintain the required net capital may subject a firm to disciplinary actions by the SEC or an SRO, which includes but not limited to suspension or expulsion by the SEC the NYSE and other regulatory bodies andor FINRA that may ultimately require its liquidation. Consequently, Edward Jones may be prohibited from expanding its business and may be required to restrict withdrawal of subordinated debt and equity capital in order to meet these requirements.
Liquidity — The Partnership's business in the securities industry requires that sufficient liquidity be available to maintain business activities.
Liquidity, or ready access to funds, is essential to the Partnership's business. The current credit market environment could have a negative impact on the Partnership's ability to maintain sufficient liquidity to meet its working capital needs. Short term and long term financing are two sources of liquidity that could be affected by the current credit market. As a result of the concerns about the stability of the markets in general, some lenders have reduced their lending to borrowers, including the Partnership. There is no assurance that financing will be available at attractive terms, or at all, in the future.
None.
The Partnership conducts its United States headquarters operations from three locations in St. Louis County, Missouri and one location in Tempe, Arizona. As of December 31, 2007,2008, the Partnership's U.S. headquarters consisted of 23twenty-three separate buildings. Two of its St. Louis headquarters buildings were demolished during 20072008 in order to prepare for further development of the St. Louis headquarters campus locations. It is anticipated that an additional ten
buildings willcould be demolished over the next fiveseveral years.
New
18
Item 2. Properties, continued construction is plannedcurrently ongoing to replace those buildings.buildings and provide space for the Partnership to continue to expand its business operations in order to support the current and future growth projections of the Partnership. As of the end of 2007,2008, the Partnership has executed construction has begunagreements for one six-storythe construction of an office building. Plans were developedbuilding and constructionrelated parking garage at its North Campus location in St. Louis, Missouri, an addition to an existing building and related parking garage at its South Campus location in St. Louis, Missouri, and a parking garage at the Tempe, Arizona location. In addition, a building and related parking garage was beguncompleted at the North Campus location in early 2008 on a significant expansion to another
headquarters building. Four additionalSt. Louis, Missouri during 2008. Other office buildings, as well as parking structures, are planned for developmentmay be developed over the next fiveseveral years.
Two U.S. headquarters buildings are leased through operating leases. In addition, the Partnership leases its Canadian home office facility in Mississauga, Ontario through an operating lease and has an operating lease for its United Kingdom home office located in London, England. The Partnership also maintains facilities in 10,19110,878 branch locations (as of February 29, 2008)27, 2009) which are located in the United States, Canada and the United Kingdom and are rented under predominantly cancelable leases. The Partnership is in the
process of expanding its buildings and facilities in order to support the
current and future growth projections of the organization.
In the normal course of business, the Partnership is named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation. Certain of these legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. The Partnership is involved, from time to time, in investigations and proceedings by governmental and self-regulatory agencies, certain of which may result in adverse judgments, fines or penalties. In recent years, the number of legal actions and investigations has increased with a focus on mutual fund issues among many firms in the financial services industry, including the Partnership.
Revenue Sharing Class Action - The Partnership
Tennessee Investigation. In April 2008, Wilks v. Edward D. Jones & Co., L.P. was suedfiled with FINRA as an arbitration concerning allegations that a former Edward Jones financial advisor (who is now deceased) and a local accountant (not affiliated with Edward Jones) conspired to convert funds of Edward Jones' customers for their own personal use and benefit. This action alleged $600,000 in nine civil class
actions that were eventually consolidated into three proceedings, namely: (1)
Bressler,actual damages. In May 2008, the same claimant filed in Tennessee state court with similar allegations and demand of $600,000. That lawsuit has been stayed by the court as to Edward Jones pending the outcome of the FINRA arbitration. In April 2008, Givens, et al. v. Edward D. Jones & Co., (2) Spahn IRA, et al.L.P. was filed with FINRA as an arbitration alleging $4.9 million in actual damages and concerning alleged misconduct by the same former financial advisor. In September 2008, Craighead v. Edward D. Jones & Co., and (3) Enriquez et al. v. Edward D. Jones & Co., L. P. In August
2006, the Partnership announced a preliminary settlement agreement to resolve
all three groups of lawsuits. Final approval of the settlement was given on
October 25, 2007 in the federal court case (Spahn) and on October 29, 2007 in
the state action (Enriquez). Pursuant to the foregoing approved settlement,
the Bressler action was dismissed. The time for appeals has past and the
Partnership is beginning the process of effectuating the settlement. Each of
the suits claimed that the Partnership failed to adequately disclose its
revenue sharing arrangements with certain designated preferred mutual fund
families.
The settlement involves all of the Partnership's present and former clients
who purchased and/or held shares in any of the Preferred Mutual Fund Families
during the period from January 1, 1999 through December 31, 2004. The
Partnership agreed to pay $55 million to former clients and for attorneys'
fees, as well as any costs to administer the settlement. Additionally, the
Partnership will issue $72.5 million of credit vouchers to current clients
than can be redeemed ratably over a three-year period. Any credit voucher not
redeemed during the applicable year will expire after each annual redemption
period. In 2006, the $55 million cash component of the settlement and related
administrative costs was charged against previously established legal expense
accruals. The $72.5 million non-cash credit voucher component will be
recognized as a reduction to revenue in the periods in which the vouchers are
redeemed by clients. The Partnership agreed to assume the cost of notice and
administration of the settlement. The settlement provides for the release of
all claims, debts and causes of action related to certain revenue sharing
payments receivedanother lawsuit alleging similar misconduct by the Partnership, fees and commissions received by the
Partnership for mutual fund trades, shelf-space arrangements, directed
brokerage transactions, shareholder accounting fees and mutual fund trades
generally.
The Peopleformer financial advisor, was filed in Tennessee state court. That action seeks damages in excess of the State of California v.$893,000. Edward D. Jones & Co., L.P., et al. -
In additionfiled a motion to the foregoing civil class action litigation, the California
Attorney General commenced a civil action against the Partnership on
essentially the same allegations present in the civil class actions. Thestay this court
has granted the
19
PART I
Item 3. Legal Proceedings, continued
Partnership's motion
proceeding and compel the matter to dismiss and dismissed the lawsuit, and
further denied the Attorney General's request for reconsideration. However,
the California Attorney General filed an appeal. On August 24,FINRA arbitration. In 2007, the
California Court of Appeal issued its opinion, remanding the case to the trial
court with instructions to vacate the order sustaining the demurrer without
leave to amend and enter a new order overruling the demurrer. On October 3,
2007, Edward Jones timely filed a Petition for Review with the California
Supreme Court. On November 28, 2007, the California Supreme Court denied the
petition. On December 6, 2007, the case was remitted back to the trial court.
Tennessee Investigation - The filing in August 2007 of a legal action In Re
Estate of Florence M. Wilkison and John E. Wilkison, Jr., Executor v. Robert
E. Bell, William E. Hood and Edward D. Jones & Co., L.P., Seventh Circuit
Court for Davidson County Tennessee Probate Division alleging
misappropriation, has been settled. As a result, additional clients claiming
conversion of property by accountant Bell and Edward Jones Financial Advisor
Hood similar to the Wilkison claim has resulted in additional investigation
and monetary settlements. Edward Jones continues its investigation. Edward
Jones has notified the regulatory authorities including the State of Tennessee and FINRA and arebegan to make inquiries related to these matters. Edward Jones is fully cooperating with their investigation.
those inquiries.
Lehman Bonds. In October 2008, a class action suit was filed in Arkansas state court in Saline County, under Section 11, 12(a)(2) and 15 of the Securities Act of 1933, regarding the sale of Lehman Bonds pursuant to the registration statement and prospectus dated May 30, 2006, and various prospectus supplements dated October 22, 2006, and thereafter. In November 2008, a similar suit was filed in Arkansas state court in Benton County regarding the sale of 6.5% Lehman Bonds maturing October 25, 2007, pursuant to the registration statement and prospectus and prospectus supplement dated August 2, 2007, (collectively referred to as "Lehman Bonds"). Both claims were filed against the officers and directors of Lehman Brothers Holdings, Inc., as well as numerous distributors, including Edward Jones, of certain series of Lehman Bonds. Plaintiffs in both actions allege among other things that the officers and directors of Lehman Brothers Holdings, Inc., and distributors of the Lehman Bonds made material misrepresentations to the purchasers of the bonds. While each lawsuit relates to a different series of Lehman Bonds, the Plaintiffs in each suit are seeking unspecified compensatory damages, attorneys' fees, costs and expenses. In February 2009, the United States Judicial Panel on multi-district litigation agreed to transfer these two actions to the Southern District of New York ("SDNY") for coordinated or consolidated pretrial proceedings with the actions currently pending in the SDNY.
Virginia Matter. In July 2007, the Commonwealth of Virginia State Corporation Commission, Division of Securities and Retail Franchising (the "Division") advised Edward Jones that a Rule to Show Cause may be issued against Edward Jones based upon the State’s investigation of the activities of a former Edward Jones financial advisor for the period January 1, 1998 through July 9, 2001. Based on the Virginia Securities and Franchise Division's investigation, the Division alleged Edward Jones conducted activity that constituted a violation of the Virginia Securities Act including unlawful offers and sales, failure to supervise, failure to keep true, accurate records relating to its business and failure to examine customer accounts to detect and prevent irregularities or abuses. Edward Jones has reached a tentative agreement with the Division, which would result in Edward Jones entering into a Settlement Order with the division and Edward Jones offering restitution to select customers in various amounts totaling approximately $380,000.
FINRA Official Statement Delivery Matter. In 2006, FINRA conducted an inquiry into certain deficiencies Edward Jones experienced in the mailing of official statements in various secondary market transactions in municipal securities during the period in which delivery of official statements was required. The transactions in question involved issues in which the firm was not a managing underwriter or a syndicate member. FINRA sought a censure, fine and the institution of certain new procedures. Edward Jones agreed to a settlement including the payment of $900,000 to FINRA, and the parties are in the process of finalizing the settlement.
Prospectus Delivery Matter. In March 2006, the NYSE initiated a review of Edward Jones' policies and procedures relating to the timely delivery of prospectuses and product descriptions in connection with purchases of certain product types. The NYSE's review focused on the time period of July 1, 2003 through October 31, 2004. The matter is still pending with FINRA who succeeded the NYSE upon the consolidation of its enforcement arm with the NASD.
PART I
Item 3. Legal Proceedings, continued
FINRA Investigation. In February 2008, FINRA initiated an inquiry into an alleged misappropriation of customer funds by a former Edward Jones financial advisor. Edward Jones identified the customers involved. A number of settlements have been completed and the remaining matters are in the settlement process.
Wage and Hour Class Actions -. On September 28, 2007, Edward Jones a
subsidiary of the Partnership, entered into twoa settlement agreements (the
"Settlement Agreements") related toagreement that resolved several wage and hour class action lawsuits, which were filed against Edward JonesJones. These various cases were consolidated into two lawsuits in the United States District Court for the Northern District of California ("Northern DistrictOhio (the “Court”). One of California"these cases asserted primarily federal law claims (the “Collective Action”), and the United States District Court forother asserted primarily state law claims (the “State Law Class Action”).
Edward Jones reached a settlement in both the Western District of
Pennsylvania ("Western District of Pennsylvania").
The first Settlement Agreement resolvesCollective Action and the State Law Class Action, which resolved the federal and state claims of a
California Class. The second Settlement Agreement resolves the federal and
state claims ofcertain individuals in all other states (the "National Class"). The
Settlement Classes provided for by these agreements consisteach of all individuals
who are (or were) employed by Edward Jones in the position of Financial
Advisor, a/k/a Investment Representative and/or salaried or commissioned
Financial Advisor Trainee, in the United States, duringexcluding the relevant class
periods, including any limited partners who hold such positions, and all
current and former general partners who were in such positions during the
class periods for the time period before they became general partners.
On September 28, 2007, the parties filed formal settlement stipulations with
the Northern DistrictState of California and the Western District of Pennsylvania.
Subsequently, on February 1,(the “National Settlements”).
In June 2008, the
Northern District of California granted
the parties' Joint Motion for Preliminary Approval. The Final Approval Hearing
in that case is set in June 2008. On December 17, 2007, the Western District
of Pennsylvania gave the parties permission to proceed with a settlement of
the federal claims, but dismissed the state claims without prejudice, ruling
in part that the state and federal claims could not proceed in the same
action.
Subsequent to dismissal of the state law claims, a new action was filed in
Ohio state court once again asserting state law claims. On February 26, 2008,
Edward Jones removed the lawsuit to the United StatesU.S. District Court for the Northern District of Ohio, Eastern
Division. Thereafter, counsel for the
plaintiffs who had been proceeding in the Western District of Pennsylvania
filed two additional lawsuits in the Northern District of Ohio, one of which
asserts primarily federal law claims and one of which asserts primarily state
law claims, and the parties voluntarily dismissed the lawsuit pending in the
Western District of Pennsylvania.
Despite the new filings, the two Settlement Agreements remain in place. Edward
Jones agreed to pay $21.0 million to settle the claims of the California ClassDivision (the
"California Fund"“Court”)
and up to a maximum of $19.0 million to settle claimsgranted preliminary approval of the National
Class (the "National Class Fund"). The California Fund,
20
Item 3. Legal Proceedings, continued
including all interest thereon, is a common fund that is not the separate
property ofSettlements, and Edward Jones and will not reverttransferred $19 million to Edward Jones, from which all
claims ofan escrow account to fund the CaliforniaNational Settlements (the “National Class as well as attorney's fees, litigation
expenses, enhancements and claims administration fees and costs associated
with the California Class will be paid. The National Class Fund will be made
on a claims-made basis with unclaimed funds to remain the property of Edward
Jones.Fund”). The National Class Fund will also include attorney'sattorney’s fees, litigation expenses, enhancements, administrative costs, and any other fees or costs associated with the settlement. The $21 million for the California Fund was
transferred to an escrow account in February 2008 andThis expense was charged against previously established legal expense accruals.
On January 5, 2009, the Court entered several orders relating to the National Settlements. The costCourt certified a Collective Action Class and entered judgment on the federal claims asserted in the Collective Action. The Court also granted final approval of the settlement in the State Law Class Action, and entered a judgment dismissing all claims asserted in that case. These judgments became final on February 5, 2009, and the checks were mailed to participating class members in late February. The National Class settlementFund will also be charged against previously established expense
accruals.
paid to class members on a claims-made basis with unclaimed funds to be returned as property of Edward Jones.
In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, or actions which are in very preliminary stages, the Partnership cannot predict with certainty the eventual loss or range of loss related to such matters. The Partnership has determined that it is likely that ultimate resolution in favor of the plaintiffs will result in losses to the Partnership on some of these matters and as a result, has established appropriate accruals for potential litigation losses. Based on current knowledge and after consultation with counsel, the Partnership believes the outcome of these actions will not have a material adverse effect on the consolidated financial condition of the Partnership, although the outcome could be material to the
Partnership'sPartnership’s future operating results for a particular period or periods.
21
PART I
None.
ITEM 5.
| MARKET FOR REGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
There is no established public trading market for the Limited Partnership interests and their assignment is prohibited.
The following information sets forth, for the past five years, selected financial data.
(All
(All dollars in millions, except per unit information and units outstanding.)
Summary Consolidated Statements of Income Data:
2007 2006 2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
Total revenue $ 4,147 $ 3,518 $ 3,196 $ 2,899 $ 2,550
Interest expense 81 56 55 56 58
-------------------------------------------------------------------------------------
Net revenue $ 4,066 $ 3,462 $ 3,141 $ 2,843 $ 2,492
Income before allocations
to partners/net income * $ 508 $ 391 $ 330 $ 217 $ 203
Income before allocations
to partners/net income
per weighted average
$1,000 equivalent
limited partnership
unit outstanding $ 165.92 $ 161.95 $ 157.11 $ 126.43 $ 108.08
Weighted average
$1,000 equivalent
limited partnership
units outstanding 498,132 210,157 214,366 219,885 224,389
- ---------------------------------------------------------------------------------------------------------------------
* Due to the implementation of SFAS No. 150, the Partnership reported income
before allocations to partners in 2007, 2006, 2005 and 2004 and net income in
2003.
22
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | | | | |
| Total revenue | | $ | 3,859 | | | $ | 4,147 | | | $ | 3,518 | | | $ | 3,196 | | | $ | 2,899 | |
| Interest expense | | | 73 | | | | 81 | | | | 56 | | | | 55 | | | | 56 | |
| Net revenue | | $ | 3,786 | | | $ | 4,066 | | | $ | 3,462 | | | $ | 3,141 | | | $ | 2,843 | |
| | | | | | | | | | | | | | | | | | | | | |
| Income before allocations | | | | | | | | | | | | | | | | | | | | |
| to partners | | $ | 312 | | | $ | 508 | | | $ | 391 | | | $ | 330 | | | $ | 217 | |
| | | | | | | | | | | | | | | | | | | | | |
| Income before allocations | | | | | | | | | | | | | | | | | | | | |
| to partners/net income | | | | | | | | | | | | | | | | | | | | |
| per weighted average | | | | | | | | | | | | | | | | | | | | |
| $1,000 equivalent | | | | | | | | | | | | | | | | | | | | |
| limited partnership | | | | | | | | | | | | | | | | | | | | |
| unit outstanding | | $ | 86.21 | | | $ | 165.92 | | | $ | 161.95 | | | $ | 157.11 | | | $ | 126.43 | |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted average | | | | | | | | | | | | | | | | | | | | |
| $1,000 equivalent | | | | | | | | | | | | | | | | | | | | |
| limited partnership | | | | | | | | | | | | | | | | | | | | |
| units outstanding | | | 489,920 | | | | 498,132 | | | | 210,157 | | | | 214,366 | | | | 219,885 | |
| | | | | | | | | | | | | | | | | | | | | |
In accordance with SFAS No. 150, the Partnership presents net income of $0 on its consolidated statement of income. See Note 1 to the Consolidated Financial Statements for further discussion.
PART I
II
Item 6. Selected Financial Data, continued
Summary Consolidated Statements of Financial Condition Data:
2007 2006 2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 5,824 $ 5,196 $ 4,317 $ 4,100 $ 3,723
============== =============== ============== ============== ==============
Bank loans $ - $ - $ 9 $ - $ -
Federal Home Loan Bank
advances - - 31 34 24
Long-term debt 11 14 24 32 40
Other liabilities exclusive
of subordinated
liabilities and partnership
capital subject to
mandatory redemption 4,087 3,880 2,993 2,839 2,466
-------------- --------------- -------------- -------------- --------------
4,098 3,894 3,057 2,905 2,530
-------------- --------------- -------------- -------------- --------------
Subordinated liabilities 275 299 344 387 408
-------------- --------------- -------------- -------------- --------------
Partnership capital
subject to mandatory
redemption / partnership
capital (net of reserve for
anticipated withdrawals) * 1,328 907 802 752 727
Reserve for anticipated
withdrawals 123 96 114 56 58
-------------- --------------- -------------- -------------- --------------
Partnership capital subject to
mandatory redemption/
partnership capital 1,451 1,003 916 808 785
-------------- --------------- -------------- -------------- --------------
Total liabilities and
partnership capital $ 5,824 $ 5,196 $ 4,317 $ 4,100 $ 3,723
============== =============== ============== ============== ==============
- ---------------------------------------------------------------------------------------------------------------------------
* Due to the implementation of SFAS No. 150, the Partnership
reported total partnership capital subject to mandatory redemption in 2007,
2006, 2005 and 2004 and partnership capital in 2003.
23
| | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | | | | |
| Total assets | | $ | 6,992 | | | $ | 5,824 | | | $ | 5,196 | | | $ | 4,317 | | | $ | 4,100 | |
| | | | | | | | | | | | | | | | | | | | | |
| Bank loans | | $ | 43 | | | $ | - | | | $ | - | | | $ | 9 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Federal Home Loan Bank | | | | | | | | | | | | | | | | | | | | |
| advances | | | - | | | | - | | | | - | | | | 31 | | | | 34 | |
| | | | | | | | | | | | | | | | | | | | | |
| Long-term debt | | | 9 | | | | 11 | | | | 14 | | | | 24 | | | | 32 | |
| | | | | | | | | | | | | | | | | | | | | |
| Other liabilities exclusive | | | | | | | | | | | | | | | | | | | | |
| of subordinated | | | | | | | | | | | | | | | | | | | | |
| liabilities and partnership | | | | | | | | | | | | | | | | | | | | |
| capital subject to | | | | | | | | | | | | | | | | | | | | |
| mandatory redemption | | | 5,203 | | | | 4,087 | | | | 3,880 | | | | 2,993 | | | | 2,839 | |
| | | | 5,255 | | | | 4,098 | | | | 3,894 | | | | 3,057 | | | | 2,905 | |
| | | | | | | | | | | | | | | | | | | | | |
| Subordinated liabilities | | | 261 | | | | 275 | | | | 299 | | | | 344 | | | | 387 | |
| | | | | | | | | | | | | | | | | | | | | |
| Partnership capital | | | | | | | | | | | | | | | | | | | | |
| subject to mandatory | | | | | | | | | | | | | | | | | | | | |
| redemption / partnership | | | | | | | | | | | | | | | | | | | | |
| capital (net of reserve for | | | | | | | | | | | | | | | | | | | | |
| anticipated withdrawals) | | | 1,413 | | | | 1,328 | | | | 907 | | | | 802 | | | | 752 | |
| | | | | | | | | | | | | | | | | | | | | |
| Reserve for anticipated | | | | | | | | | | | | | | | | | | | | |
| withdrawals | | | 63 | | | | 123 | | | | 96 | | | | 114 | | | | 56 | |
| | | | | | | | | | | | | | | | | | | | | |
| Partnership capital subject to | | | | | | | | | | | | | | | | | | | | |
| mandatory redemption/ | | | | | | | | | | | | | | | | | | | | |
| partnership capital | | | 1,476 | | | | 1,451 | | | | 1,003 | | | | 916 | | | | 808 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total liabilities and | | | | | | | | | | | | | | | | | | | | |
| partnership capital | | $ | 6,992 | | | $ | 5,824 | | | $ | 5,196 | | | $ | 4,317 | | | $ | 4,100 | |
| | | | | | | | | | | | | | | | | | | | | |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis is intended to help the reader understand the results of operations and the financial condition of the Partnership. Management's Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, the Partnership's financial statements and accompanying notes.
The following table summarizes the increase (decrease) in major categories of revenues and expenses for the last two years (dollar amounts in thousands).
| | | 2008 vs. 2007 | | | 2007 vs. 2006 | |
| | | Amount | | | Percentage | | | Amount | | | Percentage | |
| | | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | |
| Commissions | | $ | (271,587 | ) | | | (15 | ) % | | $ | 194,507 | | | | 12 | % |
| Asset fees | | | (30,687 | ) | | | (3 | ) | | | 220,850 | | | | 25 | |
| Principal transactions | | | 142,960 | | | | 37 | | | | 117,571 | | | | 44 | |
| Account and activity fees | | | 32,061 | | | | 7 | | | | 62,122 | | | | 16 | |
| Interest and dividends | | | (120,418 | ) | | | (39 | ) | | | 55,750 | | | | 22 | |
| Investment banking | | | 18,024 | | | | 52 | | | | 2,218 | | | | 7 | |
| Other revenue | | | (58,185 | ) | | | (286 | ) | | | (23,906 | ) | | | (54 | ) |
| | | | | | | | | | | | | | | | | |
| Total revenue | | | (287,832 | ) | | | (7 | ) | | | 629,112 | | | | 18 | |
| | | | | | | | | | | | | | | | | |
| Interest expense | | | (8,045 | ) | | | (10 | ) | | | 24,385 | | | | 43 | |
| | | | | | | | | | | | | | | | | |
| Net revenue | | | (279,787 | ) | | | (7 | ) | | | 604,727 | | | | 18 | |
| | | | | | | | | | | | | | | | | |
| Operating Expenses: | | | | | | | | | | | | | | | | |
| Compensation and benefits | | | (148,171 | ) | | | (6 | ) | | | 405,153 | | | | 19 | |
| Communications and data | | | | | | | | | | | | | | | | |
| processing | | | 21,975 | | | | 7 | | | | 27,695 | | | | 10 | |
| Occupancy and equipment | | | 13,495 | | | | 4 | | | | 27,512 | | | | 10 | |
| Payroll and other taxes | | | 2,929 | | | | 2 | | | | 18,446 | | | | 15 | |
| Advertising | | | 6,177 | | | | 10 | | | | 6,102 | | | | 11 | |
| Postage and shipping | | | (965 | ) | | | (2 | ) | | | 6,305 | | | | 12 | |
| Clearance fees | | | 1,478 | | | | 9 | | | | (914 | ) | | | (5 | ) |
| Legal | | | (315 | ) | | | (3 | ) | | | (39,613 | ) | | | (78 | ) |
| Other operating expenses | | | 20,020 | | | | 11 | | | | 36,488 | | | | 27 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | | (83,377 | ) | | | (2 | ) | | | 487,174 | | | | 16 | |
| | | | | | | | | | | | | | | | | |
| Income before allocations to | | | | | | | | | | | | | | | | |
| partners / net income | | $ | (196,410 | ) | | | (39 | ) % | | $ | 117,553 | | | | 30 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
PART II
2007 vs. 2006 2006 vs. 2005
Amount Percentage Amount Percentage
Revenue:
Commissions $ 194,507 12 % $ 94,787 6 %
Asset fees 220,850 25 160,867 22
Account| Item 7. | Management's Discussion and activity fees 62,122 16 43,800 13
Principal transactions 117,571 44 28,154 12
InterestAnalysis of Financial Condition and dividends 55,750 22 43,873 21
Investment banking 2,218 7 (387) (1)
Other (23,906) (54) (49,789) (53)
----------------- -----------------
Total revenue 629,112 18 321,305 10
Interest expense 24,385 43 750 1
----------------- -----------------
Net revenue 604,727 18 320,555 10
----------------- -----------------
Operating Expenses:
Compensation and benefits 405,153 19 261,232 14
Communications and data
processing 27,695 10 9,836 4
Occupancy and equipment 27,512 10 13,493 5
Payroll and other taxes 18,446 15 9,411 8
Legal (39,613) (78) (63,229) (56)
Postage and shipping 6,305 12 352 1
Advertising 6,102 11 6,401 13
Floor brokerage and
clearance fees (914) (5) 4,091 29
Other operating expenses 36,488 27 18,287 15
----------------- -----------------
Total operating expenses 487,174 16 259,874 9
----------------- -----------------
Income before allocations to
partners / net income $ 117,553 30 % $ 60,681 18 %
================= =================
- -----------------------------------------------------------------------------------------------------------------
Results of Operations, continued |
24
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
BASIS OF PRESENTATION
For internal analysis, the Partnership broadly categorizes its revenues as trade revenue (revenue from customer buy or sell transactions of securities) and net fee revenue (sources other than trade revenue including asset fees, account and activity fees and net interest income). In the Partnership'sPartnership’s Consolidated Statements of Income, trade revenue is composed of commissions, principal transactions and investment banking. Net fee revenue is composed of asset fees, account and activity fees, interest and dividends (net of interest expense), and other revenues.
RESULTS OF OPERATIONS (2008 VERSUS 2007)
For 2008, net revenue decreased 7% ($279.8 million) to $3.8 billion, and income before allocations to partners decreased 39% ($196.4 million) to $311.8 million. The Partnership’s profit margin based on income before allocations to partners decreased to 8.1% in 2008, from 12.3% in 2007. The Partnership’s decrease in net revenues was primarily due to reduced trade revenue, net interest income, asset fees and other revenue, partially offset by an increase in account and activity fee revenue. Operating expenses decreased due primarily to a decrease in financial advisor compensation (due to reduced trade revenue) and in variable compensation (due to reduced net income), partially offset by costs associated with the continued expansion and enhancement of the Partnership's branch office network. The Partnership added 953 financial advisors during the twelve months ended December 31, 2008, ending the year with 12,155 financial advisors, an increase of 9% from 11,202 as of December 31, 2007.
Trade revenue comprised 57% and 56% of net revenue for 2008 and 2007, respectively. Conversely, net fee revenue comprised 43% and 44% for 2008 and 2007, respectively.
Trade revenue, which consists of revenue from commissions, principal transactions and investment banking, of $2.2 billion decreased 5% ($110.6 million) during 2008. The decrease in trade revenue was due to a decline in the margin earned on overall customer dollars invested (the principal amount of customer's buy and sell transactions generating a commission), which was partially offset by an increase in customer dollars invested and two additional business days. Total customer dollars invested were $114.2 billion during 2008, a 3% ($3.6 billion) increase from 2007. The Partnership's margin earned on each $1,000 invested decreased to $19.00 for 2008 from $20.60 in 2007.
Commissions revenue decreased 15% ($271.6 million) for 2008 to $1.6 billion. This decrease year over year was primarily due to a 12% ($8.6 billion) decrease in customer dollars invested in commission generating transactions to $63.4 billion. The Partnership's margin earned on commission generating transactions on each $1,000 invested decreased to $25.00 during 2008 from $25.80 during 2007. Underlying the decrease in commissions revenues, mutual fund commissions decreased 24% ($299.5 million). Partially offsetting the decline in commission revenue were increased insurance commissions of 10% ($28.4 million).
PART II
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations, continued |
The following table summarizes commissions revenue year over year:
| | | Years ended (in millions) | | | | | | | |
| | | December 31, | | | December 31, | | | $ | | | % | |
| | | 2008 | | | 2007 | | | Change | | | Change | |
| Mutual funds | | $ | 958.4 | | | $ | 1,257.9 | | | $ | (299.5 | ) | | | (24 | ) |
| Equities | | | 326.9 | | | | 327.3 | | | | (0.4 | ) | | | (0 | ) |
| Insurance | | | 300.8 | | | | 272.4 | | | | 28.4 | | | | 10 | |
| Corporate bonds | | | 0.5 | | | | 0.6 | | | | (0.1 | ) | | | (17 | ) |
| | | $ | 1,586.6 | | | $ | 1,858.2 | | | $ | (271.6 | ) | | | (15 | ) |
Principal transactions revenue increased 37% ($143.0 million) to $527.6 million during 2008 due primarily to an increase in customer dollars invested. Customers invested $48.8 billion in principal transactions in 2008 compared to $37.4 billion in 2007. The Partnership’s margin earned on principal transactions on each $1,000 invested increased to $10.90 during 2008 from $10.30 during 2007 primarily due to a shift into higher margin tax-free fixed income products from lower margin taxable fixed income products. Revenue from municipal bonds increased 105% ($143.5 million) and certificates of deposit increased 50% ($21.8 million), while corporate bonds decreased 11% ($16.7 million) and government bonds decreased 17% ($4.4 million). The increase in municipal bond revenue is due to the relatively attractive yields on municipal bonds versus their historic yields relative to treasury securities. The increase in certificates of deposit revenue is primarily due to the uncertainty in the securities markets in 2008 and customers seeking shorter-term fixed income investments.
The following table summarizes principal transaction revenue year over year:
| | | Years ended (in millions) | | | | | | | |
| | | December 31, | | | December 31, | | | $ | | | % | |
| | | 2008 | | | 2007 | | | Change | | | Change | |
| Municipal bonds | | $ | 280.5 | | | $ | 137.0 | | | $ | 143.5 | | | | 105 | |
| Corporate bonds | | | 129.3 | | | | 146.0 | | | | (16.7 | ) | | | (11 | ) |
| Certificates of deposit | | | 65.3 | | | | 43.5 | | | | 21.8 | | | | 50 | |
| Government bonds | | | 21.5 | | | | 25.9 | | | | (4.4 | ) | | | (17 | ) |
| Collateralized mortgage obligations | | | 16.0 | | | | 16.0 | | | | - | | | | - | |
| Unit investment trusts | | | 15.0 | | | | 16.2 | | | | (1.2 | ) | | | (7 | ) |
| | | $ | 527.6 | | | $ | 384.6 | | | $ | 143.0 | | | | 37 | |
| | | | | | | | | | | | | | | | | |
Investment banking revenue increased 52% ($18.0 million) during 2008 to $52.7 million, due primarily to an increase in municipal and corporate tax exempt offerings in the current year.
Net fee revenue, which is fee revenue net of interest expense, decreased 9% ($169.2 million) to $1.6 billion during 2008.
Asset fees decreased 3% ($30.7 million) to $1.1 billion due primarily to a decrease in customers' mutual fund assets, partially offset by an increase in the new Advisory Solutions program revenue. Average customer mutual fund assets decreased 8% ($21.7 billion) to $258.7 billion in
PART II
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations, continued |
2008 compared to $280.3 billion in 2007. Average customer money market assets increased 12% ($2.4 billion) to $23.0 billion in 2008 compared to $20.7 billion in 2007. Insurance assets decreased 8% ($3.1 billion) to $38.4 billion in 2008 compared to $41.5 billion in 2007. The value of the assets in the Advisory Solutions program, first offered in June 2008, were $5.1 billion as of December 31, 2008.
As a 49.5% owner of Passport Research Limited, the investment advisor to money market funds made available to Edward Jones customers, the Partnership shares in the management fee charged to those funds. Due to the current interest rate environment, the fees charged have been and may in the future be reduced to maintain a positive yield on the funds. Any reduction in fees will reduce the income earned by the Partnership in the future.
Account and activity fees of $473.1 million increased 7% ($32.1 million) year over year. Revenue received from sub-transfer agent services performed for mutual fund companies increased 9% ($23.1 million) to $271.9 million. The number of customer accounts for which the Partnership provides mutual fund sub-transfer agent services increased by 7%. In addition, retirement account fees increased 9% ($9.8 million) to $120.7 million during 2008, due primarily to a 9% increase in the number of retirement accounts.
Other revenue decreased 286% ($58.2 million) year over year. The decrease between years is primarily attributable to the decrease in value in the investments held related to the non-qualified deferred compensation plan (see discussion in Note 1 to the Consolidated Financial Statements) and foreign currency translation losses. The investments held related to the non-qualified deferred compensation plan had a loss in the fair value of $28.4 million through December 2008, versus a gain of $8.0 million in the same period last year, resulting in a $36.4 million decrease in revenue. As the fair value of the investments held related to the non-qualified compensation plan fluctuates, the gains or losses are reflected in other revenue. There was an offsetting decrease in compensation and benefits expense in 2008. Each period, the net impact of the fair value fluctuations on the investments supporting the non-qualified plan to the Partnership's financial results is zero. The translation of the foreign subsidiary financial statements from local currencies to dollars resulted in an $18.3 million loss during 2008 compared to a $2.3 million gain in 2007.
Net interest and dividend income decreased 49% ($112.4 million) to $116.4 million during 2008 due primarily to a decrease in interest rates. Interest income from cash segregated under federal and other revenues.
regulations and securities purchased under agreements to resell decreased 57% ($66.2 million). The average funds invested in cash segregated under federal and other regulations and securities purchased under agreements to resell during 2008 were $2.4 billion, compared to $2.3 billion in 2007. The average rate earned on these investments decreased to 1.99% during 2008 from 4.98% during 2007. The rates earned on these investments trended down throughout 2008 with significant declines toward the end of the year. The average rate earned on those investments in December 2008 was 0.33%. Additionally, interest income from customer loans decreased 30% ($50.8 million) to $120.3 million. While average customer loan balances in 2008 increased 4% ($73.2 million) to $2.0 billion, the average rate earned on customer loan balances decreased due to the decrease in short-term interest rates during the past year to approximately 6.04% during 2008 from approximately 8.94% during 2007. In addition, interest expense decreased 10% ($8.0 million) to $72.6 million during 2008 due to lower subordinated and long-term debt balances as well as a decrease in customer credit interest expense.
PART II
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations, continued |
Operating expenses decreased 2% ($83.4 million) to $3.5 billion during 2008. Compensation and benefits costs decreased 6% ($148.2 million) to $2.3 billion. Within compensation and benefits costs, financial advisor compensation decreased 6% ($80.7 million) due to decreased trade revenues, while financial advisor salary and subsidy increased 31% ($38.8 million) due to an increased number of new financial advisors participating in advisor compensation programs. Variable compensation, including bonuses and profit sharing paid to financial advisors, branch office assistants and headquarters' associates, which expands and contracts in relation to revenues, income before allocations to partners and the Partnership’s related profit margin decreased 53% ($196.5 million). Headquarters salary and benefit expense increased 13% ($38.1 million) to $341.6 million in 2008. Branch salary and benefit expense increased 15% ($53.6 million) to $423.8 million. Salary and benefit costs for existing and additional personnel increased as the Partnership grew its financial advisor network. On a full time equivalent basis, the Partnership had 5,301 headquarters associates and 12,067 branch staff associates as of December 31, 2008, compared to 4,894 headquarters associates and 11,319 branch staff associates as of December 31, 2007.
Communications and data processing expense increased 7% ($22.0 million) to $322.5 million in 2008 due to increased costs related to the continued expansion and enhancement of the Partnership's branch office network, including the Partnership's conversion to a terrestrial communications network for its branches from a satellite network (which was completed in the fall of 2007).
RESULTS OF OPERATIONS (2007 VERSUS 2006)
For 2007, net revenue increased 18% ($604.7 million) to $4.066$4.1 billion, while income before allocations to partners increased 30% ($117.6 million) to $508.2 million. The Partnership'sPartnership’s profit margin based on income before allocations to partners increased to 12.3% in 2007, from 11.1% in 2006. Year over year, the Partnership'sPartnership’s net revenue increased due primarily to increased customer dollars invested, growth in customer asset values, higher account and activity fees, and higher net interest income. Operating expenses increased in 2007 due primarily to growth in sales compensation related to the increase in net revenues and to costs associated with the continued expansion and enhancement of the Partnership's branch office network. The Partnership added 914 financial advisors during the twelve months ended December 31, 2007, ending the year with 11,202 financial advisors, an increase of 9% from 10,288 as of December 31, 2006.
Trade revenue of $2.278$2.3 billion comprised 56% of net revenue for 2007, down from 57% for 2006. Conversely, net fee revenue comprised 44% for 2007, up from 43% in 2006. Trade revenue of $2.278 billion, increased 16% ($314.3 million) in 2007 due primarily to an increase in customer dollars invested (the principal amount of customer's buy and sell transactions generating a commission). Total customer dollars invested were $109.6$110.6 billion during 2007, a 15%16% ($13.914.9 billion) increase from 2006. The Partnership's margin earned on each $1,000 invested increased to $20.40$20.60 in 2007 from $20.30 in 2006.
PART II
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations, continued |
Commissions revenue increased 12% ($194.5 million) during 2007 to $1.858 billion. Commissions revenue increased year over year due primarily to a
14%15% ($
8.79.6 billion) increase in customer dollars invested to
$71.0$71.9 billion in 2007, compared to $62.3 billion in 2006. Underlying the increase in commissions revenue, mutual fund commissions increased 13% ($148.0 million) and insurance commissions increased 17% ($40.1 million), which together represented 97% of the increase in commissions revenue. The following table summarizes commissions revenue year over year:
Years ended (in millions)
-----------------------------------------------
December 31, December 31, %
2007 2006 Change
---------------------- ----------------------- ----------
Mutual funds $ 1,257.9 $ 1,109.9 13
Equities 327.3 320.8 2
Insurance 272.4 232.3 17
Corporate bonds 0.6 0.7 (14)
---------------------- ----------------------- ----------
$ 1,858.2 $ 1,663.7 12
====================== ======================= ==========
| | | Years ended (in millions) | | | | | | | |
| | | December 31, | | | December 31, | | | $ | | | % | |
| | | 2007 | | | 2006 | | | Change | | | Change | |
| Mutual funds | | $ | 1,257.9 | | | $ | 1,109.9 | | | $ | 148.0 | | | | 13 | |
| Equities | | | 327.3 | | | | 320.8 | | | | 6.5 | | | | 2 | |
| Insurance | | | 272.4 | | | | 232.3 | | | | 40.1 | | | | 17 | |
| Corporate bonds | | | 0.6 | | | | 0.7 | | | | (0.1 | ) | | | (14 | ) |
| | | $ | 1,858.2 | | | $ | 1,663.7 | | | $ | 194.5 | | | | 12 | |
| | | | | | | | | | | | | | | | | |
Principal transactions revenue increased 44% ($117.6 million) to $384.6 million during 2007 due primarily to an increase in customer dollars invested. Customers invested $37.4 billion in principal transactions in 2007 compared to $32.2 billion in 2006, an increase of 16% ($5.2 billion). The Partnership's margin earned on principal transactions on each $1,000 invested increased to $10.30 during
25
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
2007 from $8.30 during 2006 primarily due to a shift to higher margin, longer maturity fixed income products from lower margin, shorter maturity certificates of deposit. Revenue from corporate bonds increased 61% ($55.1 million), municipal bonds increased 62% ($52.3 million), collateralized mortgage obligations increased 18% ($2.4 million), unit investment trusttrusts increased 13% ($1.9 million), certificates of deposit increased 10% ($3.9 million) and government bonds increased 8% ($2.0 million). Increased revenue from corporate bonds and municipal bonds represent 91% of the increase in principal transactions revenue. The increase was due to strong supply and higher yield spreads for investment grade municipal and corporate bonds. The following table summarizes principal transaction revenue year over year:
Years ended (in millions)
----------------------------------------------
December 31, December 31, %
2007 2006 Change
---------------------- ----------------------- ----------
Municipal bonds $ 137.0 $ 84.7 62
Corporate bonds 146.0 90.9 61
Government bonds 25.9 23.9 8
Collateralized mortgage obligations 16.0 13.6 18
Unit investment trusts 16.2 14.3 13
Certificates of deposit and other 43.5 39.6 10
---------------------- ----------------------- ----------
$ 384.6 $ 267.0 44
====================== ======================= ==========
| | | Years ended (in millions) | | | | | | | |
| | | December 31, | | | December 31, | | | $ | | | % | |
| | | 2007 | | | 2006 | | | Change | | | Change | |
| Municipal bonds | | $ | 137.0 | | | $ | 84.7 | | | $ | 52.3 | | | | 62 | |
| Corporate bonds | | | 146.0 | | | | 90.9 | | | | 55.1 | | | | 61 | |
| Certificates of deposit | | | 43.5 | | | | 39.6 | | | | 3.9 | | | | 10 | |
| Government bonds | | | 25.9 | | | | 23.9 | | | | 2.0 | | | | 8 | |
| Collateralized mortgage obligations | | | 16.0 | | | | 13.6 | | | | 2.4 | | | | 18 | |
| Unit investment trusts | | | 16.2 | | | | 14.3 | | | | 1.9 | | | | 13 | |
| | | $ | 384.6 | | | $ | 267.0 | | | $ | 117.6 | | | | 44 | |
Investment banking revenue increased 7% ($2.2 million) during 2007 to $34.7 million, due primarily to an increase in municipal offerings in the current year.
PART II
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations, continued |
Net fee revenue, which is fee revenue net of interest expense, increased 19% ($290.4 million) to $1.789$1.8 billion during 2007. Asset fees increased 25% ($220.8 million) to $1.099$1.1 billion due to net new money flowing into mutual fund and insurance products coupled with the favorable impact of market conditions through the fall of 2007 on customers' mutual fund and insurance assets generating asset fees. Average customer mutual fund, insurance, and money market assets increased $65.4 billion or 24% to $341.0 billion in 2007 compared to $275.6 billion in 2006.
Account and activity fees of $441.0 million increased 16% ($62.1 million) year over year. Revenue received from sub-transfer agent services performed for mutual fund companies increased 9% ($21.0 million) to $248.8 million, due to a 16% increase in the number of customer accounts for which the Partnership provides mutual fund sub-transfer agent services. Offsetting the increase in mutual fund sub-transfer agent fees was an $8.9 million (50%) decrease in fees received from sub-transfer agent services related to money market accounts due to a reduction in the number of money market accounts for which the Partnership providesprovided sub-transfer agent services. Custodial fee revenue grew 28% ($24.5 million) to $111.4 million, due to an 11% increase in the number of retirement accounts for which the Partnership is custodian. In addition, the annual fees charged on most retirement accounts waswere increased beginning January 2007. Other revenue of $20.3 million decreased 54% ($23.9 million) year over year primarily due to 2006 including $21 million in gains from three sources ($8.1 million from the sale of banking assets by the Partnership's banking subsidiary; $6.8 million from the exchange of the Partnership's NYSE membership for shares in Archipelago in connection with the NYSE's initial public offering; and $6.5 million from the sale of the Partnership's interest in the investment advisor to the Federated Capital Income Fund).
Net interest and dividend income increased 16% ($31.4 million) to $228.8 million during 2007 due primarily to an increase in overnight and short-term investing activities. Interest income increased 22% ($55.8 million) to $309.4 million in 2007 due to investing increased liquidity from customer credit
26
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
balances and investing the proceeds from an offering of limited partnershipLimited Partnership ("LP") interests, which closed on January 2, 2007. The average rate on the overnight investment balances was relatively unchanged at 4.987%4.98% in 2007 and 4.976%4.97% in 2006, while the average investment balance increased 199% ($1.4661.5 billion) to $2.202$2.2 billion due to increased customer credit balances and proceeds from an offering of Limited Partnership (LP)LP interests. Interest income from customer loans decreased 10% ($19.7 million). Average customer margin loan balances were $1.913$1.9 billion in 2007, compared to $2.160$2.2 billion in 2006, a decrease of 11%. The average rate earned on customer loan balances increased to approximately 8.94% during 2007 from approximately 8.84% during 2006.
Operating expenses increased 16% ($487.2 million) to $3.558$3.6 billion during 2007. Compensation and benefits costs increased 19% ($405.2 million) to $2.494$2.5 billion. Within compensation and benefits costs, sales compensation increased 19% ($214.3 million) due to increased revenues. Additionally, financial advisor salary and subsidy increased 46% ($40.1 million) due to new financial advisor compensation programs as well as increased numbers of financial advisors participating in those programs. Variable compensation, including bonuses and profit sharing paid to financial advisors, branch office assistants, and headquarters associates, which expands and contracts in relation to revenues, income before allocations to partners and the Partnership'sPartnership’s related profit margin, increased 36% ($98.1 million). Headquarters and branch payroll expense increased 9% ($55.5 million) due to increased salary and medical costs
PART II
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations, continued |
for existing and additional personnel support as the Partnership grows its sales force. This was offset by a $29.3 million decrease due to the elimination of a special bonus program for certain existing personnel in connection with the closing of the Partnership's LP offering. On a full timefull-time equivalent basis, the Partnership had 4,894 headquarters associates and 11,319 branch staff associates as of December 31, 2007, compared to 4,331 headquarters associates and 10,594 branch staff associates as of December 31, 2006.
Occupancy and equipment expense increased 10% ($27.5 million) to $301.1 million during 2007 due primarily to the growth in the number of branch offices as the Partnership expands the number of financial advisors. Communications and data processing expense increased 10% ($27.7 million) to $300.6 million during 2007 due to increased costs related to the expansion and enhancement of the Partnership's branch office network, including the Partnership's conversion to a terrestrial communications network for its branches from a satellite network. Other operating expenses increased 27% ($36.5 million) to $174.1 million primarily due to increased travel and entertainment costs, professional and consulting expense and Managed Account Program ("MAP") money manager expense due to increased MAP assets and related revenues. Legal expenses decreased 78% ($39.6 million) to $11.1 million during 2007 due to reduced legal expense accruals associated with legal matters and regulatory matters. (See Mutual Fund
Mattersand Annuities below and Item 3
-– Legal Proceedings for more information).
RESULTS OF OPERATIONS (2006 VERSUS 2005)
For 2006, net revenue increased 10% ($320.6 million) to $3.462 billion, while
income before allocations to partners increased 18% ($60.7 million) to $390.7
million. The Partnership's profit margin based on income before allocations to
partners increased to 11.1% in 2006, from 10.3% in 2005. Year over year, the
Partnership's net revenue and income before allocations to partners increased
due primarily to growth in customer asset values, higher account and activity
fees, and higher net interest income. Operating expenses increased in 2006 due
primarily to growth in sales compensation related to the increase in net
revenues. The Partnership added 555 (6%) financial advisors during the twelve
months ended December 31, 2006, ending the year with 10,288 financial
advisors.
Trade revenue of $1.963 billion, which comprised 57% of net revenue, increased
7% ($122.6 million) in 2006 due primarily to an increase in customer dollars
invested (the principal amount of customers' buy
27
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
and sell transactions), partially offset by a lower gross margin earned on
customer dollars invested compared to the prior year. Total customer dollars
invested were $95.7 billion during 2006, a 14% ($12.0 billion) increase from
2005. The Partnership's margin earned on each $1,000 invested decreased to
$20.30 in 2006 from $21.80 in 2005. Year over year, customer dollars invested
shifted to shorter term fixed income products reducing the margin earned on
each $1,000 invested.
Commissions revenue increased 6% ($94.8 million) during 2006 to $1.664
billion. Commissions revenue increased year over year due primarily to a 7%
($4.3 billion) increase in customer dollars invested to $62.3 billion in 2006.
Underlying the increase in commissions revenue, mutual fund commissions
increased 7% ($74.6 million), equity commissions decreased .4% ($1.2 million)
and insurance commissions increased 10% ($21.4 million). The following table
summarizes commissions revenue year over year:
Years ended (in millions)
-----------------------------------------------
December 31, December 31, %
2006 2005 Change
---------------------- ----------------------- ----------
Mutual funds $ 1,109.9 $ 1,035.3 7
Equities 320.8 322.0 -
Insurance 232.3 210.9 10
Corporate bonds 0.7 0.7 -
---------------------- ----------------------- ----------
$ 1,663.7 $ 1,568.9 6
====================== ======================= ==========
Principal transactions revenue increased 12% ($28.2 million) to $267.0 million
during 2006 due primarily to an increase in customer dollars invested offset
by a shift in customer dollars invested from higher margin, longer maturity
fixed income products to lower margin, shorter maturity certificates of
deposit. Customers invested $32.2 billion in principal transactions in 2006,
an increase of 31% ($7.6 billion). The Partnership's margin earned on each
$1,000 invested decreased to $8.30 during 2006 from $9.70 during 2005. Revenue
from corporate bonds increased 69% ($37.2 million), certificates of deposit
increased 15% ($5.1 million) and government bonds increased 12% ($2.6 million)
while collateralized mortgage obligations decreased 48% ($12.5 million) and
unit investment trusts decreased 38% ($8.7 million). The following table
summarizes principal transaction revenue year over year:
Years ended (in millions)
----------------------------------------------
December 31, December 31, %
2006 2005 Change
---------------------- ----------------------- ----------
Municipal bonds $ 84.7 $ 80.3 5
Corporate bonds 90.9 53.7 69
Government bonds 23.9 21.3 12
Collateralized mortgage obligations 13.6 26.1 (48)
Unit investment trusts 14.3 23.0 (38)
Certificates of deposit and other 39.6 34.5 15
---------------------- ----------------------- ----------
$ 267.0 $ 238.9 12
====================== ======================= ==========
Investment banking revenue decreased 1% ($.4 million) during 2006 to $32.5
million, due primarily to a decrease in municipal offerings in the current
year.
Net fee revenue of $1.498 billion, comprising 43% of net revenue, increased
15% ($198.0 million) during 2006. Asset fees increased 22% ($160.9 million) to
$877.8 million due to net new money flowing into
28
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
these products coupled with the favorable impact of market conditions on
customers' mutual fund and insurance assets generating asset fees. Average
customer mutual fund and insurance assets increased $45.9 billion or 21% to
$259.9 billion for 2006 compared to $214.0 billion for 2005.
Account and activity fees of $378.9 million increased 13% ($43.8 million) year
over year due to growth in customer accounts. Revenue received from mutual
fund and money market sub-transfer agent services increased 15% ($30.3
million) to $227.8 million, due primarily to a 15% increase in the number of
customer accounts for which the Partnership provides mutual fund sub-transfer
agent services. The number of retirement accounts for which the Partnership is
custodian increased by 11%, resulting in custodial fee revenue growth of 10%
($7.8 million) to $86.0 million. Other revenue of $44.2 million decreased 53%
($49.8 million) year over year. The decrease between years is primarily
attributable to a $70 million gain in 2005 that did not recur in 2006 compared
to $21 million in gains in 2006 that did not occur in 2005. During 2006, other
income includes $21 million in gains from three sources ($8.1 million from the
sale of banking assets by the Partnership's banking subsidiary; $6.8 million
from the exchange of the Partnership's NYSE membership for shares in
Archipelago in connection with the NYSE's initial public offering; $6.5
million from the sale of the Partnership's interest in the investment advisor
to the Federated Capital Income Fund). The Partnership's results for 2005
include a $70 million gain from the sale of a profit sharing interest in a
mutual fund company.
Net interest and dividend income increased 28% ($43.1 million) to $197.4
million during 2006 due primarily to an increase in overnight investing
activities and an increase in interest rates. Interest income from overnight
investing activities increased 325% ($30.5 million) to $39.9 million. The
average rate on these balances increased to 5.0% in 2006 from 3.2% in 2005,
and the average investment balance increased 202% ($492.2 million) to $736.2
million due to increased customer credit balances. Interest income from
customer loans increased 9% ($15.9 million). Average customer margin loan
balances were $2.160 billion in 2006, compared to $2.451 billion in 2005, a
decrease of 12%. The average rate earned on customer loan balances increased
to approximately 8.84% during 2006 from approximately 7.09% during 2005.
Operating expenses increased 9% ($259.9 million) to $3.071 billion during
2006. Compensation and benefits costs increased 14% ($261.2 million) to $2.088
billion. Within compensation and benefits costs, sales compensation increased
13% ($129.6 million) due to increased revenue and financial advisor salary and
subsidy which increased 33% ($21.5 million) due to new financial advisor
compensation programs. Variable compensation, including bonuses and profit
sharing paid to financial advisors, branch office assistants, and headquarters
associates, which expands and contracts in relation to revenues, income before
allocations to partners and the Partnership's related profit margin, increased
26% ($58.3 million). Headquarters and branch payroll expense increased 9%
($52.2 million) due to increased salary and medical costs for existing
personnel and additional support at both the headquarters and in the branches
as the Partnership increased the number of financial advisors. On a full time
equivalent basis, the Partnership had 4,331 headquarters associates and 10,594
branch staff associates as of December 31, 2006, compared to 4,096
headquarters associates and 10,103 branch staff associates as of December 31,
2005.
Occupancy and equipment expense increased 5% ($13.5 million) to $273.6 million
during 2006 due primarily to the growth in the number of branch offices as the
Partnership expands the number of financial advisors and the accrual in the
second quarter of 2006 of $3.6 million of additional expense related to the
planned sublease of excess space in the Canada headquarter building.
Communications and data processing expense increased 4% ($9.8 million) to
$272.9 million during 2006 due to increased costs related to the continued
expansion and enhancement of the Partnership's branch office network,
including the Partnership's conversion to a terrestrial communications network
for its branches from a satellite network. Other operating expenses increased
15% ($18.3 million) to $137.6 million primarily due to increased travel and
entertainment costs and Managed Account Program ("MAP") money manager
29
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
expense due to increased MAP assets. Legal expenses decreased 56% ($63.2
million) to $50.7 million during 2006 due to reduced costs associated with
legal matters and regulatory settlements. (See Mutual Fund Matters below and
Item 3 - Legal Proceedings for more information).
MUTUAL FUND MATTERS
FUNDS AND ANNUITIES
There are regulatory proposals being considered that could significantly impact the disclosure and potentially the amount of compensation that broker-dealers derive from mutual funds and annuity products. The Partnership believes it is likely in the future that broker-dealers will be required to provide more disclosure to their clientscustomers with respect to payments received by them from the sales of these products. It is also possible that such payments may be restricted by law or regulation. For additional discussion of mutual fund regulatory initiatives, refer to "Item 1A-Risk1A – Risk Factors, Regulatory Initiatives" in this Form 10-K.
The Partnership's percentPartnership derived 62% of its total revenue from sales and services related to mutual fund and annuity products remained consistent atin 2008 and 65% for 2007 and
2006.in 2007. The Partnership derived 25%35% of its total revenue in 2007for 2008 and 30%29% of its total revenue in 2006for 2007 from one mutual fund vendor. Significant reductions in the revenues from these mutual fund sources could have a material impact on the Partnership's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's capital subject to mandatory redemption at December 31, 2008, excluding the reserve for anticipated withdrawals, was $1.4 billion, compared to $1.3 billion at December 31, 2007, was $1,328.3
million, compared to partnership capital, of $907.4 million at December 31,
2006.2007. The increase is primarily due to the retention of general partner earnings ($105.266.2 million) and the issuance of limited partner, subordinated limited partner and general partner interests ($293.6 million, $22.4 million
and $8.0 million, respectively)31.4 million), offset by redemption of limited partner and subordinated limited partner interests ($7.412.1 million and $0.9$1.2 million, respectively). It has been the Partnership's practice to retain approximately 28% of income allocated to general partners.General Partners. For 2008, 2007 2006 and 2005,2006, the Partnership retained 27.6%, 29.5%27.6% and 23.6%29.5%, respectively, of income allocated to General Partners.
As a partnership, any withdrawal requests by general partners.
partners, subordinated limited partners or limited partners would reduce the Partnership's available liquidity and capital. In accordance
PART II
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations, continued |
with the Partnership agreement, withdrawal requests by general and subordinated limited partners are subject to withdrawal restrictions and provide for payment over a 3 year time period, while withdrawal requests by limited partners are subject to withdrawal restrictions and provide for payment over a 2 year time period. The Managing Partner can waive the withdrawal restrictions and accelerate the return of capital to partners (see Note 11 to the Consolidated Financial Statements for additional withdrawal restrictions).
At December 31, 2007,2008, the Partnership had $378.1$216.6 million in cash and cash equivalents and $1.6equivalents. In addition, the Partnership had $1.4 billion in securities purchased under agreements to resell, which have maturities of less than one week. The Partnership also had $2.2 billion in cash segregated under federal regulations.
Linesand other regulations, which was not available for general use. As of December 31, 2008, bank lines of credit were in place at such date aggregating to $1.240$1.2 billion ($1.1401.1 billion of which is through secured uncommitted lines of credit and $0.1 billion of unsecured lines of credit) where actual. Subsequent to December 31, 2008, the Partnership had bank lines of credit aggregating $0.9 billion, of which $0.8 billion were through uncommitted facilities. Due to the tightening credit environment and the uncommitted nature of these credit facilities, they are subject to change and the Partnership cannot assume that these lines of credit will not decrease further.
Actual borrowing availability
on the secured lines is
primarily based on
securities owned and customers' margin securities which serve as collateral
on loans. During 2008, the Partnership had borrowings outstanding for
the loans.twenty-one days with an average daily outstanding balance over those twenty-one days of $9.9 million. No amounts were outstanding under these lines
of credit at December 31,
2008 or December 31, 2007.
The Partnership believes that the liquidity provided by existing cash
balances, other highly liquid assets and borrowing arrangements will be
sufficient to meet the Partnership's capital and liquidity requirements.
Depending on conditions in the capital markets and other factors,In 2008, the Partnership
will, from time to time, consider the issuanceentered into a $120 million revolving unsecured line of
debt, the
proceeds of which could be used to meet growth needs or for other purposes.
The Partnership's growth has been financed through sales of limited
partnership interests to its employees, retention of earnings, private
placements of subordinated debt, long-term secured debt and operating leases
undercredit which the Partnership
rents facilities.
On January 2, 2007, $293.6 million of limited partner interests were issued to
employees of the Partnership. The funds will be usedis currently using primarily for
general Partnership
purposes.
30
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
There were no significant changes in the Partnership's financial commitments
and obligations for the year ended December 31, 2007, except for construction
commitments related tofunding the construction of the new buildings and parking garages.
The revolving unsecured line of credit has a final termination date of August 22, 2010. To the extent that the Partnership obtains permanent financing on its South Campus facility currently under construction, such proceeds must be applied towards the amounts outstanding on the revolving unsecured line of credit if obtained prior the final termination date. As of December 31, 2008, $43.0 million was drawn on the revolving unsecured line of credit to fund the construction projects. Subsequent to December 31, 2008, an additional $30.0 million was drawn on the revolving unsecured line of credit resulting in $73.0 million total outstanding on the revolving unsecured line of credit as of March 27, 2009. Each draw is for a period of up to six months, at which time interest is due and the Partnership has the option to renew the draw. The weighted average interest rate is 1.5% as of December 31, 2008, and fluctuates with LIBOR.
The Partnership is in the process of expanding its home office facilities in order to support its current and future growth plans. The construction activities underway during 2008 included two office buildings and a parking garage on land it owns at its St. Louis, Missouri, North Campus location, a building addition and garage facilities. For further disclosure regarding theseat its St. Louis, Missouri, South Campus location, and a parking garage at its Tempe, Arizona, campus.
PART II
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations, continued |
The following table shows the estimated construction, commitments,
see Note 15furniture, fixtures and equipment and infrastructure costs for each construction project, the amounts associated with executed agreements, amounts paid as of December 31, 2008 and remaining estimated costs:
(All amounts in thousands)
| | | | | | | | | | | | | | | Amounts | |
| | | | | | | | | | | | | | | Remaining | |
| | | Building/ | | | | | | | | | Amounts | | | to be Paid | |
| | | Addition | | | | | | | | | Paid as of | | | as of | |
| | | Square | | | Estimated | | Executed | | | December | | | December | |
| Construction Project | | Footage | | | Costs | | Agreements | | | 31, 2008 | | | 31, 2008 | |
| 170 Edward Jones Blvd. & | | | | | | | | | | | | | | | | | |
| related garage* | | | 205,000 | | | $ | 83,026 | | | $ | 82,244 | | | $ | 76,229 | | | $ | 6,797 | |
| | | | | | | | | | | | | | | | | | | | | |
| 130 Edward Jones Blvd. | | | 370,000 | | | | 133,397 | | | | 106,957 | | | | 54,108 | | | | 79,289 | |
| | | | | | | | | | | | | | | | | | | | | |
| 12555 Manchester addition | | | | | | | | | | | | | | | | | | | | |
| and related garage | | | 225,000 | | | | 138,815 | | | | 119,920 | | | | 43,192 | | | | 95,623 | |
| | | | | | | | | | | | | | | | | | | | | |
| Tempe Campus garage | | | - | | | | 19,960 | | | | 19,342 | | | | 11,112 | | | | 8,848 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | | | | | $ | 375,198 | | | $ | 328,463 | | | $ | 184,641 | | | $ | 190,557 | |
| | | | | | | | | | | | | | | | | | | | | |
| *This building and garage were completed and placed into service in November 2008. | | | | | | | | | |
| (See Note 6 to the Consolidated Financial Statements.) | | | | | | | | | | | | | |
The amount remaining of $190.6 million needed to complete the Notes to the Financial Statements. In addition, the
Partnership plans to finance approximately 75% of the office and garage
facilities with loans secured by the facilities withabove construction projects will be financed through either the remaining 25%
financed frombalance of $47.0 million as of March 27, 2009 on the revolving unsecured line of credit, through the Partnership's existing working capital resources. The Partnership
has not yet obtained commitments foror by obtaining additional financing. There can be no assurance that such financing.
financing will be available at attractive terms, or at all, in the future.
PART II
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations, continued |
The following table summarizes the Partnership's long-term financing commitments and obligations, as of December 31, 2007, excluding customer accounts due on
demand.2008. Subsequent to December 31, 2007,2008, these commitments and obligations could fluctuatemay have fluctuated based on the changing business environment. The Interestinterest on Financing Commitmentsfinancing commitments is based upon the stated rates of the underlying instruments, which range from 4.31%7.28% to 8.23%7.79%. For further disclosure regarding long termlong-term debt, and liabilities subordinated to claims of general creditors and rental commitments, see Notes 8, 9 and 10,15, respectively, to the Consolidated Financial Statements.
| | | Payments Due by Period | |
| | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | Thereafter | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | |
| Long-term debt | | $ | 802 | | | $ | 863 | | | $ | 928 | | | $ | 997 | | | $ | 1,072 | | | $ | 4,430 | | | $ | 9,092 | |
| Liabilities subordinated to | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| claims of general creditors | | | 3,700 | | | | 53,700 | | | | 53,700 | | | | 50,000 | | | | 50,000 | | | | 50,000 | | | | 261,100 | |
| Rental commitments | | | 120,941 | | | | 36,930 | | | | 24,971 | | | | 17,266 | | | | 12,861 | | | | 76,634 | | | | 289,603 | |
| Financing commitments and | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| obligations | | | 125,443 | | | | 91,493 | | | | 79,599 | | | | 68,263 | | | | 63,933 | | | | 131,064 | | | | 559,795 | |
| Interest on financing commitments | | | 19,825 | | | | 17,644 | | | | 13,626 | | | | 9,603 | | | | 5,863 | | | | 2,434 | | | | 68,995 | |
| Total financing commitments | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| and obligations | | $ | 145,268 | | | $ | 109,137 | | | $ | 93,225 | | | $ | 77,866 | | | $ | 69,796 | | | $ | 133,498 | | | $ | 628,790 | |
In addition to the above table, the Partnership has a revolving unsecured line of credit outstanding as of December 31, 2008 (see Note 7 to the Consolidated Financial Statements).
Subsequent to December 31, 2008, the Partnership executed an agreement to extend the lease on a headquarters office building. The non-cancelable portion of this lease extension begins February 2010 and ends February 2011 and the related commitments are $3,596 for 2010 and $719 for 2011.
For the year ended December 31, 2008, cash and cash equivalents decreased $109.8 million to $216.6 million. Cash provided by operating activities was $416.5 million. The primary sources of cash provided by operating activities include income before allocations to partners adjusted for depreciation expense, net payable to customers, net receivable from brokers, dealers and clearing organizations, receivable from mutual funds, insurance companies and other, and securities owned. These increases to cash and cash equivalents were partially offset by increases in cash segregated under federal and other regulations, increases in securities purchased under agreements to resell, and other assets along with decreases in accrued compensation and employee benefits and accounts payable and accrued expenses. Cash used in investing activities was $266.0 million consisting of capital expenditures supporting the growth of the
Notes toPartnership’s operations and for construction of new office space as noted above. Cash used in financing activities was $260.2 million, consisting primarily of partnership withdrawals and distributions ($305.4 million), redemption of partnership interests ($13.3 million) and repayment of subordinated debt ($14.2 million) and long-term debt ($1.7 million), offset by the
Financial Statements.
Payments Due by Period
----------------------
2008 2009 2010 2011 2012 Thereafter Total
----------------------------------------------------------------------------------
Long-term debt $ 1,742 $ 802 $ 863 $ 927 $ 997 $ 5,503 $ 10,834
Liabilities subordinated to
claims of general creditors 14,200 3,700 53,700 53,700 50,000 100,000 275,300
Rental commitments 109,053 37,629 25,722 18,215 14,208 92,270 297,097
----------------------------------------------------------------------------------
Financing commitments and
obligations 124,995 42,131 80,285 72,842 65,205 197,773 583,231
Interest on financing commitments 21,042 19,825 17,644 13,626 9,603 8,297 90,037
----------------------------------------------------------------------------------
Total financing commitments
and obligations $ 146,037 $ 61,956 $ 97,929 $ 86,468 $ 74,808 $ 206,070 $ 673,268
==================================================================================
issuance of bank loans ($43.0 million) and the issuance of partnership interests ($31.4 million).
For the year ended December 31, 2007, cash and cash equivalents increased $66.1$48.8 million. Cash provided by operating activities was $265.9$248.5 million. The primary sources of cash from operating activities include income before allocations to partners adjusted for depreciation, an increase in net payable to customers, a decrease in securities owned and an increase in accrued compensation and employee benefits. These increases to cash and cash equivalents were partially offset primarily by increases in securities purchased under agreements to resell,
PART II
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations, continued |
net receivable from brokers, dealers and clearing organizations and
cash segregated
cash.under federal and other regulations, and a decrease in accounts payable and accrued expenses. Cash used in investing activities was $112.1 million consisting primarily of capital expenditures supporting the
Partnership'sPartnership’s operations and for construction of new office space. (See Item 2
- -– Properties for more information). Cash used in financing activities was $87.6 million, consisting primarily of partnership withdrawals and distributions ($376.6 million), redemption of partnership interests ($8.3 million) and repayment of subordinated debt ($23.2 million), offset by issuance of general partner, limited partner and subordinated limited partner interests ($324.0 million).
For the year ended December 31, 2006, cash and cash equivalents increased
$51.2 million. Cash provided by operating activities was $533.1 million. The
primary sources of cash from operating activities include income before
allocations to partners adjusted for depreciation, a decrease in net
receivables from customers, a decrease in receivable from mortgages and loans
and an increase in accrued compensation and employee benefits. These increases
to cash and cash equivalents were partially offset by a decrease in payable to
depositors and an increase in segregated cash. Cash used in investing
activities was $84.2 million consisting primarily of capital expenditures
supporting the Partnership's operations. Cash used in financing activities was
$397.7 million, consisting primarily of partnership withdrawals and
distributions ($314.4 million), redemption of partnership interests ($27.8
million),
31
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
repayment of subordinated debt ($45.7 million) and repayment of Federal Home
Loan Bank advances ($30.5 million), offset by issuance of general partner and
subordinated limited partner interests ($38.5 million).
As a result of its activities as a broker-dealer, Edward Jones, the Partnership's principal subsidiary, is subject to the Net Capitalnet capital provisions of Rule 15c3-1 of the Securities Exchange Act of 1934 and the capital rules of
the NYSE.1934. Under the alternative method permitted by the rules, Edward Jones must maintain minimum Net Capital,net capital, as defined, equal to the greater of $0.250$0.25 million or 2% of aggregate debit items arising from customer transactions. The Net Capital rulenet capital rules also providesprovide that partnership capital may not be withdrawn if resulting Net Capitalnet 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
Capitalnet capital to be less than 5% of aggregate debit items. At December 31, 2007,2008, Edward Jones' Net Capitalnet capital of $798.1$801.2 million was 42.9%43.9% of aggregate debit items and its Net Capitalnet capital in excess of the minimum required was $761.0$764.7 million. Net Capital after anticipated withdrawals, which are scheduled subordinated debt
principal payments through June 30, 2008,capital as a percentage of aggregate debit items after anticipated withdrawals was 42.9%also 43.9%. Net capital and the related capital percentagespercentage may fluctuate on a daily basis.
The Partnership believes that the liquidity provided by existing cash balances and securities purchased under agreements to resell and borrowing arrangements will be sufficient to meet the Partnership's capital and liquidity requirements. Depending on conditions in the capital markets and other factors, the Partnership will, from time to time, consider the issuance of debt, the proceeds of which could be used to meet growth needs or for other purposes.
The Partnership's growth has historically been financed through sales of limited partnership interests to its employees and existing limited partners, subordinated limited partnership interests to its current or retiring general partners, retention of general partner earnings, private placements of subordinated debt, long-term secured debt and operating leases under which the Partnership rents facilities.
CRITICAL ACCOUNTING POLICIES
The Partnership's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which may require judgment and involve estimation processes to determine its assets, liabilities, revenues and expenses which affect its results of operations.
The Partnership believes that of its significant accounting policies, the following critical policies may involve a higher degree of judgment and complexity.
Customers' transactions are recorded on a settlement date basis with the related revenue and expenses recorded on a trade date basis. The Partnership may be exposed to risk of loss in the event customers, other brokers and dealers, banks, depositories or clearing organizations are unable to fulfill contractual obligations. For transactions in which it extends credit to customers, the Partnership seeks to control the risks associated with these activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines.
PART II
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations, continued |
Securities owned and sold, not yet purchased, including inventory securities and investment securities, are recorded at fair value which is determined by
using quoted market or dealer prices.
value.
The following significant accounting policies require estimates that involve a higher degree of judgment and complexity.
The Partnership provides for potential losses that may arise out of litigation, regulatory proceedings and other contingencies to the extent that such losses can be estimated, in accordance with SFAS No. 5, "Accounting“Accounting for Contingencies."” See Item 3 -– Legal Proceedings, Item 7 - Management's– Management’s Discussion and Analysis of Financial Condition and Results of Operations -– Mutual Fund Mattersand Annuities and Note 16 to the consolidated financial statementsConsolidated Financial Statements for further discussion of these items. The Partnership regularly monitors its exposures for potential losses. The Partnership'sPartnership’s total liability with respect to litigation and regulatory proceedings represents the best estimate of probable losses after considering, among other factors, the progress of each case, the Partnership'sPartnership’s experience and discussions with legal counsel.
The
Partnership'sPartnership’s periodic evaluation of the estimated useful lives of equipment, property and improvements is based on the original life determined at the time of purchase and any events or changes
32
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
in circumstances that would result in a change in the useful life.
Included in management's discussion and analysis of financial condition and
results of operations, and in the quantitative and qualitative disclosures about market risk and in the notes to the financial statements (See(see Note 1 to the consolidated financial statements)Consolidated Financial Statements), are additional discussions of the Partnership's accounting policies.
THE EFFECTS OF INFLATION
The Partnership's net assets are primarily monetary, consisting of cash, securities inventories and receivables less liabilities. Monetary net assets are primarily liquid in nature and would not be significantly affected by inflation. Inflation and future expectations of inflation influence securities prices, as well as activity levels in the securities markets. As a result, profitability and capital may be impacted by inflation and inflationary expectations. Additionally, inflation's impact on the Partnership's operating expenses may affect profitability to the extent that additional costs are not recoverable through increased prices of services offered by the Partnership.
NEW ACCOUNTING STANDARDS
On September 15, 2006,
In October 2008, the Financial Accounting Standards Board ("FASB") issued FSP SFAS No. 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active" (FSP SFAS 157-3), which clarifies the application of SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines, in an inactive market and provides an example to demonstrate how the fair value establishesof a frameworkfinancial asset is determined when the market for measuring fair value under GAAP, and
enhances disclosures about fair value measurements. SFAS 157 retains the
exchange price notion and clarifies that the exchange pricefinancial asset is the price that
would be receivedinactive. FSP FAS 157-3 was effective upon issuance, including prior periods for an asset or paid to transfer a liability (an exit price)
in an orderly transaction between market participantswhich financial statements had not been issued. The adoption of this standard did not have any impact on the measurement date.
SFAS 157 is effective for the Partnership's results of operations, cash flows or financial statementspositions for the year beginning on January 1,ended December 31, 2008.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
PART II
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations, continued |
Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance with earlier adoption permitted. The Partnership
will adopt SFAS 157 for the fiscal year beginning January 1,generally accepted accounting principles. This statement became effective in November 2008. The
Partnership has completed an assessment of the implicationsAdoption of SFAS 157 and
has concluded that it will162 did not have a material impact on its consolidated
financial condition, results of operations, or cash flows.
the Consolidated Financial Statements.
In February 2007,2008, the Financial Accounting Standards Board ("FASB")FASB issued FSP SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities,
including an amendment157-2, "Effective Date of FASB Statement No. 115"157" ("FSP SFAS No. 159"157-2"). FSP SFAS No.
159 permits entities to choose, at specified election dates, to measure many
financial instruments157-2 delays the effective date of SFAS 157 for non-financial assets and certain other itemsnon-financial liabilities that are not remeasured at fair value that areon a recurring basis (at least annually) until January 2009. The implementation of FSP SFAS 157-2 did not currently requiredhave a material impact on the Consolidated Financial Statements.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements" ("SFAS 160"). SFAS 160 requires non-controlling interests to be measured at fair value. Unrealized gainstreated as a separate component of equity and losses
must be reported on itemsnot as a liability or other item outside of equity. This statement is effective for which the fair value option has been elected in
earnings at each subsequent reporting date. SFAS No. 159 is effectivefinancial statements issued for fiscal years beginning after NovemberDecember 15, 2007. The2008. Accordingly, the Partnership has electedwill adopt SFAS 160 in 2009 and does not to measure at fair value financial instruments not otherwise required to
be measured at fair value.
anticipate the adoption will have a material impact on the Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
This report on Form 10-K, and in particular
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of the federal securities laws. You can identify forward-looking statements by the use of the words
"believe,"
"expect," "anticipate," "intend," "estimate," "project," "will," "should,"“believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “will,” “should,” and other expressions which predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Partnership. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Partnership to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.
33
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Some of the factors that might cause differences include, but are not limited to, the following: (1) regulatory actions; (2) litigation,
including that
involving mutual fund matters; (3) changes in legislation; (4) actions of competitors; (5) changes in technology; (6) a fluctuation or decline in the
marketfair value of securities; (7)
risingchanges in interest rates; (8) securities theft; (9) the ability of customers, other broker-dealers, banks, depositories and clearing organizations to fulfill contractual obligations; and (10) general economic conditions. These forward-looking statements were based on information, plans, and estimates at the date of this report, and we do not undertake to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.
34
PART II
The SEC issued market risk disclosure requirements to enhance disclosures of accounting policies for derivatives and other financial instruments and to provide quantitative and qualitative disclosures about market risk inherent in derivatives and other financial instruments. Various
PART II
| Item 7A | Quantitative and Qualitative Disclosures about Market Risk, continued |
levels of management within the Partnership manage the firm'sPartnership's risk exposure. Position limits in trading and inventory accounts are established and monitored on an ongoing basis. Credit risk related to various financing activities is reduced by the industry practice of obtaining and maintaining collateral. The Partnership monitors its exposure to counterparty risk through the use of credit exposure information, the monitoring of collateral values and the establishment of credit limits.
The Partnership is exposed to market risk from changes in interest rates. Such changes in interest rates impact the income from interest earning assets, primarily receivables from customers on margin balances, and may have an impact on the expense from liabilities that finance these assets. At December 31, 2007,2008, amounts receivable from customers were $1.990$2.0 billion. Liabilities include amounts payable to customers and other interest and non-interest bearing liabilities.
The Partnership performed an analysis of its financial instruments and assessed the related interest rate risk and materiality in accordance with the rules. Under current market conditions and based on current levels of interest earning assets and the liabilities that finance these assets, the Partnership estimates that a 100 basis point increase in short-term interest rates could increase its annual net interest income by approximately $25$30 million. Conversely, the Partnership estimates that a 100 basis point decrease in short-term interest rates could decrease the Partnership'sPartnership’s annual net interest income by up to $42$6 million. A decrease in short-term interest rates currently has a moreless significant impact on net interest income because underdue to the current low interest rate environmentenvironment. The Partnership has two distinct types of interest bearing assets, customer receivables from margin accounts and overnight investments, which are comprised of cash segregated under federal and other regulations and securities purchased under agreements to resell. The Partnership has put in place an interest rate floor for the interest charged related to its customer margin loans, which helps to limit the negative impact of declining interest rates. Overnight investments have earned interest at an average rate of approximately 21 basis points (0.21%) for the two months ended February 27, 2009, and therefore the financial dollar impact of further decline in rates is minimal.
Events over the past several months, including the frozen credit markets and recent failures of a number of large financial services companies, have made the capital markets increasingly volatile. The Partnership has not been immune to the continued weakening economic conditions and market turmoil as evidenced by the Partnership's
interest bearing liabilities are
less sensitive compared to its interest earning assets.
Based on its analysis, in the opinion of management, the risk associated with
the Partnership'sweaker financial
instruments at December 31, 2007 will not have a
material adverse effect on the consolidated financial position or results
of
operations of the Partnership.
35
during 2008.
| Financial Statements Included in this Item | |
| | Page No. |
| | |
| Management's Report on Internal Control over Financial Reporting ............. 37
| 44 |
| | |
| Report of Independent Registered Public Accounting Firm ...................... 38
| 45 |
| | |
| Consolidated Statements of Financial Condition as of | |
| December 31, 20072008 and 2006 ................................................... 40
2007 | 47 |
| | |
| Consolidated Statements of Income for the years ended | |
| December 31, 2008, 2007 2006 and 2005 ............................................. 42
2006 | 49 |
| | |
| Consolidated Statements of Changes in Partnership Capital | |
| Subject to Mandatory Redemption for the years ended | |
| December 31, 2008, 2007 2006 and 2005.............................................. 43
2006 | 50 |
| | |
| Consolidated Statements of Cash Flows for the years ended | |
| December 31, 2008, 2007 2006 and 2005.............................................. 45
2006 | 51 |
| | |
| Notes to Consolidated Financial Statements.................................... 46
Statements | 52 |
36
PART II
Item 8. Financial Statements and Supplementary Data, continued
| Item 8. | Financial Statements and Supplementary Data, continued |
MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Management of The Jones Financial Companies, L.L.L.P. (the "Partnership"), is responsible for establishing and maintaining adequate internal control over financial reporting. The Partnership's internal control over financial reporting is a process designed under the supervision of the Partnership's chief executive officer and chief financial officersofficer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Partnership's financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
As of the end of the Partnership's 20072008 fiscal year, management conducted an assessment of the effectiveness of the Partnership's internal control over financial reporting based on the framework established in Internal Control -– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Partnership's internal control over financial reporting as of December 31, 20072008 was effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management of the Partnership; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership's assets that could have a material effect on our financial statements.
The Partnership's internal control over financial reporting as of December 31,
20072008 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their
accompanying report,
appearing on page 38, which expresses an unqualified opinion on the effectiveness of the Partnership's internal control over financial reporting as of December 31,
2007.
37
2008.
PART II
Item 8. Financial Statements and Supplementary Data, continued
| Item 8. | Financial Statements and Supplementary Data, continued |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Jones Financial Companies, L.L.L.P.:
In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, of changes in partnership capital subject to mandatory redemption and of cash flows present fairly, in all material respects, the consolidated financial position of The Jones Financial Companies, L.L.L.P. and its subsidiaries (the "Partnership") at December 31, 20072008 and 2006,2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20072008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007,2008, based on criteria established in Internal Control -– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Partnership's management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Partnership's internal control over financial reporting based on our audits (which was an integrated audit in 2007).audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company'scompany’s assets that could have a material effect on the financial statements.
38
PART II
Item 8. Financial Statements and Supplementary Data, continued
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
March
28, 2008
39
27, 2009
PART II
Item 8. Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
December 31, December 31,
(Dollars in thousands) 2007 2006
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 378,141 $ 311,992
Cash segregated under federal regulations 1,620,129 1,312,806
Securities purchased under agreements to resell 595,000 415,000
Receivable from:
Customers 1,989,962 2,043,980
Brokers, dealers and clearing organizations 439,378 310,715
Mutual funds, insurance companies and other 173,610 142,143
Securities owned, at fair value
Inventory securities 87,524 129,609
Investment securities 136,628 145,552
Equipment, property and improvements, at cost,
net of accumulated depreciation and amortization 328,668 310,987
Other assets $ 75,338 $ 72,831
------------------ -------------------
TOTAL ASSETS $ 5,824,378 $ 5,195,615
================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
40
PART II
| Item 8. | Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES
December 31, December 31,
(Dollars in thousands) 2007 2006
- ---------------------------------------------------------------------------------------------------------------------------------
Payable to:
Customers $ 3,326,854 $ 3,162,223
Brokers, dealers and clearing organizations 66,469 44,593
Securities sold, not yet purchased, at fair value 5,410 9,353
Accrued compensation and employee benefits 497,135 438,497
Accounts payable and accrued expenses 191,596 224,681
Long-term debt 10,834 14,389
------------------ -------------------
4,098,298 3,893,736
------------------ -------------------
Liabilities subordinated to claims of general creditors 275,300 298,500
------------------ -------------------
Commitments and contingencies (Notes 15 and 16)
Partnership capital subject to mandatory redemption,
net of reserve for anticipated withdrawals 1,328,342 907,386
Reserve for anticipated withdrawals 122,438 95,993
------------------ -------------------
Total partnership capital subject to mandatory redemption 1,450,780 1,003,379
------------------ -------------------
TOTAL LIABILITIES $ 5,824,378 $ 5,195,615
================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
|
41
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
| | | | | | | |
| | | December 31, | | | December 31, | |
| (Dollars in thousands) | | 2008 | | | 2007 | |
| | | | | | | |
| Cash and cash equivalents | | $ | 216,645 | | | $ | 326,404 | |
| | | | | | | | | |
| Cash segregated under federal and other regulations | | | 2,221,032 | | | | 1,671,866 | |
| | | | | | | | | |
| Securities purchased under agreements to resell | | | 1,354,000 | | | | 595,000 | |
| | | | | | | | | |
| Receivable from: | | | | | | | | |
| Customers | | | 1,966,972 | | | | 1,989,962 | |
| Brokers, dealers and clearing organizations | | | 332,349 | | | | 439,378 | |
| Mutual funds, insurance companies, and other | | | 147,808 | | | | 173,610 | |
| | | | | | | | | |
| Securities owned, at fair value | | | | | | | | |
| Inventory securities | | | 50,844 | | | | 87,524 | |
| Investment securities | | | 92,194 | | | | 136,628 | |
| | | | | | | | | |
| Equipment, property and improvements, at cost, | | | | | | | | |
| net of accumulated depreciation | | | 531,374 | | | | 328,668 | |
| | | | | | | | | |
| Other assets | | | 78,676 | | | | 75,338 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 6,991,894 | | | $ | 5,824,378 | |
| | | | | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
PART II
Item 8. Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(Dollars in thousands, ------------------------------------------------------------
except per unit information) 2007 2006 2005
- ------------------------------------------------------------------------------------------------------------------------
Revenue:
Commissions $ 1,858,187 $ 1,663,680 $ 1,568,893
Asset fees 1,098,621 877,771 716,904
Account and activity fees 441,027 378,905 335,105
Principal transactions 384,609 267,038 238,884
Interest and dividends 309,357 253,607 209,734
Investment banking 34,723 32,505 32,892
Other revenue 20,343 44,249 94,038
------------------- ------------------- -------------------
Total revenue 4,146,867 3,517,755 3,196,450
Interest expense 80,603 56,218 55,468
------------------- ------------------- -------------------
Net revenue 4,066,264 3,461,537 3,140,982
------------------- ------------------- -------------------
Operating expenses:
Compensation and benefits 2,493,645 2,088,492 1,827,260
Communications and data processing 300,574 272,879 263,043
Occupancy and equipment 301,119 273,607 260,114
Payroll and other taxes 140,422 121,976 112,565
Legal 11,098 50,711 113,940
Postage and shipping 58,023 51,718 51,366
Advertising 61,943 55,841 49,440
Floor brokerage and clearance fees 17,096 18,010 13,919
Other operating expenses 174,125 137,637 119,350
------------------- ------------------- -------------------
Total operating expenses 3,558,045 3,070,871 2,810,997
------------------- ------------------- -------------------
Income before allocations to partners 508,219 390,666 329,985
Allocations to partners:
Limited partners 82,650 34,035 33,679
Subordinated limited partners 44,346 37,885 39,587
General partners 381,223 318,746 256,719
------------------- ------------------- -------------------
Net income $ - $ - $ -
=================== =================== ===================
Income before allocations to limited partners
per weighted average $1,000 equivalent
limited partnership unit outstanding $ 165.92 $ 161.95 $ 157.11
=================== =================== ===================
Weighted average $1,000 equivalent
limited partnership units outstanding 498,132 210,157 214,366
=================== =================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
42
PART II
Item 8. Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY REDEMPTION
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Dollars in thousands) Capital Capital Capital Total
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL SUBJECT TO
MANDATORY REDEMPTION, JANUARY 1, 2005 234,296 115,951 457,994 808,241
Reserve for anticipated withdrawals (16,721) (3,469) (36,377) (56,567)
---------------------------------------------------------------------------
Partnership capital subject to mandatory
redemption, net of reserve of anticipated
withdrawals, January 1, 2005 217,575 112,482 421,617 751,674
===========================================================================
Issuance of partnership interests - 24,207 - 24,207
Redemption of partnership interests (5,361) (1,491) (26,900) (33,752)
Income allocated to partners 33,679 39,587 256,719 329,985
Withdrawals and distributions (11,861) (25,474) (118,408) (155,743)
---------------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL SUBJECT TO
MANDATORY REDEMPTION, DECEMBER 31, 2005 234,032 149,311 533,028 916,371
Reserve for anticipated withdrawals (21,818) (14,114) (77,827) (113,759)
---------------------------------------------------------------------------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, December 31, 2005 $ 212,214 $ 135,197 $ 455,201 $ 802,612
===========================================================================
Issuance of partnership interests $ - $ 8,270 $ 30,217 $ 38,487
Redemption of partnership interests (3,882) (18,336) (5,554) (27,772)
Income allocated to partners 34,034 37,885 318,747 390,666
Withdrawals and distributions (13,096) (25,513) (162,005) (200,614)
---------------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL SUBJECT TO
MANDATORY REDEMPTION, DECEMBER 31, 2006 229,270 137,503 636,606 1,003,379
Reserve for anticipated withdrawals (20,938) (12,372) (62,683) (95,993)
---------------------------------------------------------------------------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, December 31, 2006 $ 208,332 $ 125,131 $ 573,923 $ 907,386
===========================================================================
The accompanying notes are an integral part of these consolidated financial statements.
43
PART II
| Item 8. | Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY REDEMPTION, (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Dollars in thousands) Capital Capital Capital Total
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of partnership interests 293,563 22,408 8,038 324,009
Redemption of partnership interests (7,409) (862) - (8,271)
Income allocated to partners 82,650 44,346 381,223 508,219
Withdrawals and distributions (31,937) (32,890) (215,736) (280,563)
---------------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL SUBJECT TO
MANDATORY REDEMPTION, DECEMBER 31, 2007 545,199 158,133 747,448 1,450,780
Reserve for anticipated withdrawals (50,713) (11,456) (60,269) (122,438)
---------------------------------------------------------------------------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, December 31, 2007 $ 494,486 $ 146,677 $ 687,179 $ 1,328,342
===========================================================================
The accompanying notes are an integral part of these consolidated financial statements.
|
44
PART II
Item 8. Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
----------------------------------------------
(Dollars in thousands) 2007 2006 2005
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ - $ - $ -
Adjustments to reconcile net income to net
cash provided by operating activities -
Income before allocations to partners 508,219 390,666 329,985
Depreciation and amortization 94,451 90,281 89,191
Changes in assets and liabilities:
Cash segregated under federal regulations (307,323) (1,312,804) 49
Securities purchased under agreements to resell (180,000) 64,000 (204,000)
Net payable to/receivable from customers 218,649 1,340,509 156,156
Net receivable from brokers, dealers and
clearing organizations (106,787) (100,706) (15,416)
Receivable from mutual funds, insurance companies
and other (31,467) (21,162) (28,015)
Receivable from mortgages and loans - 133,997 15,401
Securities owned, net 47,066 (9,379) (26,459)
Other assets (2,507) 1,979 (3,526)
Payable to depositors - (104,411) (12,926)
Accrued compensation and employee benefits 58,638 84,231 55,319
Accounts payable and accrued expenses (33,085) (24,073) 68,512
--------------- -------------- --------------
Net cash provided by operating activities 265,854 533,128 424,271
--------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, property and improvements, net (112,132) (84,249) (89,396)
--------------- -------------- --------------
Net cash used in investing activities (112,132) (84,249) (89,396)
--------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment)/Issuance of Bank Loans - (8,500) 8,500
(Repayment)/Issuance of Federal Home Loan Bank
advances, net - (30,544) (3,384)
Repayment of long-term debt (3,555) (9,324) (8,110)
Repayment of subordinated liabilities (23,200) (45,700) (43,225)
Issuance of partnership interests 324,009 38,487 24,207
Redemption of partnership interests (8,271) (27,772) (33,752)
Withdrawals and distributions from partnership capital (376,556) (314,373) (212,310)
--------------- -------------- --------------
Net cash used in financing activities (87,573) (397,726) (268,074)
--------------- -------------- --------------
Net increase in cash and cash equivalents 66,149 51,153 66,801
CASH AND CASH EQUIVALENTS,
Beginning of year 311,992 260,839 194,038
--------------- -------------- --------------
End of year $ 378,141 $ 311,992 $ 260,839
=============== ============== ==============
Cash paid for interest $ 80,935 $ 57,623 $ 56,529
=============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
45
PART II
Item 8. Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES
| | | December 31, | | | December 31, | |
| (Dollars in thousands) | | 2008 | | | 2007 | |
| | | | | | | |
| Payable to: | | | | | | |
| Customers | | $ | 4,651,640 | | | $ | 3,326,854 | |
| Brokers, dealers and clearing organizations | | | 40,612 | | | | 66,469 | |
| | | | | | | | | |
| Securities sold, not yet purchased, at fair value | | | 12,135 | | | | 5,410 | |
| | | | | | | | | |
| Accrued compensation and employee benefits | | | 324,328 | | | | 497,135 | |
| | | | | | | | | |
| Accounts payable and accrued expenses | | | 174,672 | | | | 191,596 | |
| | | | | | | | | |
| Bank loans | | | 43,000 | | | | - | |
| | | | | | | | | |
| Long-term debt | | | 9,092 | | | | 10,834 | |
| | | | 5,255,479 | | | | 4,098,298 | |
| | | | | | | | | |
| Liabilities subordinated to claims of general creditors | | | 261,100 | | | | 275,300 | |
| | | | | | | | | |
| Commitments and contingencies (Notes 15 and 16) | | | | | | | | |
| | | | | | | | | |
| Partnership capital subject to mandatory redemption, | | | | | | | | |
| net of reserve for anticipated withdrawals | | | 1,412,695 | | | | 1,328,342 | |
| | | | | | | | | |
| Reserve for anticipated withdrawals | | | 62,620 | | | | 122,438 | |
| | | | | | | | | |
| Total partnership capital subject to mandatory redemption | | | 1,475,315 | | | | 1,450,780 | |
| | | | | | | | | |
| TOTAL LIABILITIES | | $ | 6,991,894 | | | $ | 5,824,378 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF INCOME
| (Dollars in thousands, | | For the Years Ended December 31, | |
| except per unit information) | | 2008 | | | 2007 | | | 2006 | |
| Revenue: | | | | | | | | | |
| Commissions | | $ | 1,586,600 | | | $ | 1,858,187 | | | $ | 1,663,680 | |
| Asset fees | | | 1,067,934 | | | | 1,098,621 | | | | 877,771 | |
| Principal transactions | | | 527,569 | | | | 384,609 | | | | 267,038 | |
| Account and activity fees | | | 473,088 | | | | 441,027 | | | | 378,905 | |
| Interest and dividends | | | 188,939 | | | | 309,357 | | | | 253,607 | |
| Investment banking | | | 52,747 | | | | 34,723 | | | | 32,505 | |
| Other revenue | | | (37,842 | ) | | | 20,343 | | | | 44,249 | |
| Total revenue | | | 3,859,035 | | | | 4,146,867 | | | | 3,517,755 | |
| Interest expense | | | 72,558 | | | | 80,603 | | | | 56,218 | |
| Net revenue | | | 3,786,477 | | | | 4,066,264 | | | | 3,461,537 | |
| Operating expenses: | | | | | | | | | | | | |
| Compensation and benefits | | | 2,345,474 | | | | 2,493,645 | | | | 2,088,492 | |
| Communications and data processing | | | 322,549 | | | | 300,574 | | | | 272,879 | |
| Occupancy and equipment | | | 314,614 | | | | 301,119 | | | | 273,607 | |
| Payroll and other taxes | | | 143,351 | | | | 140,422 | | | | 121,976 | |
| Advertising | | | 68,120 | | | | 61,943 | | | | 55,841 | |
| Postage and shipping | | | 57,058 | | | | 58,023 | | | | 51,718 | |
| Clearance fees | | | 18,574 | | | | 17,096 | | | | 18,010 | |
| Legal | | | 10,783 | | | | 11,098 | | | | 50,711 | |
| Other operating expenses | | | 194,145 | | | | 174,125 | | | | 137,637 | |
| Total operating expenses | | | 3,474,668 | | | | 3,558,045 | | | | 3,070,871 | |
| Income before allocations to partners | | | 311,809 | | | | 508,219 | | | | 390,666 | |
| Allocations to partners: | | | | | | | | | | | | |
| Limited partners | | | 42,236 | | | | 82,650 | | | | 34,035 | |
| Subordinated limited partners | | | 29,656 | | | | 44,346 | | | | 37,885 | |
| General partners | | | 239,917 | | | | 381,223 | | | | 318,746 | |
| Net income | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | |
| Income before allocations to limited partners | | | | | | | | | | | | |
| per weighted average $1,000 equivalent | | | | | | | | | | | | |
| limited partnership unit outstanding | | $ | 86.21 | | | $ | 165.92 | | | $ | 161.95 | |
| Weighted average $1,000 equivalent | | | | | | | | | | | | |
| limited partnership units outstanding | | | 489,920 | | | | 498,132 | | | | 210,157 | |
| | | | | | | | | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY REDEMPTION
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 and 2006
| (Dollars in thousands) | | Limited Partnership Capital | | | Subordinated Limited Partnership Capital | | | General Partnership Capital | | | Total | |
| Total Partnership Capital subject to | | | | | | | | | | | | |
| mandatory redemption, January 1, 2006 | | $ | 234,032 | | | $ | 149,311 | | | $ | 533,028 | | | $ | 916,371 | |
| Reserve for anticipated withdrawals | | | (21,818 | ) | | | (14,114 | ) | | | (77,827 | ) | | | (113,759 | ) |
| | | | | | | | | | | | | | | | | |
| Partnership capital subject to mandatory | | | | | | | | | | | | | | | | |
| redemption, net of reserve for anticipated | | | | | | | | | | | | | | | | |
| withdrawals, January 1, 2006 | | $ | 212,214 | | | $ | 135,197 | | | $ | 455,201 | | | $ | 802,612 | |
| | | | | | | | | | | | | | | | | |
| Issuance of partnership interests | | | - | | | | 8,270 | | | | 30,217 | | | | 38,487 | |
| Redemption of partnership interests | | | (3,882 | ) | | | (18,336 | ) | | | (5,554 | ) | | | (27,772 | ) |
| Income allocated to partners | | | 34,034 | | | | 37,885 | | | | 318,747 | | | | 390,666 | |
| Withdrawals and distributions | | | (13,096 | ) | | | (25,513 | ) | | | (162,005 | ) | | | (200,614 | ) |
| | | | | | | | | | | | | | | | | |
| Total Partnership Capital subject to | | | | | | | | | | | | | | | | |
| mandatory redemption, December 31, 2006 | | | 229,270 | | | | 137,503 | | | | 636,606 | | | | 1,003,379 | |
| Reserve for anticipated withdrawals | | | (20,938 | ) | | | (12,372 | ) | | | (62,683 | ) | | | (95,993 | ) |
| | | | | | | | | | | | | | | | | |
| Partnership capital subject to mandatory | | | | | | | | | | | | | | | | |
| redemption, net of reserve for anticipated | | | | | | | | | | | | | | | | |
| withdrawals, December 31, 2006 | | $ | 208,332 | | | $ | 125,131 | | | $ | 573,923 | | | $ | 907,386 | |
| | | | | | | | | | | | | | | | | |
| Issuance of partnership interests | | | 293,563 | | | | 22,408 | | | | 8,038 | | | | 324,009 | |
| Redemption of partnership interests | | | (7,409 | ) | | | (862 | ) | | | - | | | | (8,271 | ) |
| Income allocated to partners | | | 82,650 | | | | 44,346 | | | | 381,223 | | | | 508,219 | |
| Withdrawals and distributions | | | (31,937 | ) | | | (32,890 | ) | | | (215,736 | ) | | | (280,563 | ) |
| | | | | | | | | | | | | | | | | |
| Total Partnership Capital subject to | | | | | | | | | | | | | | | | |
| mandatory redemption, December 31, 2007 | | | 545,199 | | | | 158,133 | | | | 747,448 | | | | 1,450,780 | |
| Reserve for anticipated withdrawals | | | (50,713 | ) | | | (11,456 | ) | | | (60,269 | ) | | | (122,438 | ) |
| | | | | | | | | | | | | | | | | |
| Partnership capital subject to mandatory | | | | | | | | | | | | | | | | |
| redemption, net of reserve for anticipated | | | | | | | | | | | | | | | | |
| withdrawals, December 31, 2007 | | $ | 494,486 | | | $ | 146,677 | | | $ | 687,179 | | | $ | 1,328,342 | |
| | | | | | | | | | | | | | | | | |
| Issuance of partnership interests | | | - | | | | 31,438 | | | | - | | | | 31,438 | |
| Redemption of partnership interests | | | (12,120 | ) | | | (1,182 | ) | | | - | | | | (13,302 | ) |
| Income allocated to partners | | | 42,236 | | | | 29,656 | | | | 239,917 | | | | 311,809 | |
| Withdrawals and distributions | | | (20,554 | ) | | | (24,276 | ) | | | (138,142 | ) | | | (182,972 | ) |
| | | | | | | | | | | | | | | | | |
| Total Partnership Capital subject to | | | | | | | | | | | | | | | | |
| mandatory redemption, December 31, 2008 | | | 504,048 | | | | 182,313 | | | | 788,954 | | | | 1,475,315 | |
| Reserve for anticipated withdrawals | | | (21,682 | ) | | | (5,380 | ) | | | (35,558 | ) | | | (62,620 | ) |
| | | | | | | | | | | | | | | | | |
| Partnership capital subject to mandatory | | | | | | | | | | | | | | | | |
| redemption, net of reserve for anticipated | | | | | | | | | | | | | | | | |
| withdrawals, December 31, 2008 | | $ | 482,366 | | | $ | 176,933 | | | $ | 753,396 | | | $ | 1,412,695 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | For the years ended December 31, | |
| (Dollars in thousands) | | 2008 | | | 2007 | | | 2006 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
| Net income | | $ | - | | | $ | - | | | $ | - | |
| Adjustments to reconcile net income to net | | | | | | | | | | | | |
| cash provided by operating activities: | | | | | | | | | | | | |
| Income before allocations to partners | | | 311,809 | | | | 508,219 | | | | 390,666 | |
| Depreciation and amortization | | | 89,838 | | | | 94,451 | | | | 90,281 | |
| Changes in assets and liabilities: | | | | | | | | | | | | |
| Cash segregated under federal and other regulations | | | (549,166 | ) | | | (324,710 | ) | | | (1,330,347 | ) |
| Securities purchased under agreements to resell | | | (759,000 | ) | | | (180,000 | ) | | | 64,000 | |
| Net payable to customers | | | 1,347,776 | | | | 218,649 | | | | 1,340,509 | |
| Net receivable from brokers, dealers and | | | | | | | | | | | | |
| clearing organizations | | | 81,172 | | | | (106,787 | ) | | | (100,706 | ) |
| Receivable from mutual funds, insurance companies | | | | | | | | | | | | |
| and other | | | 25,802 | | | | (31,467 | ) | | | (21,162 | ) |
| Receivable from mortgages and loans | | | - | | | | - | | | | 133,997 | |
| Securities owned, net | | | 87,839 | | | | 47,066 | | | | (9,379 | ) |
| Other assets | | | (3,338 | ) | | | (2,507 | ) | | | 1,979 | |
| Payable to depositors | | | - | | | | - | | | | (104,411 | ) |
| Accrued compensation and employee benefits | | | (172,807 | ) | | | 58,638 | | | | 84,231 | |
| Accounts payable and accrued expenses | | | (43,444 | ) | | | (33,085 | ) | | | (24,073 | ) |
| Net cash provided by operating activities | | | 416,481 | | | | 248,467 | | | | 515,585 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
| Purchase of equipment, property and improvements, net | | | (266,024 | ) | | | (112,132 | ) | | | (84,249 | ) |
| Net cash used in investing activities | | | (266,024 | ) | | | (112,132 | ) | | | (84,249 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
| Issuance/(Repayment) of bank loans | | | 43,000 | | | | - | | | | (8,500 | ) |
| Repayment of Federal Home Loan Bank | | | | | | | | | | | | |
| advances, net | | | - | | | | - | | | | (30,544 | ) |
| Repayment of long-term debt | | | (1,742 | ) | | | (3,555 | ) | | | (9,324 | ) |
| Repayment of subordinated liabilities | | | (14,200 | ) | | | (23,200 | ) | | | (45,700 | ) |
| Issuance of partnership interests | | | 31,438 | | | | 324,009 | | | | 38,487 | |
| Redemption of partnership interests | | | (13,302 | ) | | | (8,271 | ) | | | (27,772 | ) |
| Withdrawals and distributions from partnership capital | | | (305,410 | ) | | | (376,556 | ) | | | (314,373 | ) |
| Net cash used in financing activities | | | (260,216 | ) | | | (87,573 | ) | | | (397,726 | ) |
| Net (decrease) increase in cash and cash equivalents | | | (109,759 | ) | | | 48,762 | | | | 33,610 | |
| CASH AND CASH EQUIVALENTS, | | | | | | | | | | | | |
| Beginning of year | | | 326,404 | | | | 277,642 | | | | 244,032 | |
| End of year | | $ | 216,645 | | | $ | 326,404 | | | $ | 277,642 | |
| Cash paid for interest | | $ | 73,311 | | | $ | 80,935 | | | $ | 57,623 | |
| Cash paid for taxes (Note 13) | | $ | 3,434 | | | $ | 3,922 | | | $ | 7,851 | |
| NON-CASH ACTIVITIES: | | | | | | | | | | | | |
| Additions of equipment, property and improvements | | | | | | | | | | | | |
| in accounts payable and accrued expenses | | $ | 26,520 | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
THE JONES FINANCIAL COMPANIES, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
(Dollars in thousands, except per unit information)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE PARTNERSHIP'S BUSINESS AND BASIS OF ACCOUNTING.
The Partnership's Business and Basis of Accounting. The accompanying consolidated financial statementsConsolidated Financial Statements include the accounts of The Jones Financial Companies, L.L.L.P. and all wholly ownedwholly-owned subsidiaries (collectively, the "Partnership"). All material intercompany balances and transactions have been eliminated in consolidation. Non-controlling minority interests are accounted for under the equity method. The results of the Partnership's subsidiary in Canada are included in the Partnership's consolidated financial statementsConsolidated Financial Statements for the twelve months ended November 30, 2008, 2007 2006 and 20052006 because of the timing of the Partnership's financial reporting process.
The Partnership operates as a single business segment. The Partnership's principal operating subsidiary, Edward D. Jones & Co., L.P. ("Edward Jones"), is comprised of three registered broker-dealers primarily serving individual investors. Edward Jones primarily derives its revenues from the retail brokerage business through the sale of listed and unlisted securities, insurance products, investment banking and principal transactions and as a distributor of mutual fund shares, and revenue related to assets held by and account services provided to its clients.customers. Edward Jones conducts business throughout the United States of America, Canada and the United Kingdom with its customers, various brokers, dealers, clearing organizations, depositories and banks. Trust services are offered to Edward Jones clientscustomers through Edward Jones Trust Company, a wholly ownedwholly-owned subsidiary of the Partnership. See Note 8
regarding the sale by the Partnership's wholly owned subsidiary Boone National
Savings and Loan Association, F.A. of its non-trust banking services.
The consolidated financial statementsConsolidated Financial Statements have been prepared under the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America which require the use of certain estimates by management in determining the Partnership's assets, liabilities, revenues and expenses. Actual results could differ from these estimates.
Substantially all of the Partnership's short-term financial assets and
liabilities are carried at fair value or contracted amounts which approximate
fair value.
Under the terms of the Partnership Agreement, a partner'spartner’s capital will be redeemed by the Partnership in the event of the partner'spartner’s death, resignation or termination. In the event of a partner'spartner’s death, the Partnership must redeem the partner'spartner’s capital within six months. Limited partners withdrawing from the Partnership due to termination or resignation are repaid their capital in three equal annual installments beginning the month after their resignation or termination. The capital of general partners resigning or terminated from the Partnership is converted to subordinated limited partnership capital. Subordinated limited partners are repaid their capital in four equal annual installments beginning the month after their request for withdrawal of contributed capital. The Partnership'sPartnership’s managing partner has the discretion to waive these withdrawal restrictions. All current and future partnership capital is subordinate to all current and future liabilities of the Partnership, including the liabilities subordinated to claims of general creditors.
TRANSACTION RISK.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
Transaction Risk. The Partnership's securities activities involve execution, settlement and financing of various securities transactions for customers. The Partnership may be exposed to risk of loss in the event customers, other brokers and dealers, banks, depositories or clearing organizations are unable to fulfill contractual obligations. For transactions in which it extends credit to customers, the Partnership seeks to 46
PART II
Item 8. Financial Statements and Supplementary Data, continued
control the risks associated with these activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. REVENUE RECOGNITION. Cash balances held at various major U.S. financial institutions, which typically exceed Federal Deposit Insurance Corporation insurance coverage limits, subject the Partnership to a concentration of credit risk. Additionally, the Partnership's foreign subsidiaries may also have cash deposits in excess of the applicable insured amounts. The Partnership regularly monitors the credit ratings of these financial institutions in order to mitigate the credit risk that exists with the deposits in excess of insured amounts.
Revenue Recognition. Customer transactions are recorded on a settlement date basis and the related commissions, principal transactions and investment banking revenues are recorded on a trade date basis. All other forms of revenue are recorded on an accrual basis.
Commissions consist of charges to customers for the purchase or sale of securities, insurance products and mutual fund shares.
Asset fees revenue is recorded in the period earned and consists primarily of service fees and other revenues received under agreements with mutual fund and insurance companies based on the underlying value of the Partnership's
customers'Partnership’s customers’ assets invested in those companies'companies’ products. Asset-based revenues related to the Partnership's interest in the Advisor to the Edward Jones Money Market Fund are included in asset fees revenue.
Principal transactions revenue results from the Partnership’s participation in market-making activities in over-the-counter corporate securities, municipal obligations, U.S. Government obligations, including general obligations and revenue bonds, unit investment trusts, mortgage-backed securities, and certificates of deposit.
Account and activity fees revenue is recorded in the period earned and includes fees received from mutual fund companies for sub-transfer agent accounting services performed by the Partnership and self-directed IRA custodian account fees. It also includes other activity based revenues from customers, mutual fund companies and insurance companies.
Principal transactions revenue results from the Partnership's participation in
market-making activities in over-the-counter corporate securities, municipal
obligations, U.S. Government obligations, including general obligations and
revenue bonds, unit investment trusts and mortgage-backed securities.
Interest and dividend income is earned primarily on margin account balances, cash and cash equivalents, cash segregated under federal and other regulations, securities purchased under agreement to resell, cash equivalents, inventory securities and investment securities.
Investment banking revenues are derived from the Partnership'sPartnership’s underwriting and distribution of securities on behalf of issuers.
FOREIGN EXCHANGE.
The Partnership derived 35% of its total revenue for 2008 and 29% of its total revenue for 2007 from one mutual fund vendor. Significant reductions in the revenues from this mutual fund source could have a material impact on the Partnership's results of operations.
Foreign Exchange. Assets and liabilities denominated in foreign currencies are translated at the exchange rates at the end of the period. Revenue and expenses denominated in foreign currencies are translated using the prevailingweighted average exchange rate on the date of the transaction.for each period. Foreign
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
exchange gains and losses are included in Other Revenueother revenue on the Consolidated Statements of Income.
CASH AND CASH EQUIVALENTS.
Fair Value. Substantially all of the Partnership's short-term financial assets and liabilities are carried at fair value or contracted amounts which approximate fair value.
Fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Financial assets are marked to bid prices and financial liabilities are marked to offer prices.
The Partnership adopted Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements ("SFAS 157"), effective for the fiscal year beginning January 1, 2008. The adoption of SFAS 157 had no financial impact on the Partnership's consolidated financial condition, results of operations, or cash flows. Beginning January 1, 2008, assets and liabilities recorded at fair value in the Consolidated Statement of Financial Condition are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by SFAS 157 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
Level I – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
The types of assets and liabilities categorized as Level I generally are government and agency securities, equities listed in active markets, unit investment trusts and investments in publicly traded mutual funds with quoted market prices.
Level II – Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with related market data at the measurement date and for the duration of the instrument’s anticipated life.
The types of assets and liabilities categorized as Level II generally are municipal bonds, mortgage and asset backed securities and corporate debt.
Level III – Inputs are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
The Partnership does not have any assets or liabilities categorized as Level III.
Cash and Cash Equivalents. The Partnership considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
CASH SEGREGATED UNDER FEDERAL REGULATIONS.
Cash Segregated under Federal and Other Regulations. Cash of $2,175,000 and $1,620,129 was segregated in special reserve bank accounts for the benefit of U.S. customers as of December 31, 2008 and $1,312,8062007, respectively, under rule 15c3-3 of the Securities and Exchange Commission ("SEC"). Cash of $46,032 and $51,737 was segregated in a special reserve bank account for the benefit of U.K. customers as of December 31, 20072008 and 2006,2007, respectively, under rule 15c3-3CASS 7.4.1 of the Financial Services Authority.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
Securities and Exchange Commission ("SEC").
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL.Purchased Under Agreements to Resell. The Partnership participates in short-term resale agreements collateralized by U.S. government and agency securities. The fair value of the underlying collateral as determined daily, plus accrued interest thereon, must equal or exceed 102% of the carrying amount of the transaction. It is the Partnership's policy to have such underlying resale agreement collateral delivered to the Partnership or 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.
47
PART II
Item 8. Financial Statements
Securities Borrowing and Supplementary Data, continued
SECURITIES BORROWING AND LENDING ACTIVITIES.Lending Activities. Securities borrowed and securities loaned transactions are reported as collateralized financings. Securities borrowed transactions require the Partnership to deposit cash or other collateral with the lender. In securities loaned transactions, the Partnership receives collateral in the form of cash or other collateral. Collateral for both securities borrowed and securities loaned is based on 102% of the marketfair value of the underlying securities loaned. The Partnership monitors the marketfair value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as necessary. Securities borrowed and securities loaned are included in receivable from and payable to brokers, dealers and clearing organizations in the consolidated statementsConsolidated Statements of financial condition.
COLLATERAL.Financial Condition.
Collateral. The Partnership reports as assets collateral it has pledged in secured borrowings and other arrangements when the secured party cannot sell or repledge the assets or the Partnership can substitute collateral or otherwise redeem it on short notice. The Partnership does not report collateral it has received in secured lending and other arrangements as an asset when the debtor has the right to redeem or substitute the collateral on short notice.
MORTGAGES AND LOANS. Loans that management has the intent
Securities Owned and ability to hold
for the foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
SECURITIES OWNED AND SOLD, NOT YET PURCHASED. Sold, Not Yet Purchased. Securities owned and sold, not yet purchased, including inventory securities and investment securities, are recorded at fair value which is determined by using quoted market or dealer
prices.
EQUIPMENT, PROPERTY AND IMPROVEMENTS.value.
Equipment, Property and Improvements. Equipment, including furniture and fixtures, is recorded at cost and depreciated using straight-line and accelerated methods over estimated useful lives of two to twelve years. Buildings are depreciated using the straight-line method over their useful lives, which are estimated at thirty years. Leasehold improvements are amortized based on the term of the lease or the economic useful life of the improvement, whichever is less. The Partnership's construction in progress assets will be reclassified into the appropriate asset category and begin depreciation at the time the assets are put into service. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization is removed from the accounts. The cost of maintenance and repairs is charged against income as incurred, whereas significant enhancements are capitalized. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be fully recoverable. If impairment is indicated, the asset value is written down to its fair value.
LEASE ACCOUNTING.
Non-qualified Deferred Income Plan. The Partnership has a non-qualified deferred compensation plan for certain financial advisors. The Partnership has recorded a liability for the future payments due to financial advisors participating in the non-qualified deferred compensation plan. As the future amounts due to financial advisors change in accordance with plan requirements, the Partnership records the change in future amounts owed to financial advisors as an increase or decrease in accrued compensation and employee benefits expense.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
The Partnership has chosen, at its discretion, to hedge this future liability by purchasing investment securities in an amount similar to the future liability expected to be due in accordance with the plan. The investment securities are the assets of the Partnership. The financial advisors are unsecured creditors, and therefore do not have any right or claim against the investment securities. As the fair value of the investment securities fluctuates, the gains or losses are reflected in other revenue. Each period, the net impact of the change in future amounts owed to financial advisors in the non-qualified deferred compensation plan and change in investment securities are approximately the same, resulting in no net impact on the Partnership's financial results.
Lease Accounting. The Partnership enters into lease agreements for certain headquarters facilities as well as branch office locations. The associated lease expense is recognized on a straight-line basis over the minimum lease terms.
INCOME TAXES.
Income Taxes. Income taxes have not been provided for in the consolidated
financial statementsConsolidated Financial Statements since The Jones Financial Companies, L.L.L.P. is organized as a partnership and each partner is liable for its own tax payments. Any subsidiaries' income tax provisions are insignificant.
RECLASSIFICATION.insignificant (see Note 13).
Reclassification. Certain prior year balances have been reclassified to conform with the current year presentation.
PARTNERSHIP CAPITAL SUBJECT TO MANDATORY REDEMPTIONS.
Partnership Capital Subject to Mandatory Redemption. The Financial Accounting Standards Board Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," established standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. Under the 48
PART II
Item 8. Financial Statements and Supplementary Data, continued
provisions of SFAS No. 150, the obligation to redeem a partner's capital in the event of a partner's death is one of the Statement's criteria requiring capital to be classified as a liability.
Since the Partnership is obligated to redeem a partner'spartner’s capital after a partner'spartner’s death, the Statement requires all of the Partnership'sPartnership’s equity capital to be classified as a liability. Income allocable to limited, subordinated limited and general partners prior to the issuance of SFAS No. 150 was classified in the Partnership's statementConsolidated Statement of incomeIncome as net income. In accordance with SFAS NoNo. 150, these allocations are now classified as a reduction of income before allocations to partners, which results in a presentation of $0 net income for the years ended December 31, 2008, 2007 2006 and 2005.2006. The financial statement presentations required to comply with SFAS No. 150 do not alter the Partnership'sPartnership’s treatment of income, income allocations or capital for any other purposes. In addition, SFAS No. 150 does not have any effect on, nor is it applicable to, the Partnership's subsidiaries'Partnership’s subsidiaries’ financial statements.
Net income, as defined in the Partnership Agreement, is now equivalent to income before allocations to partners on the Consolidated Statements of Income. Such income, if any, for each calendar year is allocated to the Partnership'sPartnership’s three classes of capital in accordance with the formulas prescribed in the Partnership Agreement. First, limited partners are allocated net income (as defined in the Partnership Agreement) in accordance with the prescribed formula for their share of net income. Limited partners do not share in the net loss in any year in which there is a net loss and the Partnership is not dissolved or liquidated. Thereafter, subordinated limited partners and general partners are allocated any remaining net income or net loss based on formulas in the Partnership Agreement.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
New Accounting Standards. In October 2008, the Financial Accounting Standards Board ("FASB") issued FSP SFAS No. 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active" (FSP SFAS 157-3), which clarifies the application of SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), in an inactive market and provides an example to demonstrate how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The adoption of this standard did not have any impact on the Partnership's results of operations, cash flows or financial positions for the year ended December 31, 2008.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance with generally accepted accounting principles. This statement became effective in November 2008. Adoption of SFAS 162 did not have a material impact on the Consolidated Financial Statements.
In February 2008, the FASB issued FSP SFAS No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP SFAS 157-2"). FSP SFAS 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities that are not remeasured at fair value on a recurring basis (at least annually) until January 2009. The implementation of FSP SFAS 157-2 did not have a material impact on the Consolidated Financial Statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS 160"). SFAS 160 requires noncontrolling interests to be treated as a separate component of equity and not as a liability or other item outside of equity. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, the Partnership will adopt SFAS 160 in 2009 and does not anticipate the adoption will have a material impact on the Consolidated Financial Statements.
NOTE 2 - RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
Receivable from and payable to customers include margin balances and amounts due on cash transactions. The value of securities owned by customers and held as collateral for these receivables is not reflected in the consolidated
financial statements.Consolidated Financial Statements. Substantially all amounts payable to customers are subject to withdrawal upon customer request. The Partnership pays interest on certain credit balances in customer accounts.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
NOTE 3 - RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS
AND CLEARING ORGANIZATIONS
The components of receivable from and payable to brokers, dealers and clearing organizations are as follows:
2007 2006
---- ----
Receivable from carrying broker $ 361,303 $ 233,363
Receivable from money market funds 47,390 31,311
Dividends receivable 10,256 29,245
Receivable from clearing organizations 7,396 5,516
Securities failed to deliver 7,071 6,524
Deposits paid for securities borrowed 1,108 3,061
Other 4,854 1,695
----------- -----------
Total receivable from brokers, dealers
and clearing organizations $ 439,378 $ 310,715
=========== ===========
Securities failed to receive $ 47,623 $ 30,727
Payable to clearing organizations 17,821 10,519
Deposits paid for securities loaned - 2,859
Other 1,025 488
----------- -----------
Total payable to brokers, dealers and
clearing organizations $ 66,469 $ 44,593
=========== ===========
49
PART II
Item 8. Financial Statements and Supplementary Data, continued
| | | 2008 | | | 2007 | |
| Receivable from carrying broker | | $ | 220,275 | | | $ | 361,303 | |
| Receivable from money market funds | | | 51,563 | | | | 47,390 | |
| Receivable from clearing organizations | | | 39,874 | | | | 7,396 | |
| Dividends receivable | | | 11,883 | | | | 10,256 | |
| Securities failed to deliver | | | 5,748 | | | | 7,071 | |
| Cash or collateral paid for securities borrowed | | | 275 | | | | 1,108 | |
| Other | | | 2,731 | | | | 4,854 | |
| Total receivable from brokers, dealers | | | | | | | | |
| and clearing organizations | | $ | 332,349 | | | $ | 439,378 | |
| | | | | | | | | |
| Payable to clearing organizations | | $ | 21,689 | | | $ | 17,821 | |
| Securities failed to receive | | | 17,521 | | | | 47,623 | |
| Cash or collateral received for securities loaned | | | 79 | | | | - | |
| Other | | | 1,323 | | | | 1,025 | |
| Total payable to brokers, dealers | | | | | | | | |
| and clearing organizations | | $ | 40,612 | | | $ | 66,469 | |
| | | | | | | | | |
Receivable from carrying broker represents balances and deposits with the Partnership's Canadian carrying broker. Receivable from clearing organizations represents balances and deposits with clearing organizations. Securities failed to deliver/receive represent the contract value of securities which have not been delivered or received by settlement date.
NOTE 4 - RECEIVABLE FROM MUTUAL FUNDS, INSURANCE COMPANIES, AND OTHER
Receivable from mutual funds, insurance companies and other is primarily composed of amounts due to the Partnership for asset based fees and fees for sub-transfer agent accounting services from the mutual fund vendors and insurance companies.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
NOTE 5-5 - FAIR VALUE OF SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
Securities owned and securities sold, not yet purchased are summarized as
follows (at
The following table sets forth the Partnership's financial instruments measured at fair value):
value:
| | | Financial Assets at Fair Value as of December 31, | |
| | | 2008 | | | | 2007* | |
| In thousands | | Level I | | | Level II | | | Level III | | | Total | | | Total | |
| Securities purchased under | | | | | | | | | | | | | | | | |
| agreements to resell | | $ | 1,354,000 | | | $ | - | | | $ | - | | | $ | 1,354,000 | | | $ | 595,000 | |
| Securities owned: | | | | | | | | | | | | | | | | | | | | |
| Inventory securities: | | | | | | | | | | | | | | | | | | | | |
| Certificate of deposit | | $ | - | | | $ | 5,255 | | | $ | - | | | $ | 5,255 | | | $ | 1,022 | |
| U.S. and Canadian government | | | | | | | | | | | | | | | | | | | | |
| and U.S. agency obligations | | | 1,200 | | | | - | | | | - | | | | 1,200 | | | | 4,800 | |
| State and municipal obligations | | | - | | | | 14,933 | | | | - | | | | 14,933 | | | | 56,129 | |
| Corporate bonds and notes | | | - | | | | 9,269 | | | | - | | | | 9,269 | | | | 7,434 | |
| Collateralized mortgage obligations | | | - | | | | 1,113 | | | | - | | | | 1,113 | | | | 1,731 | |
| Equities | | | 18,851 | | | | - | | | | - | | | | 18,851 | | | | 15,174 | |
| Unit investment trusts | | | 223 | | | | - | | | | - | | | | 223 | | | | 1,234 | |
| Total inventory securities | | $ | 20,274 | | | $ | 30,570 | | | $ | - | | | $ | 50,844 | | | $ | 87,524 | |
| Investment Securities: | | | | | | | | | | | | | | | | | | | | |
| U.S. government and agency | | | | | | | | | | | | | | | | | | | | |
| obligations held by U.S. | | | | | | | | | | | | | | | | | | | | |
| broker-dealer | | $ | 22,120 | | | $ | - | | | $ | - | | | $ | 22,120 | | | $ | 25,114 | |
| U.S. and Canadian government | | | | | | | | | | | | | | | | | | | | |
| and U.S.agency obligations | | | | | | | | | | | | | | | | | | | | |
| held by foreign broker-dealers | | | 14,206 | | | | - | | | | - | | | | 14,206 | | | | 24,335 | |
| Mutual funds | | | 55,095 | | | | - | | | | - | | | | 55,095 | | | | 82,824 | |
| Equities | | | 773 | | | | - | | | | - | | | | 773 | | | | 4,355 | |
| Total investment securities | | $ | 92,194 | | | $ | - | | | $ | - | | | $ | 92,194 | | | $ | 136,628 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Financial Liabilities at Fair Value as of December 31, | |
| | | 2008 | | | | 2007* | |
| In thousands | | Level I | | | Level II | | | Level III | | | Total | | | Total | |
| Securities sold, not yet purchased: | | | | | | | | | | | | | | | | | | | | |
| Certificate of deposit | | $ | - | | | $ | 528 | | | $ | - | | | $ | 528 | | | $ | 246 | |
| U.S. and Canadian government | | | | | | | | | | | | | | | | | | | | |
| and U.S. agency obligations | | | 95 | | | | - | | | | - | | | | 95 | | | | 1,139 | |
| State and municipal obligations | | | - | | | | 542 | | | | - | | | | 542 | | | | 200 | |
| Corporate bonds and notes | | | - | | | | 5,847 | | | | - | | | | 5,847 | | | | 2,629 | |
| Collateralized mortgage obligations | | | - | | | | 75 | | | | - | | | | 75 | | | | 26 | |
| Equities | | | 4,937 | | | | - | | | | - | | | | 4,937 | | | | 934 | |
| Unit investment trusts | | | 111 | | | | - | | | | - | | | | 111 | | | | 236 | |
| Total inventory securities | | $ | 5,143 | | | $ | 6,992 | | | $ | - | | | $ | 12,135 | | | $ | 5,410 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| * SFAS No. 157 adopted January 1, 2008 | | | | | | | | | | | | | | | | | | | | |
PART II
2007 2006
------------------------------ -------------------------------
Securities Securities
Sold, Sold,
Securities not yet Securities not yet
Owned Purchased Owned Purchased
------------ ------------ ---------- -------------
Inventory securities:
Certificates of deposit $ 1,022 $ 246 $ 10,573 $ 1,206
U.S.| Item 8. | Financial Statements and Canadian government
and U.S. agency obligations 4,800 1,139 4,487 3,446
State and municipal obligations 56,129 200 58,475 132
Corporate bonds and notes 7,434 2,629 39,033 2,961
Collateralized mortgage obligations 1,731 26 1,968 40
Equities 15,174 934 14,380 1,425
Unit investment trusts 1,234 236 693 143
------------ ------------ ------------ -------------
$ 87,524 $ 5,410 $ 129,609 $ 9,353
============ ============ ============ =============
Investment securities:
U.S. government and agency
obligations held by U.S. broker-
dealer $ 25,114 $ 37,456
U.S. and Canadian government and
U.S. agency obligations held by
foreign broker-dealers 24,335 26,952
Mutual funds 82,824 74,301
Equities 4,355 6,843
------------ ------------
$ 136,628 $ 145,552
============ ============
Supplementary Data, continued |
The Partnership attempts to reduce its exposure to market price fluctuations of its inventory securities through the sale of U.S. government securities and, to a limited extent, the sale of fixed income futures
50
PART II
Item 8. Financial Statements and Supplementary Data, continued contracts. The amount of the securities purchased or sold will fluctuate on a daily basis due to changes in inventory securities owned, interest rates and market conditions. Futures contracts are settled daily, and any gain or loss is recognized in principal transactions revenue. The notional amount of futures contracts sold was $9,000$3,000 and $25,000$9,000 at December 31, 2008 and 2007, respectively. The underlying assets of these contracts are not reflected in the Partnership's Consolidated Financial Statements; however, the related mark-to-market adjustments of $46 and 2006,$42 are included in the consolidated statement of financial position as of December 31, 2008 and 2007, respectively.
NOTE 6 - EQUIPMENT, PROPERTY AND IMPROVEMENTS
Equipment, property and improvements are summarized as follows:
2007 2006
---------- ----------
Land $ 15,706 $ 12,822
Buildings and improvements 421,052 376,076
Equipment, furniture and fixtures 718,112 671,551
----------- -----------
Total equipment, property and improvements 1,154,870 1,060,449
Accumulated depreciation and amortization (826,202) (749,462)
----------- -----------
Equipment, property and improvements, net $ 328,668 $ 310,987
=========== ===========
| | | 2008 | | | 2007 | |
| Land | | $ | 15,992 | | | $ | 15,706 | |
| Buildings and improvements | | | 506,819 | | | | 403,255 | |
| Equipment, furniture and fixtures | | | 773,634 | | | | 718,112 | |
| Construction in progress | | | 118,104 | | | | 17,797 | |
| | | | | | | | | |
| Total equipment, property and improvements | | | 1,414,549 | | | | 1,154,870 | |
| | | | | | | | | |
| Accumulated depreciation and amortization | | | (883,175 | ) | | | (826,202 | ) |
| | | | | | | | | |
| Equipment, property and improvements, net | | $ | 531,374 | | | $ | 328,668 | |
| | | | | | | | | |
In November 2008, the Partnership placed into service a newly constructed office building and related parking garage. The total amount capitalized related to this building and garage as of December 31, 2008 was $81,705, and is included in the buildings and improvements and equipment, furniture, and fixtures categories. See Note 15 for the related remaining commitments for this construction.
The Partnership had construction in progress in the amount of $118,104 and $17,797 as of December 31, 2008 and 2007, respectively. The construction in progress relates to the office buildings and parking garages currently under construction (see Note 15).
Depreciation and amortization expense on equipment, property and improvements is included in the Consolidated Statements of Income under Communications and Data Processing, and Occupancy and Equipment.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
NOTE 7 - BANK LOANS AND LINES OF CREDIT
As of December 31, 2007,2008, Edward Jones had bank lines of credit aggregating $1,240,000$1,165,000 of which $1,140,000$1,065,000 were through uncommitted facilities. Actual borrowing availability is primarily based on the value of securities owned and customers' margin securities. There were no bank loansborrowings outstanding under these lines as of December 31, 20072008 or 2006.
Interest is2007. Subsequent to December 31, 2008, the Partnership had bank lines of credit aggregating $945,000 of which $845,000 were through uncommitted facilities.
During the year ended December 31, 2008, Edward Jones had borrowings outstanding for twenty-one days with an average daily outstanding balance over those twenty-one days of $9,914 at a fluctuatingan average interest rate based on short-term lending rates.of 2.0%. During the year ended December 31, 2007, Edward Jones had bank loansborrowings outstanding for five days with an average daily outstanding balance over those five days of $157,200 at an average interest rate of 5.16%5.2%. During
In the year ended December 31, 2006, Edward Jones
had no outstanding bank loans.
During 2006, Bank Loans includedthird quarter of 2008, the Partnership entered into a $10,000$120,000 revolving unsecured bank line of credit which was terminated asthe Partnership is currently using primarily for funding the construction of February 26, 2007. There were nonew buildings and parking garages (see Note 15). The revolving unsecured line of credit has a final termination date of August 22, 2010. To the extent that the Partnership obtains permanent financing on its South Campus facility currently under construction, such proceeds must be applied towards the amounts outstanding under thison the revolving unsecured line of credit if obtained prior the final termination date. As of December 31, 2008, $43,000 was drawn on the revolving unsecured line of credit to fund the construction projects. Subsequent to December 31, 2008, an additional $30,000 was drawn on the revolving unsecured line of credit resulting in $73,000 total outstanding on the revolving unsecured line of credit as of March 27, 2009. Each draw is for a period of up to six months, at which time interest is due and the Partnership has the option to renew the draw. The weighted average interest rate is 1.5% as of December 31, 2006.
2008, and fluctuates with LIBOR.
The line of credit agreement contains restrictions that, among other things, require maintenance of a fixed charge coverage ratio of 1.2 to 1.0 for EDJ Leasing Co., L.P. "Leasing," an affiliate of the Partnership, and minimum capital of $1.1 billion and total indebtedness of less than 50% of total capital at the Partnership, respectively. The Partnership and Leasing were in compliance with all debt covenants and restrictions as of December 31, 2008.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
NOTE 8 - SALELONG-TERM DEBT
Long-term debt is composed of the following:
| | | 2008 | | | 2007 | |
| Note payable, collateralized by real estate, fixed rate | | | | | | |
| of 7.28%, principal and interest due in monthly | | | | | | |
| installments, with a final installment on June 1, 2017 | | $ | 9,092 | | | $ | 9,838 | |
| | | | | | | | | |
| Note payable, collateralized by real estate, fixed rate | | | | | | | | |
| of 8.23%, principal and interest due in monthly | | | | | | | | |
| installments, with a final installment on April 1, 2008 | | | - | | | | 588 | |
| | | | | | | | | |
| Note payable, collateralized by real estate, fixed rate | | | | | | | | |
| of 4.31%, principal and interest due in monthly | | | | | | | | |
| installments, with a final installment on April 5, 2008 | | | - | | | | 408 | |
| | | | | | | | | |
| | | $ | 9,092 | | | $ | 10,834 | |
| | | | | | | | | |
Scheduled annual principal payments, as of December 31, 2008, are as follows:
| | | Principal | |
| Year | | Payment | |
| | | | |
| 2009 | | $ | 802 | |
| 2010 | | | 863 | |
| 2011 | | | 928 | |
| 2012 | | | 997 | |
| 2013 | | | 1,072 | |
| Thereafter | | | 4,430 | |
| | | | | |
| | | $ | 9,092 | |
| | | | | |
The note payable of $9,092 at December 31, 2008 is collateralized by a building with a cost basis of $15,481 and a carrying value of $11,811 at December 31, 2008.
The Partnership has estimated the fair value of the long-term debt to be approximately $7,911 and $11,416 as of December 31, 2008 and 2007, respectively.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
NOTE 9 - LIABILITIES SUBORDINATED TO CLAIMS OF THE ASSOCIATION'S BANKING BUSINESS
GENERAL CREDITORS
Liabilities subordinated to claims of general creditors consist of:
| | | 2008 | | | 2007 | |
| Capital notes 7.33%, due in annual installments of | | | | | | |
| $50,000 commencing on June 12, 2010 with a | | | | | | |
| final installment on June 12, 2014 | | $ | 250,000 | | | $ | 250,000 | |
| | | | | | | | | |
| Capital notes 7.79%, due in annual installments | | | | | | | | |
| of $3,700 commencing on August 15, 2005, | | | | | | | | |
| with a final installment of $3,700 on August 15, 2011 | | | 11,100 | | | | 14,800 | |
| | | | | | | | | |
| Capital notes 8.18%, due in annual installments of | | | | | | | | |
| $10,500 with a final installment on | | | | | | | | |
| September 1, 2008 | | | - | | | | 10,500 | |
| | | | | | | | | |
| | | $ | 261,100 | | | $ | 275,300 | |
| | | | | | | | | |
Required annual principal payments, as of December 31, 2008, are as follows:
| Year | | Principal Payment | |
| | | | |
| 2009 | | $ | 3,700 | |
| 2010 | | | 53,700 | |
| 2011 | | | 53,700 | |
| 2012 | | | 50,000 | |
| 2013 | | | 50,000 | |
| Thereafter | | | 50,000 | |
| | | | | |
| | | $ | 261,100 | |
| | | | | |
The capital note agreements contain restrictions which, among other things, require Edward Jones to maintain certain financial ratios, restrict encumbrance of assets and creation of indebtedness and limit the withdrawal of its partnership capital. As of December 31, 2008, Edward Jones was required, under the note agreements, to maintain minimum partnership capital subject to mandatory redemption of $400,000 and net capital of $136,906. Edward Jones was in compliance with all restrictions as of December 31, 2008 and 2007.
The subordinated liabilities are subject to cash subordination agreements approved by FINRA and, therefore, are included in Edward Jones' computation of net capital under the SEC’s
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
Uniform Net Capital Rule. The Partnership has estimated the fair value of the subordinated capital notes to be approximately $238,000 and $292,000 as of December 31, 2008 and 2007, respectively.
NOTE 10 - PARTNERSHIP CAPITAL SUBJECT TO MANDATORY REDEMPTION
As more fully described under “Partnership Capital Subject to Mandatory Redemption” in Note 1, the Partnership's wholly ownedcapital has been classified as a liability under SFAS No. 150 as “Partnership capital subject to mandatory redemption.” The firm’s partnership capital subject to mandatory redemption, net of reserve for anticipated withdrawals of $1,412,695 consists of $482,366 of limited partnership capital issued in $1,000 units, $176,933 of subordinated limited partnership capital and $753,396 of general partnership capital as of December 31, 2008.
The limited partnership capital subject to mandatory redemption is held by current and former employees and general partners of the Partnership. Limited partners are guaranteed a minimum 7.5% return on the face amount of their capital which was $36,661, $37,355, and $15,765, for the years ended December 31, 2008, 2007 and 2006, respectively, and is included as a component of Interest Expense. The 7.5% return is paid to limited partners regardless of the Partnership’s earnings.
The subordinated limited partnership capital subject to mandatory redemption 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 subject to mandatory redemption is subordinated to the limited partnership capital.
NOTE 11 - NET CAPITAL REQUIREMENTS
As a result of its activities as a broker-dealer, Edward Jones is subject to the net capital provisions of Rule 15c3-1 of the Securities Exchange Act of 1934. Under the alternative method permitted by the rules, Edward Jones must maintain minimum net capital equal to the greater of $250 or 2% of aggregate debit items arising from customer transactions. The net capital rule also 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, 2008, Edward Jones' net capital of $801,249 was 43.9% of aggregate debit items and its net capital in excess of the minimum required was $764,741. Net capital after anticipated withdrawals, as a percentage of aggregate debit items, was also 43.9%. Net capital and the related capital percentages may fluctuate on a daily basis.
At December 31, 2008, the Partnership’s foreign broker-dealer subsidiaries and Edward Jones Trust Company were in compliance with regulatory capital requirements in the jurisdictions in which they operate.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
NOTE 12 - OTHER REVENUE
Other revenue of $(37,842) and $20,343 for the years ended December 31, 2008 and 2007, respectively, consists primarily of the change in the fair value of the assets related to the Partnership's non-qualified deferred compensation plan (see Note 1) as well as the foreign currency translation gain or loss. The change in fair value of the investments related to the non-qualified deferred compensation plan resulted in a loss of $28,400 in 2008, and a gain of $8,000 in 2007. The translation of the foreign subsidiary financial statements from local currencies to U.S. dollars resulted in a loss of $18,300 in 2008, and a gain of $2,300 in 2007.
Included in other revenue in 2006 is an $8,100 gain from the sale of the banking operations of the Partnership's wholly-owned subsidiary, Boone National Savings and Loan Association, F.A.
, (the "Association")
,. The Association made commercial, real estate, and other loans primarily to customers in central Missouri.
The Association's division
Edward Jones Trust Company offers TrustIn addition, the Association offered trust services to Edward Jones'
clients. Oncustomers. During April
4, 2006, the Association, the Partnership and Commerce Bank, N.A. ("Commerce") entered into a Purchase and Assumption Agreement (the "Purchase Agreement") pursuant to which Commerce agreed to acquire substantially all of the assets and assume substantially all of the liabilities of the Association related to its banking business.
Under the Purchase Agreement, the Partnership
received a purchase price
51
PART II
Item 8. Financial Statements and Supplementary Data, continued
of $16.2 million adjusted for the Association's net assets purchased or
liabilities assumed by Commerce. The Partnership recognized an after-tax gain
of $8.1 million when the sale closed on July 20, 2006. With the closing of the Purchase Agreement, the Association is no longer engaged in the business of banking through Boone National Savings and Loan. The Association was renamed Edward Jones Trust Company and continues the trust business that was conducted by Edward Jones Trust Company, formerly a division of the Association. During 2006, the receivable from mortgages and loans was primarily composed of
the Association's adjustable rate mortgage loans, commercial and other loans,
net of discounts, deferred origination fees and the allowance for loan losses.
The carrying amounts of the receivables approximated their fair values. The
amount payable to depositors was composed of the Association's various savings
instruments offered to its customers, whichAlso included transaction accounts and
certificates of deposit with maturities ranging from 90 days to 72 months. The
carrying amounts of these deposits approximated their fair values.
The Association had no loans from the Federal Home Loan Bank ("FHLB") as of
December 31, 2006.
As of December 31, 2006, the Association's net assets not purchased by
Commerce and remaining on the Consolidated Statements of Financial Condition
aggregated $1.0 million. As of December 31, 2007, there are no amounts from
the Association's net assets not purchased remaining on the Consolidated
Statement of Financial Condition. The income from operations for the
discontinued banking business included in Income before allocation to partners
was $0.663 million for the year ended December 31, 2006. The revenue and
expense activity related to the discontinued operations was not material to
the Partnership's financial results.
NOTE 9 - LONG-TERM DEBT
Long-term debt is composed of the following:
2007 2006
----------- -----------
Note payable, collateralized by real estate, fixed rate of 7.28%,
principal and interest due in monthly installments,
with a final installment on June 1, 2017. $ 9,838 $ 10,532
Notes payable, collateralized by real estate, fixed rate of 8.23%,
principal and interest due in monthly installments,
with a final installment on April 5, 2008. 588 2,261
Notes payable, collateralized by real estate, fixed rate of 4.31%,
principal and interest due in monthly installments,
with a final installment on April 5, 2008. 408 1,596
----------- -----------
$ 10,834 $ 14,389
=========== ===========
52
PART II
Item 8. Financial Statements and Supplementary Data, continued
Scheduled annual principal payments, as of December 31, 2007 are as follows:
Principal
Year Payment
---------- ---------
2008 $ 1,742
2009 802
2010 863
2011 927
2012 997
Thereafter 5,503
---------
$ 10,834
=========
The real estate notes payable of $10,834 at December 31, 2007 are
collateralized by land and buildings with a cost basis of $39,175 and a
carrying value of $23,192 at December 31, 2007.
The Partnership has estimated the fair value of the long-term debt to be
approximately $11,416 and $14,651 as of December 31, 2007 and 2006,
respectively.
NOTE 10 - LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Liabilities subordinated to claims of general creditors consist of:
2007 2006
----------- -----------
Capital notes, 7.33%, due in annual installments of $50,000
commencing on June 12, 2010, with a final installment
on June 12, 2014. $ 250,000 $ 250,000
Capital notes, 7.79%, due in annual installments ranging
from $3,700 to $12,700, commencing on August 15, 2005,
with a final installment of $3,700 on August 15, 2011. 14,800 27,500
Capital notes, 8.18%, due in annual installments of $10,500,
with a final installment on September 1, 2008. 10,500 21,000
----------- -----------
$ 275,300 $ 298,500
=========== ===========
53
PART II
Item 8. Financial Statements and Supplementary Data, continued
Required annual principal payments, as of December 31, 2007, are as follows:
Principal
Year Payment
---------- ---------
2008 $ 14,200
2009 3,700
2010 53,700
2011 53,700
2012 50,000
Thereafter 100,000
---------
$ 275,300
=========
The capital note agreements contain restrictions which, among other things,
requires Edward Jones to maintain certain financial ratios, restricts
encumbrance of assets and creation of indebtedness and limit the withdrawal of
its partnership capital. As of December 31, 2007, Edward Jones was required,
under the note agreements, to maintain minimum partnership capital subject to
mandatory redemption of $400,000 and Net Capital of $139,450 (see Note 12).
Edward Jones is in compliance with all restrictions as of December 31, 2007
and 2006.
The subordinated liabilities are subject to cash subordination agreements
approved by the New York Stock Exchange, Inc. and, therefore, are included in
Edward Jones' computation of Net Capital under the SEC's uniform Net Capital
rule. The Partnership has estimated the fair value of the subordinated capital
notes to be approximately $292,000 and $311,000 as of December 31, 2007 and
2006, respectively.
NOTE 11 - PARTNERSHIP CAPITAL SUBJECT TO MANDATORY REDEMPTION
As more fully described under "Partnership Capital Subject to Mandatory
Redemption" in Note 1, the Partnership's capital has been classified as a
liability under SFAS No. 150 as "Partnership capital subject to mandatory
redemption." The firm's partnership capital subject to mandatory redemption,
net of reserve for anticipated withdrawals of $1,328,342 consists of $494,486
of limited partnership capital issued in $1,000 units, $146,677 of
subordinated limited partnership capital and $687,179 of general partnership
capital as of December 31, 2007.
The limited partnership capital subject to mandatory redemption is held by
current and former employees and general partners of the Partnership. Limited
partners are guaranteed a minimum 7.5% return on the face amount of their
capital. Expense related to the 7.5% return was $37,355, $15,765, and $16,095,
for the years ended December 31, 2007, 2006 and 2005, respectively, and is
included as a component of Interest Expense. The 7.5% return is paid to
limited partners regardless of the Partnership's earnings.
The subordinated limited partnership capital subject to mandatory redemption
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 subject to
mandatory redemption is subordinated to the limited partnership capital.
NOTE 12 - NET CAPITAL REQUIREMENTS
As a result of its activities as a broker-dealer, Edward Jones 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
54
PART II
Item 8. Financial Statements and Supplementary Data, continued
Exchange, Inc. Under the alternative method permitted by the rules, Edward
Jones must maintain minimum Net Capital equal to the greater of $250 or 2% of
aggregate debit items arising from customer transactions. The Net Capital rule
also 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, 2007, Edward Jones' Net Capital of $798,139 was 42.9% of
aggregate debit items and its Net Capital in excess of the minimum required
was $760,953. Net Capital after anticipated withdrawals, which are scheduled
subordinated debt payments through June 30, 2008, as a percentage of aggregate
debit items was 42.9%. Net Capital and the related capital percentages may
fluctuate on a daily basis.
At December 31, 2007, the Partnership's foreign broker-dealer subsidiaries and
Edward Jones Trust Company were in compliance with regulatory capital
requirements in the jurisdictions in which they operate.
NOTE 13 - OTHER REVENUE
Included in other revenue in 2006 are an $8,100 gain from the sale of the
Association's banking operations, $6,800 in unrealized gains from the receipt of shares in exchange for the Partnership's New York Stock Exchange ("NYSE") membership as a result of the merger between the NYSE and Archipelago, and a $6,500 gain from the sale of the Partnership's interest in the investment advisor to Federated's Capital Income Fund.
NOTE 13 – INCOME TAXES
The Partnership is treated as such for federal and state income tax purposes and generally does not incur income taxes. Instead, its earnings and losses are included in the income tax returns of its individual partners. However, the Partnership structure does include certain subsidiaries which are corporations that are subject to income tax. As of December 31, 2008 and 2007, the Partnership's tax basis of assets and liabilities exceeds book basis by $192,548 and $256,694, respectively. The primary difference between financial statement basis and tax basis of assets is related to the timing in deducting prepaid expenses and depreciation expense related to fixed assets. The primary difference between financial statement basis and tax basis of liabilities is related to the deferral for tax purposes in deducting certain reserves and accrued expenses until they are paid. Since the Partnership is treated as such for federal and state income tax purposes, the difference between the tax basis and the book basis of assets and liabilities will impact the future tax liabilities of the partners. The tax differences will not impact the net income of the Partnership.
The Partnership has accumulated net operating losses with respect to its U.K. subsidiary. The Partnership has consistently assessed the likelihood as to whether or not the benefit of these net operating losses would be realized based on the amount of evidence available on an annual basis. The Partnership determined that a full valuation allowance would be required for the future benefit of the carry forward of these losses based on the analysis of this evidence. Therefore, the net deferred tax asset recorded for net operating losses with respect to this subsidiary is $0 as of December 31, 2008 and 2007.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Partnership maintains profit sharing plans covering all eligible employees. Contributions to the plans are at the discretion of the Partnership. Additionally, participants may contribute on a voluntary basis. Approximately $73,300, $127,100 $94,600 and $76,400$94,600 were provided by the Partnership for its contributions to the plans for the years ended December 31, 2008, 2007 and 2006, and 2005, respectively.
NOTE 15 - COMMITMENTS
The Partnership leases headquarters office space, furniture, computers and communication equipment under various operating leases. Additionally, branch offices are leased generally for terms of three to five years. Rent expense, which is recognized on a straight-line basis over the minimum lease term, was $200,000, $202,100, $188,800, and $187,700$188,800 for the years ended December 31, 2008, 2007 and 2006, and 2005, respectively.
The Partnership's noncancelablenon-cancelable lease commitments greater than one year as of December 31, 2007,2008, are summarized below:
Year
----------
| | | Principal | |
| Year | | Payment | |
| | | | |
| 2009 | | $ | 120,941 | |
| 2010 | | | 36,930 | |
| 2011 | | | 24,971 | |
| 2012 | | | 17,266 | |
| 2013 | | | 12,861 | |
| Thereafter | | | 76,634 | |
| | | | | |
| | | $ | 289,603 | |
| | | | | |
Subsequent to December 31, 2008,
$109,053
2009 37,629the Partnership executed an agreement to extend the lease on a headquarters office building. The non-cancelable portion of this lease extension begins February 2010
25,722and ends February 2011
18,215
2012 14,208
Thereafter 92,270
--------
$297,097
========
55
PART II
Item 8. Financial Statements and Supplementary Data, continued
the related commitments are $3,596 for 2010 and $719 for 2011. The Partnership's annual rent expense is greater than its annual future lease commitments because the annual future lease commitments include only non
cancelablenon-cancelable lease payments greater than one year.
During 2007, the Partnership executed a construction agreement for the
construction of a 205,000 square foot building and related parking garage on
land it owns at its St. Louis, Missouri North Campus location. The building
and garage are expected to be completed by November 2008.
The Partnership estimates thatis in the total cost forprocess of expanding its home office facilities in order to support its current and future growth plans. The construction of theactivities underway during 2008 included two office buildingbuildings and the
garage will be approximately $67.8 million. As of December 31, 2007, the
Partnership has executed $62.7 million in general and subcontractor
commitments related to the construction agreement.
Subsequent to December 31, 2007, the Partnership executed agreements to
construct an additional 370,000 square foot office building anda parking garage on land it owns at its St. Louis, Missouri, North Campus location, a 225,000 square
footbuilding addition and parking garage at an existing building at its St. Louis, Missouri, South Campus location, and a parking garage at its Tempe, Arizona, Campus. campus.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
The Partnership estimates totalfollowing table shows the estimated construction, costfurniture, fixtures and equipment and infrastructure costs for each construction project, the amounts associated with executed agreements, amounts paid as of the three
agreementsDecember 31, 2008 and remaining estimated costs:
| | | | | | | | | | | | | | | Amounts | |
| | | | | | | | | | | | | | | Remaining | |
| | | Building/ | | | | | | | | | Amounts | | | to be Paid | |
| | | Addition | | | | | | | | | Paid as of | | | as of | |
| | | Square | | | Estimated | | Executed | | | December | | | December | |
| Construction Project | | Footage | | | Costs | | Agreements | | | 31, 2008 | | | 31, 2008 | |
| 170 Edward Jones Blvd. & | | | | | | | | | | | | | | | | | |
| related garage* | | | 205,000 | | | $ | 83,026 | | | $ | 82,244 | | | $ | 76,229 | | | $ | 6,797 | |
| | | | | | | | | | | | | | | | | | | | | |
| 130 Edward Jones Blvd. | | | 370,000 | | | | 133,397 | | | | 106,957 | | | | 54,108 | | | | 79,289 | |
| | | | | | | | | | | | | | | | | | | | | |
| 12555 Manchester addition | | | | | | | | | | | | | | | | | | | | |
| and related garage | | | 225,000 | | | | 138,815 | | | | 119,920 | | | | 43,192 | | | | 95,623 | |
| | | | | | | | | | | | | | | | | | | | | |
| Tempe Campus garage | | | - | | | | 19,960 | | | | 19,342 | | | | 11,112 | | | | 8,848 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | | | | | $ | 375,198 | | | $ | 328,463 | | | $ | 184,641 | | | $ | 190,557 | |
| | | | | | | | | | | | | | | | | | | | | |
| *This building and garage were completed and placed into service in November 2008 (see Note 6). | | | | | |
The amount remaining of $190,577 needed to be $279.7 million, with estimated completion dates during 2009.
As of February 29, 2008, the Partnership has executed $82.9 million in general
and subcontractor commitments related tocomplete the above mentioned construction projects.
projects will be financed through either the remaining balance of $47,000 as of March 27, 2009 on the revolving unsecured line of credit, through the Partnership's existing working capital or by obtaining additional financing. There can be no assurance that such financing will be available at attractive terms, or at all, in the future.
NOTE 16 - CONTINGENCIES
In the normal course of business, the Partnership has been named from time to
time, as a defendant in various legal actions, including arbitrations, class actions and other litigation. Certain of these legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. The Partnership also is involved, from time to time, in investigations and proceedings by governmental and self-regulatory agencies, certain of which may result in adverse judgments, fines or penalties. In recent years, the number of legal actions and investigations has
increased with a focus on mutual fund issues among many firms in the financial
services industry, including the Partnership.
In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, or actions which are in very preliminary stages, the Partnership cannot predict with certainty the eventual loss or range of loss related to such matters. The Partnership has determined that it is likely that ultimate resolution in favor of the plaintiffs will result in losses to the Partnership on some of these matters and as a result, has established appropriate accruals for potential litigation losses. The Partnership believes, basedBased on current knowledge and after consultation with counsel, the Partnership believes that the outcome of these actions will not have a material adverse effect on the consolidated financial condition of the Partnership, although the outcome could be material to the Partnership'sPartnership’s future operating results for a particular period or periods.
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
Also, in the normal course of business, the Partnership enters into contracts which contain indemnification provisions,
including, but not limited to,such as purchase contracts, service agreements, escrow agreements, sales of assets, outsourcing agreements and leasing arrangements. Under the provisions of these contracts, the Partnership may indemnify counterparties to the contracts for certain aspects of the
Partnership'sPartnership’s past conduct if other parties fail to perform, or if certain events occur. These indemnification provisions will vary based upon the contract. The Partnership may in turn obtain indemnifications from other parties in certain contracts. These indemnification provisions are not expected to have a material impact on the
Partnership'sPartnership’s results of operations or financial condition.
56
PART II
Item 8. Financial Statements and Supplementary Data, continued
NOTE 17 - RELATED PARTIES
Edward Jones owns a 49.5% limited partnership interest in the investment advisor to the Edward Jones Money Market Fund. The Partnership does not have management responsibility with regard to the advisor. Approximately
2.7%3.3%,
2.3%2.7% and
2.0%2.3% of the Partnership's revenues were derived from the advisor and the fund during
2008, 2007
and 2006,
and 2005, respectively.
NOTE 18 - QUARTERLY INFORMATION
(Unaudited)
Quarters Ended
--------------
2006 March 31, June 30, September 29, December 31,
--------- -------- ------------- ------------
Total revenue $ 880,305 $ 877,321 $ 844,249 $ 915,880
Income before allocations to
partners 95,564 98,075 96,827 100,200
Income before allocations to
partners per weighted average
$1,000 equivalent limited
partnership unit outstanding $ 39.31 $ 40.77 $ 40.24 $ 41.63
2007 March 30, June 29, September 28, December 31,
- ---- --------- -------- ------------- ------------
Total revenue $ 992,605 $ 1,063,887 $ 1,051,977 $ 1,038,398
Income before allocations to
partners 114,154 159,460 128,149 106,456
Income before allocations to
partners per weighted average
$1,000 equivalent limited
partnership unit outstanding $ 37.27 $ 52.06 $ 41.84 $ 34.75
57
PART II
| Item 8. | Financial Statements and Supplementary Data, continued |
NOTE 18 - QUARTERLY INFORMATION
(Unaudited)
| | | 2007 | |
| | | Quarters Ended | |
| | | March 30 | | | June 29 | | | September 28 | | | December 31 | |
| | | | | | | | | | | | | |
| Total revenue | | $ | 992,605 | | | $ | 1,063,887 | | | $ | 1,051,977 | | | $ | 1,038,398 | |
| Income before allocations | | | | | | | | | | | | | | | | |
| to partners | | | 114,154 | | | | 159,460 | | | | 128,149 | | | | 106,456 | |
| Income before allocations to | | | | | | | | | | | | | | | | |
| partners per weighted | | | | | | | | | | | | | | | | |
| average $1,000 equivalent | | | | | | | | | | | | | | | | |
| limited partnership unit | | | | | | | | | | | | | | | | |
| outstanding | | $ | 37.27 | | | $ | 52.06 | | | $ | 41.84 | | | $ | 34.75 | |
| | | | | | | | | | | | | | | | | |
| | | 2008 | |
| | | Quarters Ended | |
| | | March 28 | | | June 27 | | | September 26 | | | December 31 | |
| | | | | | | | | | | | | |
| Total revenue | | $ | 1,026,720 | | | $ | 1,032,638 | | | $ | 947,980 | | | $ | 851,697 | |
| Income before allocations | | | | | | | | | | | | | | | | |
| to partners | | | 103,354 | | | | 98,511 | | | | 72,824 | | | | 37,120 | |
| Income before allocations to | | | | | | | | | | | | | | | | |
| partners per weighted | | | | | | | | | | | | | | | | |
| average $1,000 equivalent | | | | | | | | | | | | | | | | |
| limited partnership unit | | | | | | | | | | | | | | | | |
| outstanding | | $ | 28.58 | | | $ | 27.23 | | | $ | 20.14 | | | $ | 10.26 | |
| | | | | | | | | | | | | | | | | |
In accordance with SFAS No. 150, the Partnership presents net income of $0 on its consolidated statement of income. See Note 1 to the Consolidated Financial Statements for further discussion.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Evaluation of Disclosure Controls and Procedures. As required by Rule 13a-1513a-15e under the Securities Exchange Act of 1934 (the "Exchange Act"), as of the end of the period covered by this Annual Report on Form 10-K, the Partnership'sPartnership’s certifying officers, the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation with the participation of its management of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we were required to apply our judgment in evaluating and implementing possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the date of completion of the evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. We will continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
Management's report on internal control over financial reporting and the report of independent registered public accounting firm are set forth in Part II, Item 8, of this annual report on Form 10-K.
Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered
by this Annual Report on Form 10-Kquarter ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The Jones Financial Companies, L.L.L.P., organized as a partnership, does not have individuals associated with it designated as officers or directors. As of February 29, 2008,27, 2009, the Partnership was composed of 326337 general partners, 11,22010,852 limited partners and 187206 subordinated limited partners. Under the terms of the Partnership Agreement, the Managing Partner in said capacity has primary responsibility for administering the Partnership'sPartnership’s business, determining its policies, controlling the management and conduct of the Partnership'sPartnership’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. The Partnership does not have a formal code of ethics for executives, as it relies on the core values and beliefs of the Partnership as well as the Partnership Agreement. Subject to the foregoing, the Partnership is managed by its 326337 general partners.
Douglas E. Hill voluntarily retired as the Managing General Partner of the
Registrant on December 31, 2005. Mr. Hill remains a partner of the
Partnership. Effective January 1, 2006, James D. Weddle assumed the role of
Managing Partner. He has been a general partner for 23 years.
The Executive Committee of the Partnership, throughout 2007,2008, was composed of James D. Weddle, Brett A. Campbell, Norman Eaker, Tim Kirley, Steven Novik, Gary
D. Reamey and James A. Tricarico. The purpose of the Executive Committee is to provide counsel and advice to the Managing Partner in discharging his functions. Furthermore, in the event the position of Managing Partner is vacant, the Executive Committee shall succeed to all of the powers and duties of the Managing Partner.
None of the general partners are appointed for any specific term nor are there any special arrangements or understandings pursuant to their appointment other than as contained in the Partnership Agreement.
Following
The following table is a listing of the names of the Executive Committee, ages,
year of becoming an Executive Committee member, year of becoming a general partner and area of responsibility for each as of February
29, 2008:
Name Age Partner Area of responsibility
- -------------------------------------------------------------------------------------------------------------------
James D. Weddle 54 1984 Managing Partner
Brett Campbell 48 1993 Products, Services and Marketing
Norman Eaker 51 1984 Operations, Service, Information
Systems & Human Resources
Tim Kirley 53 1994 United Kingdom Operations
Steven Novik 58 1983 Finance
Gary D. Reamey 52 1984 Canadian Operations
James A. Tricarico 55 2006 Legal and Compliance
- -------------------------------------------------------------------------------------------------------------------
27, 2009. Effective January 1, 2009, Steven Novik retired as a General Partner and member of the Partnership's Executive Committee.
| | | Executive | | Area of |
| Name | Age | Committee | Partner | Responsibility |
| James D. Weddle | 55 | 2005 | 1984 | Managing Partner |
| Brett A. Campbell | 49 | 2006 | 1993 | Client Solutions |
| Norman Eaker | 52 | 2005 | 1984 | Firm Administration |
| Tim Kirley | 54 | 2006 | 1994 | United Kingdom Operations |
| Gary Reamey | 53 | 2006 | 1984 | Canadian Operations |
| Dan Timm | 50 | 2009 | 1998 | Branch Development |
| James A. Tricarico | 56 | 2007 | 2006 | Legal and Compliance |
James D. Weddle is a member of the Board of Directors of the Securities Industry & Financial Markets Association.
Brett A. Campbell is a member of the Executive Committee of the Securities Industry & Financial Markets Association Private Client Services Committee.
Norman Eaker is a member of the Board of Directors of the Depository Trust & Clearing Corporation and the Operations Chairman of the Securities Industry and& Financial Markets Association.
Gary Reamey is a director for the Investment Industry Association of Canada.
59
James A. Tricarico is a member of the Executive Committee of the Compliance and Legal Division of the Securities Industry & Financial Markets Association and the Securities Industry & Financial Markets Association General Counsel Committee.
COMPENSATION DISCUSSION AND ANALYSIS
COMPENSATION COMPONENTS
Compensation Components
The components of the Partnership's executive compensation program consist of base salary, deferred compensation, and the net income allocated to general partners, which represents the most significant component. Ninety-two percent of the Partnership's net income allocable to general partners is allocated based on each individual general partner's respective capital ownership interest. Each general partner's ownership interest is set at the discretion of the firm's Managing Partner, with input from the Executive Committee. The remaining eight percent is allocated among the general partners based on the discretion of the Managing Partner, with input from the Executive Committee and other division leaders. As a partnership, the executive compensation program does not have any bonus, stock awards, option awards, non-equity incentive plan compensation, or any other elements besides those disclosed below.
SALARY
Salary Each headquarters' general partner receives a salary generally ranging from $115,000 - $250,000 annually. Financial advisor general partners do not receive a specified salary; rather, they receive the net sales commissions earned by them (none of the five individuals listed below earned any such commissions). Additionally, financial advisor general partners 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 financial advisor employees (none of the five individuals listed below earned any such bonuses).
DEFERRED COMPENSATION
Deferred Compensation Each general partner is a participant in the Partnership's profit sharing plan which also 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.
NET INCOME ALLOCATED TO GENERAL PARTNERS
Net Income Allocated to General Partners Each general partner is entitled to participate in the annual net income of the Partnership based upon the respective percentage interest in the Partnership of each partner. Interests in the Partnership held by each general partner ranged from .03%0.03% to 2.90% in 2008, 0.03% to 3.0% in 2007 .03%and 0.03% to 3.05% in 2006 and 0.03% to 3.0% in 2005.2006. At the discretion of the Managing Partner, the Partnership Agreement provides that, generally, the first eight percent of net income allocable to general partners be distributed on the basis of individual merit or otherwise as determined by the Managing Partner. Thereafter, the remaining net income allocable to general partners is distributed based upon each individual's percentage interest in the Partnership. Net income allocated to general partners is the amount remaining after payment of guaranteed interest and allocation of net income to limited partners. Subordinated limited partners and general partners are allocated any remaining net income or net loss based on formulas in the Partnership Agreement.
In addition to base salary, under the Partnership Agreement, the Managing Partner has the discretion to allocate an additional $1.5 million (in the aggregate) in compensation to general partners. In 2008, 2007 and 2006, $0.2 million, $0.2 million and $0.3 million, respectively was allocated by the Managing Partner. NoNone of these amounts were paid to the individuals listed below. No additional amounts were
allocated to any general partner in 2005.
PART III
Item 11. Executive Compensation, continued
The Partnership is not required to have a compensation committee.
60
PART III
Item 11. Executive Compensation, continued
The following table identifies the compensation of the firm's Managing Partner ("CEO"), the Principal Financial Officer ("CFO"), and the three other most highly compensated executive officers, based on total compensation in
20072008 (including respective shares of profit participation).
Summary Compensation Table
Net Income
Deferred Allocated
Compen- to General
Year Salaries sation Partners Total
- -------------------------------------------------------------------------------------------------------------------
James D. Weddle 2007 $250,000 $13,140 $10,521,751 $10,784,891
CEO 2006 250,000 11,682 9,108,322 9,370,004
2005 175,000 9,954 6,578,395 6,763,349
Steven Novik 2007 175,000 13,140 7,891,313 8,079,453
CFO 2006 175,000 11,682 7,167,204 7,353,886
2005 175,000 9,954 6,072,365 6,257,319
Gary D. Reamey 2007 175,000 13,140 9,469,575 9,657,715
General Partner- 2006 175,000 11,682 8,361,738 8,548,420
Canadian Operations 2005 150,000 9,954 7,084,426 7,244,380
Norman Eaker 2007 175,000 13,140 8,417,401 8,605,541
General Partner- 2006 175,000 11,682 7,167,204 7,353,886
Operations, Service, 2005 175,000 9,954 6,072,365 6,257,319
Information Systems &
Human Resources
Brett Campbell 2007 175,000 13,140 7,715,951 7,904,091
General Partner- 2006 175,000 11,682 6,181,714 6,368,396
Products, Services, & 2005 150,000 9,954 5,480,384 5,640,338
Marketing
- -------------------------------------------------------------------------------------------------------------------
**The Partnership notes that Douglas E. Hill retired as the Managing Partner
on December 31, 2005. Although Mr. Hill remains a general partner, he was not
an executive officer at any time during fiscal years 2007 and 2006.
Accordingly, the Partnership is not required to report his compensation as a
named executive officer of the Partnership for fiscal years 2007 and 2006.
However, if Mr. Hill had been an executive officer during that period, he
would have been one of the five most highly compensated executive officers and
would have been included in the table.
61
| Summary Compensation Table |
| | | | | | | | | | | | | | |
| | | | | | | | | | Net Income | | | | |
| | | | | | | Deferred | | | Allocated | | | | |
| | | | | | | Compen- | | | to General | | | | |
| | Year | | Salaries | | | sation | | | Partners | | | Total | |
| | | | | | | | | | | | | | |
| James D. Weddle | 2008 | | $ | 250,000 | | | $ | 7,337 | | | $ | 6,401,001 | | | $ | 6,658,338 | |
| CEO | 2007 | | | 250,000 | | | | 13,140 | | | | 10,521,751 | | | | 10,784,891 | |
| | 2006 | | | 250,000 | | | | 11,682 | | | | 9,108,322 | | | | 9,370,004 | |
| | | | | | | | | | | | | | | | | | |
| Steven Novik | 2008 | | $ | 175,000 | | | $ | 7,337 | | | $ | 4,392,411 | | | $ | 4,574,748 | |
| CFO* | 2007 | | | 175,000 | | | | 13,140 | | | | 7,891,313 | | | | 8,079,453 | |
| | 2006 | | | 175,000 | | | | 11,682 | | | | 7,167,204 | | | | 7,353,886 | |
| | | | | | | | | | | | | | | | | | |
| Gary D. Reamey | 2008 | | $ | 175,000 | | | $ | 7,337 | | | $ | 5,297,380 | | | $ | 5,479,717 | |
| General Partner - | 2007 | | | 175,000 | | | | 13,140 | | | | 9,469,575 | | | | 9,657,715 | |
| Canadian Operations | 2006 | | | 175,000 | | | | 11,682 | | | | 8,361,738 | | | | 8,548,420 | |
| | | | | | | | | | | | | | | | | | |
| Norman Eaker | 2008 | | $ | 175,000 | | | $ | 7,337 | | | $ | 5,187,018 | | | $ | 5,369,355 | |
| General Partner - | 2007 | | | 175,000 | | | | 13,140 | | | | 8,417,401 | | | | 8,605,541 | |
| Firm Administration | 2006 | | | 175,000 | | | | 11,682 | | | | 7,167,204 | | | | 7,353,886 | |
| | | | | | | | | | | | | | | | | | |
| Brett Campbell | 2008 | | $ | 175,000 | | | $ | 7,337 | | | $ | 5,076,656 | | | $ | 5,258,993 | |
| General Partner - | 2007 | | | 175,000 | | | | 13,140 | | | | 7,715,951 | | | | 7,904,091 | |
| Client Solutions | 2006 | | | 175,000 | | | | 11,682 | | | | 6,181,714 | | | | 6,368,396 | |
| | | | | | | | | | | | | | | | | | |
| *Effective January 1, 2009, Kevin Bastien assumed the role of Chief Financial Officer. | |
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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), 277287 of the general partners also own limited partnership interests and 4643 of the general partners also own subordinated limited partnership interests, as noted in the table below.
As of February
29, 2008:
Name of Amount of
Beneficial Beneficial % of
Title of Class Owner Ownership Class
- -------------------------------------------------------------------------------------------------------------------
Limited Partnership All General
Interests Partners as
a Group $45,672,200 9%
Subordinated All General
Limited Partnership Partners as
Interests a Group $56,659,857 32%
- -------------------------------------------------------------------------------------------------------------------
62
27, 2009:| | | Name of | | Amount of | | |
| | | Beneficial | | Beneficial | | % of |
| Title of Class | | Owner | | Owner | | Class |
| | | | | | | |
| | | All General Partners | | | | |
| Limited Partnership Interests | | as a Group | | $45,665,000 | | 10% |
| | | | | | | |
| Subordinated Limited | | All General Partners | | | | |
| Partnership Interests | | as a Group | | $59,961,457 | | 30% |
In the ordinary course of its business the Partnership has extended credit to certain of its partners and employees in connection with their purchase of securities. Such extensions of credit have been made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with non-affiliated persons, and did not involve more than the normal risk of collectability or present other unfavorable features. The Partnership also, from time to time and in the ordinary course of business, enters into transactions involving the purchase or sale of securities from or to partners or employees and members of their immediate families, as principal. Such purchases and sales of securities on a principal basis are effected on substantially the same terms as similar transactions with unaffiliated third parties, with some discounts to commissions and fees provided.
The following table presents fees paid by the Partnership to its auditors, PricewaterhouseCoopers LLP.
| (Dollars in thousands) | | | | | | |
| | | | | | | |
| | | 2008 | | | 2007 | |
| Fees paid by the Partnership: | | | | | | |
| | | | | | | |
| Audit fees | | $ | 2,455 | | | $ | 2,403 | |
| Audit-related fees (1) | | | 744 | | | | 695 | |
| Tax fees (2) | | | 942 | | | | 1,027 | |
| All other (3) | | | - | | | | 175 | |
| | | | | | | | | |
| Total fees | | $ | 4,141 | | | $ | 4,300 | |
(Dollars in thousands) 2007 2006
------------------ -----------------
Fees paid by the Partnership:
Audit fees (1) $ 2,403 $ 1,253
Audit-related fees (2) 695 1,908
Tax fees (3) 1,027 507
All other (4) 175 180
------------------ -----------------
Total fees $ 4,300 $ 3,848
================== =================
(1) Audit fees in 2007 include fees related to the services performed for
the Sarbanes-Oxley Act, which are included in the audit-related fees
for the year 2006.
(2) | Audit-related fees consist primarily of fees for internal control reviews, attestation/agreed-upon procedures, employee benefit plan audits, and consultations concerning financial accounting and reporting standards.
(3) |
| (2) | Tax fees consist of fees for tax compliance, consultation on tax matters, and other tax planning and advice.
(4) |
| (3) | All other fees consist primarily of information technology advisory services. |
The audit committee pre-approved all audit and non-audit related services in fiscal year
20072008 and
2006.2007. No services were provided under the de minimis fee exception to the audit committee pre-approval requirements.
63
INDEX
| | | Page No.
INDEX
| |
| | | | |
| (a) | (1) | The following financial statements are included in Part II, Item 8: | | |
| | | | |
| | Management's Report on Internal Control over Financial Reporting .........................37
| 44 | |
| | | | |
| | Report of Independent Registered Public Accounting Firm...................................38
Firm | 45 | |
| | | | |
| | Consolidated Statements of Financial Condition as of December 31, 20072008 and 2006................................................................40
2007 | 47 | |
| | | | |
| | Consolidated Statements of Income for the years ended December 31, 2008, 2007 2006 and 2005..........................................................42
2006 | 49 | |
| | | | |
| | Consolidated Statements of Changes in Partnership Capital Subject to Mandatory Redemption for the years ended December 31, 2008, 2007 2006 and 2005.......................................................................43
2006 | 50 | |
| | | | |
| | Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 2006 and 2005..........................................................45
2006 | 51 | |
| | | | |
| | Notes to Consolidated Financial Statements ...............................................46
| 52 | |
| | | | |
| (2) | The following financial statements are included in Schedule I: | | |
| | | | |
| | Parent Company Only Condensed Statements of Financial Condition as of December 31, 20072008 and 2006.............................................................71
2007 | 83 | |
| | | | |
| | Parent Company Only Condensed Statements of Income for the years ended December 31, 2008, 2007 2006 and 2005....................................................72
2006 | 84 | |
| | | | |
| | Parent Company Only Condensed Statements of Cash Flows for the years ended December 31, 2008, 2007 2006 and 2005..............................................73
2006 | 85 | |
| | | | |
| | Schedules are omitted because they are not required, inapplicable, or the information is otherwise shown in the consolidated financial statements Consolidated Financial Statements or notes thereto. | | |
| | | | |
| (b) | | Exhibits | | |
| | | | |
| | Reference is made to the Exhibit Index hereinafter contained. | | |
64
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
(Registrant) THE JONES FINANCIAL COMPANIES, L.L.L.P.
---------------------------------------------------
By (Signature and Title) /s/ James D. Weddle
---------------------------------------------------
James D. Weddle, Chief Executive Officer
Date March 28, 2008
---------------------------------------------------
By (Signature and Title) /s/ Steven Novik
---------------------------------------------------
Steven Novik, Chief Financial Officer
Date March 28, 2008
---------------------------------------------------
| (Registrant) | | THE JONES FINANCIAL COMPANIES, L.L.L.P. |
| | |
| | |
| By (Signature and Title) | | /s/ James D. Weddle |
| | James D. Weddle, Chief Executive Officer |
| | |
| | |
| Date | | March 27, 2009 |
| | |
| | |
| | |
| By (Signature and Title) | | /s/ Kevin Bastien |
| | Kevin Bastien, Chief Financial Officer (Principal Accounting Officer) |
| | |
| | |
| | |
| Date | | March 27, 2009 |
| | |
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.
65
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2008
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2007
Exhibit Number | | Description
3.1* |
| | |
| 3.1 | * | Sixteenth Amended and Restated Agreement of Registered Limited Liability Limited Partnership of The Jones Financial Companies, L.L.L.P., dated as of May 12, 2006, incorporated herein by reference to Exhibit 3.1 to the Company'sCompany’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.
3.2* |
| | |
| 3.2 | * | Sixteenth Restated Certificate of Limited Partnership of the Jones Financial Companies, L.L.L.P., dated as of July 11, 2007, as amended, incorporated herein by reference to Exhibit 3.2 to the Company'sCompany’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2007.
3.3* |
| | |
| 3.3 | * | Form of Limited Partnership Agreement of Edward D. Jones & Co., L.P., incorporated by reference to Exhibit 2 to the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 1993.
10.1* |
| | |
| 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* |
| | |
| 10.2 | * | Agreements of Lease between EDJ Leasing Company and Edward D. Jones & Co., L.P., dated August 1, 1991, incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended September 27, 1991.
10.3* |
| | |
| 10.3 | * | Edward D. Jones & Co., L.P. Note Purchase Agreement dated as of May 8, 1992, incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 26, 1992.
10.4* |
| | |
| 10.4 | * | Purchase and Sale Agreement by and between EDJ Leasing Co., L.P. and the Resolution Trust Corporation incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.
10.5* |
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, continued
| 10.5 | * | Master Lease Agreement between EDJ Leasing Company and Edward D. Jones & Co., L.P., dated March 9, 1993, and First Amendment to Lease dated March 9, 1994, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1994.
10.6* Mortgage Note and Amendment to Deed of Trust between EDJ Leasing Co.,
L.P. and Nationwide Insurance Company dated
66
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, CONTINUED
March 9, 1994, incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 25, 1994.
10.7* |
| | |
| 10.6 | * | 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.
10.8* Note Purchase Agreement by Edward D. Jones & Co., L.P., for
$92,000,000 aggregate principal amount of 7.95% subordinated capital
notes due April 15, 2006, incorporated herein by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 24, 1994.
10.9* 1994 |
| | |
| 10.7 | * | Master Lease Agreement and Addendum by and between Edward D. Jones & Co., L.P. and General Electric Capital Corporated dated April 21, 1994, incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 24, 1994.
10.10* 1994 |
| | |
| 10.8 | * | Agreement and Plan of Acquisition between The Jones Financial Companies and Boone National Savings and Loan Association, F.A., incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
10.11* Mortgage Note; South Second Deed of Trust and Security Agreement
between EDJ Leasing Co., L.P. and Nationwide Life Insurance Company
dated August 31, 1995, incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
29, 1995.
10.12* Mortgage Note; North Second Deed of Trust and Security Agreement
between EDJ Leasing Co., L.P. and Nationwide Life Insurance Company
dated August 31, 1995, incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
29, 1995.
10.13* Note Purchase Agreement by Edward D. Jones & Co., L.P. for
$94,500,000 aggregate principal amount of 8.18% subordinated capital
notes due September 1, 2008, incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
27, 1996.
10.14* |
| | |
| 10.9 | * | Note Purchase Agreement by Edward D. Jones & Co., L.P. for $75,000,000 aggregate principal amount of subordinated capital notes with rates ranging from 7.51% to 7.79% due September 67
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, CONTINUED
15, 2011, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 24, 1999.
10.15* |
| | |
| 10.10 | * | Lease between Eckelkamp Office Center South, L.L.C., a Missouri Limited Liability Company, as Landlord and Edward D. Jones & Co., L.P., a Missouri Limited Partnership, as Tenant, dated February 3, 2000, incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
10.16* |
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, continued
| 10.11 | * | Master Agreement dated as of November 30, 2000 among Edward D. Jones & Co., L.P., as Lessee, Construction Agent and Guarantor, Atlantic Financial Group, Ltd., (registered to do business in Arizona as AFG Equity, Limited Partnership) as Lessor, Suntrust Bank and Certain Financial Institutions Parties Hereto, as Lenders, and Suntrust Bank as agent, and joined in by The Jones Financial Companies, L.L.L.P., incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
10.17* |
| | |
| 10.12 | * | Master Lease Agreement dated as of November 30, 2000 between Atlantic Financial Group, Ltd. (registered to do business in Arizona as AFG Equity, Limited Partnership), as Lessor, and Edward D. Jones & Co., L.P., as Lessee, incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
10.18* |
| | |
| 10.13 | * | Master Lease Agreement between Edward D. Jones & Co., L.P. and Fleet Capital Corporation dated as of August 22, 2001, incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
10.19* Credit Agreement dated as of August 27, 2001 between EDJ Leasing Co.,
L.P. and Southtrust Bank, incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001.
10.20* Master Lease Agreement between EDJ Leasing Co., L.P. and Edward D.
Jones & Co., L.P. dated August 27, 2001, incorporated herein by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.
10.21* |
| | |
| 10.14 | * | Master Agreement dated as of September 18, 2001 among Edward D. Jones & Co., L.P., as Lessee, Construction Agent and Guarantor, Atlantic Financial Group, Ltd., (registered to do business in Missouri as Atlantic Financial Group, L.P.) as Lessor, Suntrust Bank and Certain Financial Institutions Parties Hereto, as Lenders, and Suntrust Bank, as Agent and joined in by The Jones Financial Companies, L.L.L.P, incorporated herein by 68
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, CONTINUED
reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
10.22* |
| | |
| 10.15 | * | Master Lease Agreement dated as of September 18, 2001 between Atlantic Financial Group, Ltd. (registered to do business in Missouri as Atlantic Financial Group, L.P.), as Lessor, and Edward D. Jones & Co., L.P., as Lessee, incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
10.23* |
| | |
| 10.16 | * | Note Purchase Agreement by Edward D. Jones & Co., L.P., for $250,000,000 aggregate principal amount of 7.33% subordinated capital notes due June 12, 2014, incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 28, 2002.
10.24* |
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, continued
| 10.17 | * | Purchase and Assumption Agreement dated April 4, 2006, among Boone National Savings and Loan Association, F.A., The Jones Financial Companies, L.L.L.P. and Commerce Bank, N.A., incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K dated April 7, 2006.
10.25* |
| | |
| 10.18 | * | Stipulation of Settlement of Class Action , dated December 11, 2006 and Amendment to Stipulation of Settlement of Class Action dated July 1, 2007, incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 28, 2007.
10.26* |
| | |
| 10.19 | * | Joint Stipulation of Class Action Settlement and Release dated September 28, 2007, incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K dated October 4, 2007.
10.27* |
| | |
| 10.20 | * | Amended Joint Stipulation of Class Action Settlement and Release dated October 4, 2007, incorporate herein by reference to Exhibit 10.2 to the Company's Form 8-K dated October 4, 2007.
21* |
| | |
| 10.21 | ** | Lease Agreement between EDJ Leasing Co., L.P. and Edward D. Jones & Co., L.P., dated April 4, 2008, and First Amendment to Lease dated January 1, 2009. |
| | |
| 10.22 | ** | Lease Agreement between EDJ Leasing Co., L.P. and Edward D. Jones & Co., L.P., dated November 1, 2008. |
| | |
| 10.23 | ** | Amendment to Lease Agreement between Scottrade, Inc. and Edward D. Jones & Co., L.P., dated March 20, 2009. |
| | |
| 10.24 | ** | Third Amendment to Master Lease Agreement between EDJ Leasing Company and Edward D. Jones & Co., L.P., dated April 9, 2008. |
| | |
| 10.25 | ** | Ninth Amendment to Agreements of Lease between EDJ Leasing Company and Edward D. Jones & Co., L.P., dated January 1, 2009. |
| | |
| 21 | ** | Subsidiaries of the Registrant
23.1*Registrant. |
| | |
| 23.1 | ** | Consent of Independent Registered Public Accounting Firm, filed herewith.
24* |
| | |
| 24 | * | Delegation of Power of Attorney to Managing Partner contained within Exhibit 3.1
31.1* |
| | |
| 31.1 | ** | Certification of Chief Executive Officer pursuant to 18 U.S.C. section 1350,Rule 13a-14(a)/15(d)-14(a) of the Securities Act of 1934, as amended, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2* |
| | |
| 31.2 | ** | Certification of Chief Financial Officer pursuant to 18 U.S.C. section 1350,Rule 13a-14(a)/15(d)-14(a) of the Securities Act of 1934, as amended, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
69
32.1* |
| | |
| 32.1 | ** | Certification of Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2* |
| | |
| 32.2 | ** | Certification of Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
99.1* |
| | |
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, continued
| 99.1 | * | Order Instituting Administrative and Cease and Desist proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Sections 15(b) and 21C of the Securities Exchange Act of 1934, dated December 22, 2004, incorporated herein by reference to Exhibit 99.1 to the Company'sCompany’s Form 8-K dated December 27, 2004.
99.2* |
| | |
| 99.2 | * | NASD Letter of Acceptance, Waiver and Consent, dated December 22, 2004, incorporated herein by reference to Exhibit 99.2 to the Company'sCompany’s Form 8-K dated December 27, 2004.
99.3* |
| | |
| 99.3 | * | NYSE Stipulation of Facts and Consent to Penalty, dated December 22, 2004, incorporated herein by reference to Exhibit 99.3 to the Company'sCompany’s Form 8-K dated December 27, 2004.
99.4* |
| | |
| 99.4 | * | Deferred Consideration Agreement, dated December 22, 2004, incorporated herein by reference to Exhibit 99.4 to the Company'sCompany’s Form 8-K dated December 27, 2004.
99.5* |
| | |
| 99.5 | * | Class Action Settlement Agreement, dated August 29, 2006, incorporated herein by reference to Exhibit 99.1 to the Company's Form 8-K dated August 31, 2006.
* Incorporated by reference to previously filed exhibits.
** Filed herewith.
|
70
* Incorporated by reference to previously filed exhibits.
** Filed herewith.
Schedule I
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31, December 31,
(Dollars in thousands) 2007 2006
- ------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 8,884 $ 1,607
Securities purchased under agreements to resell 91,000 -
Investment in subsidiaries 1,351,545 1,000,755
Others assets 5,876 5,244
---------------------------- ----------------------------
TOTAL ASSETS $ 1,457,305 $ 1,007,606
============================ ============================
LIABILITIES
Payable to limited partners, accounts payable
and accrued expenses $ 6,525 $ 4,227
Partnership capital subject to mandatory
redemption 1,450,780 1,003,379
---------------------------- ----------------------------
TOTAL LIABILITIES $ 1,457,305 $ 1,007,606
============================ ============================
These financial statements should be read in conjunction with the notes to the
consolidated financial statements of The Jones Financial Companies, L.L.L.P.
71
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(Parent Company Only)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
| | | December 31, | | | December 31, | |
| (Dollars in thousands) | | 2008 | | | 2007 | |
| | | | | | | |
| ASSETS: | | | | | | |
| | | | | | | |
| Cash and cash equivalents | | $ | 4,343 | | | $ | 8,884 | |
| | | | | | | | | |
| Securities purchased under agreements to resell | | | - | | | | 91,000 | |
| | | | | | | | | |
| Investment in subsidiaries | | | 1,464,235 | | | | 1,351,545 | |
| | | | | | | | | |
| Other assets | | | 6,930 | | | | 5,876 | |
| | | | | | | | | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 1,475,508 | | | $ | 1,457,305 | |
| | | | | | | | | |
| | | | | | | | | |
| LIABILITIES | | | | | | | | |
| | | | | | | | | |
| Payable to limited partners, accounts payable | | | | | | | | |
| and accrued expenses | | $ | 193 | | | $ | 6,525 | |
| | | | | | | | | |
| Partnership capital subject to mandatory | | | | | | | | |
| redemption | | | 1,475,315 | | | | 1,450,780 | |
| | | | | | | | | |
| TOTAL LIABILITIES | | $ | 1,475,508 | | | $ | 1,457,305 | |
These financial statements should be read in conjunction with the notes to the
Consolidated Financial Statements of The Jones Financial Companies, L.L.L.P.
Schedule I
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
Years Ended
---------------------------------------------------------------
(Dollars in thousands) December 31, December 31, December 31,
2007 2006 2005
- -------------------------------------------------------------------------------------------------------------------
NET REVENUE
Subsidiary earnings $ 499,416 $ 396,554 $ 330,098
Management fee income 61,628 36,007 33,510
Other 9,030 (359) 996
------------------- ------------------- -------------------
Total revenue 570,074 432,202 364,604
Interest expense 37,364 15,753 16,042
------------------- ------------------- -------------------
Net revenue 532,710 416,449 348,562
------------------- ------------------- -------------------
OPERATING EXPENSES
Compensation and benefits 24,566 20,455 17,645
Payroll and other taxes (96) 85 672
Other operating expenses 21 5,243 260
------------------- ------------------- -------------------
Total operating expenses 24,491 25,783 18,577
------------------- ------------------- -------------------
INCOME BEFORE ALLOCATIONS
TO PARTNERS $ 508,219 $ 390,666 $ 329,985
Allocations to partners (508,219) (390,666) (329,985)
------------------- ------------------- -------------------
NET INCOME $ - $ - $ -
=================== =================== ===================
These financial statements should be read in conjunction with the notes to the consolidated financial
statements of The Jones Financial Companies, L.L.L.P.
72
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(Parent Company Only)
CONDENSED STATEMENTS OF INCOME
| | | | | | Years Ended | | | | |
| (Dollars in thousands) | | December 31, | | | December 31, | | | December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| NET REVENUE | | | | | | | | | |
| Subsidiary earnings | | $ | 311,206 | | | $ | 499,416 | | | $ | 396,554 | |
| Management fee income | | | 63,280 | | | | 61,628 | | | | 36,007 | |
| Other | | | 1,128 | | | | 9,030 | | | | (359 | ) |
| | | | | | | | | | | | | |
| Total revenue | | | 375,614 | | | | 570,074 | | | | 432,202 | |
| Interest expense | | | 36,665 | | | | 37,364 | | | | 15,753 | |
| | | | | | | | | | | | | |
| Net revenue | | | 338,949 | | | | 532,710 | | | | 416,449 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | | | | | |
| Compensation and benefits | | | 26,837 | | | | 24,566 | | | | 20,455 | |
| Payroll and other taxes | | | 249 | | | | (96 | ) | | | 85 | |
| Other operating expenses | | | 54 | | | | 21 | | | | 5,243 | |
| | | | | | | | | | | | | |
| Total operating expenses | | | 27,140 | | | | 24,491 | | | | 25,783 | |
| | | | | | | | | | | | | |
| INCOME BEFORE ALLOCATIONS | | | | | | | | | | | | |
| TO PARTNERS | | $ | 311,809 | | | $ | 508,219 | | | $ | 390,666 | |
| | | | | | | | | | | | | |
| Allocations to partners | | | (311,809 | ) | | | (508,219 | ) | | | (390,666 | ) |
| | | | | | | | | | | | | |
| NET INCOME | | $ | - | | | $ | - | | | $ | - | |
These financial statements should be read in conjunction with the notes to the
Consolidated Financial Statements of The Jones Financial Companies, L.L.L.P.
Schedule I
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended
------------------------------------------------
December 31, December 31, December 31,
(Dollars in thousands) 2007 2006 2005
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ - $ - $ -
Adjustments to reconcile net income to net cash
provided by operating activities -
Income before allocations to partners 508,219 390,666 329,985
Increase in securities purchased under agreements to resell (91,000) - -
Increase in investment in subsidiaries (350,790) (95,293) (107,753)
Decrease in other assets and liabilities, net 1,666 6,011 1,773
---------------- --------------- ---------------
Net cash provided by operating activities 68,095 301,384 224,005
---------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of partnership interests 324,009 38,487 24,207
Redemption of partnership interests (8,271) (27,772) (33,752)
Withdrawals and distributions from
partnership capital (376,556) (314,373) (212,310)
---------------- --------------- ---------------
Net cash used in financing activities (60,818) (303,658) (221,855)
---------------- --------------- ---------------
Net (decrease) increase in cash and
cash equivalents 7,277 (2,274) 2,150
CASH AND CASH EQUIVALENTS,
Beginning of year 1,607 3,881 1,731
---------------- --------------- ---------------
End of year $ 8,884 $ 1,607 $ 3,881
================ =============== ===============
These financial statements should be read in conjunction with the notes to the
consolidated financial statements of The Jones Financial Companies, L.L.L.P.
73
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(Parent Company Only)
CONDENSED STATEMENTS OF CASH FLOWS
| | | | | | Years Ended | | | | |
| | | December 31, | | | December 31, | | | December 31, | |
| (Dollars in thousands) | | 2008 | | | 2007 | | | 2006 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
| | | | | | | | | | |
| Net income | | $ | - | | | $ | - | | | $ | - | |
| Adjustments to reconcile net income to net | | | | | | | | | | | | |
| cash provided by operating activities - | | | | | | | | | | | | |
| Income before allocations to partners | | | 311,809 | | | | 508,219 | | | | 390,666 | |
| Decrease (increase) in securities | | | | | | | | | | | | |
| purchased under agreements to resell | | | 91,000 | | | | (91,000 | ) | | | - | |
| Increase in investment in subsidiaries | | | (112,690 | ) | | | (350,790 | ) | | | (95,293 | ) |
| (Increase) decrease in other assets | | | | | | | | | | | | |
| and liabilities, net | | | (7,386 | ) | | | 1,666 | | | | 6,011 | |
| Net cash provided by operating activities | | | 282,733 | | | | 68,095 | | | | 301,384 | |
| | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Issuance of partnership interests | | | 31,438 | | | | 324,009 | | | | 38,487 | |
| Redemption of partnership interests | | | (13,302 | ) | | | (8,271 | ) | | | (27,772 | ) |
| Withdrawals and distributions from | | | | | | | | | | | | |
| partnership capital | | | (305,410 | ) | | | (376,556 | ) | | | (314,373 | ) |
| | | | | | | | | | | | | |
| Net cash used in financing activities | | | (287,274 | ) | | | (60,818 | ) | | | (303,658 | ) |
| | | | | | | | | | | | | |
| Net (decrease) increase in cash and | | | | | | | | | | | | |
| cash equivalents | | | (4,541 | ) | | | 7,277 | | | | (2,274 | ) |
| | | | | | | | | | | | | |
| CASH AND CASH EQUIVALENTS, | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Beginning of year | | | 8,884 | | | | 1,607 | | | | 3,881 | |
| | | | | | | | | | | | | |
| End of year | | $ | 4,343 | | | $ | 8,884 | | | $ | 1,607 | |
These financial statements should be read in conjunction with the notes to the
Consolidated Financial Statements of The Jones Financial Companies, L.L.L.P.