United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005 Commission file number 0-16633
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THE JONES FINANCIAL COMPANIES, L.L.L.P.
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(Exact name of registrant as specified in its Partnership Agreement)
MISSOURI 43-1450818
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12555 Manchester Road
Des Peres, Missouri 63131
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (314) 515-2000
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Securities registered pursuant to Section 12(b) of the act:
Name of each exchange
Title of each class on which registered
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NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
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(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined by 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 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]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). YES [ ] NO [X]
As of March 24, 2006 there were no voting securities held by non-affiliates
of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE None
PART I
ITEM 1. BUSINESS
The Jones Financial Companies, L.L.L.P. 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. ("EDJ"), the
Partnership's principal subsidiary. EDJ was reorganized on August 28, 1987,
which date represents the organization date of The Jones Financial
Companies, L.L.L.P.
The Partnership's principal operating subsidiary, EDJ, is a registered
broker-dealer primarily serving individual investors. EDJ derives its
revenues from the sale of listed and unlisted securities and insurance
products, investment banking, principal transactions and as a distributor of
mutual fund shares. EDJ conducts business throughout the United States of
America, Canada and the United Kingdom with its customers, various brokers
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 National Association of Securities
Dealers, Inc. ("NASD").
As of February 24, 2006, the Partnership was composed of 305 general
partners, 4,636 limited partners and 160 subordinated limited partners.
ORGANIZATIONAL STRUCTURE
At December 31, 2005, 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. The Partnership also holds
all of the partnership equity of Edward D. Jones & Co., L.P., and EDJ
Leasing Co., L.P., each of which is a Missouri limited partnership. EDJ
Holding Company, Inc. and LHC, Inc. are the general partners of Edward D.
Jones & Co., L.P. and EDJ Leasing Co., L.P., respectively. In addition, the
Partnership owns 100% of the outstanding common stock of Conestoga
Securities, Inc., a Missouri corporation, and also owns, as a limited
partner, 49.5% of Passport Research Ltd., a Pennsylvania limited
partnership, which acts as an investment advisor to a money market mutual
fund and as a limited partner, 49.5% of Passport Research II Ltd., a
Pennsylvania limited partnership, which acts as an investment advisor to a
mutual fund. The Partnership owns 100% of the partnership equity of Edward
Jones, an Ontario, Canada limited partnership, and all of the common stock
of Edward D. Jones & Co. Canada Holding Co., Inc., an Ontario, Canada
corporation, its general partner. Through its Canadian entities, the
Partnership owns all of the partnership equity of Edward Jones Insurance
Agency, an Ontario, Canada limited partnership, all of the common stock of
Edward D. Jones & Co. Agency Holding Co., Inc., an Ontario, Canada
corporation, its general partner, and 100% of the common stock of Edward
Jones Insurance Agency (Quebec) Inc., a Canada corporation. The Partnership
also owns 100% of the equity of Edward Jones Limited, a U.K. private limited
company, which owns 100% of the equity of Edward Jones Nominees Limited. The
Partnership owns 100% of the equity of Boone National Savings and Loan
Association, F.A., (the "Association"), a federally chartered stock savings
and loan association. The Partnership also owns 100% of the equity of EJ
Mortgage L.L.C., a Missouri limited liability company. EJ Mortgage L.L.C.
owns 50% of Edward Jones Mortgage, a joint venture. The Partnership holds
all of the partnership equity in a Missouri limited partnership, EDJ
Ventures, Ltd. Conestoga Securities, Inc., is the general partner of EDJ
Ventures, Ltd.
The Partnership is the sole member of Edward Jones Insurance Agency Holding,
L.L.C., a Missouri limited liability company; California Agency Holding,
L.L.C., a California limited liability company and
3
PART I
Item 1. Business, continued
Edward Jones Insurance Agency of New Mexico, L.L.C., a New Mexico limited
liability company. Edward Jones Insurance Agency Holding, L.L.C. is the sole
member of Edward Jones Insurance Agency of Wyoming, L.L.C., a Wyoming
limited liability company. The Partnership and Edward Jones Insurance Agency
Holding, L.L.C. are members of Edward Jones Insurance Agency of
Massachusetts, L.L.C., a Massachusetts limited liability company. Edward
Jones Insurance Agency Holding, L.L.C. and California Agency Holding, L.L.C.
are members of Edward Jones Insurance Agency of California, L.L.C., a
California limited liability company. All of the insurance agencies engage
in general insurance brokerage activities.
The Partnership holds all of the partnership equity of Unison Investment
Trusts, L.P., d/b/a Unison Investment Trusts, Ltd., a Missouri limited
partnership, which has sponsored unit investment trusts. The general partner
of Unison Investment Trusts, L.P., Unison Capital Corp., Inc., a Missouri
corporation, is wholly owned by LHC. EDJ owns 50% of issued common stock of
S-J Capital Corp., a Missouri corporation. Conestoga owns 100% of the
outstanding stock of CIP Management, Inc., which is the managing general
partner of CIP Management, L.P. CIP Management, L.P. is the managing general
partner of Community Investment Partners II, L.P., Community Investment
Partners III, L.P., L.L.L.P., Community Investment Partners IV, L.P.,
L.L.L.P. and Community Investment Partners V, L.P., L.L.L.P., business
development companies. EDJ owns 7% of the Customer Account Protection
Company Holdings, Inc. ("CAPCO"), a captive insurance group.
During 2002, the Partnership's affiliates, Edward Jones Insurance Agency of
Nevada, Inc., Edward Jones Insurance Agency of Alabama, L.L.C., EJ Insurance
Agency of Ohio and EDJ Insurance Agency of Texas, Inc., were dissolved. The
Partnership's affiliates, Edward Jones Nominees PEP Limited and Edward Jones
Nominees ISA Limited, both 100% owned by Edward Jones Limited, a U.K.
private limited company, were also dissolved. 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 the Partnership's 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 the Partnership's
affiliates, Edward Jones Insurance Agency of Michigan, L.L.C. and
Cornerstone Mortgage Investment Group II, Inc., were dissolved.
4
PART I
Item 1. Business, continued
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):
2005 2004 2003
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Commissions
Mutual funds $ 1,035,330 $ 986,598 $ 841,516
Listed securities 260,369 249,410 214,431
Insurance 210,887 202,069 163,242
Over-the-counter securities 62,307 65,961 50,416
Asset fees 716,904 581,810 464,465
Account and activity fees 335,105 304,591 254,290
Principal transactions 238,884 304,124 350,662
Interest and dividends 209,734 153,076 132,114
Investment banking 32,892 27,934 43,817
Other revenue 88,015 15,792 23,909
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Total revenue $ 3,190,427 $ 2,891,365 $ 2,538,862
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Because of the interdependence of the activities and departments of the
Partnership's investment business and the arbitrary assumptions involved in
allocating overhead, it is impractical to identify and specify expenses
applicable to each aspect of the Partnership's operations. Furthermore, the
net income of firms principally engaged in the securities business,
including the Partnership's, is affected by interest savings as a result of
customer and other credit balances and interest earned on customer margin
accounts.
Customer transactions in securities are effected on either a cash or a
margin basis. In a margin account, the Partnership lends the customer a
portion of the purchase price up to the limits imposed by the margin
regulations of the Federal Reserve Board ("Regulation T"), New York Stock
Exchange, Inc. ("NYSE") margin requirements, or the Partnership's internal
policies, which may be more stringent than the regulatory minimum
requirements. Such loans are secured by the securities held in customer
margin accounts. These loans provide a source of income to the Partnership
since it is able to lend to customers at rates which are higher than the
rates at which it is able to borrow on a secured basis. The Partnership is
permitted to use 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 revenue primarily comprises charges to customers for the sale of
securities, mutual fund shares and insurance products. The following briefly
describes the Partnership's sources of commissions revenue.
MUTUAL FUNDS. The Partnership distributes mutual fund shares in continuous
offerings and new underwritings. As a dealer in mutual fund shares, the
Partnership receives a dealer's discount which generally ranges from 1% to
5 3/4% of the purchase price of the shares, depending on the terms of the
dealer agreement and the amount of the purchase. 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. A portion of the Partnership's revenue is
derived from customer transactions in which the Partnership acts as agent in
the purchase and sale of listed corporate securities. These securities
include common and preferred stocks and corporate debt securities traded on
and off the securities exchanges. Revenue from brokerage transactions is
highly influenced by the volume of business and securities prices.
Variations in revenues from listed securities commissions between periods is
largely a function of market conditions.
INSURANCE. The Partnership has executed agency agreements with various
national insurance companies. EDJ is able to offer life insurance, long-term
care insurance, fixed and variable annuities and other types of insurance to
its customers through its investment representatives who hold insurance
sales licenses. As an agent for the insurance company, the Partnership
receives commission on the purchase price of the policy.
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
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
advisers or distributors of some products providing a percentage of average
assets held by the Partnership's customers. In addition, the Partnership may
receive a profit sharing participation, or the revenue sharing agreement may
pay the Partnership a flat dollar amount. (See Item 3 - Legal Proceedings
for the current status of revenue sharing as it relates to the Partnership).
The Partnership does not manage any mutual fund, although it is a limited
partner of Passport Research, Ltd., an advisor to a money market mutual fund
and a limited partner of Passport Research II, Ltd., an advisor to a mutual
fund. The Partnership sold its interest in Passport Research II, Ltd.
effective March 6, 2006. The Partnership does not have management
responsibility for these advisors. Revenue from this source is primarily
based on customer assets in the funds.
6
PART I
Item 1. Business, continued
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 grown in recent years.
The Partnership offers trust services to its customers through the Edward
Jones Trust Company ("EJTC"), a division of the Association. The Association
is an investment advisor under the Investment Advisors Act of 1940. It
offers investment advisory services through EJTC.
ACCOUNT AND ACTIVITY FEES
Revenue sources include sub-transfer agent accounting services, 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. EDJ 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. These arrangements vary and are based on either a
percentage of the underwriter's concession retained by the fund distribution
company or a specified number of basis points on the Partnership's current
year fund sales (See Item 3 - Legal Proceedings for the current status of
revenue sharing as it relates to the Partnership). The Partnership receives
revenue from offering mortgage loans to its customers through a joint
venture and 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 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 investment representatives employed by the Partnership over the
periods indicated.
INTEREST AND DIVIDENDS
Interest and dividend income is earned primarily on margin account balances,
inventory securities and investment securities. Interest is also earned by
the Association on its loan portfolio. The Partnership is exposed to market
risk for changes in interest rates. The Partnership's interest income is
impacted by the level of interest rates it charges its customers and the
level of customers' loan balances.
INVESTMENT BANKING
The Partnership's investment banking activities are performed by its
Syndicate and Investment Banking Departments. The principal service which
the Partnership renders as an investment banker is the
7
PART I
Item 1. Business, continued
underwriting and distribution of securities either in a primary distribution
on behalf of the issuer of such securities, or in a secondary distribution
on behalf of a holder of such securities. The distributions of corporate and
municipal securities are, in most cases, underwritten by a group or
syndicate of underwriters. Each underwriter has a participation in the
offering.
Unlike many larger firms against which the Partnership competes, the
Partnership does not presently engage in other investment banking
activities, such as assisting in mergers and acquisitions, arranging private
placement of securities issues with institutions, or providing consulting
and financial advisory services to corporations.
The Syndicate and 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
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.
BUSINESS OPERATIONS
RESEARCH DEPARTMENT. The Partnership maintains a Research Department to
provide specific investment recommendations and market information for
retail customers. The Department supplements its own research with the
services of various independent research services.
CUSTOMER ACCOUNT ADMINISTRATION AND OPERATIONS. Operations associates are
responsible for activities relating to customer securities and the
processing of transactions with other broker-dealers, exchanges and clearing
organizations. These activities include receipt, identification, and
delivery of funds and securities, internal financial controls, accounting
and personnel functions, office services, storage of customer securities and
the handling of margin accounts. The Partnership processes substantially all
of its own transactions for its United States and United Kingdom entities.
In Canada, the Partnership has entered into an introducing/carrying broker
arrangement with National Bank Correspondent Network ("NBCN"), as part of
the National Bank of Canada group of companies.
It is important that the Partnership maintain current and accurate books and
records from both a profit viewpoint as well as for regulatory compliance.
To expedite the processing of orders, the Partnership's branch office system
is linked to the St. Louis headquarters office through an extensive
communications network. Orders for securities are generally captured at the
branch electronically, routed to St. Louis and
8
PART I
Item 1. Business, continued
forwarded to the appropriate market for execution. The Partnership's
processing of paperwork following the execution of a security transaction is
automated and operations are generally on a current basis.
There is considerable fluctuation during any one year and from year to year
in the volume of transactions the Partnership processes. The Partnership
records transactions and posts its books on a daily basis. 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.
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") and Depository Trust Company
("DTC"), both 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 the Central Securities Depository for the
United Kingdom ("CREST"). CREST effects clearing of securities on the London
Stock Exchange. In conjunction with clearing and settling transactions with
CREST, the Partnership's United Kingdom operation holds customer securities
on deposit with CREST in lieu of maintaining physical custody of the
certificates. The Partnership's United Kingdom operation also uses DTC for
custody of United States securities, a major independent brokerage firm for
custody of non-United Kingdom and non-United States securities, and
individual unit trust vendors for custody of unit trust holdings.
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"), 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 NSCC, DTC, CREST, NBCN, 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. These services are performed for the
Partnership under contracts which may be changed or terminated at will by
either party.
Automated Data Processing, Inc. ("ADP"), ADP Wilco Ltd. (a subsidiary of
ADP) and NBCN provide automated data processing services for customer
account activity and related records for the United States, United Kingdom
and Canada, respectively.
The Partnership does not employ its own floor broker for transactions on
exchanges. The Partnership has arrangements with other brokers to execute
the Partnership's transactions in return for a commission based on the size
and type of trade. If, for any reason, any of the Partnership's clearing,
settling or executing agents were to fail, the Partnership and its customers
would be subject to possible loss. To the extent that the Partnership would
not be able to meet the obligations of the customers, such customers might
experience delays in obtaining the protections afforded them.
9
PART I
Item 1. Business, continued
Customers are protected from the loss of securities and cash in the event of
a firm insolvency by the Securities Investors Protection Corporation
("SIPC") in the United States, Financial Services Compensation Scheme
("FSCS") in the United Kingdom and Canadian Investor Protection Fund
("CIPF") in Canada, and through excess coverage maintained by the
Partnership in the United States and the United Kingdom. Excess SIPC and
excess FSCS coverage in the United States is provided by Customer Asset
Protection Company Holdings, Inc. ("CAPCO"), of which the Partnership is a
7% owner. SIPC provides protection for customer accounts for up to $500,000,
including up to $100,000 for cash claims. FSCS covers 100% of the first
(pounds)30,000 and 90% for the next (pounds)20,000, for a maximum protection
of (pounds)48,000 for all investment business. CIPF limits coverage to
CAD$1,000,000 total, which can be any combination of securities and cash.
The Partnership believes that its internal controls and safeguards
concerning the risks of securities thefts are adequate. Although the
possibility of securities thefts is a risk of the industry, the Partnership
has not had, to date, a significant problem with such thefts. The
Partnership maintains fidelity bonding insurance which, in the opinion of
management, provides adequate coverage.
EMPLOYEES. Including its 305 general partners, the Partnership has
approximately 32,400 full and part-time employees. This includes 9,753
registered salespeople as of February 24, 2006. The Partnership's
salespersons are generally compensated on a commission basis and may, in
addition, be entitled to bonus compensation based on their respective branch
office profitability and the profitability of the Partnership. The
Partnership has 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
salespeople that spans four months that includes concentrated instruction
and on-the-job training in a branch office. During the first phase, the
trainee spends 60 days studying Series 7 examination materials and taking
the examination. After passing the examination, trainees spend one week in a
comprehensive training program in a central location followed by three weeks
at a designated location to conduct market research and prepare for opening
the office. The trainee then spends three weeks of on-the-job training in a
branch location reviewing investments, office procedures and sales
techniques. Next, the trainee returns to his or her designated location for
one week to continue building a prospect base. One final week is then spent
in a central location to complete the initial training program. Four months
later, the investment representative attends an additional training class in
a central location, and subsequently, EDJ offers periodic continuing
training to its experienced sales force. EDJ's basic brokerage payout is
similar to its competitors.
The Partnership considers its employee relations to be good and believes
that its compensation and employee benefits which include medical, life and
disability insurance plans and profit sharing and deferred compensation
retirement plans, are competitive with those offered by other firms
principally engaged in the securities business.
BRANCH OFFICE NETWORK. The Partnership operates 9,289 branch offices as of
February 24, 2006, primarily staffed by a single investment representative
and a branch office assistant. The Partnership operates 8,614 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 555 offices as of February 24, 2006) and the
United Kingdom (through 120 offices as of February 24, 2006).
10
PART I
Item 1. Business, continued
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 service to individual customers. With minor exceptions, customers
are free to transfer their business to competing organizations at any time.
There is intense competition among firms for salespeople with good sales
production records. In recent periods, the Partnership has experienced
increasing efforts by competing firms to hire away its registered
representatives, although the Partnership believes that its rate of turnover
of investment representatives is not higher than that of other firms
comparable to the Partnership.
REGULATION. The securities industry in the United States is subject to
extensive regulation under both federal and state laws. The SEC is the
federal agency responsible for the administration of the federal securities
laws. The Partnership's principal subsidiary is registered as a
broker-dealer and investment advisor with the SEC. Much of the regulation of
broker-dealers has been delegated to self-regulatory organizations,
principally the NASD, and national securities exchanges such as the NYSE,
which has been designated by the SEC as the Partnership's primary regulator.
These self-regulatory organizations adopt rules (which are subject to
approval by the SEC) that govern the industry and conduct periodic
examinations of the Partnership's operations. Securities firms are also
subject to regulation by state securities administrators in those states in
which they conduct business. EDJ or an affiliate is registered as a
broker-dealer in all 50 states, Puerto Rico, Canada and the United Kingdom.
EDJ conducts business in Canada through a subsidiary partnership which is
regulated by the Investment Dealers Association of Canada and in the United
Kingdom through a subsidiary which is regulated by the Financial Services
Authority. As a federally chartered savings and loan, the Association is
subject to regulation by the Office of Thrift Supervision ("OTS").
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
self-regulatory organizations, and/or changes in the interpretation or
enforcement of existing laws and rules, may directly affect the operations
and profitability of broker-dealers. The SEC, self-regulatory organizations
and state securities commissions may conduct administrative proceedings
which can result in censure, fine, suspension or expulsion of a
broker-dealer, its officers or employees. The principal purpose of
regulation and discipline of broker-dealers is the protection of customers
and the securities markets, rather than protection of the creditors and
stockholders of broker-dealers. In recent years, the Partnership has been
the subject of significant regulatory actions by various agencies that have
the authority to regulate its activities (See Item 3 - Legal Proceedings for
more information).
UNIFORM NET CAPITAL RULE. As a broker-dealer and a member firm of the NYSE,
the Partnership is subject to the Uniform Net Capital rule ("Rule")
promulgated by the SEC. The Rule is designed to measure the general
financial integrity and liquidity of a broker-dealer and the minimum Net
Capital deemed necessary to meet the broker-dealer's continuing commitments
to its customers. The Rule provides for two methods of computing Net Capital
and the Partnership has adopted what is generally referred to as the
alternative method. Minimum required Net Capital under the alternative
method is equal to 2% of the aggregate debit items, as defined. The Rule
prohibits withdrawal of equity capital whether by payment of dividends,
repurchase of stock or other means, if Net Capital would thereafter be less
than 5% of 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. In computing 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 Capital may subject a firm to
11
PART I
Item 1. Business, continued
suspension or expulsion by the NYSE, the SEC and other regulatory bodies and
may ultimately require its liquidation. The Partnership has, at all times,
been in compliance with the Rule.
The firm has other operating subsidiaries, including the Association and
broker-dealer subsidiaries in Canada and the United Kingdom. These wholly
owned subsidiaries are required to maintain specified levels of liquidity
and capital standards. Each subsidiary is in compliance with the applicable
capital requirements in the jurisdictions in which they operate as of
December 31, 2005 and 2004.
ITEM 1A. RISK FACTORS
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 CAN HAVE A
SIGNIFICANT NEGATIVE EFFECT ON REVENUES AND PROFITABILITY.
The securities industry, including the Partnership, is highly dependent
upon market prices and volumes which are highly unpredictable and volatile
in nature. The operating results of the Partnership are exposed to
substantial risk of loss due to market volatility. As the Partnership has
seen in the past, a material reduction 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, the Partnership is subject
to the risk of customer inability to meet commitments (such as margin
obligations), customer fraud and employee misconduct and errors.
Developments such as lower revenues, declining profit margins and losses
from trading and investment activities could reduce or eliminate the cash
available to make payments on debt, including debt incurred from investing
in capital expenditures. In addition, 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 common to the securities industry include the state of
world affairs and the national economy. General political and economic
conditions such as recession, natural disasters, terrorist attacks, war or
interest rate or currency rate fluctuations, could create a downswing in the
securities market.
OPERATIONAL SYSTEMS -- THE PARTNERSHIP INTENDS TO UPGRADE OR REPLACE
COMPONENTS OF ITS COMPUTER AND COMMUNICATIONS SYSTEMS IN THE NEAR 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 CLIENTS.
The business is highly dependent on the ability to process, on a daily
basis, a large number of transactions. Consequently, there is reliance on
the mainframe system and client server based computer system, satellite
communications, and software systems. In order to support the Partnership's
branch offices at projected growth rates, and to achieve the speed and level
of access to the Internet that our investment representatives desire, there
will likely be upgrades or replacements to these systems, which may include
replacement of satellites with other communications networks. Any such
upgrade or replacement will require a very substantial capital expenditure,
and asset impairment charges or write-downs related to existing technology
and communications systems may be incurred, thereby reducing earnings. In
fact, in anticipation of necessary upgrades to these systems, depreciation
was accelerated on certain existing technology and equipment. Further, any
upgrade or replacement could result in difficulties in the short-term as the
Partnership integrates the new system with operations, learns to
12
PART I
Item 1. Business, continued
operate the new system, and trains personnel. As there is limited experience
engaging in such large-scale information technology projects, there is the
risk of unforeseen problems in the implementation of any new systems. The
implementation of any such upgrade or replacement will be challenging and
any problems encountered may be exacerbated due to the fact that there are
over 9,200 investment representative offices to support.
Whether or not such an upgrade or replacement is undertaken, if the
computer or communications systems do not operate properly, are disabled, or
fail to perform due to increased demand (which might occur during market
upswings or downswings), or if a new software system or upgrade contains a
major problem, there could be unanticipated disruptions in service, slower
response times, decreased customer service and customer satisfaction, and
delays in the introduction of new products and services, which could result
in financial losses, liability to clients, regulatory intervention or
reputational damage. Further, the inability of the systems to accommodate an
increasing volume of transactions could also constrain the ability to expand
the Partnership's business.
The computer system and satellite network are also vulnerable to damage
or interruption from human error, natural disasters, power loss, sabotage,
computer viruses, intentional acts of vandalism and similar events. There is
a second data center in Tempe, Arizona which operates as a backup of the
primary data center located in St. Louis, Missouri and expects to be able to
maintain service during a system disruption contained to St. Louis. 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,
staff would be relocated to the Tempe facility, which might result in
substantial additional costs and a delay in service during the transition.
SUCCESSION -- THE PARTNERSHIP HAS A NEW MANAGING PARTNER COMMENCING IN 2006,
AND WE ARE UNABLE TO ANTICIPATE WHAT, IF ANY, IMPACT THAT CHANGE MAY HAVE ON
PROFITABILITY.
Effective January 1, 2006, James D. Weddle assumed the role of
Managing Partner. Mr. Weddle has been a general partner for 21 years, and he
has worked closely with Douglas E. Hill, the Partnership's previous managing
partner, since the succession committee identified him as the successor to
Mr. Hill. However, while Mr. Weddle may share Mr. Hills's vision for the
Partnership, he may approach certain matters differently than Mr. Hill or
John W. Bachmann, who was the Managing Partner prior to Mr. Hill, from 1980
through 2003. Additionally, Mr. Weddle has been responsible for broad
aspects of the business; however, he has no experience as a chief executive
officer. There can be no assurance that the same level of returns will be
achieved in the future that have been experienced under the leadership of
Mr. Hill and Mr. Bachmann. See Item 10 for additional information.
BRANCH OFFICE SYSTEM -- THE PARTNERSHIP'S SYSTEM OF ONE-BROKER BRANCH
OFFICES MAY EXPOSE THE PARTNERSHIP TO A GREATER RISK OF LOSS OR LIABILITY
FROM THE ACTIVITIES OF THE INVESTMENT REPRESENTATIVES THAN IF A MORE
TRADITIONAL OFFICE SYSTEM IS MAINTAINED.
Most securities firms typically staff several investment
representatives 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 investment representative with primary
supervisory activity being conducted from its headquarters office, a method
of supervision which the Partnership believes complies with all applicable
industry and regulatory requirements. However, as a result of such method of
supervision, the Partnership is potentially exposed to a greater risk of
loss arising from alleged imprudent or illegal actions of its investment
representatives due to the lack of direct supervisory oversight within each
office. Furthermore, more time may elapse for such supervisory personnel to
detect problem activity than if managers were maintained within each office,
thereby exposing possible losses.
13
PART I
Item 1. Business, continued
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 OUR BUSINESS.
In recent years, mutual fund and annuity products have come under
increased scrutiny from various state and federal regulatory authorities in
connection with several industry issues including revenue sharing, mutual
fund fees and expenses (including so-called "12b-1" fees described below
under "Regulatory Initiatives"), market timing, late trading, the failure of
various broker/dealers to provide breakpoint discounts to mutual fund
purchasers and the manner in which mutual fund and annuity companies
compensate broker/dealers. The Partnership has received information
requests and subpoenas from various regulatory and enforcement authorities
regarding the Partnership's mutual fund compensation arrangements, mutual
fund sales practices and other mutual fund issues. Although the Partnership
is voluntarily cooperating with each inquiry, these or any other potential
legal actions may result in adverse judgment, fines, or penalties. Some of
these legal actions include claims for substantial compensatory and/or
punitive damages or claims for indeterminate amounts of damages. In each
case, although the Partnership opposes the various recommendations proposed
and being discussed with the staffs of various federal and state regulators,
there is no assurance that they will concur with the Partnership's
positions. See Item 3- Legal Proceedings for additional information.
In view of the inherent difficulty of predicting the outcome of such
matters, the Partnership cannot predict with certainty the eventual loss or
range of loss related to such matters. The Partnership believes that the
outcome of these actions will not have a material adverse effect on the
consolidated financial condition, although the outcome could be material to
the future operating results for a particular period or periods.
REGULATORY INITIATIVES- RECENTLY PROPOSED REGULATIONS MAY SIGNIFICANTLY
ALTER OR RESTRICT THE HISTORIC BUSINESS PRACTICES, WHICH COULD NEGATIVELY
AFFECT THE OPERATING RESULTS.
The Partnership is subject to extensive regulation by federal and state
regulatory agencies and by self-regulatory organizations within the
industry. The principal purpose of such regulation is the protection of
customers and the securities markets.
The Partnership receives various payments in connection with the
purchase, sale and holding of mutual fund shares by its clients. Those
payments include standard sales loads, annual service fees (also referred to
as "12b-1"fees) and expense reimbursements. All of the Partnership's
preferred mutual fund families pay such fees, as well as some non-preferred
mutual funds. Rule 12b-1 allows a mutual fund to pay distribution and
marketing expenses out of the fund's assets. Although the SEC does not limit
the size of 12b-1 fees that funds may pay, the NASD does impose such
limitations. In addition, the Partnership also receives revenue sharing
payments from its preferred mutual fund families.
In February 2005, the SEC reopened for comment proposed rules that
would require broker/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. The Partnership cannot determine if or when the final rules will
be adopted, and if adopted, how they will differ from the proposed rules. If
the proposals are adopted, the new rules could adversely impact or restrict
the business practices with respect to disclosures of 12b-1, revenue sharing
and other fees. In addition, if the SEC, the NASD or any state regulatory
agencies limit or eliminate such fees, it would have a material adverse
effect on operating results for future periods. This would negatively affect
the ability to recruit and retain IRs.
Any of these foregoing regulatory initiatives could adversely affect
the business operations by reducing or eliminating certain fees that are
significant components of the revenue stream.
14
PART I
Item 1. Business, continued
COMPETITION -- THE PARTNERSHIP IS SUBJECT TO INTENSE COMPETITION FOR CLIENTS
AND PERSONNEL, AND MANY OF THE COMPETITORS HAVE GREATER RESOURCES.
All aspects of the 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.
Many of these entities have substantially greater capital and other
resources and some offer a wider range of financial services. In recent
years, there has been significant consolidation of firms in the securities
industry, forcing the Partnership to compete with larger firms with greater
capital, brokerage volume and underwriting activities.
Competition among financial services firms also exists for investment
representatives 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 investment representatives 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.
Many aspects of the business involve substantial risks of liability. In
recent years, there has been increasing litigation involving the securities
industry generally and the Partnership, including class action suits that
generally seek substantial damages. Litigation is expected to remain at this
high level or continue to increase to the extent market fluctuations
continue.
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 investment representatives.
The expenses incurred to defend and/or settle claims in have increased
significantly in the last few years. There can be no assurance that material
losses arising from the defense and satisfaction of legal actions will not
occur in future periods. See Item 3- Legal Proceedings for more information.
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.
15
PART I
Item 1. Business, continued
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 capital position and, as such, our participation in an
underwriting may be limited by the requirement that we must at all times be
in compliance with the SEC's Uniform Net Capital Rule, discussed below. In
maintaining trading positions 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.
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.
The Partnership incurs obligations to our customers which are supported
by obligations from firms within the industry, especially those firms with
which the Partnership maintains relationships through 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 Automated Data Processing,
Inc. ("ADP") in the United States. ADP acts as the exclusive agent for
providing customer accounting and record keeping in the United States and
all communications and information systems are integrated with the
information systems of ADP. Consequently, any new computer systems or
software packages implemented by ADP which are not compatible with our
systems, or any other interruption or the cessation of service by ADP as a
result of systems limitations or failures, could cause unanticipated
disruptions in the Partnership's business which may result in financial
losses and/or disciplinary action by governmental and self-regulatory
organizations. Similar risks are experienced in foreign countries where the
subsidiaries operate. Such foreign subsidiaries rely on other entities for
providing clearing, settlement and customer accounting and/or record
keeping.
The Partnership does not employ its own floor brokers for transactions
on exchanges. The Partnership 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 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.
INTERNATIONAL EXPANSION -- THE PARTNERSHIP'S FOREIGN OPERATIONS ARE NOT YET
PROFITABLE; THEY MAY REQUIRE SIGNIFICANT INFUSIONS OF CAPITAL AND MAY NEVER
BECOME PROFITABLE.
The 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 jurisdictions will reach a
sufficient scale of operations to yield profitability. Additional
investments will be incurred in the interim; however, there can be no
assurance that such operations will be successful even with additional
investments.
16
PART I
Item 1. Business, continued
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 OR TO RETURN YOUR CAPITAL CONTRIBUTION TO YOU.
Adequacy of capital is vitally important to broker/dealers, and lack of
sufficient capital may limit EDJ's ability to compete effectively. In
particular, lack of sufficient capital, or compliance with the SEC's Uniform
Net Capital Rules, may limit EDJ's ability to commit to certain securities
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 EDJ's 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 than us.
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. EDJ has elected to use the Rule's alternative method of
computation, which requires that "net capital" be not less than the greater
of $0.250 million or 2% of our "aggregate debit items," computed in
accordance with the Formula for Determination of Reserve Requirements for
Brokers and Dealers (Exchange Act Rule 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, EDJ 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. Rule 15c3-1 further
provides that the total outstanding principal amount of a broker/dealer's
indebtedness under certain subordination agreements, the proceeds of which
are includable in our 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 "net capital," various deductions are made from net worth
and qualifying subordinated debt which exclude assets not readily
convertible into cash and which conservatively reduce the value of certain
other assets (such as securities owned by EDJ) to reflect the possibility of
a market decline pending their disposition. At December 31, 2005, EDJ's net
capital of $570.9 million was 24% of aggregate debit items and its net
capital in excess of the minimum required was $524.2 million. Net capital as
a percentage of aggregate debit items after anticipated withdrawals was 24%.
Net capital and the related capital percentage may fluctuate on a daily
basis. See Note 13 in Part II.
Failure to maintain the required net capital may subject a firm to
suspension or expulsion by the SEC, the NYSE and other regulatory bodies and
may ultimately require its liquidation. Consequently, EDJ 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Partnership conducts its United States headquarters operations from
three locations in St. Louis County, Missouri and one location in Tempe,
Arizona, comprising a total of 26 separate buildings. Twenty-three buildings
are owned by the Partnership and three buildings are leased through
long-term operating leases. In addition, the Partnership leases its Canadian
home office facility in Mississauga, Ontario through an operating lease and
has an operating lease for its United Kingdom home office located
17
PART I
in London, England. The Partnership also maintains facilities in 9,289
branch locations (as of February 24, 2006) which are located in the United
States, Canada and the United Kingdom and are rented under predominantly
cancelable leases. The Partnership believes that its properties are both
suitable and adequate to meet the current and future growth projections of
the organization.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Partnership 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.
The Partnership has been named as a defendant in nine civil class action
matters arising out of the Partnership's revenue sharing arrangements and
sales practices associated with Preferred Family mutual funds. In general,
each of these cases allege that the Partnership designated, and recommended
to its customers, seven mutual fund families ("Preferred Families"), in
consideration for the receipt of sales and asset based revenue sharing
payments. Plaintiffs allege that the Partnership was obliged to fully
disclose the nature and extent of its revenue sharing arrangements to
customers and that the Partnership failed to make adequate disclosure.
Although each case is somewhat different, in general, the cases seek
disgorgement of all revenue sharing payments received by the Partnership
from January 1, 1999 through December 2004, which amounts to approximately
$375 million, plus other unspecified damages, attorneys fees and injunctive
relief. The nine civil class actions have been consolidated into the
following three groups of cases.
Spahn IRA, et al. v. Edward D. Jones & Co., L.P., et al. - This case, and
- --------------------------------------------------------
five other companion cases filed in January or February 2004, have been
consolidated under this case caption before the United States District Court
for the Eastern District of Missouri. The Amended and Consolidated Complaint
alleges that the Partnership violated Sections 10(b), 12(2), and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, by failing to
adequately disclose its revenue sharing arrangements to customers.
Plaintiffs seek to represent a class of all persons who purchased shares of
the Preferred Family mutual funds from January 25, 1999 through December
2004. After the Partnership filed a Motion to Dismiss the Amended and
Consolidated Complaint, the Court granted the Plaintiffs leave to file a
Second Amended Complaint which is currently due to be filed on April 15,
2006. No class has been certified in these cases.
Enriquez, et al. v. Edward D. Jones & Co., L.P., et al. - This case was
- -------------------------------------------------------
filed in the Circuit Court for the City of St. Louis, Missouri in January
2004. Plaintiffs allege that the Partnership breached fiduciary duties to
its customers by receiving revenue sharing payments in exchange for the mere
holding of mutual fund shares under management without making a disclosure
to those customers. In addition, Plaintiffs allege that the Partnership was
unjustly enriched by the receipt of revenue sharing associated with those
customers' mutual fund shares held under management. Plaintiffs seek to
represent a class of all Partnership customers who held Preferred Family
mutual fund shares during the period of January 1999 through December 2004.
The Partnership filed a Motion to Dismiss the Petition, which was denied in
January 2005. Although a motion for class certification has been filed, no
class has yet been certified in this case.
18
PART I
Bressler, et al. v. Edward D. Jones & Co., L.P. - This and another case have
- -----------------------------------------------
been consolidated under this caption before the Superior Court for Los
Angeles, California. This case was filed in February 2004. Plaintiffs, in
their Amended and Consolidated Complaint, allege that the Partnership
violated Section 17200 of the California Business and Professions Code by
failing to disclose the receipt of revenue sharing associated with
customers' holding of mutual fund shares under management at the
Partnership. In addition, Plaintiffs allege that the Partnership breached
fiduciary duties by accepting account fees and revenue sharing incident to
the holding of mutual fund shares without adequate disclosures, as well as
alleging unjust enrichment. The Plaintiffs only seek to represent California
resident customers of the Partnership who held Preferred Family mutual fund
shares from January 1999 through 2004. It is estimated that California
residents account for approximately 5% to 5.5% of the Partnership's
business. The Partnership has filed a Motion to Dismiss the Amended and
Consolidated Complaint, which has yet to be heard by the Court. No class has
yet been certified. Pursuant to an agreement of the parties, the Case has
been stayed until June 2006.
In addition to the foregoing civil class action litigation, the California
Attorney General has commenced a civil action against the Partnership on
essentially the same allegations present in the civil class actions. On
December 20, 2004, the California Attorney General filed: People of the
State of California vs. Edward D. Jones & Co., L.P. in the Superior Court
for Sacramento, California. The California Attorney General alleges that EDJ
violated Sections 25401 and 2516(a) of the California Corporations Code by
failing to adequately disclose to California resident customers purchasing
mutual fund shares, the Partnership's revenue sharing arrangements. The
Complaint seeks unspecified damages, attorney's fees, injunctive relief and
a civil monetary penalty of $25,000 for each alleged violation of the
Corporations Code. The Partnership has filed a Motion for Judgment on the
Pleadings asserting that the lawsuit is preempted by federal regulations.
The Court granted the motion to dismiss the lawsuit with leave for the
Attorney General to amend it.
The NASD is examining the practices of certain broker/dealers, including
EDJ, with respect to mutual fund net asset value ("NAV") transfer programs
during the period from 2002 through June 2004. During this period, the
prospectuses of several mutual fund companies provided that under certain
circumstances investors were eligible to purchase shares at net asset value
(i.e., without any deduction for a sales load) if they were making the
purchase with proceeds from the redemption of the shares of another fund
family and that redemption had taken place within a specified period of time
of the purchase, e.g., 30 or 60 or 90 days. The NASD is investigating
whether EDJ and other broker/dealers complied with the terms of the
prospectuses with respect to these NAV transfer programs, and has requested
documents and information from EDJ, including data concerning transactions
that were eligible for but did not receive the benefit of NAV transfer
programs. EDJ is cooperating in the investigation. Negotiations with the
NASD concerning possible resolution of this matter are ongoing.
In November 2005, a case was filed by a former investment representative as
a putative class action on behalf of all present and former California
investment representatives since 2001. The case was filed in state court but
was removed to the United States District Court for the Northern District of
California. Plaintiff did not seek to remove the case. Although the lawsuit
consists of eight separate causes of action, all of the causes of action
arise from claims that EDJ failed to pay California investment
representatives in compliance with California state wage and hour laws and
the federal Fair Labor Standards Act ("FLSA"). More specifically, it is
alleged that EDJ failed to treat the investment representatives as exempt
employees under both federal and state law and, therefore, that those
employees are entitled to overtime pay for all hours worked in excess of 40
in a workweek (federal and state law) and weekend hours and hours worked in
excess of eight in one day (California law). In addition, it is alleged that
EDJ unlawfully deducted business expenses from the wages of investment
representatives and failed to provide mandatory meal periods in violation of
California state law. Finally, it is alleged that as a result of the above
referenced practices, EDJ failed to properly compensate (by not paying all
wages due) former employees upon their separation from employment and,
therefore, that EDJ is responsible for a waiting period penalty of 30 days
additional salary for each former employee who was not paid in full all
wages due at the time of his or her separation from employment.
19
PART I
EDJ has answered the complaint denying the Plaintiff's allegations. No
discovery has commenced and no schedule has been set for the case. No class
has been certified. EDJ intends to vigorously defend the claims made.
In view of the inherent difficulty of predicting the outcome of such
matters, particularly in cases in which claimants seek substantial or
indeterminate damages, or actions which are in very preliminary stages, the
Partnership cannot predict with certainty the eventual loss or range of loss
related to such matters. The Partnership believes, based on current
knowledge and after consultation with counsel, that the outcome of these
actions will not have a material adverse effect on the consolidated
financial condition of the Partnership, although the outcome could be
material to the Partnership's future operating results for a particular
period or periods.
20
PART I
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Limited Partnership
interests and their assignment is prohibited.
ITEM 6. SELECTED FINANCIAL DATA
The following information sets forth, for the past five years, selected
financial data. (All dollars in millions, except per unit information and
units outstanding.)
Summary Consolidated Statements of Income Data:
2005 2004 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Total revenue $ 3,190 $ 2,891 $ 2,539 $ 2,280 $ 2,154
Income before allocations
to partners/net income * $ 330 $ 217 $ 203 $ 149 $ 149
Income before allocations
to partners/net income
per weighted average
$1,000 equivalent
limited partnership
unit outstanding $ 157.11 $ 126.43 $ 108.08 $ 87.44 $ 96.89
Weighted average
$1,000 equivalent
limited partnership
units outstanding 214,366 219,885 224,389 230,970 236,696
- ---------------------------------------------------------------------------------------------------------------------
<FN>
* Due to the implementation of SFAS No. 150, the Partnership reported income
before allocations to partners in 2005 and 2004 and net income in 2003,
2002, and 2001.
21
PART I
Summary Consolidated Statements of Financial Condition Data:
2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------
Total assets $4,317 $4,100 $3,723 $3,258 $3,158
====== ====== ====== ====== ======
Bank Loans $ 9 $ - $ - $ - $ -
Federal Home Loan Bank
advances 31 34 24 14 14
Long-term debt 24 32 40 49 46
Other liabilities exclusive
of subordinated
liabilities and partnership
capital subject to
mandatory redemption 2,993 2,839 2,466 2,056 2,217
Subordinated liabilities 344 387 408 429 206
Total partnership capital
subject to mandatory
redemption /
partnership captital * 916 808 785 710 675
------ ------ ------ ------ ------
Total liabilities and
partnership capital $4,317 $4,100 $3,723 $3,258 $3,158
====== ====== ====== ====== ======
- ----------------------------------------------------------------------------------------------
<FN>
* Due to the implementation of SFAS No. 150, the Partnership reported total
partnership capital subject to mandatory redemption in 2005 and 2004 and
partnership capital in 2003, 2002, and 2001.
22
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table summarizes the increase (decrease) in major categories
of revenues and expenses for the last two years (dollar amounts in
thousands).
2005 vs. 2004 2004 vs. 2003
------------------------ -------------------------
Amount Percentage Amount Percentage
- -----------------------------------------------------------------------------------------
Revenue:
Commissions $ 64,855 4 % $ 234,433 18 %
Asset fees 135,094 23 117,345 25
Account and activity fees 30,514 10 50,301 20
Principal transactions (65,241) (22) (46,538) (13)
Interest and dividends 56,658 37 20,962 16
Investment banking 4,958 18 (15,883) (36)
Other 72,224 457 (8,117) (34)
--------- ---------
Total revenue 299,062 10 352,503 14
Interest expense (445) (1) (2,400) (4)
--------- ---------
Net revenue 299,507 11 354,903 14
--------- ---------
Operating Expenses:
Compensation and benefits 146,792 9 220,044 15
Communications and data
processing (15,271) (6) 15,430 6
Occupancy and equipment 7,084 3 15,522 7
Legal 12,582 12 75,915 298
Payroll and other taxes 10,491 10 10,537 12
Postage and shipping 6,361 14 1,725 4
Advertising 9,365 23 (1,363) (3)
Floor brokerage and
clearance fees 842 6 (881) (6)
Other operating expenses 8,003 7 4,557 4
--------- ---------
Total operating expenses 186,248 7 341,486 15
--------- ---------
Income before allocations to
partners / net income $ 113,259 52 % $ 13,417 7 %
- -----------------------------------------------------------------------------------------
23
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
BASIS OF PRESENTATION
Due to the adoption of Statement of Financial Accounting Standards ("SFAS")
No. 150 on January 1, 2004, we are providing certain information in this
discussion of our results of operations, including a measure of income
before allocations to partners, that may be considered financial measures
not in accordance with Generally Accepted Accounting Principles ("GAAP") in
the United States of America. We believe that these figures are helpful in
allowing the reader to more accurately assess the ongoing nature of our
operations and measure our performance more consistently. We use the
presented financial measures internally to understand and assess the
performance of our business. Therefore, we believe that this information is
meaningful in addition to the information contained in the GAAP presentation
of financial information. The presentation of this additional financial
information is not intended to be considered in isolation or as a substitute
for the financial information prepared and presented in accordance with
GAAP. See the New Accounting Standards note to the consolidated financial
statements for further discussion of these items.
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'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 (2005 VERSUS 2004)
For 2005, net revenue increased 11% ($299.5 million) to $3.135 billion,
while income before allocations to partners increased 52% ($113.3 million)
to $330.0 million. The Partnership's profit margin based on income before
allocations to partners increased to 10.3% in 2005, from 7.5% in 2004. 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, higher net interest income, and a payment
received due to termination of a profit sharing agreement (see Other
Revenues). Operating expenses increased in 2005 due primarily to growth in
sales compensation related to the increase in net revenues, costs associated
with legal matters and costs associated with the continued expansion and
enhancement of its branch office network. The Partnership added 240 (3%)
Investment Representatives ("IRs") during the twelve months ended December
31, 2005, ending the year with 9,733 IRs.
Trade revenue of $1.841 billion, which comprised 59% of net revenue,
increased .2% ($4.6 million) in 2005 due primarily to an increase in
customer dollars invested (the principal amount of customers' buy and sell
transactions generating trade revenue), partially offset by a lower gross
margin earned on customer dollars invested compared to the prior year. Total
customer dollars invested were $74.3 billion during 2005, a 6% ($4.2
billion) increase from 2004. The Partnership's margin earned on each $1,000
invested decreased to $24.70 in 2005 from $26.20 in 2004 due to a shift in
the customer dollars invested to shorter term fixed income products with
lower margins from longer term higher margin fixed income products.
Commissions revenue increased 4% ($64.9 million) during 2005 to $1.569
billion. Commissions revenue increased year over year due primarily to a 6%
($3.1 billion) increase in customer dollars invested to $52.4 billion in
2005. Underlying the increase in commissions revenue, mutual fund
commissions increased 5% ($48.7 million), equity commissions increased 2%
($7.0 million) and insurance commissions increased 4% ($8.8 million). The
following table summarizes commissions revenue year over year:
24
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
(in millions) Years ended
---------------------------
December 31, December 31,
2005 2004
------------ ------------
Mutual funds $ 1,035.3 $ 986.6
Equities 322.0 315.0
Insurance 210.9 202.1
Corporate bonds 0.7 0.3
---------- ----------
$ 1,568.9 $ 1,504.0
========== ==========
Principal transactions revenue decreased 22% ($65.2 million) to $238.9
million during 2005 due to a shift in customer dollars invested from higher
margin, longer maturity fixed income products to lower margin, shorter
maturity certificates of deposit. Customers invested $20.6 billion in
principal revenue transactions in 2005, an increase of 6% ($1.1 billion).
The Partnership's margin earned on each $1,000 invested decreased to $10.90
during 2005 from $15.00 during 2004. Revenue from corporate bonds decreased
42% ($39.4 million), municipal bonds decreased 25% ($26.9 million) and
government bonds decreased 39% ($13.8 million) while certificates of
deposits increased 70% ($14.2 million). The following table summarizes
principal transaction revenue year over year:
(in millions) Years ended
---------------------------
December 31, December 31,
2005 2004
------------ ------------
Municipal bonds $ 80.3 $ 107.2
Corporate bonds 53.7 93.0
Government bonds 21.3 35.1
Collateralized mortgage obligations 26.1 24.8
Unit investment trusts 23.0 23.7
Certificates of deposit and other 34.5 20.3
-------- --------
$ 238.9 $ 304.1
======== ========
Investment banking revenue increased 18% ($5.0 million) during 2005 to $32.9
million, due primarily to an increase in syndicate corporate debt offerings
in the current year.
Net fee revenue of $1.294 billion, comprising 41% of net revenue, increased
30% ($294.9 million) during 2005. Asset fees increased 23% ($135.1 million)
to $716.9 million due to the favorable impact of market conditions on
customers' mutual fund and insurance assets generating asset fees. Average
customer mutual fund and insurance assets increased $39.8 billion or 23% to
$214.0 billion for 2005 compared to $174.3 billion for 2004.
Account and activity fees, and other revenue of $423.1 million increased 32%
($102.7 million) year over year. Other revenue for 2005 includes a $70.0
million payment received from a mutual fund company due to a termination of
a profit sharing agreement. Excluding the $70.0 million termination payment,
account and activity, and other fees have increased 10% ($32.7 million) over
the prior year due to growth in customer accounts. Revenue received from
mutual fund and money market sub-transfer agent services increased 15%
($25.4 million) to $197.4 million, due primarily to an 18% 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 13%, resulting in custodial fee
revenue growth of 14% ($9.5 million) to $78.2 million.
25
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Net interest and dividend income increased 59% ($57.1 million) to $154.3
million during 2005 due primarily to an increase in customer margin loans
outstanding and an increase in interest rates. Interest income from customer
loans increased 39% ($49.3 million). Average customer margin loan balances
were $2.451 billion in 2005, compared to $2.343 billion in 2004, an increase
of 5%. The average rate earned on customer loan balances increased to
approximately 7.09% during 2005 from approximately 5.24% during 2004.
Operating expenses increased 7% ($186.2 million) to $2.805 billion during
2005. Compensation and benefits costs increased 9% ($146.8 million) to
$1.821 billion. Within compensation and benefits costs, sales compensation
increased 5% ($45.1 million) due to increased revenue. Variable
compensation, including bonuses and profit sharing paid to IRs, branch
office assistants, and headquarters associates, which expands and contracts
in relation to revenues, income before allocations to partners and the
Partnership's related profit margin, increased 22% ($39.5 million). Payroll
expense increased 12% ($61.7 million) due to increased compensation costs
for existing personnel and additional support at both the headquarters and
in the branches as the Partnership grows its sales force. Effective January
1, 2005, the Partnership implemented a special bonus program for certain
existing personnel. Related bonus expense for 2005 was $28.0 million. On a
full time equivalent basis, the Partnership had 4,096 headquarters
associates and 10,103 branch staff associates as of December 31, 2005,
compared to 4,030 headquarters associates and 9,858 branch staff associates
as of December 31, 2004.
Advertising expenses increased 23% ($9.4 million) to $49.4 million during
2005 primarily due to the launch of a new advertising campaign in January
2005. Postage and shipping expense increased 14% ($6.4 million) to $51.4
million primarily due to mailing costs in 2005 associated with the
Partnership's mutual fund settlements which were executed in December 2004.
Legal expenses increased 12% ($12.6 million) to $113.9 million during 2005
due primarily to costs associated with legal matters and regulatory
settlements. (See Mutual Fund Matters below and Item 3 - Legal Proceedings
for more information).
MUTUAL FUND MATTERS
In recent years, mutual fund and annuity products have come under increased
scrutiny from various state and federal regulatory authorities in connection
with several industry issues including market timing, late trading, the
failure of various broker-dealers to provide breakpoint discounts to mutual
fund purchasers, 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.
In December 2004, the Partnership entered into settlement agreements with
the SEC, NASD, the NYSE and the U.S. Attorney's Office for the Eastern
District of Missouri primarily related to allegations that the Partnership
failed to adequately disclose revenue sharing payments that it received from
a group of mutual fund families and 529 savings plans that the Partnership
recommended to its customers. The agreements and orders required the
Partnership to make a payment of $75 million into a FAIR FUND, pursuant to
Section 308 of the Sarbanes-Oxley Act of 2002, that will in turn be
distributed to its customers who purchased so-called Preferred Family mutual
fund shares from January 1, 1999 through December 2004. Through 2004, the
Partnership had designated seven mutual fund companies as Preferred Family
mutual funds. The Preferred Family mutual funds constitute a significant
portion of the Partnership's revenue derived from mutual funds.
In addition, the Partnership was required to offer a free switch to
customers who held Preferred Family mutual fund shares as of December 2004
that would allow, in general, the Partnership's customers to
26
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
switch their holdings in a Preferred Family mutual fund to some other
buy-eligible mutual fund offered by the Partnership without the normal sales
load. Buy-eligible mutual funds are those the Partnership has authorized its
investment representatives to offer to customers. The Partnership was also
required to make ongoing additional disclosures to customers concerning
revenue sharing arrangements with Preferred Family mutual funds and to alter
various policies, practices, training and other internal procedures
including restructuring the Partnership's investment representative bonus
system, pursuant to the agreements and orders. Furthermore, the Partnership
was required and has engaged an independent consultant to review the
Partnership's compliance with the agreements and orders. In connection with
the $75 million payment, the Partnership recorded a charge of $50 million in
December 2004 with the remaining $25 million charged against previously
established reserves. The $50 million reduction in net income before
allocations to partners was specially allocated to subordinated limited
partners and general partners. Subordinated limited partners are either
current or retired general partners. Additionally, in connection with the
settlements, the Partnership's Managing Partner voluntarily retired as the
Partnership's Managing Partner effective December 31, 2005 and absorbed a
disproportionate allocation of the reduction of income allocated to general
partners (See Item 11 - Executive Compensation).
During 2003, a task force organized by the SEC, the NASD, the Securities
Industry Association, and the Investment Company Institute examined the
ability of broker-dealers to deliver breakpoint discounts in the sale of
front-end sales load mutual fund shares commonly known as A shares.
Breakpoint discounts are reductions in sales loads based upon the amount
invested by the customer. The task force recommended significant changes in
procedures for gathering information from clients and sharing information
with mutual funds to better enable broker-dealers to meet their obligations
to deliver breakpoint discounts to clients purchasing A shares.
The NASD issued a notice to its members in August 2003 requiring restitution
where member firms were aware that customers did not receive the breakpoint
discounts to which they were entitled. After issuing the August notice, the
NASD directed almost 450 securities firms, including the Partnership, to
notify its customers who purchased Class A mutual funds since January 1,
1999, that they may be due refunds as a result of the firms' failure to
provide breakpoint discounts. During 2004, the Partnership notified its
customers that they may not have received breakpoint discounts to which they
may have been entitled. As of December 31, 2005, the Partnership had made
approximately $3.5 million in restitution payments. The Partnership does not
anticipate that additional restitution payments will be significant, nor are
they expected to exceed reserves established by the Partnership for
potential refunds.
The Partnership has received information requests and subpoenas from various
regulatory and enforcement authorities regarding the Partnership's mutual
fund compensation arrangements, mutual fund sales practices and other mutual
fund issues. The Partnership is voluntarily cooperating with each inquiry.
Also, the Partnership has been named as a defendant in various class actions
on behalf of purchasers of recommended mutual funds. For additional
discussions, refer to "Item 3 - Legal Proceedings".
In addition to the regulatory actions directed at the Partnership, there are
various regulatory and legislative proposals being considered that could
significantly impact the compensation that broker-dealers derive from mutual
funds and annuity products. It is likely in the future that broker-dealers
will be required to provide more disclosure to their clients with respect to
payments received by them from the sales of these products. It is also
possible that such payments may be restricted by law or regulation. The
Partnership derived 64% of its total revenue from sales and services related
to mutual fund and annuity products in 2005 and 66% in 2004 with 30% of its
total revenue in 2005 and 31% in 2004 being derived from one vendor.
Significant reductions in the revenues from these products could have a
material adverse impact on the Partnership.
27
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
RESULTS OF OPERATIONS (2004 VERSUS 2003)
For 2004, net revenue increased 14% ($354.9 million) to $2.835 billion,
while income before allocations to partners increased 7% ($13.4 million) to
$216.7 million. The Partnership's profit margin based on income before
allocations to partners decreased to 7.5% in 2005, from 8.0% in 2003. Year
over year, the Partnership's net revenue and income before allocations to
partners increased due primarily to an increase in customer activity, growth
in customer asset values and higher account and activity fees. Operating
expenses increased in 2004 due primarily to growth in sales compensation
related to the increase in net revenues, costs associated with regulatory
settlements and costs associated with the continued expansion and
enhancement of its branch office network. The Partnership added 84 (1%) IRs
during the twelve months ended December 31, 2004, ending the year with 9,493
IRs.
Trade revenue of $1.836 billion, which comprised 65% of net revenue,
increased 10% ($172.0 million) in 2004 due primarily to an increase in
customer dollars invested (the principal amount of customers' buy and sell
transactions generating trade revenue), partially offset by a lower gross
margin earned on customer dollars invested compared to the prior year. Total
customer dollars invested in the U.S. were $67.3 billion during 2004, a 15%
($8.6 billion) increase from the $58.7 billion invested during 2003. The
Partnership's margin earned in the U.S. on each $1,000 invested decreased to
$26.10 in 2004 from $27.40 in 2003 due to overall margin compression in the
Partnership's product offerings.
Commissions revenue increased 18% ($234.4 million) during 2004 to $1.504
billion. Commissions revenue increased year over year due primarily to a 24%
($9.3 billion) increase in underlying customer dollars invested in the U.S.
in mutual funds, equities and insurance products to $47.8 billion in 2004
from $38.5 billion in 2003. Underlying the increase in commissions revenue,
mutual fund commissions increased 17% ($145.1 million), equity commissions
increased 19% ($50.7 million) and insurance commissions increased 24% ($38.9
million). The following table summarizes commissions revenue year over year:
(in millions) Years ended
----------------------------------------------
December 31, December 31,
2004 2003
----------------------- ----------------------
Mutual funds $ 986.6 $ 841.5
Equities 315.0 264.3
Insurance 202.1 163.2
Corporate bonds 0.3 0.6
----------------------- ----------------------
$1,504.0 $1,269.6
======================= ======================
Principal transactions revenue decreased 13% ($46.6 million) to $304.1
million during 2004 due to a decrease in customer dollars invested in fixed
income products and a shift to lower margin shorter maturity products.
Customers in the U.S. invested $18.7 billion in principal revenue
transactions in 2004 compared to $19.1 billion in 2003, a decrease of 2%.
The Partnership's margin earned in the U.S. on each $1,000 invested
decreased to $15.30 during 2004 from $17.40 during 2003. Revenue from
municipal bonds decreased 27% ($40.2 million) and collateralized mortgage
obligations decreased 34% ($12.6 million) while corporate bonds increased 8%
($7.0 million). The following table summarizes principal transaction revenue
year over year:
28
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
(in millions) Years ended
----------------------------------------------
December 31, December 31,
2004 2003
----------------------- ----------------------
Municipal bonds $ 107.2 $ 147.4
Corporate bonds 93.0 86.0
Government bonds 35.1 40.4
Collateralized mortgage obligations 24.8 37.4
Unit investment trusts 23.7 26.1
Certificates of deposit and other 20.3 13.4
----------------------- ----------------------
$ 304.1 $ 350.7
======================= ======================
Investment banking revenue decreased 36% ($15.9 million) during 2004 to
$27.9 million, due primarily to a decrease in syndicate corporate debt
offerings in the current year.
Net fee revenue of $999.4 million, comprising 35% of net revenue, increased
22% ($182.9 million) during the 2004. Asset fees increased 25% ($117.3
million) to $581.8 million due to the favorable impact of market conditions
on customers' mutual fund and insurance assets generating asset fees.
Average customer mutual fund and insurance assets increased $43.4 billion or
33% to $174.3 billion for 2004 compared to $130.9 billion for 2003.
Account and activity fees, and other revenue of $320.4 million increased 15%
($42.1 million) year over year. Revenue for 2003 includes a business
interruption insurance claim of $7.0 million pertaining to September 11,
2001, which is included in other revenue. Excluding this item, account and
activity, and other fees have increased 18% ($49.1 million) over the prior
year due to growth in customer accounts and increased fees related to mutual
fund and insurance sales. Revenue received from mutual fund and money market
sub-transfer agent services increased 22% ($31.5 million) to $172.0 million,
due primarily to a 20% 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
15%, resulting in custodial fee revenue growth of 16% ($9.5 million) to
$68.8 million. Fee revenue from mutual fund and insurance sales increased
41% ($4.4 million) to $15.4 million due to higher sales volumes.
Interest and dividend income, net of interest expense, increased 32% ($23.4
million) to $97.2 million during 2004 due primarily to an increase in
customer margin loans outstanding and an increase in interest rates.
Interest income from customer loans increased 24% ($24.2 million). Average
customer margin loan balances were $2.343 billion in 2004, compared to
$1.985 billion in 2003, an increase of 18%. The average rate earned on
customer loan balances increased to approximately 5.24% during 2004 from
approximately 5.07% during 2003.
Operating expenses increased 15% ($341.5 million) to $2.619 billion during
2004. Compensation and benefits costs increased 15% ($220.0 million) to
$1.674 billion. Within compensation and benefits costs, sales compensation
increased 16% ($128.7 million) due to increased revenue. Variable
compensation, including bonuses and profit sharing paid to IRs, branch
office assistants, and headquarters associates, which expands and contracts
in relation to revenues, income before allocations to partners and the
Partnership's related profit margin, increased 52% ($60.9 million). Payroll
expense increased 8% ($35.5 million) due to increased costs for existing
personnel and additional support at both the headquarters and in the
branches as the Partnership grows its sales force. On a full time equivalent
basis, the Partnership had 4,030 headquarters associates and 9,858 branch
staff associates as of December 31, 2004, compared to 3,887 headquarters
associates and 9,567 branch staff associates as of December 31, 2003.
29
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Occupancy and equipment expenses increased 7% ($15.5 million) and
communications and data processing increased 6% ($15.4 million) due to
changes in estimated useful lives of equipment as the Partnership plans to
replace certain computer equipment and to growth in the number of branch
offices as the Partnership expands its sales force. Payroll and other taxes
increased 12% ($10.5 million) due to higher sales compensation, variable
compensation and payroll expense as well as the increased number of full
time equivalent associates.
Legal expenses increased 298% ($75.9 million) to $101.4 million during 2004.
The increase is primarily due to regulatory settlements reached in December
2004 and the related legal and professional expenses (See Mutual Fund
Matters below and Item 3 - Legal Proceedings for more information).
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's capital subject to mandatory redemption at December 31,
2005, excluding the reserve for anticipated withdrawals, was $802.6 million,
compared to partnership capital, excluding the reserve for anticipated
withdrawals, of $751.7 million at December 31, 2004. The increase is
primarily due to the retention of General Partner earnings ($60.5 million)
and the issuance of subordinated limited partner interests ($24.2 million),
offset by redemption of general partner, subordinated limited partner, and
limited partner interests ($26.9 million, $1.5 million, and $5.4 million,
respectively). It has been the Partnership's practice to retain
approximately 30% of income allocated to general partners. For 2005, the
Partnership retained 26% of income allocated to general partners. For 2004,
as a result of the regulatory settlements the Partnership retained
approximately only 13% of income allocated to general partners.
At December 31, 2005, the Partnership had $260.8 million in cash and cash
equivalents. Lines of credit were in place at such date aggregating $1.210
billion ($1.160 billion of which is through uncommitted lines of credit
where actual borrowing availability is based on securities owned and
customers' margin securities which serve as collateral for the loans). No
amounts were outstanding under these lines at December 31, 2005. The
Association had loans from The Federal Home Loan Bank of $30.5 million as of
December 31, 2005, which were secured by mortgage loans.
The Partnership believes that the liquidity provided by existing cash
balances, other highly liquid assets and borrowing arrangements will be
sufficient to meet the Partnership's capital and liquidity requirements.
Depending on conditions in the capital markets and other factors, the
Partnership will, from time to time, consider the issuance of debt, the
proceeds of which could be used to meet growth needs or for other purposes.
The Partnership's growth in recent years has been financed through sales of
limited partnership interests to its employees, retention of earnings,
private placements of subordinated debt, long-term secured debt and
operating leases under which the Partnership rents facilities, furniture,
fixtures, computers and communication equipment. There were no significant
changes in the Partnership's financial commitments and obligations for the
year ended December 31, 2005.
30
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
The following table summarizes the Partnership's financing commitments and
obligations, as of December 31, 2005, excluding customer accounts due on
demand. Subsequent to December 31, 2005, these commitments and obligations
could fluctuate based on the changing business environment.
Payments Due by Period
----------------------
2006 2007 2008 2009 2010 Thereafter Total
----------------------------------------------------------------------------------
Bank loans $ 8,500 $ - $ - $ - $ - $ - $ 8,500
Long-term debt 9,324 3,555 1,742 802 863 7,427 23,713
Liabilities subordinated to
claims of general creditors 45,700 23,200 14,200 3,700 53,700 203,700 344,200
Rental commitments 96,608 44,660 29,694 20,298 13,590 99,905 304,755
Fedral Home Loan Bank advances 8,750 4,850 6,535 640 7,220 2,549 30,544
----------------------------------------------------------------------------------
Total financing commitments
and obligations $168,882 $76,265 $52,171 $25,440 $75,373 $313,581 $711,712
----------------------------------------------------------------------------------
For the year ended December 31, 2005, cash and cash equivalents increased
$66.8 million. Cash provided by operating activities was $424.2 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, an increase in accounts payable and accrued
expenses, and an increase in accrued compensation and employee benefits.
These increases to cash and cash equivalents were partially offset by an
increase in securities purchased under agreements to resell and other
assets. Cash used in investing activities was $89.4 million consisting
primarily of capital expenditures supporting the Partnership's operations.
Cash used in financing activities was $268.1 million, consisting primarily
of partnership withdrawals and distributions ($212.3 million), redemption of
partnership interests ($33.8 million) and repayment of subordinated debt
($43.2 million), offset by issuance of subordinated limited partner
interests ($24.2 million).
For the year ended December 31, 2004, cash and cash equivalents increased
$6.1 million. Cash provided by operating activities was $300.9 million. The
primary sources of cash from operating activities include income before
allocations to partners adjusted for depreciation, a net decrease in
inventory securities and an increase in accounts payable and accrued
expenses. These increases to cash and cash equivalents were partially offset
by growth in the customer margin loans. Cash used in investing activities
was $81.7 million consisting of capital expenditures supporting the
Partnership's operations. Cash used in financing activities was $212.1
million, consisting primarily of partnership withdrawals ($201.1 million)
and repayment of subordinated debt ($20.7 million).
As a result of its activities as a broker-dealer, EDJ, the Partnership's
principal subsidiary, is subject to the Net Capital provisions of Rule
15c3-1 of the Securities Exchange Act of 1934 and the capital rules of the
NYSE. Under the alternative method permitted by the rules, EDJ must maintain
minimum Net Capital, as defined, equal to the greater of $0.250 million 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, 2005, EDJ's Net Capital of $570.9 million was 24.4% of aggregate debit
items and its Net Capital in excess of the minimum required was $524.2
million. Net Capital after anticipated withdrawals, which are scheduled
subordinated debt principal payments through June 30, 2006, as a percentage
of aggregate debit items was 24.0%. Net capital and the related capital
percentages may fluctuate on a daily basis.
CRITICAL ACCOUNTING POLICIES
The Partnership's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America,
which may require judgment and involve estimation processes to determine its
assets, liabilities, revenues and expenses which affect its results of
operations.
31
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
The Partnership believes that of its significant accounting policies, the
following critical policies may involve a higher degree of judgment and
complexity.
Customers' transactions are recorded on a settlement date basis with the
related revenue and expenses recorded on a trade date basis. The Partnership
may be exposed to risk of loss in the event customers, other brokers and
dealers, banks, depositories or clearing organizations are unable to fulfill
contractual obligations. For transactions in which it extends credit to
customers, the Partnership seeks to control the risks associated with these
activities by requiring customers to maintain margin collateral in
compliance with various regulatory and internal guidelines.
Securities owned and sold, not yet purchased, including inventory securities
and investment securities, are valued at market value which is determined by
using quoted market or dealer prices.
The following significant accounting policies require estimates that involve
a higher degree of judgment and complexity.
The Partnership provides for potential losses that may arise out of
litigation, regulatory proceedings and other contingencies to the extent
that such losses can be estimated, in accordance with SFAS No. 5,
"Accounting for Contingencies." See Item 3 - Legal Proceedings, Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Mutual Fund Matters and Note 16 to the consolidated financial
statements for further discussion of these items. The Partnership regularly
monitors its exposures for potential losses. The Partnership's total
liability with respect to litigation represents the best estimate of
probable losses after considering, among other factors, the progress of each
case, the Partnership's experience and discussions with legal counsel.
The Association's periodic evaluation of the adequacy of its allowance for
loan losses is based on past loan loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower's ability
to repay, the estimated value of any underlying collateral and current
economic conditions.
The Partnership's periodic evaluation of the estimated useful lives of
equipment, property and improvements is based on the original life
determined at the time of purchase and any events or changes in
circumstances that would result in a change in the useful life.
Included in management's discussion and analysis of financial condition and
results of operations, and in the quantitative and qualitative disclosures
about market risk, and in the notes to the financial statements (See Note 1
to the consolidated financial statements), are additional discussions of the
Partnership's accounting policies.
32
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
THE EFFECTS OF INFLATION
The Partnership's net assets are primarily monetary, consisting of cash,
securities inventories and receivables less liabilities. Monetary net assets
are primarily liquid in nature and would not be significantly affected by
inflation. Inflation and future expectations of inflation influence
securities prices, as well as activity levels in the securities markets. As
a result, profitability and capital may be impacted by inflation and
inflationary expectations. Additionally, inflation's impact on the
Partnership's operating expenses may affect profitability to the extent that
additional costs are not recoverable through increased prices of services
offered by the Partnership.
NEW ACCOUNTING STANDARDS
In June 2005, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 154- "Accounting Changes and Error Corrections," a replacement of APB
Opinion No. 20- "Accounting Changes," and FASB No. 3- "Reporting Accounting
Changes in Interim Financial Statements." This statement requires all
changes in accounting principles to be accounted for by retrospective
application to the financial statements for prior periods unless it is
impracticable to do so. It is effective for accounting changes made in
fiscal years beginning after December 15, 2005. The Partnership does not
expect SFAS No. 154 to have a material impact on consolidated financial
position, results of operation or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No.
150 establishes standards for classifying and measuring certain financial
instruments with characteristics of both liabilities and equity. The
provisions of SFAS No. 150 were adopted in the Partnership's financial
statements beginning with the quarter ended March 26, 2004.
Under the 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 equity capital to be classified as a liability. Since the
Partnership is obligated to redeem a partner's capital after a partner's
death, the Statement requires all of the Partnership's equity capital to be
classified as a liability. Income allocable to limited, subordinated limited
and general partners was previously classified on the Partnership's
statement of income as net income. In accordance with SFAS No. 150, these
allocations are now considered interest expense and are classified as a
reduction of income before allocations to partners, which results in a
presentation of $0 net income for the year ended December 31, 2005 and 2004.
The financial statement presentations required to comply with SFAS No. 150
do not alter the Partnership's treatment of income, income allocations or
equity capital for any other purposes. In addition, SFAS No. 150 does not
have any effect on, nor is it applicable to, the Partnership's subsidiaries'
financial statements.
Net income, as defined in the Partnership Agreement, is now equivalent to
income before allocations to partners on the Consolidated Statements of
Income. Such income, if any, for each calendar year is allocated to the
Partnership's three classes of capital in accordance with the formulas
prescribed in the Partnership Agreement. First, limited partners are
allocated net income (as defined in the Partnership Agreement) in accordance
with the prescribed formula for their share of net income. Limited partners
do not share in the net loss (as defined in the Partnership Agreement) in
any year in which there is a net loss and the Partnership is not dissolved
or liquidated. Thereafter, subordinated limited partners and general
partners are allocated any remaining net income based on formulas in the
Partnership Agreement.
The Partnership does not qualify as an accelerated filer under the
Sarbanes-Oxley Act of 2002 with regard to Section 404 of the Act concerning
Management Assessment of Internal Controls. The provisions of Section 404
will be applicable to the Partnership's financial statements effective for
the year ended December 31, 2007. The Partnership is currently preparing for
implementation of this requirement.
33
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
FORWARD-LOOKING STATEMENTS
This report on Form 10-K, and in particular Management'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," 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.
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 market value of securities; (7) rising 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
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The SEC issued market risk disclosure requirements to enhance disclosures of
accounting policies for derivatives and other financial instruments and to
provide quantitative and qualitative disclosures about market risk inherent
in derivatives and other financial instruments. Various levels of management
within the Partnership manage the firm's risk exposure. Position limits in
trading and inventory accounts are established and monitored on an ongoing
basis. Credit risk related to various financing activities is reduced by the
industry practice of obtaining and maintaining collateral. The Partnership
monitors its exposure to counterparty risk through the use of credit
exposure information, the monitoring of collateral values and the
establishment of credit limits.
The Partnership is exposed to market risk from changes in interest rates.
Such changes in interest rates impact the income from interest earning
assets, primarily receivables from customers on margin balances, and may
have an impact on the expense from liabilities that finance these assets. At
December 31, 2005, amounts receivable from customers were $2.419 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 $17.4
million. Conversely, the Partnership estimates that a 100 basis point
decrease in short-term interest rates could decrease the Partnership's
annual net interest income by up to $27.8 million. A decrease in short-term
interest rates has a more significant impact on net interest income because
under the current low interest rate environment the Partnership's interest
bearing liabilities are less sensitive compared to its interest earning
assets.
Based on its analysis, in the opinion of management, the risk associated
with the Partnership's financial instruments at December 31, 2005 will not
have a material adverse effect on the consolidated financial position or
results of operations of the Partnership.
35
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements Included in this Item
Page No.
Report of Independent Registered Public Accounting Firm .......... 37
Consolidated Statements of Financial Condition as of
December 31, 2005 and 2004........................................ 38
Consolidated Statements of Income for the years ended
December 31, 2005, 2004 and 2003.................................. 40
Consolidated Statement of Changes in Partnership Capital
for the year ended December 31, 2003.............................. 41
Consolidated Statements of Changes in Partnership Capital
Subject to Mandatory Redemption for the years ended
December 31, 2005 and 2004........................................ 42
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003.................................. 43
Notes to Consolidated Financial Statements........................ 44
36
PART II
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, 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 subsidiaries (the "Partnership") at December 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America. These
consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We conducted
our audits of these statements in accordance with 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 consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 24, 2006
37
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) 2005 2004
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 260,841 $ 194,089
Securities purchased under agreements to resell 479,000 275,000
Receivable from:
Customers 2,418,887 2,498,688
Brokers, dealers and clearing organizations 232,030 221,535
Mortgages and loans 134,976 150,377
Securities owned, at market value
Inventory securities 96,911 48,730
Investment securities 170,978 220,048
Equipment, property and improvements, at cost,
net of accumulated depreciation and amortization 317,019 316,814
Other assets 206,836 174,222
------------------ ------------------
TOTAL ASSETS $4,317,478 $4,099,503
================== ==================
The accompanying notes are an integral part of these consolidated financial statements.
38
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) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------
Bank loans $ 8,500 $ -
Payable to:
Customers 2,208,645 2,131,217
Brokers, dealers and clearing organizations 66,614 71,535
Depositors 104,411 117,337
Securities sold, not yet purchased, at market value 11,460 38,808
Accrued compensation and employee benefits 354,266 285,754
Accounts payable and accrued expenses 248,754 193,435
Federal Home Loan Bank advances 30,544 33,928
Long-term debt 23,713 31,823
------------------ -------------------
3,056,907 2,903,837
------------------ -------------------
Liabilities subordinated to claims of general creditors 344,200 387,425
------------------ -------------------
Commitments and contingencies (Notes 16 and 17)
Partnership capital subject to mandatory redemption,
net of reserve for anticipated withdrawals 802,612 751,674
Reserve for anticipated withdrawals 113,759 56,567
------------------ -------------------
Total partnership capital subject to mandatory redemption 916,371 808,241
------------------ -------------------
TOTAL LIABILITIES $4,317,478 $4,099,503
================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
39
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) 2005 2004 2003
- -------------------------------------------------------------------------------------------------------------------------
Revenue:
Commissions $1,568,893 $1,504,038 $1,269,605
Asset fees 716,904 581,810 464,465
Account and activity fees 335,105 304,591 254,290
Principal transactions 238,884 304,124 350,662
Interest and dividends 209,734 153,076 132,114
Investment banking 32,892 27,934 43,817
Other revenue 88,015 15,792 23,909
------------------- ------------------- -------------------
Total revenue 3,190,427 2,891,365 2,538,862
Interest expense 55,468 55,913 58,313
------------------- ------------------- -------------------
Net revenue 3,134,959 2,835,452 2,480,549
------------------- ------------------- -------------------
Operating expenses:
Compensation and benefits 1,821,237 1,674,444 1,454,400
Communications and data processing 263,043 278,314 262,884
Occupancy and equipment 260,114 253,031 237,509
Legal 113,940 101,358 25,443
Payroll and other taxes 112,565 102,074 91,537
Postage and shipping 51,366 45,005 43,280
Advertising 49,440 40,075 41,438
Floor brokerage and clearance fees 13,919 13,077 13,958
Other operating expenses 119,350 111,347 106,790
------------------- ------------------- -------------------
Total operating expenses 2,804,974 2,618,725 2,277,239
------------------- ------------------- -------------------
Income before allocations to partners 329,985 216,727 203,310
Allocations to partners:
Limited partners 33,679 27,800 -
Subordinated limited partners 39,587 22,555 -
General partners 256,719 166,372 -
------------------- ------------------- -------------------
Net income $ - $ - $ 203,310
=================== =================== ===================
Net income allocated to:
Limited partners $ - $ - $ 24,252
Subordinated limited partners - - 21,680
General partners - - 157,378
------------------- ------------------- -------------------
$ - $ - $ 203,310
=================== =================== ===================
Income before allocations to partners/net
income per weighted average $1,000 equivalent
limited partnership unit outstanding $ 157.11 $ 126.43 $ 108.08
=================== =================== ===================
Weighted average $1,000 equivalent
limited partnership units outstanding 214,366 219,885 224,389
=================== =================== ===================
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 STATEMENT OF CHANGES IN PARTNERSHIP CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2003
Limited Subordinated General
Partnership Limited Partnership Partnership
(Dollars in thousands) Capital Capital Capital Total
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL $ 239,839 $ 98,422 $ 371,684 $ 709,945
Reserve for anticipated withdrawals (11,173) (3,123) (14,278) (28,574)
----------------------------------------------------------------------
Partnership capital net of reserve for
anticipated withdrawals, December 31, 2002 228,666 95,299 357,406 681,371
Issuance of partnership interests - 9,829 - 9,829
Redemption of partnership interests (6,166) (1,190) - (7,356)
Net Income 24,252 21,680 157,378 203,310
Withdrawals and distributions (8,907) (13,212) (79,749) (101,868)
----------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL 237,845 112,406 435,035 785,286
Reserve for anticipated withdrawals (15,345) (8,468) (34,193) (58,006)
----------------------------------------------------------------------
Partnership capital net of reserve for
anticipated withdrawals, December 31, 2003 222,500 103,938 400,842 727,280
Required reclassification of partnership
capital pursuant to SFAS No. 150 (See Note 1) (222,500) (103,938) (400,842) (727,280)
----------------------------------------------------------------------
Partnership capital net of reserve for
anticipated withdrawals, January 1, 2004 $ - $ - $ - $ -
======================================================================
Included in Total Partnership Capital as of December 31, 2003 are Reserves
for anticipated withdrawals which the Partnership distributed to its General
and Limited Partners subsequent to year end.
The accompanying notes are an integral part of these consolidated financial statements.
41
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, 2005 AND 2004
Limited Subordinated General
Partnership Limited Partnership Partnership
(Dollars in thousands) Capital Capital Capital Total
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL SUBJECT TO
MANDATORY REDEMPTION, JANUARY 1, 2004 $ 237,845 $ 112,406 $ 435,035 $ 785,286
Reserve for anticipated withdrawals (15,345) (8,468) (34,193) (58,006)
-----------------------------------------------------------------------
Partnership capital subject to mandatory
redemption, net of reserve of anticipated
withdrawals, January 1, 2004 222,500 103,938 400,842 727,280
=======================================================================
Issuance of partnership interests - 12,727 - 12,727
Redemption of partnership interests (4,925) (450) - (5,375)
Income allocated to partners 27,800 22,555 166,372 216,727
Withdrawals and distributions (11,079) (22,819) (109,220) (143,118)
-----------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL SUBJECT TO
MANDATORY REDEMPTION, DECEMBER 31, 2004 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 for anticipated
withdrawals, December 31, 2004 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
=======================================================================
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 CASH FLOWS
For the years ended December 31,
---------------------------------------------
(Dollars in thousands) 2005 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ - $ - $ 203,310
Adjustments to reconcile net income to net
cash provided by operating activities -
Income before allocations to partners 329,985 216,727 -
Depreciation and amortization 89,191 95,476 88,785
Changes in assets and liabilities:
Securities purchased under agreements to resell (204,000) 15,000 (225,000)
Net receivable from customers 157,229 (157,698) 77,008
Net receivable from brokers, dealers and
clearing organizations (15,416) (38,468) (42,167)
Receivable from mortgages and loans 15,401 (24,317) (13,101)
Securities owned, net (26,459) 80,131 113,940
Other assets (32,614) (5,886) (10,933)
Payable to depositors (12,926) 9,349 (1,736)
Accrued compensation and employee benefits 55,319 37,025 91,679
Accounts payable and accrued expenses 68,512 72,527 62
-------------- --------------- --------------
Net cash provided by operating activities 424,222 299,866 281,847
-------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, property and improvements, net (89,396) (81,664) (121,282)
-------------- --------------- --------------
Net cash used in investing activities (89,396) (81,664) (121,282)
-------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Bank Loans 8,500 - -
Issuance of Federal Home Loan Bank advances, net (3,384) 10,272 9,828
Repayment of long-term debt (8,110) (7,868) (9,672)
Repayment of subordinated liabilities (43,225) (20,725) (20,725)
Issuance of partnership interests 24,207 12,727 9,829
Redemption of partnership interests (33,752) (5,375) (7,356)
Withdrawals and distributions from partnership capital (212,310) (201,124) (130,442)
-------------- --------------- --------------
Net cash used in financing activities (268,074) (212,093) (148,538)
-------------- --------------- --------------
Net increase in cash and cash equivalents 66,752 6,109 12,027
CASH AND CASH EQUIVALENTS,
Beginning of year 194,089 187,980 175,953
-------------- --------------- --------------
End of year $ 260,841 $ 194,089 $ 187,980
============== =============== ==============
Cash paid for interest $ 56,529 $ 56,429 $ 58,813
============== =============== ==============
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit information)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE PARTNERSHIP'S BUSINESS AND BASIS OF ACCOUNTING. The accompanying
consolidated financial statements include the accounts of The Jones
Financial Companies, L.L.L.P. and all wholly owned subsidiaries
(collectively, the "Partnership"). All material intercompany balances and
transactions have been eliminated in consolidation. Non-controlling minority
interests are accounted for under the equity method.
The Partnership operates as a single business segment. The Partnership's
principal operating subsidiary, Edward D. Jones & Co., L.P. ("EDJ'"), is
comprised of three registered broker-dealers primarily serving individual
investors. EDJ 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. EDJ conducts business throughout the United States of
America, Canada and the United Kingdom with its customers, various brokers,
dealers, clearing organizations, depositories and banks. Boone National
Savings and Loan Association, F.A. (the "Association"), a wholly owned
subsidiary of the Partnership, makes commercial, real estate, and other
loans primarily to customers in central Missouri. Additionally, the
Association offers trust services to EDJ customers through its division, the
Edward Jones Trust Company.
The consolidated 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's capital will be
redeemed by the Partnership in the event of the partner's death, resignation
or termination. In the event of a partner's death, the Partnership must
redeem the partner's capital within six months. Limited partners withdrawing
from the Partnership due to termination or resignation are repaid their
capital in three equal annual installments beginning the month after their
resignation or termination. 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'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. The Partnership's securities activities involve execution,
settlement and financing of various securities transactions for customers.
The Partnership may be exposed to risk of loss in the event customers, other
brokers and dealers, banks, depositories or clearing organizations are
unable to fulfill contractual obligations. For transactions in which it
extends credit to customers, the Partnership seeks to control the risks
associated with these activities by requiring customers to maintain margin
collateral in compliance with various regulatory and internal guidelines.
44
PART II
Item 8. Financial Statements and Supplementary Data, continued
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 sale of securities,
insurance products and mutual fund shares.
Asset fees revenue 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' assets invested in
those companies' products. The asset-based portion of the Partnership's
revenues related to its interest in the Edward Jones Money Market Fund is
also included in asset fees revenue.
Account and activity fees revenue includes fees received from mutual fund
companies for sub-transfer agent accounting services performed by the
Partnership and self-directed IRA custodian account fees. It also includes
other activity based revenues from customers, mutual fund companies and
insurance companies.
Principal transactions revenue is the result of the Partnership's
participation in market-making activities in over-the-counter corporate
securities, municipal obligations, U.S. Government obligations, including
general obligations and revenue bonds, unit investment trusts and
mortgage-backed securities.
Interest and dividend income is earned primarily on margin account balances,
inventory securities and investment securities.
Investment banking revenues are derived from the Partnership's underwriting
and distribution of securities on behalf of issuers or existing holders of
securities.
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
prevailing exchange rate on the date of the transaction. Foreign exchange
gains and losses are included in Other Revenue on the Consolidated
Statements of Income.
CASH AND CASH EQUIVALENTS. The Partnership considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE. The Partnership participates in short-term resale
agreements and repurchase agreements collateralized by U.S. government and
agency securities. The market value of the underlying collateral as
determined daily, plus accrued interest thereon, must equal or exceed 102%
of the carrying amount of the transaction. It is the Partnership's policy to
have such underlying resale agreement collateral deposited in its accounts
at its custodian banks. Repurchase transactions require the Partnership to
deposit collateral with the lender. Resale and repurchase agreements are
carried at the amount at which the securities will be subsequently
resold/repurchased as specified in the agreements.
SECURITIES BORROWING AND LENDING ACTIVITIES. Securities borrowed and
securities loaned transactions are reported as collateralized financings.
Securities borrowed transactions require the Partnership to deposit cash or
other collateral with the lender. In securities loaned transactions, the
Partnership receives collateral in the form of cash or other collateral.
Collateral for both securities borrowed and securities loaned is based on
102% of the market value of the underlying securities loaned. The
Partnership monitors the market value of securities borrowed and loaned on a
daily basis, with additional collateral obtained or refunded as necessary.
Securities borrowed and securities loaned are included in receivable
45
PART II
Item 8. Financial Statements and Supplementary Data, continued
from and payable to brokers, dealers and clearing organizations in the
consolidated statements of 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 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. Securities owned and sold, not
yet purchased, including inventory securities and investment securities, are
valued at market value which is determined by using quoted market or dealer
prices.
EQUIPMENT, PROPERTY AND IMPROVEMENTS. Equipment, including furniture and
fixtures, is recorded at cost and depreciated using straight-line and
accelerated methods over estimated useful lives of two to twelve years.
Buildings are depreciated using the straight-line method over their useful
lives, which are estimated at thirty years. Leasehold improvements are
amortized based on the term of the lease or the economic useful life of the
improvement, whichever is less. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation or amortization
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 market value.
SEGREGATED CASH. Cash of $2 and $51 was segregated in a special reserve bank
account for the benefit of customers, and is included in Cash and Cash
Equivalents as of December 31, 2005 and 2004, respectively, under rule
15c3-3 of the Securities and Exchange Commission ("SEC").
INCOME TAXES. Income taxes have not been provided for in the consolidated
financial statements since The Jones Financial Companies, L.L.L.P. is
organized as a partnership and each partner is liable for their own tax
payments. Any subsidiaries' income tax provisions are insignificant.
RECLASSIFICATION. Certain prior year balances have been reclassified to
conform with the current year presentation.
NEW ACCOUNTING STANDARDS. In May 2003, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 establishes standards for classifying
and measuring certain financial instruments with characteristics of both
liabilities and equity. The provisions of SFAS No. 150 were adopted in the
Partnership's financial statements beginning with the quarter ended March
26, 2004.
Under the 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 equity capital to be classified as a liability. Since the
Partnership is obligated to redeem a partner's capital after a partner's
death, the Statement requires all of the Partnership's equity capital to be
classified as a liability. Income allocable to limited, subordinated limited
and general partners was previously classified on the Partnership's
statement of income as net income. In accordance with SFAS No. 150, these
allocations are now considered interest
46
PART II
Item 8. Financial Statements and Supplementary Data, continued
expense and are 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, 2005 and 2004. The financial statement presentations
required to comply with SFAS No. 150 do not alter the Partnership's
treatment of income, income allocations or equity capital for any other
purposes. In addition, SFAS No. 150 does not have any effect on, nor is it
applicable to, the Partnership's subsidiaries' financial statements.
Net income, as defined in the Partnership Agreement, is now equivalent to
income before allocations to partners on the Consolidated Statements of
Income. Such income, if any, for each calendar year is allocated to the
Partnership's three classes of capital in accordance with the formulas
prescribed in the Partnership Agreement. First, limited partners are
allocated net income (as defined in the Partnership Agreement) in accordance
with the prescribed formula for their share of net income. Limited partners
do not share in the net loss (as defined in the Partnership Agreement) in
any year in which there is a net loss and the Partnership is not dissolved
or liquidated. Thereafter, subordinated limited partners and general
partners are allocated any remaining net income based on formulas in the
Partnership Agreement.
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. Substantially all amounts payable to
customers are subject to withdrawal upon customer request. The Partnership
pays interest on certain credit balances in customer accounts.
NOTE 3 - RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING
ORGANIZATIONS
The components of receivable from and payable to brokers, dealers and
clearing organizations are as follows:
2005 2004
----------- -----------
Receivable from clearing organizations $ 200,640 $ 196,403
Receivable from money market funds 10,635 6,523
Securities failed to deliver 9,306 5,552
Dividends receivable 8,262 4,196
Deposits paid for securities borrowed 2,122 6,447
Other 1,065 2,414
----------- -----------
Total receivable from brokers, dealers
and clearing organizations $ 232,030 $ 221,535
=========== ===========
Securities failed to receive $ 39,425 $ 58,077
Payable to clearing organizations 22,726 1,591
Securities loaned 3,265 8,203
Other 1,198 3,664
----------- -----------
Total payable to brokers, dealers and
clearing organizations $ 66,614 $ 71,535
=========== ===========
Receivable from clearing organizations represents balances and deposits with
clearing organizations and the Partnership's Canadian carrying broker.
Securities failed to deliver/receive represent the contract value of
securities which have not been received or delivered by settlement date.
47
PART II
Item 8. Financial Statements and Supplementary Data, continued
NOTE 4 - RECEIVABLE FROM MORTGAGES AND LOANS
Receivable from mortgages and loans is 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 approximate their fair
values.
NOTE 5 - SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
Securities owned and securities sold, not yet purchased are summarized as
follows (at market value):
2005 2004
------------------------------ -------------------------------
Securities Securities
Sold, Sold,
Securities not yet Securities not yet
Owned Purchased Owned Purchased
------------- ------------- ------------- --------------
Inventory securities:
Certificates of deposit $ 15,105 $ 2,994 $ 5,519 $ 23,194
U.S. and Canadian government
and U.S. agency obligations 6,744 4,675 8,246 11,947
State and municipal obligations 44,374 203 22,426 206
Corporate bonds and notes, and
collateralized mortgage obligations 17,485 2,578 8,421 3,314
Equities 12,239 445 333 72
Unit investment trusts 964 565 3,785 75
------------- ------------- ------------- --------------
$ 96,911 $ 11,460 $ 48,730 $ 38,808
============= ============= ============= ==============
Investment securities:
U.S. government and agency
obligations held by U.S. broker-
dealer $ 74,093 $ 121,558
U.S. and Canadian government and
U.S. agency obligations held by
foreign broker-dealers 32,597 39,731
Mutual funds 64,288 58,759
------------- -------------
$ 170,978 $ 220,048
============= =============
The Partnership attempts to reduce its exposure to market price
fluctuations of its inventory securities through the sale of U.S. government
securities and, to a limited extent, the sale of fixed income futures
contracts. The amount of the securities purchased or sold will fluctuate on
a daily basis due to changes in inventory securities owned, interest rates
and market conditions. Futures contracts are settled daily, and any gain or
loss is recognized in principal transactions revenue. The notional amount of
futures contracts sold was $7,000 and $6,000 at December 31, 2005 and 2004,
respectively.
48
PART II
Item 8. Financial Statements and Supplementary Data, continued
NOTE 6 - EQUIPMENT, PROPERTY AND IMPROVEMENTS
Equipment, property and improvements are summarized as follows:
2005 2004
------------ -----------
Land $ 12,915 $ 12,915
Buildings and improvements 361,747 326,324
Equipment, furniture and fixtures 652,021 631,981
------------ -----------
Total equipment, property and improvements 1,026,683 971,220
Accumulated depreciation and amortization (709,664) (654,406)
------------ -----------
Equipment, property and improvements, net $ 317,019 $ 316,814
============ ===========
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.
NOTE 7 - BANK LOANS
Bank Loans consist of a $20,000 unsecured bank line of credit expiring April
14, 2006, which the Partnership plans to renew at that time. The $8,500
drawn under the line of credit at 12/31/05 was used to fund the construction
of a new office building in Tempe, Arizona. Interest on amounts drawn under
the line of credit is paid quarterly at a variable rate of 5.68% at December
31, 2005, based on LIBOR plus applicable margin.
The Partnership borrows from banks on a short-term basis primarily to
finance customer margin balances and inventory securities. As of December
31, 2005, the Partnership had bank lines of credit aggregating $1,210,000 of
which $1,160,000 were through uncommitted facilities. Actual borrowing
availability under the uncommitted facilities is primarily based on the
value of securities owned and customers' margin securities. There were no
bank loans outstanding under these lines as of December 31, 2005 or 2004.
Interest is at a fluctuating rate based on short-term lending rates. During
the year ended December 31, 2005, EDJ had bank loans outstanding for ten
days with an average daily outstanding balance of $40,200 at an average
interest rate of 3.89%. During the year ended December 31, 2004, EDJ had
bank loans outstanding for twenty-one days of $29,810 at an average interest
rate of 2.26%. During 2003, EDJ had bank loans outstanding for one day of
$50,000 at an average interest rate of 1.98%
NOTE 8 - PAYABLE TO DEPOSITORS
Amounts payable to depositors are composed of the Association's various
savings instruments offered to its customers, which include transaction
accounts and certificates of deposit with maturities ranging from 90 days to
72 months. The carrying amounts of the deposits approximate their fair
values.
49
PART II
Item 8. Financial Statements and Supplementary Data, continued
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES
The Association had loans from The Federal Home Loan Bank ("FHLB") of
$30,544 and $33,928 as of December 31, 2005 and 2004, respectively. The
interest rates on these loans as of December 31, 2005 and 2004 ranged from
1.90% to 6.41% and from 1.38% to 7.40%, respectively. At December 31, 2005
and 2004, $6,000 of these loans were callable at the discretion of the FHLB.
At December 31, 2005 and 2004, $64,777 and $76,076, respectively, of
receivable from mortgages and loans were pledged as collateral to the FHLB
for these loans. Bank loans outstanding at the Association approximate their
fair value.
The Association's scheduled bank loan maturities, as of December 31, 2005,
are as follows:
Maturity
Year Amount
---------- ---------
2006 $ 8,750
2007 4,850
2008 6,535
2009 640
2010 7,220
Thereafter 2,549
---------
$30,544
=========
During 2005, 2004 and 2003, the Association's average aggregate bank loans
outstanding were $36,109, $30,800, and $19,000, respectively, and the
average interest rate was 3.93%, 3.69%, and 4.58%, respectively.
50
PART II
Item 8. Financial Statements and Supplementary Data, continued
NOTE 10 - LONG-TERM DEBT
Long-term debt is composed of the following:
2005 2004
-------- --------
Note payable, collateralized by equipment, interest paid quarterly
at a variable rate (6.20% at December 31, 2005 and 3.81%
at December 31, 2004) based on LIBOR plus applicable margin,
due in annual installments of $5,000, with a final
installment of $6,000 on September 30, 2006. $ 6,000 $ 11,000
Note payable, collateralized by real estate, fixed rate of 7.28%,
principal and interest due in monthly installments, with a final
installment on June 1, 2017. 11,177 11,777
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. 3,801 5,220
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. 2,735 3,826
-------- --------
$ 23,713 $ 31,823
======== ========
Scheduled annual principal payments, as of December 31, 2005 are as follows:
Principal
Year Payment
---------- ----------
2006 $ 9,324
2007 3,555
2008 1,742
2009 802
2010 863
Thereafter 7,427
----------
$23,713
==========
The real estate notes payable of $17,713 at December 31, 2005 are
collateralized by land and buildings with a cost basis of $39,163 and a
carrying value of $26,047 at December 31, 2005. The $6,000 equipment note
payable as of December 31, 2005 is collateralized by equipment with a cost
basis of $26,455 and a carrying value of $1,999 at December 31, 2005.
Certain notes payable agreements contain restrictions that among other
things, require maintenance of a fixed charge coverage ratio of 1.0 to 1.0
and minimum net capital of $28,000, as defined in the agreement. The
Partnership is in compliance with all debt covenants and restrictions as of
December 31, 2005 and 2004.
51
PART II
Item 8. Financial Statements and Supplementary Data, continued
The Partnership has estimated the fair value of the long-term debt to be
approximately $23,544 and $31,079 as of December 31, 2005 and 2004,
respectively.
NOTE 11 - LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Liabilities subordinated to claims of general creditors consist of:
2005 2004
---------- ----------
Capital notes, 7.33%, due in annual installments of $50,000
commencing on June 12, 2010, with a final installment
on June 12, 2014. $250,000 $250,000
Capital notes, with rates ranging from 7.58% to 7.79%,
due in annual installments ranging from $3,700 to
$25,000, commencing on August 15, 2005, with a
final installment of $3,700 on August 15, 2011. 52,500 75,000
Capital notes, 8.18%, due in annual installments of $10,500,
with a final installment on September 1, 2008. 31,500 42,000
Capital notes, 7.95%, due in annual installments
of $10,225, with a final installment
of $10,200 on April 15, 2006. 10,200 20,425
---------- ----------
$344,200 $387,425
========== ==========
Required annual principal payments, as of December 31, 2005, are as follows:
Principal
Year Payment
---------- ----------
2006 $ 45,700
2007 23,200
2008 14,200
2009 3,700
2010 53,700
Thereafter 203,700
----------
$ 344,200
==========
The capital note agreements contain restrictions which, among other things,
require maintenance of certain financial ratios, restrict encumbrance of
assets and creation of indebtedness and limit the withdrawal of partnership
capital subject to mandatory redemption. As of December 31, 2005, EDJ was
required, under the note agreements, to maintain minimum partnership capital
subject to mandatory redemption of $400,000 and Net Capital of $175,390 (see
Note 13). EDJ is in compliance with all restrictions as of December 31, 2005
and 2004.
52
PART II
Item 8. Financial Statements and Supplementary Data, continued
The subordinated liabilities are subject to cash subordination agreements
approved by the New York Stock Exchange, Inc. and, therefore, are included
in EDJ's computation of Net Capital under the SEC's uniform Net Capital
rule. The Partnership has estimated the fair value of the subordinated
capital notes to be approximately $352,200 and $403,140 as of December 31,
2005 and 2004, respectively.
NOTE 12 - PARTNERSHIP CAPITAL SUBJECT TO MANDATORY REDEMPTION
As more fully described under "New Accounting Standards" in Note 1, the
firm's partnership 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 $802,612 consists of $212,214 of limited
partnership capital issued in $1,000 units, $135,197 of subordinated limited
partnership capital and $455,201 of general partnership capital as of
December 31, 2005.
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 $16,095, $16,492, and
$16,868 for the years ended December 31, 2005, 2004 and 2003, 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 13 - NET CAPITAL REQUIREMENTS
As a result of its activities as a broker-dealer, EDJ is subject to the Net
Capital provisions of Rule 15c3-1 of the Securities Exchange Act of 1934 and
the capital rules of the New York Stock Exchange, Inc. Under the alternative
method permitted by the rules, EDJ must maintain minimum Net Capital equal
to the greater of $250 or 2% of aggregate debit items arising from customer
transactions. The 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, 2005, EDJ's Net Capital of $570,929 was 24.4% of aggregate
debit items and its Net Capital in excess of the minimum required was
$524,158. Net Capital after anticipated withdrawals, which are scheduled
subordinated debt payments through June 30, 2006, as a percentage of
aggregate debit items was 24.0%. Net Capital and the related capital
percentages may fluctuate on a daily basis.
At December 31, 2005, the Partnership's foreign broker-dealer subsidiaries
and the Association were in compliance with regulatory capital requirements
in the jurisdictions in which they operate.
53
PART II
Item 8. Financial Statements and Supplementary Data, continued
NOTE 14 - OTHER REVENUE
During December 2005, EDJ and a mutual fund company terminated a profit
sharing agreement which entitled EDJ to receive a specified percentage of
the mutual fund company's annual earnings. Other revenue for 2005 includes
$70,000 received from the mutual fund company due to the termination of the
profit sharing agreement.
During 2003, the Partnership received a business interruption insurance
claim of $6,950 pertaining to September 11, 2001, which is included in Other
Revenue.
NOTE 15 - 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 $76,600, $63,300 and $47,900 were provided by the Partnership
for its contributions to the plans for the years ended December 31, 2005,
2004 and 2003, respectively.
NOTE 16 - COMMITMENTS
The Partnership leases headquarters office space, furniture, computers and
communication equipment under various operating leases. Additionally, branch
offices are leased generally for terms of three to five years. Rent expense
was $187,700, $190,700, and $183,500 for the years ended December 31, 2005,
2004 and 2003, respectively.
The Partnership's noncancelable lease commitments greater than one year as
of December 31, 2005, are summarized below:
Year
----------
2006 $96,608
2007 44,660
2008 29,694
2009 20,298
2010 13,590
Thereafter 99,905
----------
$304,755
==========
NOTE 17 - CONTINGENCIES
In the normal course of business, the Partnership has been named, from time
to time, as a defendant in various legal actions, including arbitrations,
class actions and other litigation. Certain of these legal actions include
claims for substantial compensatory and/or punitive damages or claims for
indeterminate amounts of damages. The Partnership is involved, from time to
time, in investigations and proceedings by governmental and self-regulatory
agencies, certain of which may result in adverse judgments, fines or
penalties. 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.
54
PART II
Item 8. Financial Statements and Supplementary Data, continued
In view of the inherent difficulty of predicting the outcome of such
matters, particularly in cases in which claimants seek substantial or
indeterminate damages, or actions which are in very preliminary stages, the
Partnership cannot predict with certainty the eventual loss or range of loss
related to such matters. The Partnership believes, based on current
knowledge and after consultation with counsel, that the outcome of these
actions will not have a material adverse effect on the consolidated
financial condition of the Partnership, although the outcome could be
material to the Partnership's future operating results for a particular
period or periods.
Also, in the normal course of business, the Partnership enters into
contracts which contain indemnification provisions, 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'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's results of operations or financial condition.
NOTE 18 - REGULATORY SETTLEMENTS
In December 2004, the Partnership entered into settlement agreements with
the Securities and Exchange Commission, National Association of Securities
Dealers, Inc., the New York Stock Exchange and the U.S. Attorney's Office
for the Eastern District of Missouri primarily related to allegations that
the Partnership failed to adequately disclose revenue sharing payments that
it received from a group of mutual fund families and 529 savings plans that
the Partnership recommended to its customers. As part of the agreement, the
Partnership, without admitting or denying the allegations or findings,
consented to various undertakings that included enhanced disclosure of
revenue sharing arrangements to customers and payment of $75,000 into a FAIR
FUND established pursuant to Section 308 of the Sarbanes-Oxley Act of 2002
for distribution to the Partnership's customers. In connection with the
$75,000 payment, the Partnership recorded a charge of $50,000 in December
2004 with the remaining $25,000 charged against previously established
reserves. The $50,000 reduction in net income before allocations to partners
was specially allocated to subordinated limited partners and general
partners. Additionally, in connection with the settlements, the
Partnership's Managing Partner voluntarily retired as the Partnership's
Managing Partner effective December 31, 2005.
NOTE 19 - RELATED PARTIES
EDJ owns a 49.5% limited partnership interest in the investment advisor to
the Edward Jones Money Market Fund and a 49.5% limited partnership interest
in the investment advisor to the Federated Capital Income Fund. The
Partnership does not have management responsibility with regard to the
advisors. Approximately 2% of the Partnership's revenues were derived from
the advisors and these funds during 2005 and 2004, and 3% for 2003.
55
PART II
NOTE 20 - QUARTERLY INFORMATION
(Unaudited)
Quarters Ended
--------------
2004 March 26, June 25, September 24, December 31,
- ---- --------- -------- ------------ ------------
Total revenue $725,029 $728,841 $686,397 $751,098
Income before allocations to
partners 60,939 72,453 58,910 24,425
Income before allocations to
partners per weighted average
$1,000 equivalent limited
partnership unit outstanding $ 28.89 $ 34.34 $ 27.92 $ 35.28*
<FN>
* The $50,000 reduction in net income before allocations to partners related
to regulatory settlements (See Note 18) was specially allocated to
subordinated limited partners and general partners, and was not allocated to
limited partners.
2005 March 24, June 24, September 30, December 31,
--------- -------- ------------ -----------
Total revenue $755,797 $784,269 $808,535 $841,826
Income before allocations to
partners 63,980 76,706 88,466 100,833
Income before allocations to
partners per weighted average
$1,000 equivalent limited
partnership unit outstanding $ 30.64 $ 36.73 $ 42.34 $ 47.40
56
PART II
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As required by Rule 13a-15
under the Securities Exchange Act of 1934, as of the end of the period
covered by this Annual Report on Form 10-K, the Partnership's certifying
officers, the Chief Executive Officer and the Chief Financial Officer,
carried out an evaluation with the participation of our 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 they believe that, as of the date of completion
of the evaluation, our disclosure controls and procedures were reasonably
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. 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-K that has materially affected, or
is reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Jones Financial Companies, L.L.L.P., organized as a partnership, does
not have individuals associated with it designated as officers or directors.
As of February 24, 2006, the Partnership was composed of 305 general
partners, 4,636 limited partners and 160 subordinated limited partners.
Under the terms of the Partnership Agreement, the Managing Partner in said
capacity has primary responsibility for administering the Partnership's
business, determining its policies, controlling the management and conduct
of the Partnership's business and has the power to appoint and dismiss
general partners of the Partnership and to fix the proportion of their
respective interests in the Partnership. The Partnership does not have a
formal code of ethics for executives. It relies on the core values and
beliefs of the Partnership as well as the Partnership Agreement. The
Partnership is in the process of developing a code of ethics and program.
Subject to the foregoing, the Partnership is managed by its 305 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 21 years.
The Executive Committee of the Partnership, throughout 2005, was composed of
Douglas E. Hill, Richie L. Malone, Steven Novik, Norm Eaker, and Lawrence R.
Sobol. Mr. Sobol retired as of December 31, 2005, and he is currently a
subordinated limited partner of the Partnership. 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 is a listing of the names of the Executive Committee, ages, year
of becoming a general partner and area of responsibility for each as of
February 24, 2006:
Name Age Partner Area of responsibility
- ------------------------------------------------------------------------------------------------------------
James D. Weddle 52 1984 Managing Partner
Richie L. Malone 57 1979 Information Systems
Steven Novik 56 1983 Finance
Tim Kirley 51 1994 United Kingdom Operations
Gary D. Reamey 50 1984 Canadian Operations
Norman Eaker 49 1984 Global Operations & Service
Brett Campbell 46 1993 IR Hiring, Training, & Development
- ------------------------------------------------------------------------------------------------------------
Each member of the Executive Committee has been a general partner of the
Partnership for more than five preceding years.
Richie L. Malone is a director of F5 Networks, Inc., Seattle, Washington.
Norman Eaker is a member of the Board of Directors of the Depository Trust &
Clearing Corporation and the Board of Trustees of the CUSIP Agency.
58
PART III
ITEM 11. EXECUTIVE COMPENSATION
The following table identifies the compensation of the firm's Managing
Partner and the five highest compensated individuals of the Partnership
during the three most recent years (including respective shares of profit
participation).
(1) (2) (3)(4)
Net Income
Deferred Allocated
Compen- to General Total
Year Salaries sation Partners (1)(2)(3)(4)
- ---------------------------------------------------------------------------------------------------------------
Douglas E. Hill (4) 2005 $225,000 $9,954 $7,590,456 $7,825,410
2004 225,000 8,508 1,576,498 1,810,006
2003 200,000 7,160 4,287,876 4,495,036
Richie L. Malone 2005 175,000 9,954 7,084,425 7,269,379
2004 175,000 8,508 4,365,620 4,549,128
2003 175,000 7,160 4,192,168 4,374,328
Gary D. Reamey 2005 150,000 9,954 7,084,426 7,244,380
2004 150,000 8,508 4,365,621 4,524,129
2003 150,000 7,160 4,054,043 4,211,203
James D. Weddle 2005 175,000 9,954 6,578,395 6,763,349
2004 175,000 8,508 4,053,790 4,237,298
2003 175,000 7,160 3,897,020 4,079,180
Steven Novik 2005 175,000 9,954 6,072,365 6,257,319
2004 175,000 8,508 3,741,961 3,925,469
2003 175,000 7,160 3,601,872 3,784,032
Norman Eaker 2005 175,000 9,954 6,072,365 6,257,319
2004 175,000 8,508 3,741,961 3,925,469
2003 175,000 7,160 3,607,446 3,789,606
- ---------------------------------------------------------------------------------------------------------------
<FN>
(1) Each non-selling general partner receives a salary generally ranging
from $115,000 - $250,000 annually. Selling general partners do not
receive a specified salary, rather, they receive the net sales
commissions earned by them (none of the six individuals listed above
earned any such
59
PART III
Item 11. Executive Compensation, continued
commissions). Additionally, general partners who are principally
engaged in sales are entitled to office bonuses based on the
profitability of their respective branch office, on the same
basis as the office bonus program established for all investment
representative employees.
(2) Each general partner is a participant in the Partnership's profit
sharing plan which covers all eligible employees. Contributions to
the plan, which are within the discretion of the Partnership, are
made annually and have historically been determined based on
approximately twenty-four percent of the Partnership's net income.
Allocation of the Partnership's contribution among participants is
determined by each participant's relative level of eligible earnings,
including in the case of general partners, their net income
participation.
(3) Each general partner is entitled to participate in the annual net
income of the Partnership based upon the respective percentage
interest in the Partnership of each partner. Interests in the
Partnership held by each general partner ranged from .03% to 3.1% in
2005 and 0.03% to 3.0% in 2004 and 2003. At the discretion of the
Managing Partner, the partnership agreement provides that, generally,
the first eight percent of net income allocable to general partners
be distributed on the basis of individual merit or otherwise as
determined by the Managing Partner. Thereafter, the remaining net
income allocable to general partners is distributed based upon each
individual's percentage interest in the Partnership. Net income
allocated to general partners excludes income required to be
reinvested under the Partnership Agreement.
Net income allocable to general partners is the amount remaining
after payment of interest and earnings on capital invested to limited
partners and subordinated limited partners.
(4) Under a 2004 settlement agreement with the U.S. Attorney's Office for
the Eastern District of Missouri resolving threatened enforcement
action in connection with the Partnership's disclosure practices
regarding the receipt of revenue sharing from preferred mutual funds,
Mr. Hill absorbed a disproportionate allocation of the settlement
agreement's cost of approximately $3.1 million reducing Mr. Hill's
2004 net income allocated to general partners and his total
remuneration presented in the foregoing table. In the absence of the
settlement agreement, Mr. Hill's 2004 net income allocated to general
partners and the total presented in the above table would have been
$4,677,451 and $4,910,959, respectively.
60
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 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), 253 of the general partners also own
limited partnership interests and 46 of the general partners also own
subordinated limited partnership interests, as noted in the table below.
As of February 24, 2006:
Name of Amount of
Beneficial Beneficial % of
Title of Class Owner Ownership Class
- -----------------------------------------------------------------------------------------------------
Limited Partnership All General
Interests Partners as
a Group $28,568,400 13%
Subordinated All General
Limited Partnership Partners as
Interests a Group $29,527,512 24%
- -----------------------------------------------------------------------------------------------------
61
PART III
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the ordinary course of its business the Partnership has extended credit
to certain of its partners and employees in connection with their purchase
of securities. Such extensions of credit have been made on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with non-affiliated persons, and did
not involve more than the normal risk of collectability or present other
unfavorable features. The Partnership also, from time to time and in the
ordinary course of business, enters into transactions involving the purchase
or sale of securities from or to partners or employees and members of their
immediate families, as principal. Such purchases and sales of securities on
a principal basis are effected on substantially the same terms as similar
transactions with unaffiliated third parties.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees paid by the Partnership to its auditors,
PricewaterhouseCoopers LLP.
(Dollars in thousands) 2005 2004
------- -------
Fees paid by the Partnership:
Audit fees $ 1,225 $ 1,112
Audit-related fees (1) 2,150 692
Tax fees (2) 514 813
All other (3) 144 68
------- -------
Total fees $ 4,033 $ 2,685
======= =======
<FN>
(1) Audit-related fees consist primarily of fees for internal control
reviews, attestation/agreed-upon procedures, employee benefit plan
audits, and consultations concerning financial accounting and reporting
standards.
(2) Tax fees consist of fees for tax compliance, consultation on tax
matters, and other tax planning and advice.
(3) All other fees consist primarily of information technology advisory
services and settlement services.
The audit committee pre-approved all audit and non-audit related services in
fiscal year 2005. No services were provided under the deminimis fee
exception to the audit committee pre-approval requirements.
62
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Page No.
INDEX
(a) (1) The following financial statements are included in Part II,
Item 8:
Report of Independent Registered Public Accounting Firm.............37
Consolidated Statements of Financial Condition as of
December 31, 2005 and 2004..........................................38
Consolidated Statements of Income for the years ended
December 31, 2005, 2004 and 2003....................................40
Consolidated Statement of Changes in Partnership Capital
for the year ended December 31, 2003................................41
Consolidated Statements of Changes in Partnership Capital
Subject to Mandatory Redemption for the years ended
December 31, 2005 and 2004..........................................42
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003....................................43
Notes to Consolidated Financial Statements .........................44
(2) The following financial statements are included in Schedule I:
Parent Company Only Condensed Statements of Financial Condition as
of December 31, 2005 and 2004.......................................69
Parent Company Only Condensed Statements of Income for the years
ended December 31, 2005, 2004 and 2003..............................70
Parent Company Only Condensed Statements of Cash Flows for the
years ended December 31, 2005, 2004 and 2003........................71
Report of Independent Registered Public Accounting Firm.............72
Schedules are omitted because they are not required, inapplicable,
or the information is otherwise shown in the consolidated financial
statements or notes thereto.
(b) Exhibits
Reference is made to the Exhibit Index hereinafter contained.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized:
(Registrant) THE JONES FINANCIAL COMPANIES, L.L.L.P.
------------------------------------------
By (Signature and Title) /s/ James D. Weddle
------------------------------------------
James D. Weddle, Chief Executive Officer
Date March 31, 2006
------------------------------------------
By (Signature and Title) /s/ Steven Novik
------------------------------------------
Steven Novik, Chief Financial Officer
Date March 31, 2006
------------------------------------------
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.
64
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2005
Exhibit
Number Page Description
3.1 * Fifteenth Amended and Restated Agreement of Registered
Limited Liability Limited Partnership of The Jones
Financial Companies, L.L.L.P., dated as of May 14, 2004,
incorporated herein by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 25, 2004.
3.2 * Fifteenth Restated Certificate of Limited Partnership of
the Jones Financial Companies, L.L.L.P., dated as of
January 4, 2004, as amended, incorporated herein by
reference to Exhibit 3.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 25, 2004.
3.3 * Form of Limited Partnership Agreement of Edward D. Jones
& Co., L.P., incorporated by reference to Exhibit 2 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1993.
10.1 * Form of Cash Subordination Agreement between the
Registrant and Edward D. Jones & Co., incorporated
herein by reference to Exhibit 10.1 to the Company's
registration statement of Form S-1 (Reg. No. 33-14955).
10.2 * Agreements of Lease between EDJ Leasing Company and
Edward D. Jones & Co., L.P., dated August 1, 1991,
incorporated herein by reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the year ended
September 27, 1991.
10.3 * Edward D. Jones & Co., L.P. Note Purchase Agreement
dated as of May 8, 1992, incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 26, 1992.
10.4 * Purchase and Sale Agreement by and between EDJ Leasing
Co., L.P. and the Resolution Trust Corporation
incorporated herein by reference to Exhibit 10.21 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992.
10.5 * Master Lease Agreement between EDJ Leasing Company and
Edward D. Jones & Co., L.P., dated March 9, 1993, and
First Amendment to Lease dated March 9, 1994,
incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 25, 1994.
10.6 * Mortgage Note and Amendment to Deed of Trust between EDJ
Leasing Co., L.P. and Nationwide Insurance Company dated
March 9, 1994, incorporated herein by reference to the
65
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, CONTINUED
Company's Quarterly Report on Form 10-Q for the quarter
ended March 25, 1994.
10.7 * Mortgage Note; Deed of Trust and Security Agreement;
Assignment of Leases, Rents and Profits; and
Subordination and Attornment Agreement between EDJ
Leasing Co., L.P. and Nationwide Insurance Company dated
April 6, 1994, incorporated by reference to exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 25, 1994.
10.8 * Note Purchase Agreement by Edward D. Jones & Co., L.P.,
for $92,000,000 aggregate principal amount of 7.95%
subordinated capital notes due April 15, 2006,
incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 24, 1994.
10.9 * Master Lease Agreement and Addendum by and between
Edward D. Jones & Co., L.P. and General Electric Capital
Corporated dated April 21, 1994, incorporated herein by
reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 24, 1994.
10.10 * Agreement and Plan of Acquisition between The Jones
Financial Companies and Boone National Savings and Loan
Association, F.A., incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994.
10.11 * Mortgage Note; South Second Deed of Trust and Security
Agreement between EDJ Leasing Co., L.P. and Nationwide
Life Insurance Company dated August 31, 1995,
incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 29, 1995.
10.12 * Mortgage Note; North Second Deed of Trust and Security
Agreement between EDJ Leasing Co., L.P. and Nationwide
Life Insurance Company dated August 31, 1995,
incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 29, 1995.
10.13 * Note Purchase Agreement by Edward D. Jones & Co., L.P.
for $94,500,000 aggregate principal amount of 8.18%
subordinated capital notes due September 1, 2008,
incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 27, 1996.
10.14 * Note Purchase Agreement by Edward D. Jones & Co., L.P.
for $75,000,000 aggregate principal amount of
subordinated capital notes with rates ranging from 7.51%
to 7.79% due September 15, 2011, incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 24, 1999.
66
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, CONTINUED
10.15 * Lease between Eckelkamp Office Center South, L.L.C., a
Missouri Limited Liability Company, as Landlord and
Edward D. Jones & Co., L.P., a Missouri Limited
Partnership, as Tenant, dated February 3, 2000,
incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 2001.
10.16 * Master Agreement dated as of November 30, 2000 among
Edward D. Jones & Co., L.P., as Lessee, Construction
Agent and Guarantor, Atlantic Financial Group, Ltd.,
(registered to do business in Arizona as AFG Equity,
Limited Partnership) as Lessor, Suntrust Bank and
Certain Financial Institutions Parties Hereto, as
Lenders, and Suntrust Bank as agent, and joined in by
The Jones Financial Companies, L.L.L.P., incorporated
herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
10.17 * Master Lease Agreement dated as of November 30, 2000
between Atlantic Financial Group, Ltd. (registered to do
business in Arizona as AFG Equity, Limited Partnership),
as Lessor, and Edward D. Jones & Co., L.P., as Lessee,
incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31,
2001.
10.18 * Master Lease Agreement between Edward D. Jones & Co.,
L.P. and Fleet Capital Corporation dated as of August
22, 2001, incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
10.19 * Credit Agreement dated as of August 27, 2001 between EDJ
Leasing Co., L.P. and Southtrust Bank, incorporated
herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
10.20 * Master Lease Agreement between EDJ Leasing Co., L.P. and
Edward D. Jones & Co., L.P. dated August 27, 2001,
incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31,
2001.
10.21 * Master Agreement dated as of September 18, 2001 among
Edward D. Jones & Co., L.P., as Lessee, Construction
Agent and Guarantor, Atlantic Financial Group, Ltd.,
(registered to do business in Missouri as Atlantic
Financial Group, L.P.) as Lessor, Suntrust Bank and
Certain Financial Institutions Parties Hereto, as
Lenders, and Suntrust Bank, as Agent and joined in by
The Jones Financial Companies, L.L.L.P, incorporated
herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
10.22 * Master Lease Agreement dated as of September 18, 2001
between Atlantic Financial Group, Ltd. (registered to do
business in Missouri as Atlantic Financial Group, L.P.),
as Lessor, and
67
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, CONTINUED
Edward D. Jones & Co., L.P., as Lessee, incorporated
herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
10.23 * Note Purchase Agreement by Edward D. Jones & Co., L.P.,
for $250,000,000 aggregate principal amount of 7.33%
subordinated capital notes due June 12, 2014,
incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June
28, 2002.
21 * Subsidiaries of the Registrant, incorporated herein by
reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2004.
23.1 73 Consent of Independent Registered Public Accounting
Firm, filed herewith.
24 * Delegation of Power of Attorney to Managing Partner
contained within Exhibit 3.1
31 74 Certification pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 302 of the Sarbanes-Oxley
Act of 2002.
32 76 Certification pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
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's Form 8-K
dated December 27, 2004.
99.2 * NASD Letter of Acceptance, Waiver and Consent, dated
December 22, 2004, incorporated herein by reference to
Exhibit 99.2 to the Company's Form 8-K dated December
27, 2004.
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's Form 8-K dated December
27, 2004.
99.4 * Deferred Consideration Agreement, dated December 22,
2004, incorporated herein by reference to Exhibit 99.4
to the Company's Form 8-K dated December 27, 2004.
<FN>
* Incorporated by reference to previously filed exhibits.
68
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) 2005 2004
- ---------------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 3,881 $ 1,731
Investment in subsidiaries 905,463 797,710
Others assets 7,423 9,173
--------------- -----------------
TOTAL ASSETS $ 916,767 $ 808,614
=============== =================
LIABILITIES AND PARTNERSHIP CAPITAL:
Payable to limited partners, accounts payable
and accrued expenses $ 395 $ 373
Partnership capital subject to mandatory
redemption 916,371 808,241
--------------- -----------------
TOTAL LIABILITIES 916,766 808,614
TOTAL PARTNERSHIP CAPITAL - -
TOTAL LIABILITIES AND PARTNERSHIP
--------------- -----------------
CAPITAL $ 916,766 $ 808,614
=============== =================
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.
69
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,
except per unit information) 2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
NET REVENUE
Subsidiary earnings $ 330,098 $ 216,908 $ 200,978
Management fee income 33,510 34,864 36,265
Other 996 339 645
------------------- ------------------- -------------------
Total revenue 364,604 252,111 237,888
Interest expense 16,042 16,507 16,880
------------------- ------------------- -------------------
Net revenue 348,562 235,604 221,008
------------------- ------------------- -------------------
OPERATING EXPENSES
Compensation and benefits 17,645 18,682 17,532
Payroll and other taxes 672 103 75
Other operating expenses 260 92 91
------------------- ------------------- -------------------
Total operating expenses 18,577 18,877 17,698
------------------- ------------------- -------------------
INCOME BEFORE ALLOCATIONS
TO PARTNERS $ 329,985 $ 216,727 $ 203,310
Allocations to partners (329,985) (216,727) -
------------------- ------------------- -------------------
NET INCOME $ - $ - $ 203,310
=================== =================== ===================
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.
70
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) 2005 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ - $ - $ 203,310
Adjustments to reconcile net income to net cash
provided by operating activities -
Income before allocations to partners 329,985 216,727 -
Increase in investment in subsidiaries (107,753) (27,725) (68,237)
Decrease (increase) in other assets and liabilities, net 1,773 2,137 (6,160)
------------------------------------------------
Net cash provided by operating activities 224,005 191,139 128,913
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of partnership interests 24,207 12,727 9,829
Redemption of partnership interests (33,752) (5,375) (7,356)
Withdrawals and distributions from
partnership capital (212,310) (201,124) (130,442)
------------------------------------------------
Net cash used in financing activities (221,855) (193,772) (127,969)
------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 2,150 (2,633) 944
CASH AND CASH EQUIVALENTS,
Beginning of year 1,731 4,364 3,420
------------------------------------------------
End of year $ 3,881 $ 1,731 $ 4,364
------------------------------------------------
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
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM ON FINANCIAL STATEMENT SCHEDULES
To The Jones Financial Companies, L.L.L.P.:
Our audits of the consolidated financial statements referred to in our
report dated March 24, 2006 appearing in the Form 10-K of The Jones
Financial Companies, L.L.L.P. also included audits of the financial
statement schedules listed in Item 15(a)(2) of this Form 10-K. In our
opinion, these financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with
the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 24, 2006
72