UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- -----------------
Commission file number 0-16633
THE JONES FINANCIAL COMPANIES, L.L.L.P.
- ------------------------------------------------------------------------------
(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)
(314) 515-2000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is 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]
Indicated by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of the filing date, there were no voting securities held by
non-affiliates of the registrant.
THE JONES FINANCIAL COMPANIES, L.L.L.P.
INDEX
Page
Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition.....................3
Consolidated Statements of Income..................................5
Consolidated Statements of Changes in Partnership Capital Subject
to Mandatory Redemption..........................................6
Consolidated Statements of Cash Flows..............................7
Notes to Consolidated Financial Statements.........................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk........21
Item 4. Controls and Procedures...........................................21
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................22
Item 1A. Risk Factors......................................................23
Item 6. Exhibits..........................................................23
Signatures........................................................24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
(Unaudited)
June 30, December 31,
(Dollars in thousands) 2006 2005
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 317,623 $ 260,841
Securities purchased under agreements to resell 550,000 479,000
Receivable from:
Customers 2,212,756 2,418,887
Brokers, dealers and clearing organizations 223,320 232,030
Mortgages and loans 130,517 134,976
Securities owned, at market value
Inventory securities 102,156 96,911
Investment securities 142,332 170,978
Equipment, property and improvements, at cost,
net of accumulated depreciation 305,727 317,019
Other assets 229,003 206,836
----------- -----------
TOTAL ASSETS $ 4,213,434 $ 4,317,478
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES
(Unaudited)
June 30, December 31,
(Dollars in thousands) 2006 2005
- ---------------------------------------------------------------------------------------------------------------------
Bank loans $ 8,500 $ 8,500
Payable to:
Customers 2,164,670 2,208,645
Brokers, dealers and clearing organizations 47,530 66,614
Depositors 102,309 104,411
Securities sold, not yet purchased, at market value 10,882 11,460
Accounts payable and accrued expenses 273,041 248,754
Accrued compensation and employee benefits 320,712 354,266
Federal Home Loan Bank advances 27,964 30,544
Long-term debt 16,079 23,713
----------- -----------
2,971,687 3,056,907
----------- -----------
Liabilities subordinated to claims of general creditors 334,000 344,200
----------- -----------
Commitments and contingencies (See Notes)
Partnership capital subject to mandatory redemption,
net of reserve for anticipated withdrawals 863,494 802,612
Reserve for anticipated withdrawals 44,253 113,759
----------- -----------
Total partnership capital subject to mandatory redemption 907,747 916,371
----------- -----------
TOTAL LIABILITIES $ 4,213,434 $ 4,317,478
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
-------------------------- --------------------------
(Dollars in thousands, June 30, June 24, June 30, June 24,
except per unit information) 2006 2005 2006 2005
- --------------------------------------------------------------------------------------- --------------------------
Revenue:
Trade Revenue
Commissions $ 415,555 $ 398,271 $ 857,502 $ 789,150
Principal transactions 76,691 58,231 134,268 113,939
Investment banking 9,712 11,393 17,602 19,084
Fee Revenue
Asset fees 214,429 176,419 419,278 341,930
Account and activity fees 92,895 84,965 184,614 168,561
Interest and dividends 64,806 50,866 123,623 96,662
Other revenue 3,233 5,348 20,740 10,818
--------- --------- ---------- ----------
Total revenue 877,321 785,493 1,757,627 1,540,144
Interest expense 14,968 14,026 29,313 27,585
--------- --------- ---------- ----------
Net revenue 862,353 771,467 1,728,314 1,512,559
--------- --------- ---------- ----------
Operating expenses:
Compensation and benefits 513,617 458,934 1,033,842 901,315
Communications and data processing 71,322 67,052 136,397 132,485
Occupancy and equipment 69,817 64,696 136,969 128,884
Payroll and other taxes 30,564 28,068 65,258 59,458
Legal 11,438 18,988 29,538 29,035
Advertising 14,560 13,261 29,530 30,883
Postage and shipping 13,285 11,131 26,626 26,313
Floor brokerage and clearance fees 4,624 3,971 9,169 7,541
Other operating expenses 35,051 28,660 67,347 55,959
--------- --------- ---------- ----------
Total operating expenses 764,278 694,761 1,534,676 1,371,873
--------- --------- ---------- ----------
Income before allocations to partners 98,075 76,706 193,638 140,686
Allocations to partners:
Limited partners 8,591 7,915 16,908 14,547
Subordinated limited partners 9,676 9,238 19,451 17,337
General partners 79,808 59,553 157,279 108,802
--------- --------- ---------- ----------
Net Income $ - $ - $ - $ -
========= ========= ========== ==========
Income before allocations to partners
per weighted average $1,000
equivalent limited partnership unit outstanding $ 40.77 $ 36.73 $ 80.08 $ 67.37
========= ========= ========== ==========
Weighted average $1,000 equivalent
limited partnership units outstanding 210,716 215,491 211,138 215,927
========= ========= ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY REDEMPTION
SIX MONTHS ENDED JUNE 30, 2006 AND JUNE 24, 2005
(Unaudited)
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Dollars in thousands) Capital Capital Capital Total
- ------------------------------------------------------------------------------------------------------------------------
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 - 22,891 - 22,891
Redemption of partnership interests (2,698) - (18,858) (21,556)
Income allocated to partners 14,547 17,337 108,802 140,686
Withdrawals and distributions (1,018) (15,419) (55,454) (71,891)
--------- --------- --------- ---------
TOTAL PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY
REDEMPTION, JUNE 24, 2005 228,406 137,291 456,107 821,804
Reserve for anticipated withdrawals (13,529) (1,919) (16,518) (31,966)
--------- --------- --------- ---------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, June 24, 2005 $ 214,877 $ 135,372 $ 439,589 $ 789,838
========= ========= ========= =========
TOTAL PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY
REDEMPTION, DECEMBER 31, 2005 $ 234,032 $ 149,311 $ 533,028 $ 916,371
Reserve for anticipated withdrawals (21,818) (14,114) (77,827) (113,759)
--------- --------- --------- ---------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, December 31, 2005 212,214 135,197 455,201 802,612
Issuance of partnership interests - 7,523 26,947 34,470
Redemption of partnership interests (1,658) (18,186) (3,068) (22,912)
Income allocated to partners 16,908 19,451 157,279 193,638
Withdrawals and distributions (1,389) (16,760) (81,912) (100,061)
--------- --------- --------- ---------
TOTAL PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY
REDEMPTION, JUNE 30, 2006 226,075 127,225 554,447 907,747
Reserve for anticipated withdrawals (15,519) (2,690) (26,044) (44,253)
--------- --------- --------- ---------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, June 30, 2006 $ 210,556 $ 124,535 $ 528,403 $ 863,494
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
6
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
------------------------------
June 30, June 24,
(Dollars in thousands) 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ - $ -
Adjustments to reconcile net income to net
cash provided by operating activities -
Income before allocations to partners 193,638 140,686
Depreciation 47,788 44,192
Changes in assets and liabilities:
Securities purchased under agreements to resell (71,000) 219,000
Net receivable from customers 162,156 (205,943)
Net receivable from brokers, dealers and
clearing organizations (10,374) 61,652
Receivable from mortgages and loans 4,459 3,506
Securities owned, net 22,823 (29,906)
Other assets (22,167) (37,929)
Payable to depositors (2,102) (9,038)
Accounts payable and accrued expenses 24,287 (12,284)
Accrued compensation and employee benefits (33,554) (15,530)
--------- ---------
Net cash provided by operating activities 315,954 158,406
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, property and improvements, net (36,496) (30,631)
--------- ---------
Net cash used in investing activities (36,496) (30,631)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment)/Issuance of Federal Home Loan Bank advances, net (2,580) 5,551
Repayment of long-term debt (7,634) (1,529)
Repayment of subordinated debt (10,200) (10,225)
Issuance of partnership interests 34,470 22,891
Redemption of partnership interests (22,912) (21,556)
Withdrawals and distributions from partnership capital (213,820) (128,458)
--------- ---------
Net cash used in financing activities (222,676) (133,326)
--------- ---------
Net increase/(decrease) in cash and cash equivalents 56,782 (5,551)
CASH AND CASH EQUIVALENTS,
Beginning of period 260,841 194,089
--------- ---------
End of period $ 317,623 $ 188,538
========= =========
Cash paid for interest $ 29,572 $ 25,199
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
7
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per unit information)
BASIS OF PRESENTATION
THE PARTNERSHIP'S BUSINESS AND BASIS OF ACCOUNTING. The accompanying
consolidated financial statements include the accounts of The Jones
Financial Companies, L.L.L.P. and all wholly owned subsidiaries
(collectively, the "Partnership"). All material intercompany balances and
transactions have been eliminated in consolidation. Non-controlling minority
interests owned 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. ("Edward
Jones"), is comprised of three registered broker-dealers primarily serving
individual investors. Edward Jones primarily derives its revenues from the
retail brokerage business through the sale of listed and unlisted
securities, insurance products, investment banking and principal
transactions and as a distributor of mutual fund shares. Edward Jones
conducts business throughout the United States of America, Canada and the
United Kingdom with its customers, various brokers, dealers, clearing
organizations, depositories and banks. 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 Edward Jones customers through its division, the Edward Jones
Trust Company. See Subsequent Event note for information on the sale of the
Association's banking business.
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 ("GAAP") 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 the partner's death, the Partnership must
redeem the partner's capital within six months. Limited partners withdrawing
from the Partnership due to termination or resignation are repaid their
capital in three equal annual installments beginning the month after their
resignation or termination. 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.
The interim financial information included herein is unaudited. However, in
the opinion of management, such information includes all adjustments,
consisting primarily of normal recurring accruals, which are necessary for a
fair presentation of the results of interim operations. Certain prior period
amounts have been reclassified to conform to the current year presentation.
8
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The results of operations for the six months ended June 30, 2006 and June
24, 2005 are not necessarily indicative of the results to be expected for
the full year. These consolidated financial statements should be read in
conjunction with the Partnership's Annual Report on Form 10-K for the year
ended December 31, 2005.
REVENUE RECOGNITION. Customer transactions are recorded on a settlement date
basis, and the related commissions and principal transactions are recorded
on a trade date basis. All other forms of revenue are recorded on an accrual
basis.
Commissions consist of charges to customers for the purchase or sale of
securities, insurance products and mutual fund shares.
Asset fees revenue 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,
securities purchased under agreement to resell, inventory securities and
investment securities.
Investment banking revenues are derived from the Partnership's underwriting
and distribution of securities on behalf of issuers.
PARTNERSHIP CAPITAL SUBJECT TO MANDATORY REDEMPTION
The Financial Accounting Standards Board Statement of Financial Accounting
Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity," established standards
for classifying and measuring certain financial instruments with
characteristics of both liabilities and equity. Since the Partnership is
obligated to redeem a partner's capital after a partner's death, SFAS No.
150 requires all of the Partnership's equity capital to be classified as a
liability. Income allocable to limited, subordinated limited and general
partners is considered interest expense and is classified as a reduction of
income before allocations to partners in the Partnership's statement of
income, which results in a presentation of $0 net income for the six month
periods ended June 30, 2006 and June 24, 2005. The financial statement
presentations required to comply with GAAP 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 in 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. Thereafter,
9
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
subordinated limited partners and general partners are allocated any
remaining net income based on formulas in the Partnership Agreement. Limited
partners do not share in the net loss (as defined in the Partnership
Agreement) in any year in which there is net loss and the Partnership is not
dissolved or liquidated.
Partnership capital subject to mandatory redemption, net of reserve for
anticipated withdrawals, of $863,494 consists of $210,556 of limited
partnership capital issued in $1,000 units, $124,535 of subordinated limited
partnership capital and $528,403 of general partnership capital as of June
30, 2006. The reserve for anticipated withdrawals consists of current year
profits to be withdrawn over the next year.
Limited partnership capital is held by current and former employees,
subordinated limited partners 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 $7,900 and $8,100 for
the six months ended June 30, 2006 and June 24, 2005, respectively, and is
included as a component of Interest Expense. The 7.5% return is paid to
limited partners regardless of the Partnership's earnings.
Subordinated limited partnership capital 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.
Subordinated limited partner capital is subordinated to the limited
partnership capital.
NET CAPITAL REQUIREMENTS
As a result of its activities as a broker-dealer, Edward Jones is subject to
the Net Capital provisions of Rule 15c3-1 of the Securities Exchange Act of
1934 and the capital rules of the New York Stock Exchange, Inc, ("NYSE").
Under the alternative method permitted by the rules, Edward Jones must
maintain minimum Net Capital equal to the greater of $250 or 2% of aggregate
debit items arising from customer transactions. The Net Capital rules also
provide 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 Securities and Exchange
Commission ("SEC") to the extent they exceed defined levels, even though
such withdrawals would not cause Net Capital to be less than 5% of aggregate
debit items.
At June 30, 2006, Edward Jones's Net Capital of $580.7 million was 27.2% of
aggregate debit items and its Net Capital in excess of the minimum required
was $538.0 million. Net Capital after anticipated withdrawals, which are
scheduled subordinated debt payments through December 31, 2006, as a
percentage of aggregate debit items was 25.5%. Net capital and the related
capital percentages may fluctuate on a daily basis.
At June 30, 2006, the Partnership's foreign broker-dealer subsidiaries and
the Association were in compliance with regulatory capital requirements in
the jurisdictions in which they operate.
CONTINGENCIES
In the normal course of business, the Partnership has been named, from time
to time, as a defendant in various legal actions, including arbitrations,
class actions and other litigation. Certain of these legal actions include
claims for substantial compensatory and/or punitive damages or claims for
indeterminate amounts of damages. The Partnership is also 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.
10
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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. For additional discussions, refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 2005, and Part II, Item I "Legal Proceedings" in this
Form 10-Q.
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 consolidated results of operations or financial condition.
SUBSEQUENT EVENT
On April 4, 2006, the Association, the Partnership and Commerce Bank, N.A.
("Commerce") entered into a Purchase and Assumption Agreement (the "Purchase
Agreement") pursuant to which Commerce agreed to acquire substantially all
of the assets and assume substantially all of the liabilities of the
Association related to its banking business. Under the Purchase Agreement,
the Partnership received a purchase price of $16.2 million adjusted for the
Association's net assets purchased or liabilities assumed by Commerce. The
Partnership will recognize an after-tax gain of approximately $8.7 million
on the sale in July. With the closing of the Purchase Agreement, the
Association is no longer engaged in the business of banking through Boone
National Savings and Loan. The Association has been renamed Edward Jones
Trust Company and will continue the trust business that was conducted by
Edward Jones Trust Company, formerly a division of the Association. The
Purchase closed on July 20, 2006.
The Association's banking business assets on the Consolidated Statements of
Financial Condition that were sold are included in Receivables from
Mortgages and loans and aggregated $127.2 million of the $130.5 million of
the receivable as of June 30, 2006. The Association's banking business
liabilities on the Consolidated Statements of Financial Condition that were
sold are included in Payable to Depositors and Federal Home Loan Bank
advances. This represents $102.3 million of the payable to depositors and
all $28.0 million of the advances as of June 30, 2006. The income from
operations for the discontinued banking business included in Income before
allocation to partners was $0.376 million for the three months ended June
30, 2006 and $0.540 million for the six months ended June 30, 2006. The
revenue and expense activity related to the discontinued operations was not
material to the Partnership's financial results.
11
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BASIS OF PRESENTATION
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 GAAP. 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.
For internal analysis, the Partnership broadly categorizes its revenues as
trade revenue (revenue from buy or sell transactions on securities) and net
fee revenue (sources other than trade revenue). In the Partnership's
Consolidated Statements of Income, trade revenue is comprised of
commissions, principal transactions and investment banking. Net fee revenue
is comprised of asset fees, account and activity fees, interest and
dividends net of interest expense and other revenues.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND JUNE 24,
2005
For the second quarter of 2006, net revenue increased 12% ($90.9 million) to
$862.4 million, while income before allocations to partners increased 28%
($21.4 million) to $98.1 million. The Partnership's profit margin based on
income before allocations to partners increased to 11.2% in the second
quarter of 2006, from 9.8% in the second quarter of 2005. The Partnership's
net revenue and income before allocations to partners primarily increased
due to higher trade revenue from increased customer dollars invested, growth
in customer asset values, higher account and activity fees, and higher net
interest income. Operating expenses increased due primarily to growth in
sales compensation related to the increase in net revenues and to costs
associated with the continued expansion and enhancement of the Partnership's
branch office network. The Partnership added 394 Investment Representatives
("IRs") during the twelve months ended June 30, 2006, ending the quarter
with 9,999 IRs, an increase of 4% from 9,605 as of June 24, 2005.
TRADE REVENUE
Trade revenue comprised 58% of net revenue for the second quarter of 2006,
down from 61% for the second quarter of 2005. Conversely, net fee revenue
comprised 42% for the second quarter of 2006, up from 39% in the second
quarter of 2005.
Trade revenue of $502.0 million increased 7% ($34.1 million) during the
second quarter of 2006 compared to the same period in the prior year. Trade
revenue increased primarily due to an increase in customer dollars invested
when compared to the second quarter of 2005 offset by a lower gross margin
earned on customer dollars invested (the principal amount of customers' buy
and sell transactions generating trade revenue). Total customer dollars
invested were $21.3 billion during the second quarter of 2006, a 13% ($2.5
billion) increase from the second quarter of 2005. The Partnership's margin
earned on each $1,000 invested decreased to $23.60 for the second quarter of
2006 from $24.80 in 2005. Quarter over quarter, customer dollars invested
shifted to shorter term fixed income products reducing the margin earned on
each $1,000 invested.
12
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Commissions revenue increased 4% ($17.3 million) for the second quarter of
2006 to $415.6 million. Customers invested $14.0 billion in commissions
transactions in the second quarter of 2006 compared to $13.2 billion in the
second quarter of 2005, a 6% increase. Revenue from mutual fund commissions
increased 7% ($17.2 million), representing substantially all of the increase
in commissions revenue. The following table summarizes commissions revenue
quarter over quarter:
Quarter ended (in millions)
-------------------------------
June 30, June 24,
2006 2005
-------- --------
Mutual funds $ 281.0 $ 263.8
Equities 79.6 80.2
Insurance 54.8 54.1
Corporate bonds 0.2 0.2
------- -------
$ 415.6 $ 398.3
======= =======
Principal transactions revenue increased 32% ($18.5 million) to $76.7
million during the second quarter of 2006 due primarily to an increase in
customer dollars invested. Customers invested $6.6 billion in principal
transactions in the second quarter of 2006 compared to $5.2 billion in the
second quarter of 2005, an increase of 27%. The Partnership's margin earned
on principal transactions on each $1,000 invested increased to $11.40 during
the second quarter of 2006 from $10.01 during the second quarter of 2005 due
to an overall increase in fixed income margins which was partially offset by
a shift from higher margin, longer maturity bonds to lower margin, shorter
maturity certificates of deposit. Revenue from corporate bonds increased
143% ($15.8 million), municipal bonds increased 33% ($6.4 million),
government bonds increased 52% ($2.4 million), and certificates of deposit
increased 14% ($1.4 million) while unit investment trust decreased 61% ($4.1
million) and collateralized mortgage obligations decreased 53% ($3.4
million). The following table summarizes principal transaction revenue
quarter over quarter:
Quarter ended (in millions)
-------------------------------
June 30, June 24,
2006 2005
-------- --------
Municipal bonds $ 25.6 $ 19.2
Corporate bonds 26.8 11.0
Certificates of deposit 11.3 9.9
Government bonds 7.3 4.9
Collateralized mortgage obligations 3.1 6.5
Unit investment trusts 2.6 6.7
------ ------
$ 76.7 $ 58.2
====== ======
Investment banking revenue decreased 15% ($1.7 million) during the second
quarter of 2006 to $9.7 million, due primarily to a decrease in municipal
offerings in the current quarter.
13
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
NET FEE REVENUE
Net fee revenue, which is Fee Revenue net of Interest expense, increased 19%
($56.8 million) to $360.4 million during the second quarter of 2006. Asset
fees increased 22% ($38.0 million) to $214.4 million due primarily to the
favorable impact of market conditions increasing customers' mutual fund and
insurance assets generating asset fees. Average customer mutual fund and
insurance assets increased $50.4 billion or 25% to $252.0 billion in the
second quarter of 2006 compared to $201.6 billion in the second quarter of
2005.
Account and activity fees of $92.9 million increased 9% ($7.9 million)
quarter over quarter. Revenue received from sub-transfer agent services
performed for mutual fund companies increased 17% ($8.3 million) to $57.2
million, due to an 18% increase in the number of customer accounts for which
the Partnership provides mutual fund sub-transfer agent services. Other
revenue of $3.2 million decreased 40% ($2.1 million) quarter over quarter
primarily due to an unrealized loss on investment securities recognized in
the second quarter of 2005.
Net interest and dividend income increased 35% ($13.0 million) to $49.8
million during the second quarter of 2006 due primarily to an increase in
interest rates and an increase in volume of securities purchased under
agreements to resell. Interest income from customer loans increased 14%
($6.1 million). The average rate earned on customer loan balances increased
due to the increase in short-term interest rates during the past year to
8.78% during the second quarter of 2006 from 6.82% during the second quarter
of 2005, while the average customer margin loan balances decreased 11%
($266.5 million) to $2.2 billion. Interest income from securities purchased
under agreements to resell increased 720% ($6.6 million) to $7.5 million.
The average rate on these balances increased to 4.84% during the second
quarter of 2006 from 2.83% during the second quarter of 2005, and the
average investment balance increased 342% ($476.7 million) to $616.2
million.
Operating expenses increased 10% ($69.5 million) to $764.3 million during
the second quarter of 2006. Compensation and benefits costs increased 12%
($54.7 million) to $513.6 million. Within compensation and benefits costs,
sales compensation increased 12% ($29.2 million) due to increased revenues.
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 13% ($7.5 million).
Headquarters and branch payroll expense increased 6% ($4.0 million) due to
increased salary and medical costs for existing personnel and additional
support in the branches as the Partnership grows its sales force. On a full
time equivalent basis, the Partnership had 4,189 headquarters associates and
10,463 branch staff associates as of June 30, 2006, compared to 4,024
headquarters associates and 10,013 branch staff associates as of June 24,
2005.
Occupancy and equipment increased 8% ($5.1 million) during the second
quarter of 2006 due primarily to the accrual of $3.6 million of additional
expense related to the planned sublease of excess office space in the Canada
headquarter building. Legal expenses decreased 40% ($7.5 million) during the
second quarter of 2006 primarily due to reduced costs associated with legal
matters. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in the Partnership's Annual Report on
Form 10-K for the Fiscal year ended December 31, 2005 and Part II, Item 1
"Legal Proceedings" in this Form 10-Q for additional discussion on
regulatory settlements). Other operating expenses increased 22% ($6.4
million) during the second quarter of 2006 primarily due to increased travel
and entertainment costs and Managed Account Program ("MAP") money manager
expense due to increased MAP assets.
14
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND JUNE 24, 2005
For the first six months of 2006, net revenue increased 14% ($215.8 million)
to $1.728 billion, while income before allocations to partners increased 38%
($53.0 million) to $193.6 million. The Partnership's profit margin based on
income before allocations to partners increased to 11.0% for the first six
months of 2006, from 9.1% in the first six months of 2005. The Partnership's
net revenue, and income before allocations to partners increased primarily
due to increased customer dollars invested (the principal amount of
customers' buy and sell transactions generating trade revenue), growth in
customer asset values, higher net interest income, recognition of a gain of
$4.5 million on the exchange of its NYSE membership for shares as a result
of the merger between the NYSE and Archipelago, and a gain of $6.5 million
from the sale of the Partnership's interest in the investment advisor to
Federated's Capital Income Fund. Operating expenses increased due primarily
to growth in sales compensation related to the increase in net revenues and
costs associated with the continued expansion and enhancement of the
Partnership's branch office network.
TRADE REVENUE
Trade revenue comprised 58% of net revenue for the first six months of 2006,
down from 61% for the first six months of 2005. Conversely, net fee revenue
comprised 42% for the first six months of 2006, up from 39% in the
corresponding period.
Trade revenue of $1.009 billion increased 10% ($87.2 million) during the
first six months of 2006 compared to the same period in the prior year.
Trade revenue increased due primarily to an increase in customer dollars
invested partially offset by a lower average gross margin earned on customer
dollars invested when compared to the first six months of 2005. Total
customer dollars invested were $42.0 billion during the first six months of
2006, a 15% ($5.6 billion) increase from the first six months of 2005 due in
part to four additional selling days in 2006. There were 125 selling days in
the first six months of 2006, a 3% increase over the 121 selling days in the
first six months of 2005. The Partnership's margin earned on each $1,000
invested decreased to $24.00 for the first six months of 2006 from $25.30 in
2005. Year over year, customer dollars invested shifted to shorter term
fixed income products reducing the margin earned on each $1,000 invested.
Commissions revenue increased 9% ($68.4 million) for the first six months of
2006 to $857.5 million. Commissions revenue increased year over year due
primarily to a 10% ($2.7 billion) increase in customer dollars invested to
$28.8 billion. Underlying the increase in commissions revenues, mutual fund
commissions increased 10% ($52.5 million), equity commissions increased 4%
($6.3 million), and insurance commissions increased 9% ($9.5 million). The
following table summarizes commissions revenue year over year:
Six Months ended (in millions)
-------------------------------
June 30, June 24,
2006 2005
-------- --------
Mutual funds $ 580.9 $ 528.5
Equities 164.9 158.6
Insurance 111.3 101.8
Corporate bonds 0.4 0.3
------- -------
$ 857.5 $ 789.2
======= =======
15
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Principal transactions revenue increased 18% ($20.3 million) to $134.3 million
during the first six months of 2006 due primarily to an increase in customer
dollars invested offset by a shift in customer dollars invested from higher
margin, longer maturity bonds to lower margin, shorter maturity certificates
of deposit. The Partnership's margin earned on principal transactions on each
$1,000 invested decreased to $9.90 during the first six months of 2006 from
$11.20 during the first six months of 2005. Customers invested $13.3 billion
in principal transactions in the first six months of 2006 compared to $9.6
billion in the first six months of 2005, an increase of 39%. Revenue from
municipal bonds increased 23% ($8.6 million), corporate bonds increased 64%
($16.5 million), certificates of deposit increased 23% ($3.8 million),
government bonds decreased 18% ($1.9 million), while collateralized mortgage
obligations decreased 46% ($5.6 million). The following table summarizes
principal transaction revenue year over year:
Six Months ended (in millions)
-------------------------------
June 30, June 24,
2006 2005
-------- --------
Municipal bonds $ 45.2 $ 36.6
Corporate bonds 42.2 25.7
Certificates of deposit 20.3 16.5
Government bonds 12.9 11.0
Unit investment trusts 7.0 11.8
Collateralized mortgage obligations 6.7 12.3
------- -------
$ 134.3 $ 113.9
======= =======
Investment banking revenue decreased 8% ($1.5 million) during the first six
months of 2006 to $17.6 million, due primarily to a decrease in municipal
offerings.
NET FEE REVENUE
Net fee revenue, which is Fee Revenue net of Interest expense, increased 22%
($128.6 million) to $718.9 million during the first six months of 2006.
Asset fees increased 23% ($77.3 million) to $419.3 million due primarily to
the favorable impact of market conditions increasing customers' mutual fund
and insurance assets generating asset fees. Average customer mutual fund and
insurance assets increased 23% ($46.7 billion) to $246.7 billion in the
first six months of 2006 compared to $200.0 billion in the first six months
of 2005.
Account and activity fees of $184.6 million increased 10% ($16.1 million)
year over year. Revenue received from sub-transfer agent services performed
for mutual fund companies increased 16% ($15.4 million) to $111.0 million.
The number of customer accounts for which the Partnership provides mutual
fund sub-transfer agent services increased by 18%. Other revenue of $20.7
million increased 92% ($9.9 million) year over year. 2006 includes a $4.5
million gain from the receipt of shares in exchange for the Partnership's
NYSE membership as a result of the merger between the NYSE and Archipelago
and a $6.5 million gain from the sale of the Partnership's interest in the
investment advisor to Federated's Capital Income Fund. Additionally, in
2005, the Partnership recognized a $2.9 million unrealized gain on
investment securities whereas in 2006, the Partnership recognized a $1.6
million unrealized loss on investment securities.
Net interest and dividend income increased 37% ($25.2 million) to $94.3
million during the first six months of 2006 due primarily to an increase in
interest rates and an increase in volume of securities purchased under
agreements to resell. Interest income from customer loans increased 17%
($14.2 million). The average rate earned on customer loan balances increased
due to the increase in short-term
16
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
interest rates during the past year to 8.55% during the first six months of
2006 from 6.59% during the first six months of 2005, while the average
customer loan balance decreased 9% ($220.5 million) to $2.3 billion.
Interest income from securities purchased under agreement to resell
increased 469% ($10.9 million) to $13.3 million. The average rate on these
balances increased to 4.60% during the first six months of 2006 from 2.51%
during the first six months of 2005, and the average investment balance
increased 185% ($376.6 million) to $580.1 million.
Operating expenses increased 12% ($162.8 million) to $1.535 billion during
the first six months of 2006. Compensation and benefits costs increased 15%
($132.5 million) to $1.034 billion. Within compensation and benefits costs,
sales compensation increased 15% ($72.5 million) due to increased revenues.
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 26% ($27.9 million).
Headquarters and branch payroll expense increased 6% ($8.4 million) due to
increased salary and medical costs for existing personnel and additional
support in the branches as the Partnership increased its sales force.
Occupancy and equipment increased 6% ($8.1 million) during the first six
months of 2006 due primarily to the accrual of $3.6 million of additional
expense related to the planned sublease of excess space in the Canada
headquarter building. Other operating expenses increased 20% ($11.4 million)
primarily due to increased travel and entertainment costs and MAP money
manager expense due to increased MAP assets.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included in the Partnership's Annual Report on Form 10-K for
the fiscal year ended December 31, 2005, and Part II, Item 1 "Legal
Proceedings" in this Form 10-Q for additional discussion on legal matters
and regulatory settlements.
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.
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 of mutual fund matters, refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 2005, and Part II, Item 1 "Legal Proceedings" in this
Form 10-Q.
There are regulatory proposals being considered that could significantly
impact the disclosure and potentially the amount of compensation that
broker-dealers derive from mutual funds and annuity products. The
Partnership believes it is likely in the future that broker-dealers will be
required to provide more disclosure to their 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.
17
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
The Partnership derived 66% of its total revenue from sales and services
related to mutual fund and annuity products in the first six months of 2006
and 67% in the first six months of 2005. The Partnership derived 31% of its
total revenue for the first six months of 2006 and 2005 from one mutual fund
vendor. Significant reductions in the revenues from these mutual fund
sources could have a material impact on the Partnership's results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's capital subject to mandatory redemption at June 30, 2006,
excluding the reserve for anticipated withdrawals, was $863.5 million,
compared to $802.6 million at December 31, 2005. The increase is primarily
due to the retention of General Partner earnings ($49.3 million) and the
issuance of general partners and subordinated limited partner interests
($26.9 million and $7.5 million, respectively), offset by redemption of
general partner, subordinated limited partner and limited partner interests
($3.1 million, $18.2 million and $1.7 million, respectively).
At June 30, 2006, the Partnership had $317.6 million in cash and cash
equivalents. Lines of credit are in place 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 June 30, 2006. The Association had loans
from The Federal Home Loan Bank of $28.0 million as of June 30, 2006 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
subordinated limited partnership interests to its current or retiring
general partners, retention of general partner earnings, private placements
of subordinated debt, long-term secured debt and operating leases under
which the Partnership rents facilities, furniture, fixtures, computers and
communication equipment.
There were no significant changes in the Partnership's financial commitments
and obligations for the six months ended June 30, 2006.
For the six months ended June 30, 2006, cash and cash equivalents increased
$56.8 million. Cash provided by operating activities was $316.0 million. The
primary sources of cash from operating activities include a decrease in net
receivable from customers, an increase in accounts payable and accrued
expenses, and income before allocations to partners adjusted for
depreciation. These increases to cash and cash equivalents were partially
offset by an increase in net receivable from brokers, dealers and clearing
organizations and a decrease in accrued compensation and employee benefits.
Cash used in investing activities was $36.5 million consisting primarily of
capital expenditures supporting the growth of the Partnership's operations.
Cash used in financing activities was $222.7 million, consisting primarily
of partnership withdrawals and distributions ($213.8 million) and redemption
of partnership interests ($22.9 million) offset by issuance of subordinated
limited partner interests ($34.5 million).
As a result of its activities as a broker-dealer, Edward Jones, 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,
18
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Edward Jones 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 rules also provide 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 June 30,
2006, Edward Jones's Net Capital of $580.7 million was 27.2% of aggregate
debit items and its Net Capital in excess of the minimum required was $538.0
million. Net Capital after anticipated withdrawals, which are scheduled
subordinated debt principal payments through December 31, 2006, as a
percentage of aggregate debit items was 25.5%. Net capital and the related
capital percentage may fluctuate on a daily basis.
CRITICAL ACCOUNTING POLICIES
The Partnership's financial statements are prepared in accordance with GAAP,
which require judgment and involve estimation processes to determine its
assets, liabilities, revenues and expenses which may affect its results of
operations.
The Partnership believes that of its significant accounting policies, the
following critical policies may involve a higher degree of judgment and
complexity.
Customers' transactions are recorded on a settlement date basis with the
related revenue and expenses recorded on a trade date basis. The Partnership
may be exposed to risk of loss in the event customers, other brokers and
dealers, banks, depositories or clearing organizations are unable to fulfill
contractual obligations. For transactions in which it extends credit to
customers, the Partnership seeks to control the risks associated with these
activities by requiring customers to maintain margin collateral in
compliance with various regulatory and internal guidelines.
Securities owned and sold, not yet purchased, including inventory securities
and investment securities, are valued at market value which is determined by
using quoted market or dealer prices.
The Partnership provides for potential losses that may arise out of
litigation, regulatory proceedings and other contingencies to the extent
that such losses are probable and can be estimated, in accordance with SFAS
No. 5, "Accounting for Contingencies". The Partnership regularly monitors
its exposures for potential losses. The Partnership's total liability with
respect to litigation represents the best estimate of probable losses after
considering, among other factors, the progress of each case, the
Partnership's experience and 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.
For additional discussions of the Partnership's accounting policies, refer
to "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Critical Accounting Policies" included in the Partnership's
Annual Report on Form 10-K for the Fiscal year ended December 31, 2005.
19
PART I. FINANCIAL INFORMATION
Item 2. 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.
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q 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.
20
PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The SEC issued market risk disclosure requirements to enhance disclosures of
accounting policies for derivatives and other financial instruments and to
provide quantitative and qualitative disclosures about market risk inherent
in derivatives and other financial instruments. Various levels of management
within the Partnership manage the Partnership's risk exposure. Position
limits in trading and inventory accounts are established and monitored on an
ongoing basis. Credit risk related to various financing activities is
reduced by the industry practice of obtaining and maintaining collateral.
The Partnership monitors its exposure to counterparty risk through the use
of credit exposure information, the monitoring of collateral values and the
establishment of credit limits.
The Partnership is exposed to market risk from changes in interest rates.
Such changes in interest rates impact the income from interest earning
assets, primarily receivables from customers on margin balances, and may
have an impact on the expense from liabilities that finance these assets. At
June 30, 2006, amounts receivable from customers were $2.213 billion.
Liabilities include amounts payable to customers and other interest and
non-interest bearing liabilities.
Under current market conditions and based on current levels of interest
earning assets and the liabilities that finance these assets, the
Partnership estimates that a 100 basis point increase in short-term interest
rates could increase its annual net interest income by approximately $17.3
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 $28.9 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 to changes in short-term interest
rates compared to its interest earning assets.
There were no material changes in the Partnership's exposure to market risk
and changes in interest rates during the six months ended June 30, 2006 that
would have a material adverse effect on the consolidated financial position
or results of operations of the Partnership.
ITEM 4. CONTROLS AND PROCEDURES
Based upon an evaluation performed as of the end of the period covered by
this report, the Partnership's certifying officers, the Chief Executive
Officer and the Chief Financial Officer, have concluded that the
Partnership's disclosure controls and procedures were effective.
There have been no changes in the Partnership's last fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Partnership's internal control over financial reporting.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following information supplements the discussion in Part I, Item 3
"Legal Proceedings" in the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 2005, and Part II, Item 1 "Legal Proceedings"
in the Partnership's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 2006:
Spahn IRA, et al v. Edward D. Jones & Co., L.P., et al. - After the
Partnership filed a Motion to Dismiss to 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 September 30, 2006. No class
has been certified in these cases.
Enriquez, et al v. Edward D. Jones & Co., L.P., et al. - In March, 2006 the
Partnership removed the case to Federal Court. Plaintiff has filed a Motion
to Remand seeking to have the case returned to state court. The parties have
fully briefed the Motion to Remand. The Partnership anticipates that the
issue will be heard and decided within the next sixty to ninety days.
Although a Motion for Class Certification has been filed, no class has yet
been certified in this case.
Bressler, et al v. Edward D. Jones & Co., L.P. - On March 31, 2006, the
Court granted the Partnership's request to remove this case to Federal Court
based on the U.S. Supreme Court decision, Dabit. Plaintiffs filed a Motion
to Remand seeking to have the case returned to state court. The parties have
fully briefed the Motion to Remand and the hearing is set for October 9,
2006. No class has yet been certified.
The People of the State of California v. Edward D. Jones & Co., L.P., et al.
- - The Court granted the Motion for Judgment on the Pleadings and allowed the
Attorney General to file an Amended Complaint. After the Attorney General
filed a Second Amended Complaint, the Partnership filed a Motion to Dismiss.
Recently, the Court granted the motion and dismissed the lawsuit without
leave to refile or amend. Subsequently, the Attorney General requested the
Court to reconsider its dismissal of the lawsuit. The Court denied the
Attorney General's request for reconsideration. The Partnership anticipates
that the Attorney General will appeal the decision dismissing the lawsuit.
Booher, et al. v. Edward D. Jones & Co., L.P., et al.- This case was filed
on March 31, 2006 in the United States District Court for the Central
District of California by a former Investment Representative as a putative
class action on behalf of all present and former Investment Representatives
in the State of California and, potentially, throughout the United States.
Although the lawsuit consists of seven separate causes of action, all of the
causes of action arise from claims that Edward Jones failed to comply with
California State Wage and Hour Laws and the Federal Fair Labor Standards
Act. Specifically, it is alleged that Edward Jones failed to pay overtime in
compliance with such laws, unlawfully deducted business expenses from the
wages of Investment Representatives, failed to fully compensate terminated
Investment Representatives and failed to provide mandatory meal and rest
periods in violation of California State Law. Initial Disclosures will be
exchanged in July. No class has been certified.
Ellis v. Edward D. Jones & Co., L.P.- This case was filed on March 16, 2006
in the United States District Court for the Western District of Pennsylvania
(Johnstown), by a former Investment Representative as a putative class
action on behalf of all present and former Pennsylvania Investment
Representatives. Although the lawsuit consists of three separate causes of
action, all the causes of action arise from claims that Edward Jones failed
to pay Pennsylvania Investment Representatives overtime in accordance with
Pennsylvania's Minimum Wage Act and the Pennsylvania Wage Payment Collection
Law.
22
PART II. OTHER INFORMATION
Edward Jones discovered that a series of customers who purchased Exchange
Traded Funds ("ETFs") did not receive prospectuses or product descriptions
with their purchases as required by rule. This error was corrected, a
rescission offering was made and Edward Jones self-reported the ETF prospectus
delivery issue to the NYSE on or about February 17, 2006. Edward Jones
continues to cooperate with their investigation, while the NYSE considers
taking formal action against Edward Jones.
See also "Contingencies" in Part I, Item 1, "Financial Statements" and
"Mutual Fund Matters" in Part I, Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this Form
10-Q.
ITEM 1A. RISK FACTORS
There were no material changes from the risk factors disclosed on Form 10-K
for the fiscal year ended December 31, 2005.
ITEM 6. EXHIBITS
Exhibit
Number Page Description
3.1 * Sixteenth Amended and Restated Agreement of Registered
Limited Liability Limited Partnership of The Jones
Financial Companies, L.L.L.P., dated as of May 12, 2006,
incorporated herein by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2006.
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.
31. 25-26 Certification pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 302 of the Sarbanes-Oxley
Act of 2002.
32. 27-28 Certification pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
<FN>
* Incorporated by reference to previously filed exhibits.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
THE JONES FINANCIAL COMPANIES, L.L.L.P.
---------------------------------------------
(Registrant)
Date: August 11, 2006 /s/ James D. Weddle
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James D. Weddle, Chief Executive Officer
Date: August 11, 2006 /s/ Steven Novik
---------------------------------------------
Steven Novik, Chief Financial Officer
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