United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-16633
THE JONES FINANCIAL COMPANIES, L.L.L.P.
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(Exact name of registrant as specified in its Partnership Agreement)
MISSOURI 43-1450818
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12555 Manchester Road
Des Peres, Missouri 63131
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (314) 515-2000
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Securities registered pursuant to Section 12(b) of the act:
Name of each exchange
Title of each class on which registered
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NONE NONE
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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 23, 2007 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. ("Edward Jones"), the
Partnership's principal subsidiary. Edward Jones was reorganized on August 28,
1987, which date represents the organization date of The Jones Financial
Companies, L.L.L.P.
The Partnership's principal operating subsidiary, Edward Jones, is a
registered broker-dealer primarily serving individual investors. Edward Jones
primarily derives its revenues from the retail brokerage business through the
sale of listed and unlisted securities and insurance products, investment
banking, principal transactions and as a distributor of mutual fund shares.
Edward Jones 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 23, 2007, the Partnership was composed of 320 general partners,
11,492 limited partners and 170 subordinated limited partners.
ORGANIZATIONAL STRUCTURE
At December 31, 2006, the Partnership was organized as follows: The
Partnership owns 100% of the outstanding common stock of EDJ Holding Company,
Inc., and 100% of the outstanding common stock of LHC, Inc. ("LHC"), each of
which is a Missouri corporation. EDJ Holding Company, Inc. and LHC, Inc. are
the sole general partners of Edward D. Jones & Co., L.P. ("Edward Jones") and
EDJ Leasing Co., L.P. ("Leasing"), respectively. The Partnership also holds
all of the limited partnership equity of Edward D. Jones & Co., L.P., and EDJ
Leasing Co., L.P., each of which is a Missouri limited partnership. The
Partnership owns 100% of the equity of Edward Jones Trust Company ("EJTC").
Edward Jones owns 100% of the limited partnership equity of Edward Jones, an
Ontario, Canada limited partnership ("Edward Jones Canada"), and all of the
common stock of Edward D. Jones & Co. Canada Holding Co., Inc., an Ontario,
Canada corporation, its sole general partner. Edward Jones Canada owns all of
the partnership equity of Edward Jones Insurance Agency, an Ontario, Canada
limited partnership, all of the common stock of Edward D. Jones & Co. Agency
Holding Co., Inc., an Ontario, Canada corporation, its general partner, and
100% of the common stock of Edward Jones Insurance Agency (Quebec) Inc., a
Canada corporation. Edward Jones owns 100% of the equity of Edward Jones
Limited, a U.K. private limited company, which owns 100% of the equity of
Edward Jones Nominees Limited.
Edward Jones owns 100% of the equity of EJ Mortgage L.L.C., a Missouri limited
liability company. EJ Mortgage L.L.C. owns 49.9% of Edward Jones Mortgage, a
joint venture. Edward Jones owns 100% of the outstanding common stock of
Conestoga Securities, Inc., a Missouri corporation. Conestoga owns 100% of the
outstanding stock of CIP Management, Inc., which is the managing general
partner of CIP Management, L.P. CIP Management, L.P. is the 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. Edward Jones holds all of the limited partnership equity in a
Missouri limited partnership, EDJ Ventures,
3
PART I
Item 1. Business, continued
Ltd. Conestoga Securities, Inc., is the general partner of EDJ Ventures, Ltd.
Edward Jones owns, as a limited partner, 49.5% of Passport Research Ltd., a
Pennsylvania limited partnership, which acts as an investment advisor to a
money market mutual fund. Edward Jones owns 50% of issued common stock of S-J
Capital Corp., a Missouri corporation. Edward Jones owns 8% of the Customer
Account Protection Company Holdings, Inc. ("CAPCO"), a captive insurance
group.
Edward Jones is the sole member of Edward Jones Insurance Agency Holding,
L.L.C., a Missouri limited liability company; California Agency Holding,
L.L.C., a California limited liability company; and 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.
Edward Jones and Edward Jones Insurance Agency Holding, L.L.C. are members of
Edward Jones Insurance Agency of Massachusetts, L.L.C., a Massachusetts
limited liability company. Edward Jones Insurance Agency Holding, L.L.C. and
California Agency Holding, L.L.C. are members of Edward Jones Insurance Agency
of California, L.L.C., a California limited liability company. All of the
insurance agencies engage in general insurance brokerage activities.
During 2002, Edward Jones' affiliates, Edward Jones Insurance Agency of
Nevada, Inc., Edward Jones Insurance Agency of Alabama, L.L.C., EJ Insurance
Agency of Ohio and Edward Jones Insurance Agency of Texas, Inc., were
dissolved. Edward Jones' affiliates, Edward Jones Nominees PEP Limited and
Edward Jones Nominees ISA Limited, both 100% owned by Edward Jones Limited, a
U.K. private limited company, were also dissolved. Edward Jones Insurance
Agency (Quebec) Inc., a Canada corporation, was organized. During 2003,
Community Investment Partners V, L.P., L.L.L.P., a business development
company, was organized, and an Edward Jones affiliate, Edward Jones Insurance
Agency of Montana, L.L.C., was dissolved. During 2004, Passport Research II
Ltd., a Pennsylvania limited partnership, was organized and Edward Jones owns
49.5% of the limited partnership interest. The Edward Jones affiliates, Edward
Jones Insurance Agency of Michigan, L.L.C. and Cornerstone Mortgage Investment
Group II, Inc., were dissolved.
During 2006, the Edward Jones affiliates, Unison Investment Trusts, L.P.,
d/b/a Unison Investment Trusts, Ltd. and Unison Capital Corp., Inc. were
dissolved. The Edward Jones affiliate, Passport Research II Ltd. was sold. The
Partnership's subsidiary Boone National Savings and Loan Association F.A., was
renamed Edward Jones Trust Company.
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):
2006 2005 2004
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Commissions
Mutual funds $ 1,109,905 $ 1,035,330 $ 986,598
Listed securities 259,676 260,369 249,410
Insurance 232,281 210,887 202,069
Over-the-counter securities 61,818 62,307 65,961
Asset fees 877,771 716,904 581,810
Account and activity fees 378,905 335,105 304,591
Principal transactions 267,038 238,884 304,124
Interest and dividends 253,607 209,734 153,076
Investment banking 32,505 32,892 27,934
Other revenue 44,249 94,038 23,369
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Total revenue $ 3,517,755 $ 3,196,450 $ 2,898,942
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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 purchase
or 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. Edward Jones is able to offer life insurance,
long-term care insurance, fixed and variable annuities and other types of
insurance to its customers through its financial advisors who hold insurance
sales licenses. As an agent for the insurance company, the Partnership
receives commission on the purchase price of the policy.
OVER-THE-COUNTER SECURITIES TRANSACTIONS. 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 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.
The Partnership does not have management responsibility for the advisor.
Revenue from this source is primarily based on customer assets in the funds.
The Partnership has registered an investment advisory program with the
Securities and Exchange Commission ("SEC") under the Investment Advisors Act
of 1940. The registered investment advisory service is a managed account
program that offers a single comprehensive fee structure to qualifying
customers through independent investment managers. Revenues from this source,
although not significant, have grown in recent years.
6
PART I
Item 1. Business, continued
The Partnership offers trust and investment advisory services to its
customers 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.
Edward Jones is also the custodian for its IRA accounts and charges customers
an annual fee for its services. Account and activity fees also include sales
based revenue sharing fees pursuant to arrangements with certain mutual fund
and insurance vendors. These arrangements are based on 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
financial advisors employed by the Partnership over the periods indicated.
INTEREST AND DIVIDENDS
Interest and dividend income is earned primarily on margin account balances,
securities purchased under agreement to resell, cash equivalents, inventory
securities and investment securities. The Partnership is exposed to market
risk for changes in interest rates. The Partnership's interest income is
impacted by the level of interest rates it charges its customers and the level
of customers' loan balances and credit balances.
7
PART I
Item 1. Business, continued
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 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 an
independent research service.
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.
8
PART I
Item 1. Business, continued
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 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.
9
PART I
Item 1. Business, continued
The Partnership does not employ its own floor broker for transactions on
exchanges. The Partnership has arrangements with other brokers to execute the
Partnership's transactions in return for a commission based on the size and
type of trade. If, for any reason, any of the Partnership's clearing, settling
or executing agents were to fail, the Partnership and its customers would be
subject to possible loss. To the extent that the Partnership would not be able
to meet the obligations of the customers, such customers might experience
delays in obtaining the protections afforded them.
Customers 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 ("CAPCO"), of which the
Partnership is an 8% 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 (pound)30,000 and 90% for the next (pound)20,000, for a maximum
protection of (pound)48,000 for all investment business. CIPF limits coverage
to CAD$1,000,000 in 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 320 general partners, the Partnership has
approximately 34,300 full and part-time employees. This includes 10,325
financial advisors as of February 23, 2007. The Partnership's financial
advisors are generally compensated on a commission basis and may, in addition,
be entitled to bonus compensation based on their respective branch office
profitability and the profitability of the Partnership. The Partnership has in
the past paid bonuses to its non-registered employees on a discretionary
basis, but there can be no assurance that such bonuses will be paid for any
given period or will be within any specific range of amounts.
Employees of the Partnership are bonded under a blanket policy as required by
NYSE rules. The annual aggregate amount of coverage is $50,000,000, subject to
a $2,000,000 deductible provision per occurrence.
The Partnership maintains an initial training program for prospective
financial advisors that spans four months which includes preparation for
regulatory exams, concentrated instruction in the classroom and on-the-job
training in a branch office. During the first phase, the trainee spends 60
days studying Series 7 examination materials and taking the examination.
Subsequently, the trainee prepares for and takes either the Series 66 or 63
examinations. After passing the examination, trainees spend one week in a
comprehensive training program in one of our headquarter training facilities
followed by three weeks at their designated location to conduct market
research and prepare for opening the office. The trainee then spends three
weeks of on-the-job training in a branch location reviewing investments,
office procedures and understanding client needs. 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 headquarter training facility to
complete the initial training program. Four months later, the financial
advisor attends an additional training class in a headquarter location, and
subsequently, Edward Jones offers periodic continuing training to its
experienced financial advisors for the entirety of their career. Training
programs for the more experienced financial advisors focus on meeting client
needs and effective management of the branch office.
10
PART I
Item 1. Business, continued
The Partnership considers its employee relations to be good and believes that
its compensation and employee benefits which include medical, life and
disability insurance plans and profit sharing and deferred compensation
retirement plans, are competitive with those offered by other firms
principally engaged in the securities business.
BRANCH OFFICE NETWORK. The Partnership operates 9,704 branch offices as of
February 23, 2007, primarily staffed by a single financial advisor and a
branch office assistant. The Partnership operates 8,978 offices in the United
States located in all 50 states, predominantly in communities with populations
of under 50,000 and metropolitan suburbs. The Partnership also operates in
Canada (through 551 offices as of February 23, 2007) and the United Kingdom
(through 175 offices as of February 23, 2007).
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 financial advisors,
although the Partnership believes that its rate of turnover of financial
advisors is not higher than that of other firms comparable to the Partnership.
REGULATION. 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.
Edward Jones or an affiliate is registered as a broker-dealer in all 50
states, Puerto Rico, Canada and the United Kingdom. Edward Jones conducts
business in Canada through a subsidiary partnership which is regulated by the
Investment Dealers Association of Canada and in the United Kingdom through a
subsidiary which is regulated by the Financial Services Authority. EJTC 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).
11
PART I
Item 1. Business, continued
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 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 EJTC 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 was in compliance with the applicable capital requirements in
the jurisdictions in which they operate during the years ended December 31,
2006 and 2005.
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.
12
PART I
Item 1. Business, continued
OPERATIONAL SYSTEMS -- THE PARTNERSHIP IS UPGRADING AND REPLACING COMPONENTS
OF ITS COMPUTER AND COMMUNICATIONS SYSTEMS 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 current and projected growth rates, and to achieve the
speed, response time and level of access to the Internet that our financial
advisors desire, these systems are being updated. The Partnership is in the
process of replacing our current satellite-based system with a broadband
communication network utilizing T-1 and DSL connectivity. Through February 23,
2007, approximately 5,000 branches have been converted to the new
communications network. This replacement is expected to be completed by the
third quarter of 2007, but there is no assurance that it will be completed on
time or within the projected cost estimates established for this project.
Also, third parties are implementing this replacement, and there is no
assurance of their timely completion. Based on a full replacement of all
video, data and telephony systems, this replacement will require total capital
expenditures of approximately $145 million and additional asset impairment
charges or write-downs related to existing technology and communications
systems may be incurred, thereby reducing earnings. Further, any upgrade or
replacement could result in difficulties in the short-term as the Partnership
integrates the new system with operations, learns to 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 9,700 financial advisor
offices to support. The new system is expected to result in increased firm
operating costs of approximately $55-65 million each year once it is fully
implemented.
Either during or following any upgrade or replacement, 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 communications 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 the Partnership 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.
13
PART I
Item 1. Business, continued
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 FINANCIAL ADVISORS THAN IF A MORE TRADITIONAL OFFICE SYSTEM
IS MAINTAINED.
Most securities firms typically staff several financial advisors and one or
more managers or other supervisory personnel in each of their branch offices.
In contrast, most of the Partnership's branch offices are staffed by a single
financial advisor with primary supervisory activity being conducted from its
headquarters office, 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 financial advisors 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.
ACTIONS BY REGULATORY AGENCIES -- THE SECURITIES INDUSTRY IS HIGHLY REGULATED,
AND AS A RESULT THE PARTNERSHIP IS SUBJECT TO VARIOUS LEGAL ACTIONS AND OTHER
PROPOSED INVESTIGATIONS, WHICH, IF ADVERSELY DETERMINED, COULD MATERIALLY
ADVERSELY AFFECT BUSINESS.
In recent years, mutual 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,
particularly in cases in which claimants seek substantial or indeterminate
damages, or actions which are in very preliminary stages, the Partnership
cannot predict with certainty the eventual loss or range of loss related to
such matters. The Partnership has determined that it is likely that ultimate
resolution in favor of the plaintiffs will result in losses to the Partnership
on some of these matters and as a result, has established appropriate accruals
for potential litigation losses. The Partnership believes, based on current
knowledge and after consultation with counsel, 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.
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.
14
PART I
Item 1. Business, continued
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 could negatively affect the ability to
recruit and retain financial advisors.
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.
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. 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.
Competition among financial services firms also exists for financial advisors
and other personnel. The Partnership's continued ability to expand its
business and to compete effectively depends on the ability of the Partnership
to attract qualified employees and to retain and motivate current employees.
If the profitability of the Partnership decreases, then bonuses paid to
financial advisors and other personnel, along with profit-sharing
contributions, may be decreased or eliminated, increasing the risk that
personnel could be hired away by competitors. In addition, the Partnership has
recently faced increased competition from larger firms in its non-urban
markets, and from a broad range of firms in the urban and suburban markets in
which it competes.
LITIGATION -- LITIGATION SEEKING SUBSTANTIAL DAMAGES FROM SECURITIES FIRMS HAS
INCREASED IN RECENT YEARS, AND IT IS EXPECTED TO CONTINUE TO INCREASE AS
MARKET FLUCTUATIONS CONTINUE.
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.
15
PART I
Item 1. Business, continued
Additionally, due to the system of home office supervision, the Partnership
may be exposed to an enhanced risk of legal actions instituted by customers
resulting from alleged imprudent or illegal actions undertaken by the
financial advisors.
The expenses incurred to defend and/or settle claims 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.
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 its 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 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 current 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. Furthermore, ADP has recently announced that it
will spin off its brokerage services group as an independent company, and the
effect this spin-off could have on the services from ADP is unknown. Similar
risks are experienced in
16
PART I
Item 1. Business, continued
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. While annual losses for the Canadian
operation have continued to decrease, the losses for the U.K. operation have
remained relatively constant.
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.
Adequacy of capital is vitally important to broker/dealers, and lack of
sufficient capital may limit Edward Jones' ability to compete effectively. In
particular, lack of sufficient capital, or compliance with the SEC's Uniform
Net Capital Rules, may limit Edward Jones' 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 Edward Jones' ability to expand or even
maintain its present levels of business. Further, many of the Partnership's
competitors have substantially greater capital and other resources.
Every registered broker/dealer doing business with the public is subject to
the Uniform Net Capital Rule (Rule 15c3-1), promulgated by the SEC under the
Securities and Exchange Act of 1934, as amended (the "Exchange Act") and
incorporated into the rules of the NYSE. Rule 15c3-1 is designed to ensure
financial soundness and liquidity through minimum net capital requirements.
Edward Jones 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, Edward Jones will also be required to restrict withdrawal of
subordinated debt and equity capital if its net capital becomes less than 4%
of its aggregate debit items. In addition, if Edward Jones' net capital
becomes less than 5% of its aggregate debit items, it would not be able to
expand its business operations, including opening new branch offices or hiring
additional financial advisors. Rule 15c3-1 further provides that the total
outstanding principal amount of a broker/dealer's indebtedness under certain
subordination
17
PART I
Item 1. Business, continued
agreements, the proceeds of which are includable in net capital, may not
exceed 70% of the sum of the total outstanding principal amounts of all
subordinated indebtedness included in net capital and equity capital
accounts for periods in excess of 90 days.
In computing "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 Edward Jones) to reflect the possibility of a market
decline pending their disposition. At December 31, 2006, Edward Jones' net
capital of $573.9 million was 29.8% of aggregate debit items and its net
capital in excess of the minimum required was $535.4 million. Net capital as a
percentage of aggregate debit items after anticipated withdrawals was 29.8%.
Net capital and the related capital percentage may fluctuate on a daily basis.
See Note 15 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, Edward Jones may be
prohibited from expanding its business and may be required to restrict
withdrawal of subordinated debt and equity capital in order to meet these
requirements.
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 25 separate buildings. Twenty-three buildings are owned
by the Partnership and two 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 in London, England. The Partnership
also maintains facilities in 9,704 branch locations (as of February 23, 2007)
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.
Revenue Sharing Class Action - The Partnership was sued in nine civil class
- ----------------------------
actions that were eventually consolidated into three proceedings; namely:
(1) Bressler, et al. v. Edward D. Jones & Co., L.P., (2) Spahn IRA, et al.
v. Edward D. Jones & Co., L.P. and (3) Enriquez, et al. v. Edward D. Jones &
Co., L.P. In August 2006, the Partnership announced a preliminary settlement
agreement to resolve all three groups of lawsuits. Each of the suits claimed
that the Partnership failed to adequately disclose its revenue sharing
arrangements with certain designated Preferred Mutual Fund Families.
18
PART I
Item 3. Legal Proceedings, continued
The settlement involves all of the Partnership's present and former clients
who purchased and/or held shares in any of the Preferred Mutual Fund Families
during the period from January 1, 1999 through December 31, 2004. The
Partnership has agreed to pay $55 million to former clients and for attorneys'
fees, as well as any costs to administer the settlement. Additionally, the
Partnership will issue $72.5 million of credit vouchers to current clients
that can be redeemed ratably over a three-year period. Any credit voucher not
redeemed during the applicable year would expire after each annual redemption
period. The $55 million cash component of the settlement and related
administrative costs was charged against previously established legal expense
accruals. The $72.5 million non-cash credit voucher component will be
recognized as a reduction to revenue in the periods in which they are redeemed
by clients. The Partnership agreed to assume the cost of notice and
administration of the settlement. The settlement provides for the release of
all claims, debts and causes of action related to certain revenue sharing
payments received by the Partnership, fees and commissions received by the
Partnership for mutual fund trades, shelf-space arrangements, directed
brokerage transactions, shareholder accounting fees and mutual fund trades
generally.
On December 12, 2006, the Court in the Spahn case gave its preliminary
approval for the settlement and directed notice be provided to class members
within 120 days. On December 21, 2006, the Court in the Enriquez case entered
an identical order preliminarily approving the settlement. The District Court
in Bressler dismissed the lawsuit, however, the Plaintiffs have appealed that
dismissal. The appeal has been stayed pending completion of the settlement.
Once the settlement is finally approved, Plaintiffs in Bressler will dismiss
their appeal and the dismissal entered by the District Court will become
final.
The preliminarily approved settlement must still proceed through a final
approval process before the Courts. At present, tentative hearings for final
approval of the settlement are scheduled for July 20, 2007. If the settlement
fails to be finally approved, the Partnership faces the possible legal risk of
adjudicating the claims for damages that currently equal or exceed the amount
of revenue sharing from 1999 through 2004.
The People of the State of California v. Edward D. Jones & Co., L.P., et al. -
In addition to the foregoing civil class action litigation, the California
Attorney General commenced a civil action against the Partnership on
essentially the same allegations present in the civil class actions. The court
has granted the Partnership's motion to dismiss and dismissed the lawsuit, and
further denied the Attorney General's request for reconsideration. The
California Attorney General has filed an appeal.
Wage and Hour Litigation - The Partnership has been sued in five putative
class actions that allege that the Partnership has misclassified its financial
advisors as exempt from overtime pay, improperly deducted certain business
expenses and otherwise failed to comply with certain state and federal wage
and hour laws. Four of the cases have been, or are in the process of being,
consolidated before the United States District Court for the Western District
of Pennsylvania. Those consolidated actions are Booher, et al. v. Edward D.
Jones & Co., L.P., (National class under federal statutes); Ellis, et al. v.
Edward D. Jones & Co., L.P. (Pennsylvania only class); Weaver, et al. v.
Edward D. Jones & Co., L.P. (Ohio only class); and O'Brien, et al. v. Edward
D. Jones & Co., L.P. (New York only class). The fifth lawsuit, Thill, et al.
v. Edward D. Jones & Co., L.P. is pending before the United District Court in
California and involves a California only putative class. The California and
Pennsylvania courts have entered coordination orders. No class has yet been
certified and the Partnership has denied the claims.
Net Asset Value ("NAV")- The NASD examined the practices of certain
broker/dealers, including Edward Jones, with respect to mutual fund net asset
value 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
19
PART I
Item 3. Legal Proceedings, continued
shares of another fund family and that redemption had taken place within a
specified period of time of the purchase, typically 30, 60 or 90 days. The
NASD investigated whether EDJ complied with the terms of the prospectuses with
respect to these NAV transfer programs. In response to NASD requests for
information, the Partnership identified transactions that involved payments by
the firm's clients of front-end sales loads or purchases of share classes with
contingent deferred sales charges under circumstances where customers may have
been eligible to purchase shares at NAV under such NAV Transfer Programs. On
December 11, 2006, the Partnership entered into a Letter of Acceptance, Waiver
and Consent (the "AWC") with the NASD. Pursuant to the AWC, the Partnership
agreed to establish a remediation program for clients who purchased shares of
mutual funds from January 1, 2002 through December 31, 2004 and qualified for,
but did not receive, the benefit of an NAV Transfer Program. Such remediation
will include, in appropriate cases, 1) a refund of amounts paid as a sales
charge, 2) a cash payment equal to an amount necessary to place the client in
a financial position equivalent to what he or she would have been in if the
relevant transactions had taken place at net asset value, and 3) interest on
those amounts. The Partnership estimates that remediation payments to
investors for the relevant period will be approximately $25 million plus
interest, which will be charged against previously established legal expense
accruals. Pursuant to the AWC, the remediation process is subject to review by
a third party examiner, which review is currently ongoing. The Partnership is
also required to set up and train a response team to field and respond to
client inquires regarding the remediation process and the AWC. The Partnership
also consented to a censure and a fine of $250,000.
In view of the inherent difficulty of predicting the outcome of such matters,
particularly in cases in which claimants seek substantial or indeterminate
damages, or actions which are in very preliminary stages, the Partnership
cannot predict with certainty the eventual loss or range of loss related to
such matters. The Partnership has determined that it is likely that ultimate
resolution in favor of the plaintiffs will result in losses to the Partnership
on some of these matters and as a result, has established appropriate accruals
for potential litigation losses. The Partnership believes, based on current
knowledge and after consultation with counsel, 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:
2006 2005 2004 2003 2002
- ----------------------------------------------------------------------------------
Total revenue $ 3,518 $ 3,196 $ 2,899 $ 2,550 $ 2,273
Income before allocations
to partners/net income * $ 391 $ 330 $ 217 $ 203 $ 149
Income before allocations
to partners/net income
per weighted average
$1,000 equivalent
limited partnership
unit outstanding $ 161.95 $ 157.11 $ 126.43 $ 108.08 $ 87.44
Weighted average
$1,000 equivalent
limited partnership
units outstanding 210,157 214,366 219,885 224,389 230,970
- ----------------------------------------------------------------------------------
<FN>
* Due to the implementation of SFAS No. 150, the Partnership reported income
before allocations to partners in 2006, 2005 and 2004 and net income in 2003
and 2002.
21
PART I
Item 6. Selected Financial Data, continued
Summary Consolidated Statements of Financial Condition Data:
2006 2005 2004 2003 2002
- --------------------------------------------------------------------------------
Total assets $5,196 $4,317 $4,100 $3,723 $3,258
====== ====== ====== ====== ======
Bank loans $ -- $ 9 $ -- $ -- $ --
Federal Home Loan Bank
advances -- 31 34 24 14
Long-term debt 14 24 32 40 49
Other liabilities exclusive
of subordinated
liabilities and partnership
capital subject to
mandatory redemption 3,880 2,993 2,839 2,466 2,056
------ ------ ------ ------ ------
3,894 3,057 2,905 2,530 2,119
------ ------ ------ ------ ------
Subordinated liabilities 299 344 387 408 429
------ ------ ------ ------ ------
Partnership capital
subject to mandatory
redemption / partnership
capital (net of reserve for
anticipated withdrawals) * 907 802 752 727 681
Reserve for anticipated
withdrawals 96 114 56 58 29
------ ------ ------ ------ ------
Partnership capital subject to
mandatory redemption/
partnership capital 1,003 916 808 785 710
------ ------ ------ ------ ------
Total liabilities and
partnership capital $5,196 $4,317 $4,100 $3,723 $3,258
====== ====== ====== ====== ======
- --------------------------------------------------------------------------------
<FN>
* Due to the implementation of SFAS No. 150, the Partnership reported total
partnership capital subject to mandatory redemption in 2006, 2005 and 2004 and
partnership capital in 2003 and 2002.
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).
2006 vs. 2005 2005 vs. 2004
-------------------------- --------------------------
Amount Percentage Amount Percentage
- -----------------------------------------------------------------------------------------------------------------
Revenue:
Commissions $ 94,787 6 % $ 64,855 4 %
Asset fees 160,867 22 135,094 23
Account and activity fees 43,800 13 30,514 10
Principal transactions 28,154 12 (65,241) (22)
Interest and dividends 43,873 21 56,658 37
Investment banking (386) (1) 4,958 18
Other (49,789) (53) 72,224 457
--------- ---------
Total revenue 321,306 10 299,062 10
Interest expense 750 1 (445) (1)
--------- ---------
Net revenue 320,556 10 299,507 11
--------- ---------
Operating Expenses:
Compensation and benefits 261,232 14 146,792 9
Communications and data
processing 9,837 4 (15,271) (6)
Occupancy and equipment 13,493 5 7,084 3
Payroll and other taxes 9,411 8 10,491 10
Legal (63,229) (56) 12,582 12
Postage and shipping 352 1 6,361 14
Advertising 6,401 13 9,365 23
Floor brokerage and
clearance fees 4,091 29 842 6
Other operating expenses 18,287 15 8,003 7
--------- ---------
Total operating expenses 259,875 9 186,248 7
--------- ---------
Income before allocations to
partners / net income $ 60,681 18 % $ 113,259 52 %
- -----------------------------------------------------------------------------------------------------------------
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 (2006 VERSUS 2005)
For 2006, net revenue increased 10% ($320.6 million) to $3.462 billion, while
income before allocations to partners increased 18% ($60.7 million) to $390.7
million. The Partnership's profit margin based on income before allocations to
partners increased to 11.1% in 2006, from 10.3% in 2005. Year over year, the
Partnership's net revenue and income before allocations to partners increased
due primarily to growth in customer asset values, higher account and activity
fees, and higher net interest income. Operating expenses increased in 2006 due
primarily to growth in sales compensation related to the increase in net
revenues. The Partnership added 555 (6%) financial advisors during the twelve
months ended December 31, 2006, ending the year with 10,288 financial
advisors.
Trade revenue of $1.963 billion, which comprised 57% of net revenue, increased
7% ($122.6 million) in 2006 due primarily to an increase in customer dollars
invested (the principal amount of customers' buy and sell transactions, which,
in general, individually generate more than $50 (fifty dollars) in trade
revenue), partially offset by a lower gross margin earned on customer dollars
invested compared to the prior year. Total customer dollars invested were
$82.9 billion during 2006, a 12% ($8.6 billion) increase from 2005. The
Partnership's margin earned on each $1,000 invested decreased to $23.70 in
2006 from $24.70 in 2005. Year over year, customer dollars invested shifted to
shorter term fixed income products reducing the margin earned on each $1,000
invested.
Commissions revenue increased 6% ($94.8 million) during 2006 to $1.664
billion. Commissions revenue increased year over year due primarily to a 7%
($3.9 billion) increase in customer dollars invested to $56.3 billion in 2006.
Underlying the increase in commissions revenue, mutual fund commissions
increased 7% ($74.6 million), equity commissions decreased .4% ($1.2 million)
and insurance commissions increased 10% ($21.4 million). The following table
summarizes commissions revenue year over year:
24
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Years ended (in millions)
-------------------------------------
December 31, December 31, %
2006 2005 Change
------------ ------------ ------
Mutual funds $ 1,109.9 $ 1,035.3 7
Equities 320.8 322.0 -
Insurance 232.3 210.9 10
Corporate bonds 0.7 0.7 -
--------- --------- --
$ 1,663.7 $ 1,568.9 6
========= ========= ==
Principal transactions revenue increased 12% ($28.2 million) to $267.0 million
during 2006 due primarily to an increase in customer dollars invested offset
by a shift in customer dollars invested from higher margin, longer maturity
fixed income products to lower margin, shorter maturity certificates of
deposit. Customers invested $25.0 billion in principal transactions in 2006,
an increase of 21% ($4.4 billion). The Partnership's margin earned on each
$1,000 invested decreased to $10.40 during 2006 from $10.90 during 2005.
Revenue from corporate bonds increased 69% ($37.2 million), certificates of
deposit increased 15% ($5.1 million) and government bonds increased 12% ($2.6
million) while collaterized mortgage obligations decreased 48% ($12.5 million)
and unit investment trusts decreased 38% ($8.7 million). The following table
summarizes principal transaction revenue year over year:
Years ended (in millions)
--------------------------------
December 31, December 31, %
2006 2005 Change
------------ ------------ ------
Municipal bonds $ 84.7 $ 80.3 5
Corporate bonds 90.9 53.7 69
Government bonds 23.9 21.3 12
Collateralized mortgage obligations 13.6 26.1 (48)
Unit investment trusts 14.3 23.0 (38)
Certificates of deposit and other 39.6 34.5 15
------- ------- ---
$ 267.0 $ 238.9 12
======= ======= ===
Investment banking revenue decreased 1% ($.4 million) during 2006 to $32.5
million, due primarily to a decrease in municipal offerings in the current
year.
Net fee revenue of $1.498 billion, comprising 43% of net revenue, increased
15% ($198.0 million) during 2006. Asset fees increased 22% ($160.9 million) to
$877.8 million due to net new money flowing into these products coupled with
the favorable impact of market conditions on customers' mutual fund and
insurance assets generating asset fees. Average customer mutual fund and
insurance assets increased $45.9 billion or 21% to $259.9 billion for 2006
compared to $214.0 billion for 2005.
Account and activity fees of $378.9 million increased 13% ($43.8 million) year
over year due to growth in customer accounts. Revenue received from mutual
fund and money market sub-transfer agent services increased 15% ($30.3
million) to $227.8 million, due primarily to a 15% increase in the number of
customer accounts for which the Partnership provides mutual fund sub-transfer
agent services. The number of retirement accounts for which the Partnership is
custodian increased by 11%, resulting in custodial fee revenue growth of 10%
($7.8 million) to $86.0 million. Other revenue of $44.2 million decreased 53%
($49.8 million) year over year. The decrease between years is primarily
attributable to a $70 million gain in 2005 that did not recur in 2006 compared
to $21 million in gains in 2006 that did not
25
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
occur in 2005. During 2006, other income includes $21 million in gains from
three sources ($8.1 million from the sale of banking assets by the
Partnership's banking subsidiary; $6.8 million from the exchange of the
Partnership's NYSE membership for shares in Archipelago in connection with the
NYSE's Initial Public Offering; $6.5 million from the sale of the
Partnership's interest in the investment advisor to the Federated Capital
Income Fund). The Partnership's results for 2005 include a $70 million gain
from the sale of a profit sharing interest in a mutual fund company.
Net interest and dividend income increased 28% ($43.1 million) to $197.4
million during 2006 due primarily to an increase in overnight investing
activities and an increase in interest rates. Interest income from overnight
investing activities increased 325% ($30.5 million) to $39.9 million. The
average rate on these balances increased to 5.0% in 2006 from 3.2% in 2005,
and the average investment balance increased 202% ($492.2 million) to $736.2
million due to increased customer credit balances. Interest income from
customer loans increased 9% ($15.9 million). Average customer margin loan
balances were $2.160 billion in 2006, compared to $2.451 billion in 2005, a
decrease of 12%. The average rate earned on customer loan balances increased
to approximately 8.84% during 2006 from approximately 7.09% during 2005.
Operating expenses increased 9% ($259.9 million) to $3.071 billion during
2006. Compensation and benefits costs increased 14% ($261.2 million) to $2.088
billion. Within compensation and benefits costs, sales compensation increased
13% ($129.6 million) due to increased revenue and financial advisor salary and
subsidy which increased 33% ($21.5 million) due to new financial advisor
compensation programs. Variable compensation, including bonuses and profit
sharing paid to financial advisors, branch office assistants, and headquarters
associates, which expands and contracts in relation to revenues, income before
allocations to partners and the Partnership's related profit margin, increased
26% ($58.3 million). Headquarters and branch payroll expense increased 9%
($52.2 million) due to increased salary and medical costs for existing
personnel and additional support at both the headquarters and in the branches
as the Partnership increased the number of financial advisors. On a full time
equivalent basis, the Partnership had 4,331 headquarters associates and 10,594
branch staff associates as of December 31, 2006, compared to 4,096
headquarters associates and 10,103 branch staff associates as of December 31,
2005.
Occupancy and equipment expense increased 5% ($13.5 million) to $273.6 million
during 2006 due primarily to the growth in the number of branch offices as the
Partnership expands the number of financial advisors and the accrual in the
second quarter of 2006 of $3.6 million of additional expense related to the
planned sublease of excess space in the Canada headquarter building.
Communications and data processing expense increased 4% ($9.8 million) to
$272.9 million during 2006 due to increased costs related to the continued
expansion and enhancement of the Partnership's branch office network,
including the Partnership's conversion to a terrestrial communications network
for its branches from a satellite network. Other operating expenses increased
15% ($18.3 million) to $137.6 million primarily due to increased travel and
entertainment costs and Managed Account Program ("MAP") money manager expense
due to increased MAP assets. Legal expenses decreased 56% ($63.2 million) to
$50.7 million during 2006 due to reduced costs associated with legal matters
and regulatory settlements. (See Mutual Fund Matters below and Item 3 - Legal
Proceedings for more information).
MUTUAL FUND MATTERS
In December 2004, the Partnership entered into settlement agreements with the
SEC, NASD, 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, among
other things, 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
26
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
distributed to its customers who purchased so-called Preferred Family mutual
fund shares from January 1, 1999 through December 2004. The payment was made
to the U.S. Treasury in 2005 and is currently scheduled for distribution in
2007. To the best of the Partnerships' knowledge, all other aspects of the
settlement have been completed.
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. For
additional discussion, refer to "Item 1A- Risk Factors, Regulatory
Initiatives". The Partnership derived 66% of its total revenue from sales and
services related to mutual fund and annuity products in 2006 and 64% in 2005
with 30% of its total revenue in 2006 and 2005 being derived from one vendor.
Significant reductions in the revenues from these products could have a
material adverse impact on the Partnership.
RESULTS OF OPERATIONS (2005 VERSUS 2004)
For 2005, net revenue increased 10% ($298.0 million) to $3.141 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%) financial advisors during the twelve months ended
December 31, 2005, ending the year with 9,733 financial advisors.
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, which,
in general, individually generate more than $50 (fifty dollars) in 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:
27
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Years ended (in millions)
-------------------------------------
December 31, December 31, %
2005 2004 Change
------------ ------------ ------
Mutual funds $ 1,035.3 $ 986.6 5
Equities 322.0 315.0 2
Insurance 210.9 202.1 4
Corporate bonds 0.7 0.3 133
--------- --------- ---
$ 1,568.9 $ 1,504.0 4
========= ========= ===
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:
Years ended (in millions)
-------------------------------------
December 31, December 31, %
2005 2004 Change
------------ ------------ ------
Municipal bonds $ 80.3 $ 107.2 (25)
Corporate bonds 53.7 93.0 (42)
Government bonds 21.3 35.1 (39)
Collateralized mortgage obligations 26.1 24.8 5
Unit investment trusts 23.0 23.7 (3)
Certificates of deposit and other 34.5 20.3 70
------- ------- ---
$ 238.9 $ 304.1 (21)
======= ======= ===
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
2005.
Net fee revenue of $1.300 billion, comprising 41% of net revenue, increased
29% ($293.4 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 $429.1 million increased 31%
($101.2 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% ($31.2 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.
28
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% ($184.7 million) to $2.811 billion during
2005. Compensation and benefits costs increased 9% ($145.2 million) to $1.827
billion. Within compensation and benefits costs, sales compensation increased
5% ($43.6 million) due to increased revenue. Variable compensation, including
bonuses and profit sharing paid to financial advisors, branch office
assistants, and headquarters associates, which expands and contracts in
relation to revenues, income before allocations to partners and the
Partnership's related profit margin, increased 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 and Item 3 - Legal Proceedings for more information).
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's capital subject to mandatory redemption at December 31,
2006, excluding the reserve for anticipated withdrawals, was $907.4 million,
compared to partnership capital, excluding the reserve for anticipated
withdrawals, of $802.6 million at December 31, 2005. The increase is primarily
due to the retention of General Partner earnings ($94.1 million) and the
issuance of general partner and subordinated limited partner interests ($30.2
million and $8.2 million, respectively), offset by redemption of general
partner, subordinated limited partner, and limited partner interests ($5.6
million, $18.4 million, and $3.9 million, respectively). It has been the
Partnership's practice to retain approximately 30% of income allocated to
general partners. For 2006 and 2005, the Partnership retained 32% and 26%,
respectively, of income allocated to general partners. For 2004, the
Partnership retained approximately 13% of income allocated to general
partners.
At December 31, 2006, the Partnership had $312.0 million in cash and cash
equivalents and $1.3 billion in cash segregated under federal regulations.
Lines of credit were in place at such date aggregating $1.240 billion ($1.140
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, 2006.
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.
29
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
The Partnership's growth has been financed through sales of limited
partnership interests to its employees, retention of earnings, private
placements of subordinated debt, long-term secured debt and operating leases
under which the Partnership rents facilities, furniture, fixtures, computers
and communication equipment.
On January 2, 2007, $294 million of limited partner interests were issued to
employees of the Partnership. The funds will be used for general Partnership
purposes.
There were no significant changes in the Partnership's financial commitments
and obligations for the year ended December 31, 2006.
The following table summarizes the Partnership's financing commitments and
obligations, as of December 31, 2006, excluding customer accounts due on
demand. Subsequent to December 31, 2006, these commitments and obligations
could fluctuate based on the changing business environment.
Payments Due by Period
----------------------
2007 2008 2009 2010 2011 Thereafter Total
--------------------------------------------------------------------------
Long-term debt $ 3,555 $ 1,742 $ 802 $ 863 $ 927 $ 6,500 $ 14,389
Liabilities subordinated to
claims of general creditors 23,200 14,200 3,700 53,700 53,700 150,000 298,500
Rental commitments 100,610 37,435 26,703 18,078 13,975 90,326 287,127
--------------------------------------------------------------------------
Total financing commitments
and obligations $127,365 $ 53,377 $ 31,205 $ 72,641 $ 68,602 $246,826 $600,016
==========================================================================
For the year ended December 31, 2006, cash and cash equivalents increased
$51.2 million. Cash provided by operating activities was $533.1 million. The
primary sources of cash from operating activities include income before
allocations to partners adjusted for depreciation, a decrease in net
receivables from customers, a decrease in receivable from mortgages and loans
and an increase in accrued compensation and employee benefits. These increases
to cash and cash equivalents were partially offset by a decrease in payable to
depositors and an increase in segregated cash. Cash used in investing
activities was $84.2 million consisting primarily of capital expenditures
supporting the Partnership's operations. Cash used in financing activities was
$397.7 million, consisting primarily of partnership withdrawals and
distributions ($314.4 million), redemption of partnership interests ($27.8
million), repayment of subordinated debt ($45.7 million) and repayment of
Federal Home Loan Bank advances ($30.5 million), offset by issuance of general
partner and subordinated limited partner interests ($38.5 million).
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).
As a result of its activities as a broker-dealer, Edward Jones, the
Partnership's principal subsidiary, is
30
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
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, 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 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, 2006, Edward Jones' Net Capital of
$573.9 million was 29.8% of aggregate debit items and its Net Capital in
excess of the minimum required was $535.4 million. Net Capital after
anticipated withdrawals, which are scheduled subordinated debt principal
payments through June 30, 2007, as a percentage of aggregate debit items was
29.8%. 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.
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 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.
31
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
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.
THE EFFECTS OF INFLATION
The Partnership's net assets are primarily monetary, consisting of cash,
securities inventories and receivables less liabilities. Monetary net assets
are primarily liquid in nature and would not be significantly affected by
inflation. Inflation and future expectations of inflation influence securities
prices, as well as activity levels in the securities markets. As a result,
profitability and capital may be impacted by inflation and inflationary
expectations. Additionally, inflation's impact on the Partnership's operating
expenses may affect profitability to the extent that additional costs are not
recoverable through increased prices of services offered by the Partnership.
NEW ACCOUNTING STANDARDS
On September 15, 2006, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines
fair value, establishes a framework for measuring fair value under GAAP, and
enhances disclosures about fair value measurements. SFAS 157 retains the
exchange price notion and clarifies that the exchange price is the price that
would be received for an asset or paid to transfer a liability (an exit price)
in an orderly transaction between market participants on the measurement date.
SFAS 157 is effective for the Partnership's financial statements for the year
beginning on January 1, 2008, with earlier adoption permitted. The Partnership
is currently evaluating the effect of SFAS 157 and does not expect it to have
a material impact on its consolidated financial condition, results of
operations, or cash flows.
On September 13, 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB
108"). SAB 108 expressed the SEC Staff's views regarding the process of
quantifying financial statement misstatements. SAB 108 states that in
evaluating the materiality of financial statement misstatements, the impact of
correcting misstatements, including both the carryover and reversing effects
of prior year misstatements, must be quantified on the current year financial
statements. SAB 108 is effective for the year ended December 31, 2006. Under
certain circumstances, prior year financial statements will not have to be
restated and the effects of initially applying SAB 108 on prior years will be
recorded as a cumulative effect adjustment. The Partnership has determined
that the implementation of SAB 108 did not have an effect on its consolidated
financial condition, results of operations, or cash flows.
In June 2005, the 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. SFAS No. 154 did not
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.
32
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
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, 2006 and 2005. 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 has prepared for implementation of
this requirement.
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.
33
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, 2006, amounts receivable from customers were $2.044 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 $17.0 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 $29.7 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, 2006 will not have a
material adverse effect on the consolidated financial position or results of
operations of the Partnership.
34
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements Included in this Item
Page No.
Report of Independent Registered Public Accounting Firm ...... 36
Consolidated Statements of Financial Condition as of
December 31, 2006 and 2005 ................................... 37
Consolidated Statements of Income for the years ended
December 31, 2006, 2005 and 2004 ............................. 39
Consolidated Statements of Changes in Partnership Capital
Subject to Mandatory Redemption for the years ended
December 31, 2006, 2005 and 2004.............................. 40
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004.............................. 42
Notes to Consolidated Financial Statements.................... 43
35
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 subject to mandatory redemption and of cash flows present
fairly, in all material respects, the consolidated financial position of The
Jones Financial Companies, L.L.L.P. and its subsidiaries (the "Partnership")
at December 31, 2006 and 2005, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2006
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.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 23, 2007
36
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) 2006 2005
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 311,992 $ 260,839
Cash segregated under federal regulations 1,312,806 2
Securities purchased under agreements to resell 415,000 479,000
Receivable from:
Customers 2,043,980 2,430,911
Brokers, dealers and clearing organizations 310,715 232,030
Mutual funds, insurance companies, and other 141,164 120,002
Mortgages and loans 979 134,976
Securities owned, at market value
Inventory securities 129,609 96,911
Investment securities 145,552 170,978
Equipment, property and improvements, at cost,
net of accumulated depreciation and amortization 310,987 317,019
Other assets 72,831 74,810
----------- -----------
TOTAL ASSETS $ 5,195,615 $ 4,317,478
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
37
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) 2006 2005
- ------------------------------------------------------------------------------------------------------
Bank loans $ - $ 8,500
Payable to:
Customers 3,162,223 2,208,645
Brokers, dealers and clearing organizations 44,593 66,614
Depositors - 104,411
Securities sold, not yet purchased, at market value 9,353 11,460
Accrued compensation and employee benefits 438,497 354,266
Accounts payable and accrued expenses 224,681 248,754
Federal Home Loan Bank advances - 30,544
Long-term debt 14,389 23,713
----------- -----------
3,893,736 3,056,907
----------- -----------
Liabilities subordinated to claims of general creditors 298,500 344,200
----------- -----------
Commitments and contingencies (Notes 18 and 19)
Partnership capital subject to mandatory redemption,
net of reserve for anticipated withdrawals 907,386 802,612
Reserve for anticipated withdrawals 95,993 113,759
----------- -----------
Total partnership capital subject to mandatory redemption 1,003,379 916,371
----------- -----------
TOTAL LIABILITIES $ 5,195,615 $ 4,317,478
=========== ===========
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 INCOME
Years Ended December 31,
(Dollars in thousands, -------------------------------------------------------
except per unit information) 2006 2005 2004
- -------------------------------------------------------------------------------------------------------------------------
Revenue:
Commissions $ 1,663,680 $ 1,568,893 $ 1,504,038
Asset fees 877,771 716,904 581,810
Account and activity fees 378,905 335,105 304,591
Principal transactions 267,038 238,884 304,124
Interest and dividends 253,607 209,734 153,076
Investment banking 32,505 32,892 27,934
Other revenue 44,249 94,038 23,369
----------- ----------- -----------
Total revenue 3,517,755 3,196,450 2,898,942
Interest expense 56,218 55,468 55,913
----------- ----------- -----------
Net revenue 3,461,537 3,140,982 2,843,029
----------- ----------- -----------
Operating expenses:
Compensation and benefits 2,088,492 1,827,260 1,682,021
Communications and data processing 272,879 263,043 278,314
Occupancy and equipment 273,607 260,114 253,031
Payroll and other taxes 121,976 112,565 102,074
Legal 50,711 113,940 101,358
Postage and shipping 51,718 51,366 45,005
Advertising 55,841 49,440 40,075
Floor brokerage and clearance fees 18,010 13,919 13,077
Other operating expenses 137,637 119,350 111,347
----------- ----------- -----------
Total operating expenses 3,070,871 2,810,997 2,626,302
----------- ----------- -----------
Income before allocations to partners 390,666 329,985 216,727
Allocations to partners:
Limited partners 34,035 33,679 27,800
Subordinated limited partners 37,885 39,587 22,555
General partners 318,746 256,719 166,372
----------- ----------- -----------
Net income $ - $ - $ -
=========== =========== ===========
Income before allocations to limited partners
per weighted average $1,000 equivalent
limited partnership unit outstanding $ 161.95 $ 157.11 $ 126.43
=========== =========== ===========
Weighted average $1,000 equivalent
limited partnership units outstanding 210,157 214,366 219,885
=========== =========== ===========
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 CHANGES IN PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY REDEMPTION
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
Subordinated
Limited Limited General
Partnership 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.
40
PART II
Item 8. Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY REDEMPTION, (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Dollars in thousands) Capital Capital Capital Total
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of partnership interests $ - $ 8,270 $ 30,217 $ 38,487
Redemption of partnership interests (3,882) (18,336) (5,554) (27,772)
Income allocated to partners 34,034 37,885 318,747 390,666
Withdrawals and distributions (13,096) (25,513) (162,005) (200,614)
-------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL SUBJECT TO
MANDATORY REDEMPTION, DECEMBER 31, 2006 229,270 137,503 636,606 1,003,379
Reserve for anticipated withdrawals (20,938) (12,372) (62,683) (95,993)
-------------------------------------------------------------------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, December 31, 2006 $ 208,332 $ 125,131 $ 573,923 $ 907,386
===================================================================
The accompanying notes are an integral part of these consolidated financial statements.
41
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) 2006 2005 2004
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ - $ - $ -
Adjustments to reconcile net income to net
cash provided by operating activities -
Income before allocations to partners 390,666 329,985 216,727
Depreciation and amortization 90,281 89,191 95,476
Changes in assets and liabilities:
Cash segregated under federal regulations (1,312,804) 49 -
Securities purchased under agreements to resell 64,000 (204,000) 15,000
Net receivable from customers 1,340,509 156,156 (154,555)
Net receivable from brokers, dealers and
clearing organizations (100,706) (15,416) (38,468)
Receivable from mutual funds, insurance companies
and other (21,162) (28,015) (4,905)
Receivable from mortgages and loans 133,997 15,401 (24,317)
Securities owned, net (9,379) (26,459) 80,131
Other assets 1,979 (3,526) (4,124)
Payable to depositors (104,411) (12,926) 9,349
Accrued compensation and employee benefits 84,231 55,319 37,025
Accounts payable and accrued expenses (24,073) 68,512 72,527
----------- --------- ---------
Net cash provided by operating activities 533,128 424,271 299,866
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, property and improvements, net (84,249) (89,396) (81,664)
----------- --------- ---------
Net cash used in investing activities (84,249) (89,396) (81,664)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment)/Issuance of Bank Loans (8,500) 8,500 -
(Repayment)/Issuance of Federal Home Loan Bank
advances, net (30,544) (3,384) 10,272
Repayment of long-term debt (9,324) (8,110) (7,868)
Repayment of subordinated liabilities (45,700) (43,225) (20,725)
Issuance of partnership interests 38,487 24,207 12,727
Redemption of partnership interests (27,772) (33,752) (5,375)
Withdrawals and distributions from partnership capital (314,373) (212,310) (201,124)
----------- --------- ---------
Net cash used in financing activities (397,726) (268,074) (212,093)
----------- --------- ---------
Net increase in cash and cash equivalents 51,153 66,801 6,109
CASH AND CASH EQUIVALENTS,
Beginning of year 260,839 194,038 187,929
----------- --------- ---------
End of year $ 311,992 $ 260,839 $ 194,038
=========== ========= =========
Cash paid for interest $ 57,623 $ 56,529 $ 56,429
=========== ========= =========
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.
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 results of the Partnership's subsidiary in
Canada are included in the Partnership's consolidated financial statements for
the twelve months ended November 30, 2006, 2005 and 2004 because of the timing
of the Partnership's financial reporting process.
The Partnership operates as a single business segment. The Partnership's
principal operating subsidiary, Edward D. Jones & Co., L.P. ("Edward Jones"),
is comprised of three registered broker-dealers primarily serving individual
investors. Edward Jones primarily derives its revenues from the retail
brokerage business through the sale of listed and unlisted securities,
insurance products, investment banking and principal transactions and as a
distributor of mutual fund shares. 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, made commercial, real estate,
and other loans primarily to customers in central Missouri. Additionally, the
Association offered trust services to Edward Jones customers through its
division, the Edward Jones Trust Company. See Note 10 - Sale of the
Association's Banking Business 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 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
43
PART II
Item 8. Financial Statements and Supplementary Data, continued
control the risks associated with these activities by requiring customers to
maintain margin collateral in compliance with various regulatory and internal
guidelines.
REVENUE RECOGNITION. Customer transactions are recorded on a settlement date
basis and the related commissions, principal transactions and investment
banking revenues are recorded on a trade date basis. All other forms of
revenue are recorded on an accrual basis.
Commissions consist of charges to customers for the purchase or sale of
securities, insurance products and mutual fund shares.
Asset fees revenue is recorded in the period earned and consists primarily of
service fees and other revenues received under agreements with mutual fund and
insurance companies based on the underlying value of the Partnership's
customers' assets invested in those companies' products. Asset-based revenues
related to the Partnership's interest in the Advisor to the Edward Jones Money
Market Fund are included in asset fees revenue.
Account and activity fees revenue is recorded in the period earned and
includes fees received from mutual fund companies for sub-transfer agent
accounting services performed by the Partnership and self-directed IRA
custodian account fees. It also includes other activity based revenues from
customers, mutual fund companies and insurance companies.
Principal transactions revenue results from the Partnership's participation in
market-making activities in over-the-counter corporate securities, municipal
obligations, U.S. Government obligations, including general obligations and
revenue bonds, unit investment trusts and mortgage-backed securities.
Interest and dividend income is earned primarily on margin account balances,
securities purchased under agreement to resell, cash equivalents, inventory
securities and investment securities.
Investment banking revenues are derived from the Partnership's underwriting
and distribution of securities on behalf of issuers.
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.
CASH SEGREGATED UNDER FEDERAL REGULATIONS. Cash of $1,313,000 and $2 was
segregated in a special reserve bank account for the benefit of customers, as
of December 31, 2006 and 2005, respectively, under rule 15c3-3 of the
Securities and Exchange Commission ("SEC").
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL. The Partnership participates
in short-term resale agreements collateralized by U.S. government and agency
securities. The market value of the underlying collateral as determined daily,
plus accrued interest thereon, must equal or exceed 102% of the carrying
amount of the transaction. It is the Partnership's policy to have such
underlying resale agreement collateral delivered to the Partnership or
deposited in its accounts at its custodian banks. Resale agreements are
carried at the amount at which the securities will be subsequently resold as
specified in the agreements.
44
PART II
Item 8. Financial Statements and Supplementary Data, continued
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 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.
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 its 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.
PARTNERSHIP CAPITAL SUBJECT TO MANDATORY REDEMPTIONS. 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, the Statement requires all of the Partnership's equity
capital to be classified as a liability. Income before allocations to partners
prior to the issuance of the Statement was classified on the Partnership's
statement of income as
45
PART II
Item 8. Financial Statements and Supplementary Data, continued
net income. 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 years ended December 31,
2006, 2005 and 2004. 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 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 in accordance with the prescribed formula for their share of net
income. Thereafter, 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 in any year in which
there is a net loss and the Partnership is not dissolved or liquidated.
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:
2006 2005
----------- -----------
Receivable from clearing organizations $ 238,879 $ 200,640
Receivable from money market funds 31,311 10,635
Securities failed to deliver 6,524 9,306
Dividends receivable 29,245 8,262
Deposits paid for securities borrowed 3,061 2,122
Other 1,695 1,065
----------- -----------
Total receivable from brokers, dealers
and clearing organizations $ 310,715 $ 232,030
=========== ===========
Securities failed to receive $ 30,727 $ 39,425
Payable to clearing organizations 10,519 22,726
Deposits paid for securities loaned 2,859 3,265
Other 488 1,198
----------- -----------
Total payable to brokers, dealers and
clearing organizations $ 44,593 $ 66,614
=========== ===========
46
PART II
Item 8. Financial Statements and Supplementary Data, continued
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 delivered or received by settlement date.
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. See Note 10 - Sale of
the Association's Banking Business.
NOTE 5 - RECEIVABLE FROM MUTUAL FUNDS, INSURANCE COMPANIES, AND OTHER
Receivable from mutual funds, insurance companies and other is primarily
composed of amounts due to the Partnership for asset based fees and fees for
sub-transfer agent accounting services from the mutual fund vendors and
insurance companies.
NOTE 6 - SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
Securities owned and securities sold, not yet purchased are summarized as
follows (at market value):
2006 2005
-------------------------- --------------------------
Securities Securities
Sold, Sold,
Securities not yet Securities not yet
Owned Purchased Owned Purchased
----------- ----------- ----------- -----------
Inventory securities:
Certificates of deposit $ 10,573 $ 1,206 $ 15,105 $ 2,994
U.S. and Canadian government
and U.S. agency obligations 4,487 3,446 6,744 4,675
State and municipal obligations 58,475 132 44,374 203
Corporate bonds and notes, and
collateralized mortgage obligations 41,001 3,001 17,485 2,578
Equities 14,380 1,425 12,239 445
Unit investment trusts 693 143 964 565
----------- ----------- ----------- -----------
$ 129,609 $ 9,353 $ 96,911 $ 11,460
=========== =========== =========== ===========
Investment securities:
U.S. government and agency
obligations held by U.S. broker-
dealer $ 37,456 $ 74,093
U.S. and Canadian government and
U.S. agency obligations held by
foreign broker-dealers 26,952 32,597
Mutual funds 74,301 64,288
Equities 6,843 -
----------- -----------
$ 145,552 $ 170,978
=========== ===========
47
PART II
Item 8. Financial Statements and Supplementary Data, continued
The Partnership attempts to reduce its exposure to market price fluctuations
of its inventory securities through the sale of U.S. government securities
and, to a limited extent, the sale of fixed income futures 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 $25,000 and $7,000 at December 31, 2006 and 2005,
respectively.
NOTE 7 - EQUIPMENT, PROPERTY AND IMPROVEMENTS
Equipment, property and improvements are summarized as follows:
2006 2005
---------- ----------
Land $ 12,822 $ 12,915
Buildings and improvements 376,076 361,747
Equipment, furniture and fixtures 671,551 652,021
---------- ----------
Total equipment, property and improvements 1,060,449 1,026,683
Accumulated depreciation and amortization (749,462) (709,664)
---------- ----------
Equipment, property and improvements, net $ 310,987 $ 317,019
========== ==========
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 8 - BANK LOANS
Bank Loans consist of a $10,000 unsecured bank line of credit, which was
terminated as of February 26, 2007. There are no amounts outstanding under
this line of credit as of December 31, 2006. Interest on amounts drawn under
the line of credit is paid quarterly at a variable rate of 6.88% at December
31, 2006, based on LIBOR plus applicable margin. At December 31, 2005, Leasing
had $8,500 drawn under the unsecured line of credit, which was used to fund
the construction of a new office building in Tempe, Arizona. The note payable
agreement contained restrictions that, among other things, required
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.
Edward Jones borrows from banks on a short-term basis primarily to finance
customer margin balances and inventory securities. As of December 31, 2006,
Edward Jones had bank lines of credit aggregating $1,240,000 of which
$1,140,000 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, 2006 or 2005.
Interest is at a fluctuating rate based on short-term lending rates. During
the year ended December 31, 2006, Edward Jones had no outstanding bank loans.
During the year ended December 31, 2005, Edward Jones 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 2004, Edward Jones had bank loans
outstanding for twenty-one days of $29,810 at an average interest rate of
2.26%.
48
PART II
Item 8. Financial Statements and Supplementary Data, continued
NOTE 9 - 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.
See Note 10 - Sale of the Association's Banking Business for additional
information.
NOTE 10 - SALE OF THE ASSOCIATION'S BANKING BUSINESS
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
recognized an after-tax gain of $8.1 million when the sale closed on July 20,
2006. With the closing of the Purchase Agreement, the Association is no longer
engaged in the business of banking through Boone National Savings and Loan.
The Association was renamed Edward Jones Trust Company and continues the trust
business that was conducted by Edward Jones Trust Company, formerly a division
of the Association.
As of December 31, 2006, the Association's net assets not purchased by
Commerce and remaining on the Consolidated Statements of Financial Condition
aggregated $1.0 million. The Partnership intends to sell these assets. The
income from operations for the discontinued banking business included in
Income before allocation to partners was $0.663 million for the year ended
December 31, 2006. The revenue and expense activity related to the
discontinued operations was not material to the Partnership's financial
results.
NOTE 11- FEDERAL HOME LOAN BANK ADVANCES
The Association had no loans from The Federal Home Loan Bank ("FHLB") as of
December 31, 2006. The Association had $30,544 as of December 31, 2005. The
interest rates on these loans as of December 31, 2005 ranged from 1.90% to
6.41%. At December 31, 2005, $6,000 of these loans were callable at the
discretion of the FHLB. At December 31, 2005, $64,777 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.
During 2005 and 2004, the Association's average aggregate bank loans
outstanding were $36,109 and $30,800, respectively, and the average interest
rate was 3.93% and 3.69%, respectively.
49
PART II
Item 8. Financial Statements and Supplementary Data, continued
NOTE 12 - LONG-TERM DEBT
Long-term debt is composed of the following:
2006 2005
-------- --------
Note payable, collateralized by equipment, interest paid quarterly
at a variable rate (6.59% at May 8, 2006)
based on LIBOR plus applicable margin,
due in annual installments of $5,000, with a final
installment of $6,000 paid on May 8, 2006. $ - $ 6,000
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. 10,532 11,177
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. 2,261 3,801
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. 1,596 2,735
-------- --------
$ 14,389 $ 23,713
======== ========
Scheduled annual principal payments, as of December 31, 2006 are as follows:
Principal
Year Payment
---------- ---------
2007 $ 3,555
2008 1,742
2009 802
2010 863
2011 927
Thereafter 6,500
--------
$ 14,389
========
The real estate notes payable of $14,389 at December 31, 2006 are
collateralized by land and buildings with a cost basis of $39,167 and a
carrying value of $24,617 at December 31, 2006. One note payable agreement
contained restrictions that, among other things, required maintenance of a
fixed charge coverage ratio of 1.0 to 1.0 and minimum net capital of $14,000,
as defined in the agreement. The Partnership is in compliance with all debt
covenants and restrictions as of December 31, 2006 and 2005.
The Partnership has estimated the fair value of the long-term debt to be
approximately $14,651 and $21,770 as of December 31, 2006 and 2005,
respectively.
50
PART II
Item 8. Financial Statements and Supplementary Data, continued
NOTE 13 - LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Liabilities subordinated to claims of general creditors consist of:
2006 2005
--------- ---------
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 7.65% to 7.79%,
due in annual installments ranging from $3,700 to
$12,700, commencing on August 15, 2005, with a
final installment of $3,700 on August 15, 2011. 27,500 52,500
Capital notes, 8.18%, due in annual installments of $10,500,
with a final installment on September 1, 2008. 21,000 31,500
Capital notes, 7.95%, due in annual installments
of $10,225, with a final installment
of $10,200 paid on April 15, 2006. - 10,200
--------- ---------
$ 298,500 $ 344,200
========= =========
Required annual principal payments, as of December 31, 2006, are as follows:
Principal
Year Payment
---------- ---------
2007 $ 23,200
2008 14,200
2009 3,700
2010 53,700
2011 53,700
Thereafter 150,000
---------
$ 298,500
=========
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, 2006, Edward Jones
was required, under the note agreements, to maintain minimum partnership
capital subject to mandatory redemption of $400,000 and Net Capital of
$144,385 (see Note 15). Edward Jones is in compliance with all restrictions as
of December 31, 2006 and 2005.
The subordinated liabilities are subject to cash subordination agreements
approved by the New York Stock Exchange, Inc. and, therefore, are included in
Edward Jones' computation of Net Capital under the SEC's uniform Net Capital
rule. The Partnership has estimated the fair value of the subordinated capital
notes to be approximately $311,000 and $352,200 as of December 31, 2006 and
2005, respectively.
51
PART II
Item 8. Financial Statements and Supplementary Data, continued
NOTE 14 - 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 $907,386 consists of $208,332 of limited partnership capital
issued in $1,000 units, $125,131 of subordinated limited partnership capital
and $573,923 of general partnership capital as of December 31, 2006.
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 $15,765, 16,095, and $16,492,
for the years ended December 31, 2006, 2005 and 2004, 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 15 - 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. Under the
alternative method permitted by the rules, Edward Jones must maintain minimum
Net Capital equal to the greater of $250 or 2% of aggregate debit items
arising from customer transactions. The Net Capital rule also provides that
partnership capital may not be withdrawn if resulting Net Capital would be
less than 5% of aggregate debit items. Additionally, certain withdrawals
require the consent of the SEC to the extent they exceed defined levels, even
though such withdrawals would not cause Net Capital to be less than 5% of
aggregate debit items.
At December 31, 2006, Edward Jones' Net Capital of $573,913 was 29.8% of
aggregate debit items and its Net Capital in excess of the minimum required
was $535,410. Net Capital after anticipated withdrawals, which are scheduled
subordinated debt payments through June 30, 2007, as a percentage of aggregate
debit items was 29.8%. Net Capital and the related capital percentages may
fluctuate on a daily basis.
At December 31, 2006, the Partnership's foreign broker-dealer subsidiaries and
EJTC were in compliance with regulatory capital requirements in the
jurisdictions in which they operate.
NOTE 16 - OTHER REVENUE
Included in other revenue in 2006 are an $8,100 gain from the sale of the
Association's banking operations, $6,800 in unrealized gains from the receipt
of shares in exchange for the Partnership's NYSE membership as a result of the
merger between the NYSE and Archipelago, and a $6,500 gain from the sale of
the Partnership's interest in the investment advisor to Federated's Capital
Income Fund.
During December 2005, Edward Jones and a mutual fund company terminated a
profit sharing agreement which entitled Edward Jones 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.
52
PART II
Item 8. Financial Statements and Supplementary Data, continued
NOTE 17 - 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 $94,600, $76,400 and $63,300 were provided by the Partnership
for its contributions to the plans for the years ended December 31, 2006, 2005
and 2004, respectively.
NOTE 18 - 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 $188,800, $187,700 and $190,700, for the years ended December 31, 2006,
2005 and 2004, respectively.
The Partnership's noncancelable lease commitments greater than one year as of
December 31, 2006, are summarized below:
Year
----------
2007 $100,610
2008 37,435
2009 26,703
2010 18,078
2011 13,975
Thereafter 90,326
--------
$287,127
========
NOTE 19 - 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.
In view of the inherent difficulty of predicting the outcome of such matters,
particularly in cases in which claimants seek substantial or indeterminate
damages, or actions which are in very preliminary stages, the Partnership
cannot predict with certainty the eventual loss or range of loss related to
such matters. The Partnership has determined that it is likely that ultimate
resolution in favor of the plaintiffs will result in losses to the Partnership
on some of these matters and as a result, has established appropriate accruals
for potential litigation losses. The Partnership believes, based on current
knowledge and after consultation with counsel, 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.
53
PART II
Item 8. Financial Statements and Supplementary Data, continued
Also, in the normal course of business, the Partnership enters into contracts
which contain indemnification provisions, including, but not limited to,
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 20 - RELATED PARTIES
Edward Jones owns a 49.5% limited partnership interest in the investment
advisor to the Edward Jones Money Market Fund. The Partnership does not have
management responsibility with regard to the advisor. Approximately 2% of the
Partnership's revenues were derived from the advisor and the fund during 2006
and 2005 and 3% for 2004.
NOTE 21 - QUARTERLY INFORMATION
(Unaudited)
Quarters Ended
--------------
2005 March 24, June 24, September 30, December 31,
- ---- ---------- ---------- ------------- -----------
Total revenue $ 754,651 $ 785,493 $ 812,148 $ 844,158
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
2006 March 24, June 24, September 30, December 31,
- ---- ---------- ---------- ------------- -----------
Total revenue $ 880,305 $ 877,321 $ 844,249 $ 915,880
Income before allocations to
partners 95,564 98,075 96,827 100,200
Income before allocations to
partners per weighted average
$1,000 equivalent limited
partnership unit outstanding $ 39.31 $ 40.77 $ 40.24 $ 41.63
54
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.
55
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 23, 2007, the Partnership was composed of 320 general partners,
11,492 limited partners and 170 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. Subject to the foregoing,
the Partnership is managed by its 320 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 22 years.
The Executive Committee of the Partnership, throughout 2006, was composed of
James D. Weddle, Richie L. Malone, Steven Novik, Norman Eaker, Brett Campbell,
Gary D. Reamey and Tim Kirley. James A. Tricarico was appointed a member of
the executive committee effective January 1, 2007. Mr. Malone retired as of
December 31, 2006, 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
23, 2007:
Name Age Partner Area of responsibility
- --------------------------------------------------------------------------------------------------------
James D. Weddle 53 1984 Managing Partner
Steven Novik 57 1983 Finance
Tim Kirley 52 1994 United Kingdom Operations
Gary D. Reamey 51 1984 Canadian Operations
Norman Eaker 50 1984 Operations & Service
Brett Campbell 47 1993 Financial Advisor Management &
Administration
James A. Tricarico 54 2006 Legal
- --------------------------------------------------------------------------------------------------------
James D. Weddle is a member of the Board of Directors of the Securities
Industry & Financial Markets Association.
Norman Eaker is a member of the Board of Directors of the Depository Trust &
Clearing Corporation.
Gary Reamey is a director for the Investment Industry Association of Canada.
56
PART III
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
COMPENSATION COMPONENTS
The components of the Partnership's executive compensation program consist of
base salary, deferred compensation, and the net income allocated to general
partners, which represents the most significant component. Ninety-two percent
of the Partnership's net income allocable to general partners is allocated
based on each individual general partner's respective capital ownership
interest. Each general partner's ownership interest is set at the discretion
of the firm's Managing Partner, with input from the Executive Committee. The
remaining 8% is allocated among the general partners based on the discretion
of the Managing Partner, with input from the Executive Committee and other
division leaders. As a Partnership, the executive compensation program does
not have any bonus, stock awards, option awards, non-equity incentive plan
compensation, or any other elements besides those disclosed below.
SALARY Each headquarters' general partner receives a salary generally ranging
from $115,000 - $250,000 annually. Financial advisor general partners do not
receive a specified salary, rather, they receive the net sales commissions
earned by them (none of the five individuals listed below earned any such
commissions). Additionally, financial advisor general partners are entitled to
office bonuses based on the profitability of their respective branch office,
on the same basis as the office bonus program established for all financial
advisor employees (none of the five individuals listed below earned any such
bonuses).
DEFERRED COMPENSATION Each general partner is a participant in the
Partnership's profit sharing plan which also covers all eligible employees.
Contributions to the plan, which are within the discretion of the Partnership,
are made annually and have historically been determined based on approximately
twenty-four percent of the Partnership's net income. Allocation of the
Partnership's contribution among participants is determined by each
participant's relative level of eligible earnings, including in the case of
general partners, their net income participation.
NET INCOME ALLOCATED TO GENERAL PARTNERS 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 3.05% in
2006 and 0.03% to 3.0% in 2005 and 2004. At the discretion of the Managing
Partner, the Partnership Agreement provides that, generally, the first eight
percent of net income allocable to general partners be distributed on the
basis of individual merit or otherwise as determined by the Managing Partner.
Thereafter, the remaining net income allocable to general partners is
distributed based upon each individual's percentage interest in the
Partnership. Net income allocated to general partners is the amount remaining
after payment of guaranteed interest and allocation of net income to limited
partners. Subordinated limited partners and general partners are allocated any
remaining net income based on formulas in the Partnership Agreement.
In addition to base salary, under the Partnership Agreement, the Managing
Partner has the discretion to allocate an additional $1.5 million (in the
aggregate) in compensation to general partners. In 2006, $0.3 million was
allocated by the Managing Partner. No amounts were paid to the individuals
listed below. In 2005 and 2004, no additional amounts were allocated to any
general partner.
The Partnership is not required to have a compensation committee.
57
PART III
Item 11. Executive Compensation, continued
The following table identifies the compensation of the firm's Managing Partner
("CEO"), the Principal Financial Officer ("CFO"), and the three other most
highly compensated executive officers, based on total compensation in 2006
(including respective shares of profit participation).
Summary Compensation Table
Net Income
Deferred Allocated
Compen- to General
Year Salaries sation Partners Total
- -------------------------------------------------------------------------------------------------------------
James D. Weddle 2006 $250,000 $11,682 $9,108,322 $9,370,004
CEO 2005 175,000 9,954 6,578,395 6,763,349
2004 175,000 8,508 4,053,790 4,237,298
Steven Novik 2006 175,000 11,682 7,167,204 7,353,886
CFO 2005 175,000 9,954 6,072,365 6,257,319
2004 175,000 8,508 3,741,961 3,925,469
Richie L. Malone 2006 175,000 11,682 $8,361,738 8,548,420
General Partner- 2005 175,000 9,954 7,084,425 7,269,379
Information Systems 2004 175,000 8,508 4,365,620 4,549,128
Gary D. Reamey 2006 175,000 11,682 8,361,738 8,548,420
General Partner- 2005 150,000 9,954 7,084,426 7,244,380
Canadian Operations 2004 150,000 8,508 4,365,621 4,524,129
Norman Eaker 2006 175,000 11,682 7,167,204 7,353,886
General Partner- 2005 175,000 9,954 6,072,365 6,257,319
Operations and Service 2004 175,000 8,508 3,741,961 3,925,469
- -------------------------------------------------------------------------------------------------------------
<FN>
**The Partnership notes that Douglas E. Hill retired as the Managing Partner
on December 31, 2005. Although Mr. Hill remains a general partner, he was not
an executive officer at any time during fiscal year 2006. Accordingly, the
Partnership is not required to report his compensation as a named executive
officer of the Partnership for fiscal year 2006. However, if Mr. Hill had been
an executive officer during that period, he would have been one of the three
most highly compensated executive officers in addition to the CEO and CFO and
would have been included in the table.
58
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), 270 of the general partners also own
limited partnership interests and 45 of the general partners also own
subordinated limited partnership interests, as noted in the table below.
As of February 23, 2007:
Name of Amount of
Beneficial Beneficial % of
Title of Class Owner Ownership Class
- ----------------------------------------------------------------------------------------------------
Limited Partnership All General
Interests Partners as
a Group $46,800,600 9%
Subordinated All General
Limited Partnership Partners as
Interests a Group $42,008,674 29%
- ----------------------------------------------------------------------------------------------------
59
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) 2006 2005
------------ ------------
Fees paid by the Partnership:
Audit fees $ 1,253 $ 1,225
Audit-related fees (1) 1,908 2,150
Tax fees (2) 507 514
All other (3) 180 144
------------ ------------
Total fees $ 3,848 $ 4,033
============ ============
<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.
The audit committee pre-approved all audit and non-audit related services in
fiscal year 2006 and 2005. No services were provided under the deminimis fee
exception to the audit committee pre-approval requirements.
60
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...............36
Consolidated Statements of Financial Condition as of
December 31, 2006 and 2005............................................37
Consolidated Statements of Income for the years ended
December 31, 2006, 2005 and 2004......................................39
Consolidated Statements of Changes in Partnership Capital
Subject to Mandatory Redemption for the years ended December 31,
2006, 2005 and 2004...................................................40
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004......................................42
Notes to Consolidated Financial Statements............................43
(2) The following financial statements are included in Schedule I:
Parent Company Only Condensed Statements of Financial Condition as
of December 31, 2006 and 2005.........................................68
Parent Company Only Condensed Statements of Income for the years
ended December 31, 2006, 2005 and 2004................................69
Parent Company Only Condensed Statements of Cash Flows for the
years ended December 31, 2006, 2005 and 2004..........................70
Report of Independent Registered Public Accounting Firm...............71
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.
61
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 30, 2007
-------------------------------------------------
By (Signature and Title) /s/ Steven Novik
-------------------------------------------------
Steven Novik, Chief Financial Officer
Date March 30, 2007
-------------------------------------------------
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.
62
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2006
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.
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
63
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, CONTINUED
March 9, 1994, incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 25, 1994.
10.7 * 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
64
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, CONTINUED
15, 2011, incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 24, 1999.
10.15 * 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
65
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, CONTINUED
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
10.22 * Master Lease Agreement dated as of September 18, 2001
between Atlantic Financial Group, Ltd. (registered to do
business in Missouri as Atlantic Financial Group, L.P.),
as Lessor, and Edward D. Jones & Co., L.P., as Lessee,
incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
10.23 * Note Purchase Agreement by Edward D. Jones & Co., L.P.,
for $250,000,000 aggregate principal amount of 7.33%
subordinated capital notes due June 12, 2014, incorporated
herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 28, 2002.
10.24 * Purchase and Assumption Agreement dated April 4, 2006,
among Boone National Savings and Loan Association, F.A.,
The Jones Financial Companies, L.L.L.P. and Commerce Bank,
N.A., incorporated herein by reference to Exhibit 10.1 to
the Company's Form 8-K dated April 7, 2006.
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 72 Consent of Independent Registered Public Accounting Firm,
filed herewith.
24 * Delegation of Power of Attorney to Managing Partner
contained within Exhibit 3.1
31.1 73 Certification pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 74 Certification pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 75 Certification pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 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.
66
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, CONTINUED
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.
99.5 * Class Action Settlement Agreement, dated August 29, 2006,
incorporated herein by reference to Exhibit 99.1 to the
Company's Form 8-K dated August 31, 2006.
<FN>
* Incorporated by reference to previously filed exhibits.
67
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) 2006 2005
- -------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 1,607 $ 3,881
Investment in subsidiaries 1,000,755 905,463
Others assets 5,244 7,423
----------- -----------
TOTAL ASSETS $ 1,007,606 $ 916,767
=========== ===========
LIABILITIES AND PARTNERSHIP CAPITAL:
Payable to limited partners, accounts payable
and accrued expenses $ 4,227 $ 396
Partnership capital subject to mandatory
redemption 1,003,379 916,371
----------- -----------
TOTAL LIABILITIES 1,007,606 916,767
TOTAL PARTNERSHIP CAPITAL - -
----------- -----------
TOTAL LIABILITIES AND PARTNERSHIP CAPITAL $ 1,007,606 $ 916,767
=========== ===========
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.
68
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,
2006 2005 2004
- -------------------------------------------------------------------------------------------------------------------
NET REVENUE
Subsidiary earnings $ 396,554 $ 330,098 $ 216,908
Management fee income 36,007 33,510 34,864
Other (359) 996 339
--------- --------- ---------
Total revenue 432,202 364,604 252,111
Interest expense 15,753 16,042 16,507
--------- --------- ---------
Net revenue 416,449 348,562 235,604
--------- --------- ---------
OPERATING EXPENSES
Compensation and benefits 20,455 17,645 18,682
Payroll and other taxes 85 672 103
Other operating expenses 5,243 260 92
--------- --------- ---------
Total operating expenses 25,783 18,577 18,877
--------- --------- ---------
INCOME BEFORE ALLOCATIONS
TO PARTNERS $ 390,666 $ 329,985 $ 216,727
Allocations to partners (390,666) (329,985) (216,727)
--------- --------- ---------
NET INCOME $ - $ - $ -
========= ========= =========
These financial statements should be read in conjunction with the notes to the
consolidated financial statements of The Jones Financial Companies, L.L.L.P.
69
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) 2006 2005 2004
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ - $ - $ -
Adjustments to reconcile net income to net cash
provided by operating activities -
Income before allocations to partners 390,666 329,985 216,727
Increase in investment in subsidiaries (95,292) (107,753) (27,725)
Decrease in other assets and liabilities, net 6,011 1,773 2,137
--------- --------- ---------
Net cash provided by operating activities 301,385 224,005 191,139
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of partnership interests 38,487 24,207 12,727
Redemption of partnership interests (27,773) (33,752) (5,375)
Withdrawals and distributions from
partnership capital (314,373) (212,310) (201,124)
--------- --------- ---------
Net cash used in financing activities (303,659) (221,855) (193,772)
--------- --------- ---------
Net (decrease) increase in cash and
cash equivalents (2,274) 2,150 (2,633)
CASH AND CASH EQUIVALENTS,
Beginning of year 3,881 1,731 4,364
--------- --------- ---------
End of year $ 1,607 $ 3,881 $ 1,731
========= ========= =========
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
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 23, 2007 appearing in the Form 10-K of The Jones Financial
Companies, L.L.L.P. also included an audit 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.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 23, 2007
71