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, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission file number 0-16633
THE JONES FINANCIAL COMPANIES, L.L.L.P.
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(Exact name of registrant as specified in its Partnership Agreement)
MISSOURI 43-1450818
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12555 Manchester Road
Des Peres, Missouri 63131
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (314) 515-2000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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NONE NONE
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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 (section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer", "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ X ]
(Do not check if a smaller reporting company) Smaller reporting company [ ]
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 28, 2008, 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. ("the Partnership") is organized under
the Revised Uniform Limited Partnership Act of the State of Missouri. Unless
expressly stated otherwise or the context otherwise requires, the terms
"Registrant" and "Partnership" refer to The Jones Financial Companies,
L.L.L.P. and any or all of its consolidated subsidiaries. The Partnership is
the successor to Whitaker & Co., which was established in 1871 and dissolved
on October 1, 1943, the organization date of Edward D. Jones & Co., L.P.
("Edward Jones"), the Partnership's principal subsidiary. Edward Jones was
reorganized on August 28, 1987, which date represents the organization date of
The Jones Financial Companies, L.L.L.P.
The Partnership's principal operating subsidiary, Edward Jones, is a
registered broker-dealer primarily serving individual investors. Edward Jones
primarily derives its revenues from the retail brokerage business through the
sale of listed and unlisted securities and insurance products, investment
banking, principal transactions and as a distributor of mutual fund shares,
and revenue related to assets held by and account services provided to its
clients. 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 Financial Industry Regulatory Authority,
Inc. ("FINRA").
As of February 29, 2008, the Partnership was composed of 326 general partners,
11,220 limited partners and 187 subordinated limited partners.
ORGANIZATIONAL STRUCTURE
At December 31, 2007, 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,
3
PART I
Item 1. Business, continued
L.P., L.L.L.P. and Community Investment Partners V, L.P., L.L.L.P., business
development companies. Edward Jones holds all of the limited partnership
equity in a Missouri limited partnership, EDJ Ventures, 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 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 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 2004, S-J Capital Corp., a Missouri Corporation of which Edward Jones
owned 50% of the issued common stock was dissolved.
During 2006, the Edward Jones affiliates, Unison Investment Trusts, L.P.,
d/b/a Unison Investment Trusts, Ltd. and Unison Capital Corp., Inc. were
dissolved. The Edward Jones affiliate, Passport Research II Ltd. was sold. The
Partnership's subsidiary Boone National Savings and Loan Association F.A., was
renamed Edward Jones Trust Company.
During 2007, an Edward Jones affiliate, Edward Jones Insurance Agency of
Wyoming, LLC, was dissolved.
4
PART I
Item 1. Business, continued
REVENUES BY SOURCE. The following table sets forth, for the past three years,
the sources of the Partnership's revenues by dollar amounts (all amounts in
thousands):
2007 2006 2005
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Commissions
Mutual funds $ 1,257,939 $ 1,109,905 $ 1,035,330
Listed securities 271,014 259,676 260,369
Insurance 272,352 232,281 210,887
Over-the-counter securities 56,882 61,818 62,307
Asset fees 1,098,621 877,771 716,904
Account and activity fees 441,027 378,905 335,105
Principal transactions 384,609 267,038 238,884
Interest and dividends 309,357 253,607 209,734
Investment banking 34,723 32,505 32,892
Other revenue 20,343 44,249 94,038
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Total revenue $ 4,146,867 $ 3,517,755 $ 3,196,450
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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 litigation as it relates to the
Partnership.)
The Partnership does not manage any mutual funds, although it is a limited
partner of Passport Research, Ltd., 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, which are based on a specified number of basis points
on the Partnership's current year fund sales. 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
("SROs").
The Partnership clears and settles virtually all of its listed and
over-the-counter equities, municipal bond, corporate bond, mutual fund and
annuity transactions for its U.S. broker-dealer through the National
Securities Clearing Corporation ("NSCC"), Fixed Income Clearing Corporation
("FICC") and Depository Trust Company ("DTC"), which are located in New York,
New York.
In conjunction with clearing and settling transactions with NSCC, the
Partnership holds customer securities on deposit with the DTC in lieu of
maintaining physical custody of the certificates. The Partnership also uses a
major bank for custody and settlement of treasury securities and Government
National Mortgage Association ("GNMA"), Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") issues.
The Partnership's United Kingdom operation clears and settles virtually all of
its listed transactions through Euroclear UK & Ireland, ("Euroclear").
Euroclear effects clearing of securities on the London Stock Exchange. In
conjunction with clearing and settling transactions with Euroclear, the
Partnership's United Kingdom operation holds customer securities on deposit
with Euroclear in lieu of maintaining physical custody of the certificates.
The Partnership's United Kingdom operation also uses DTC for custody of United
States securities, a major independent brokerage firm for custody of
non-United Kingdom and non-United States securities, and individual unit trust
vendors for custody of unit trust holdings.
As the carrying broker in Canada, NBCN handles the routing and settlement of
customer transactions. Transactions are settled through the Canadian
Depository for Securities ("CDS"), 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, Euroclear, 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.
Broadridge Financial Solutions, Inc. along with its U.S. business, Securities
Processing Solutions, U.S. and its international business, Securities
Processing Solutions, International and NBCN provide automated data processing
services for customer account activity and related records for the United
States, United Kingdom and Canada, respectively.
9
PART I
Item 1. Business, continued
The Partnership does not employ its own floor broker for transactions on
exchanges. The Partnership has arrangements with other 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 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. CAPCO protects each client's
account net equity in excess of the SIPC and FSCS coverage. 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 326 general partners, the Partnership has
approximately 38,100 full and part-time employees. This includes 11,292
financial advisors as of February 29, 2008. 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 requisite examinations, trainees spend one
week in a comprehensive training program in one of the Partnership's
headquarter training facilities followed by three weeks at their designated
location to conduct market research and prepare for opening the office. The
trainee then spends six 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 10,191 branch offices as of
February 29, 2008, primarily staffed by a single financial advisor and a
branch office assistant. The Partnership operates 9,336 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 605 offices as of February 29, 2008) and the United Kingdom
(through 250 offices as of February, 29, 2008).
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 financial advisors with good
sales production records. In recent periods, the Partnership has experienced
increasing efforts by competing firms to hire away its financial advisors,
although the Partnership believes that its rate of turnover of financial
advisors is not higher than that of other firms comparable to the Partnership.
REGULATION. The securities industry in the United States is subject to
extensive regulation under both federal and state laws. The SEC is the federal
agency responsible for the administration of the federal securities laws. The
Partnership's principal subsidiary is registered as a broker-dealer and
investment advisor with the SEC. Much of the regulation of broker-dealers has
been delegated to SROs, principally FINRA. FINRA is the securities industry's
new self-regulated body as a result of the consolidation of the NASD and NYSE
Member Regulation effective July 30, 2007, which has been designated by the
SEC as the Partnership's primary regulator. FINRA adopts rules (which are
subject to approval by the SEC) that govern the industry and 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.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customer funds and securities, customer
payment and margin requirements, capital structure of securities firms,
record-keeping and the conduct of directors, officers and employees.
Additional legislation, changes in rules promulgated by the SEC and SROs,
and/or changes in the interpretation or enforcement of existing laws and
rules, may directly affect the operations and profitability of broker-dealers.
The SEC, SROs and state securities commissions may conduct administrative
proceedings which can result in censure, fine, suspension or expulsion of a
broker-dealer, its officers or employees. The principal purpose of regulation
and discipline of broker-dealers is the protection of customers and the
securities markets, rather than protection of the creditors and stockholders
of broker-dealers. In recent years, the Partnership has been the subject of
significant regulatory actions by various agencies that have the authority to
regulate its activities (See 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,
2007 and 2006.
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, COULD IN THE
FUTURE 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
Item 1A. Risk factors, continued
OPERATIONAL SYSTEMS -- THE PARTNERSHIP RECENTLY REPLACED ITS SATELLITE BASED
COMMUNICATIONS SYSTEMS AND IS ENGAGED IN OTHER SIGNIFICANT TECHNOLOGY
INITIATIVES WHICH WILL BE COSTLY AND COULD LEAD TO DISRUPTIONS; ANY
SUBSTANTIAL DISRUPTION TO THESE SYSTEMS COULD LEAD TO FINANCIAL LOSS AND HARM
RELATIONS WITH CLIENTS.
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, 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. As of December 31, 2007, all branch offices have
been converted to a new terrestrial communications network from a satellite
network. In addition to the new terrestrial communication network, the
Partnership anticipates a significant upgrade or replacement to branch video
and telephony systems. The Partnership has not yet finalized the specific
design and solution for replacing the video and telephony systems, but
anticipate relying on third parties to implement these replacements and cannot
assure their timely completion. The Partnership has limited experience in such
large-scale information technology projects, as such, it is expected that
there could be a risk of unforeseen problems and costs.
The full replacement of all voice, data and telephony systems, is projected to
require capital expenditures of $145 million and the Partnership projects the
new system to result in increased firm operation costs of approximately $55-65
million each year once fully implemented in all of it's offices. While the
terrestrial network was completed in 2007 and required capital expenditures of
$35 million, the Partnership has not yet experienced the full magnitude of the
expected cost increases since not all branches were converted at the beginning
of the year and the video and voice solution has not yet been determined.
Accordingly, the Partnership expects the financial results of future periods
to be impacted by these cost increases.
If the Partnership's communications systems or equipment do not operate
properly, are disabled or fail to perform due to increased demand (which might
occur during market upswings or downturns), or if a new system or system
upgrade contains a major problem, the Partnership could experience
unanticipated disruptions in service, slower response times, decreased
customer service and customer satisfaction and delays in the introduction of
new products and services, any of which could result in financial losses,
liability to clients, regulatory intervention or reputational damage. Further,
the inability of the systems to accommodate an increasing volume of
transactions could also constrain the Partnership's ability to expand
business.
The Partnership's computer system and network are also vulnerable to damage or
interruption from human error, natural disasters, power loss, sabotage,
computer viruses, intentional acts of vandalism and similar events. The
Partnership has established a second data center in Tempe, Arizona which
operates as a backup of the primary data center located in St. Louis, Missouri
and expects to be able to resume service during a system disruption contained
to St. Louis with a short-term interruption in service. However, the staff at
the Tempe facility is not sufficient to operate the systems in the event of a
prolonged disruption to the St. Louis systems. In such event, the Partnership
would need to re-locate staff to the Tempe facility, which might result in a
delay in service during the transition and substantial additional costs and
expenses.
BRANCH OFFICE SYSTEM -- THE PARTNERSHIP'S SYSTEM OF ONE-FINANCIAL ADVISOR
BRANCH OFFICES MAY EXPOSE THE PARTNERSHIP TO A GREATER RISK OF LOSS OR
LIABILITY FROM THE ACTIVITIES OF THE FINANCIAL ADVISORS THAN IF A MORE
TRADITIONAL OFFICE SYSTEM IS MAINTAINED.
13
Item 1A. Risk factors, continued
Pursuant to our business plan, we have been increasing our number of branch
offices and financial advisors, along with the home office and branch office
staff and equipment to support them. Our business plan is dependent upon our
ability to grow our number of branch offices and financial advisors.
Most securities firms typically staff several financial advisors and one or
more managers or other supervisory personnel in each of their branch offices.
In contrast, most of the Partnership's branch offices are staffed by a single
financial advisor with primary supervisory activity being conducted from its
headquarters office, 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 funds, annuities and other investment products, as well
as sales practices in the brokerage industry generally, have come under
increased scrutiny from various state, federal and SROs in connection with
several industry issues including market timing, late trading, the failure of
various broker-dealers to provide breakpoint discounts to mutual fund
purchasers, the sale of certain mutual fund share classes, mutual fund net
asset value transfer programs and the manner in which mutual fund and annuity
companies compensate broker-dealers. From time to time the Partnership may
receive information requests or subpoenas from various regulatory and
enforcement authorities in connection with industry-wide sweeps or other
inquiries or investigations. These inquiries or requests for information may
at times result in additional inquiries by the regulators or more specific
investigation of the Partnership.
REGULATORY INITIATIVES- RECENTLY PROPOSED REGULATIONS MAY SIGNIFICANTLY ALTER
OR RESTRICT THE HISTORIC BUSINESS PRACTICES, WHICH COULD NEGATIVELY AFFECT THE
OPERATING RESULTS.
The Partnership is subject to extensive regulation by federal and state
regulatory agencies and by SROs within the industry.
The Partnership receives various payments in connection with the purchase,
sale and holding of mutual fund shares by its clients. Those payments include
"Rule 12b-1 fees" and expense reimbursements. Rule 12b-1 allows a mutual fund
to pay distribution and marketing expenses out of the fund's assets. Although
the SEC does not limit the size of Rule 12b-1 fees that funds may pay, FINRA
does impose such limitations. All of the Partnership's preferred mutual fund
families, as well as some non-preferred mutual funds, pay such fees.
In February, 2005, the SEC reopened for comment proposed rules that would
require broker/dealers to provide their customers with information regarding
the costs and conflicts of interest that arise from the sales of mutual fund
shares, including point-of-sale disclosures in both written and oral form.
Additionally, in 2007 the SEC solicited additional public comments and held
public forums and discussions on the issues as they relate to Rule 12b-1 fees.
Similarly, a Congressional subcommittee held hearings in July, 2007 centered
on Rule 12b-1 fees. If rules with regard to 12b-1 fees are proposed, these
rules could adversely impact or restrict our business practices with respect
to receipt and disclosure of Rule 12b-1 fees. In addition, if the SEC, FINRA
or any state regulatory agencies limit or eliminate such fees, it could have a
material impact on the Partnership's operating results for future periods,
including
14
Item 1A. Risk factors, continued
reducing or eliminating the Partnership's net income, general and limited
partnership returns, and compensation to the Partnership's financial advisors
(including bonuses and profit sharing). This could negatively affect the
Partnership's ability to recruit and retain financial advisors.
There is continued uncertainty in the industry as to the status of regulations
affecting whether an individual financial advisor is acting in certain
circumstances as a broker as opposed to an investment adviser. In light of
this and other Partnership business initiatives, including the offering of
certain financial planning services to the Partnership's clients, the
Partnership has required that all financial advisors be registered both as
general securities representatives and as investment advisor representatives
("IARs") in states where the IAR registration is required and if the financial
advisor engages in offering services where the IAR registration is necessary.
An IAR is considered a fiduciary and could subject the Partnership's financial
advisors and the Partnership to more stringent standards, inhibit certain
types of proprietary transactions, increase disclosure requirements and
increase potential liability for such financial advisors and the Partnership.
The Pension Protection Act of 2006 (the "PPA") enacted August 3, 2006 provides
for enhanced Individual Retirement Account ("IRA") requirements and made
permanent a variety of provisions relating to IRAs that would otherwise have
expired. A temporary increase to IRA annual contribution limits was made
permanent, as was another reform that allows eligible individuals who make
contributions to an IRA or qualified pension plan to receive a federal "match"
in the form of an income tax credit for the first $2,000 of annual
contributions. The PPA also directs the Internal Revenue Service ("IRS") to
permit taxpayers who are due a federal income tax refund to choose to have the
IRS deposit a portion of that refund directly to an IRA chosen by the
taxpayer. The option would be made when the individual files his or her tax
return. The PPA furthermore directed the Department of Labor to enact
regulations relating to IRAs, and it is expected that such regulations will be
proposed in the coming year. Since approximately 50% of the accounts we open
are IRAs, this law and the impending regulations could affect our business and
customer accounts.
The Partnership is also subject to federal and state regulations like other
businesses and must evaluate and adapt to new regulations as they are adopted.
While we believe we are in compliance with these regulations, these
regulations could impact our future revenues or results of operations.
Any of the foregoing regulatory initiatives could adversely affect our
business operations and our business model by reducing or eliminating certain
fees that are significant components of our revenues.
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. In addition,
the Partnership encounters competition from other organizations such as banks,
insurance companies, and others offering financial services. Many of these
entities have substantially greater capital and 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.
15
Item 1A. Risk factors, continued
Competition among financial services firms also exists for financial advisors
and other personnel. The Partnership's continued ability to expand its
business and to compete effectively depends on the ability of the Partnership
to attract qualified employees and to retain and motivate current employees.
If the profitability of the Partnership decreases, then bonuses paid to
financial advisors and other personnel, along with profit-sharing
contributions, may be decreased or eliminated, increasing the risk that
personnel could be hired away by competitors. In addition, the Partnership has
recently faced increased competition from larger firms in its non-urban
markets, and from a broad range of firms in the urban and suburban markets in
which it competes.
LITIGATION -- LITIGATION SEEKING SUBSTANTIAL DAMAGES FROM SECURITIES FIRMS HAS
INCREASED IN RECENT YEARS, AND IT IS EXPECTED TO CONTINUE TO INCREASE AS
MARKET FLUCTUATIONS CONTINUE.
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. Edward Jones, like other broker/dealers, is also
from time to time the subject of arbitrations and other litigation. We would
expect litigation to remain at this high level or continue to increase to the
extent the market experiences further downturns.
Additionally, due to the system of home office supervision, the Partnership
may be exposed to an enhanced risk of legal actions instituted by customers
resulting from alleged imprudent or illegal actions undertaken by the
financial advisors.
The Partnership has experienced significant expenses incurred to defend and/or
settle claims over 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 -- 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.
16
Item 1A. Risk factors, continued
RELIANCE ON ORGANIZATIONS -- THE PARTNERSHIP DEPENDS ON THIRD-PARTY
ORGANIZATIONS, WHICH EXPOSES THE PARTNERSHIP TO DISRUPTION IF THEIR PRODUCTS
AND SERVICES ARE NO LONGER OFFERED, SUPPORTED OR DEVELOP DEFECTS.
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 Broadridge Financial Solutions,
Inc. ("Broadridge") in the United States. Broadridge acts as our primary
vendor for providing customer accounting and record-keeping in the United
States and our communications and information systems are integrated with the
information systems of Broadridge. There are relatively few alternative
providers to Broadridge and although we have analyzed the feasibility of
performing Broadridge's functions internally, the Partnership may not be able
to do it in a cost-effective manner or otherwise. Consequently, any new
computer systems or software packages implemented by Broadridge which are not
compatible with our systems, or any other interruption or the cessation of
service by Broadridge as a result of systems limitations or failures, could
cause unanticipated disruptions in our business which may result in financial
losses to us and/or disciplinary action by governmental agencies and/or SROs.
Furthermore, Broadridge was spun off in 2007 from its parent company,
Automated Data Processing, Inc., and we are uncertain of the effect this
spin-off could ultimately have on the services we receive from Broadridge. The
Partnership experiences similar risks in foreign countries where our
subsidiaries operate. Such foreign subsidiaries rely on Broadridge and 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 decreased since it's early start up years, the losses for the
U.K. operation have increased significantly in recent years.
CAPITAL LIMITATIONS; UNIFORM NET CAPITAL RULE -- THE UNIFORM NET CAPITAL RULE
IMPOSES MINIMUM NET CAPITAL REQUIREMENTS AND COULD LIMIT THE PARTNERSHIP'S
ABILITY TO ENGAGE IN CERTAIN ACTIVITIES WHICH ARE CRUCIAL TO ITS BUSINESS.
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
17
Item 1A. Risk factors, continued
activities such as underwriting and trading, which use significant amounts of
capital, its ability to expand margin account balances, as well as its
commitment to new activities requiring an investment of capital. Consequently,
a significant operating loss or an extraordinary charge against net capital
could adversely affect Edward Jones' 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 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, 2007, Edward Jones' net
capital of $798.1 million was 42.9% of aggregate debit items and its net
capital in excess of the minimum required was $761.0 million. Net capital as a
percentage of aggregate debit items after anticipated withdrawals was 42.9%.
Net capital and the related capital percentage may fluctuate on a daily basis.
See Note 12 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. As
of December 31, 2007, the Partnership's U.S. headquarters consisted of 23
separate buildings. Two of its St. Louis headquarters buildings were
demolished during 2007 in order to prepare for further development of the St.
Louis headquarters campus locations. It is anticipated that an additional ten
buildings will be demolished over the next five years. New
18
Item 2. Properties, continued
construction is planned to replace those buildings. As of the end of 2007,
construction has begun for one six-story office building. Plans were developed
and construction was begun in early 2008 on a significant expansion to another
headquarters building. Four additional office buildings, as well as parking
structures, are planned for development over the next five years.
Two U.S. headquarters buildings are leased through operating leases. In
addition, the Partnership leases its Canadian home office facility in
Mississauga, Ontario through an operating lease and has an operating lease for
its United Kingdom home office located in London, England. The Partnership
also maintains facilities in 10,191 branch locations (as of February 29, 2008)
which are located in the United States, Canada and the United Kingdom and are
rented under predominantly cancelable leases. The Partnership is in the
process of expanding its buildings and facilities in order to support the
current and future growth projections of the organization.
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., (2) Spahn IRA, et al. v. Edward D.
Jones & Co., and (3) Enriquez et al. v. Edward D. Jones & Co., L. P. In August
2006, the Partnership announced a preliminary settlement agreement to resolve
all three groups of lawsuits. Final approval of the settlement was given on
October 25, 2007 in the federal court case (Spahn) and on October 29, 2007 in
the state action (Enriquez). Pursuant to the foregoing approved settlement,
the Bressler action was dismissed. The time for appeals has past and the
Partnership is beginning the process of effectuating the settlement. Each of
the suits claimed that the Partnership failed to adequately disclose its
revenue sharing arrangements with certain designated preferred mutual fund
families.
The settlement involves all of the Partnership's present and former clients
who purchased and/or held shares in any of the Preferred Mutual Fund Families
during the period from January 1, 1999 through December 31, 2004. The
Partnership agreed to pay $55 million to former clients and for attorneys'
fees, as well as any costs to administer the settlement. Additionally, the
Partnership will issue $72.5 million of credit vouchers to current clients
than can be redeemed ratably over a three-year period. Any credit voucher not
redeemed during the applicable year will expire after each annual redemption
period. In 2006, the $55 million cash component of the settlement and related
administrative costs was charged against previously established legal expense
accruals. The $72.5 million non-cash credit voucher component will be
recognized as a reduction to revenue in the periods in which the vouchers are
redeemed by clients. The Partnership agreed to assume the cost of notice and
administration of the settlement. The settlement provides for the release of
all claims, debts and causes of action related to certain revenue sharing
payments 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.
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
19
Item 3. Legal Proceedings, continued
Partnership's motion to dismiss and dismissed the lawsuit, and
further denied the Attorney General's request for reconsideration. However,
the California Attorney General filed an appeal. On August 24, 2007, the
California Court of Appeal issued its opinion, remanding the case to the trial
court with instructions to vacate the order sustaining the demurrer without
leave to amend and enter a new order overruling the demurrer. On October 3,
2007, Edward Jones timely filed a Petition for Review with the California
Supreme Court. On November 28, 2007, the California Supreme Court denied the
petition. On December 6, 2007, the case was remitted back to the trial court.
Tennessee Investigation - The filing in August 2007 of a legal action In Re
Estate of Florence M. Wilkison and John E. Wilkison, Jr., Executor v. Robert
E. Bell, William E. Hood and Edward D. Jones & Co., L.P., Seventh Circuit
Court for Davidson County Tennessee Probate Division alleging
misappropriation, has been settled. As a result, additional clients claiming
conversion of property by accountant Bell and Edward Jones Financial Advisor
Hood similar to the Wilkison claim has resulted in additional investigation
and monetary settlements. Edward Jones continues its investigation. Edward
Jones has notified the regulatory authorities including the State of Tennessee
and FINRA and are cooperating with their investigation.
Wage and Hour Class Actions - On September 28, 2007, Edward Jones, a
subsidiary of the Partnership, entered into two settlement agreements (the
"Settlement Agreements") related to several wage and hour class action
lawsuits, which were filed against Edward Jones in the United States District
Court for the Northern District of California ("Northern District of
California") and the United States District Court for the Western District of
Pennsylvania ("Western District of Pennsylvania").
The first Settlement Agreement resolves the federal and state claims of a
California Class. The second Settlement Agreement resolves the federal and
state claims of individuals in all other states (the "National Class"). The
Settlement Classes provided for by these agreements consist of all individuals
who are (or were) employed by Edward Jones in the position of Financial
Advisor, a/k/a Investment Representative and/or salaried or commissioned
Financial Advisor Trainee, in the United States during the relevant class
periods, including any limited partners who hold such positions, and all
current and former general partners who were in such positions during the
class periods for the time period before they became general partners.
On September 28, 2007, the parties filed formal settlement stipulations with
the Northern District of California and the Western District of Pennsylvania.
Subsequently, on February 1, 2008, the Northern District of California granted
the parties' Joint Motion for Preliminary Approval. The Final Approval Hearing
in that case is set in June 2008. On December 17, 2007, the Western District
of Pennsylvania gave the parties permission to proceed with a settlement of
the federal claims, but dismissed the state claims without prejudice, ruling
in part that the state and federal claims could not proceed in the same
action.
Subsequent to dismissal of the state law claims, a new action was filed in
Ohio state court once again asserting state law claims. On February 26, 2008,
Edward Jones removed the lawsuit to the United States District Court for the
Northern District of Ohio, Eastern Division. Thereafter, counsel for the
plaintiffs who had been proceeding in the Western District of Pennsylvania
filed two additional lawsuits in the Northern District of Ohio, one of which
asserts primarily federal law claims and one of which asserts primarily state
law claims, and the parties voluntarily dismissed the lawsuit pending in the
Western District of Pennsylvania.
Despite the new filings, the two Settlement Agreements remain in place. Edward
Jones agreed to pay $21.0 million to settle the claims of the California Class
(the "California Fund") and up to a maximum of $19.0 million to settle claims
of the National Class (the "National Class Fund"). The California Fund,
20
Item 3. Legal Proceedings, continued
including all interest thereon, is a common fund that is not the separate
property of Edward Jones and will not revert to Edward Jones, from which all
claims of the California Class, as well as attorney's fees, litigation
expenses, enhancements and claims administration fees and costs associated
with the California Class will be paid. The National Class Fund will be made
on a claims-made basis with unclaimed funds to remain the property of Edward
Jones. The National Class Fund will also include attorney's fees, litigation
expenses, enhancements, administrative costs, and any other fees or costs
associated with the settlement. The $21 million for the California Fund was
transferred to an escrow account in February 2008 and was charged against
previously established legal expense accruals. The cost of the National Class
settlement will also be charged against previously established expense
accruals.
In view of the inherent difficulty of predicting the outcome of such matters,
particularly in cases in which claimants seek substantial or indeterminate
damages, or actions which are in very preliminary stages, the Partnership
cannot predict with certainty the eventual loss or range of loss related to
such matters. The Partnership has determined that it is likely that ultimate
resolution in favor of the plaintiffs will result in losses to the Partnership
on some of these matters and as a result, has established appropriate accruals
for potential litigation losses. Based on current knowledge and after
consultation with counsel, the Partnership believes the outcome of these
actions will not have a material adverse effect on the consolidated financial
condition of the Partnership, although the outcome could be material to the
Partnership's future operating results for a particular period or periods.
21
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:
2007 2006 2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
Total revenue $ 4,147 $ 3,518 $ 3,196 $ 2,899 $ 2,550
Interest expense 81 56 55 56 58
-------------------------------------------------------------------------------------
Net revenue $ 4,066 $ 3,462 $ 3,141 $ 2,843 $ 2,492
Income before allocations
to partners/net income * $ 508 $ 391 $ 330 $ 217 $ 203
Income before allocations
to partners/net income
per weighted average
$1,000 equivalent
limited partnership
unit outstanding $ 165.92 $ 161.95 $ 157.11 $ 126.43 $ 108.08
Weighted average
$1,000 equivalent
limited partnership
units outstanding 498,132 210,157 214,366 219,885 224,389
- ---------------------------------------------------------------------------------------------------------------------
<FN>
* Due to the implementation of SFAS No. 150, the Partnership reported income
before allocations to partners in 2007, 2006, 2005 and 2004 and net income in
2003.
22
PART I
Item 6. Selected Financial Data, continued
Summary Consolidated Statements of Financial Condition Data:
2007 2006 2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 5,824 $ 5,196 $ 4,317 $ 4,100 $ 3,723
============== =============== ============== ============== ==============
Bank loans $ - $ - $ 9 $ - $ -
Federal Home Loan Bank
advances - - 31 34 24
Long-term debt 11 14 24 32 40
Other liabilities exclusive
of subordinated
liabilities and partnership
capital subject to
mandatory redemption 4,087 3,880 2,993 2,839 2,466
-------------- --------------- -------------- -------------- --------------
4,098 3,894 3,057 2,905 2,530
-------------- --------------- -------------- -------------- --------------
Subordinated liabilities 275 299 344 387 408
-------------- --------------- -------------- -------------- --------------
Partnership capital
subject to mandatory
redemption / partnership
capital (net of reserve for
anticipated withdrawals) * 1,328 907 802 752 727
Reserve for anticipated
withdrawals 123 96 114 56 58
-------------- --------------- -------------- -------------- --------------
Partnership capital subject to
mandatory redemption/
partnership capital 1,451 1,003 916 808 785
-------------- --------------- -------------- -------------- --------------
Total liabilities and
partnership capital $ 5,824 $ 5,196 $ 4,317 $ 4,100 $ 3,723
============== =============== ============== ============== ==============
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
* Due to the implementation of SFAS No. 150, the Partnership
reported total partnership capital subject to mandatory redemption in 2007,
2006, 2005 and 2004 and partnership capital in 2003.
23
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).
2007 vs. 2006 2006 vs. 2005
Amount Percentage Amount Percentage
Revenue:
Commissions $ 194,507 12 % $ 94,787 6 %
Asset fees 220,850 25 160,867 22
Account and activity fees 62,122 16 43,800 13
Principal transactions 117,571 44 28,154 12
Interest and dividends 55,750 22 43,873 21
Investment banking 2,218 7 (387) (1)
Other (23,906) (54) (49,789) (53)
----------------- -----------------
Total revenue 629,112 18 321,305 10
Interest expense 24,385 43 750 1
----------------- -----------------
Net revenue 604,727 18 320,555 10
----------------- -----------------
Operating Expenses:
Compensation and benefits 405,153 19 261,232 14
Communications and data
processing 27,695 10 9,836 4
Occupancy and equipment 27,512 10 13,493 5
Payroll and other taxes 18,446 15 9,411 8
Legal (39,613) (78) (63,229) (56)
Postage and shipping 6,305 12 352 1
Advertising 6,102 11 6,401 13
Floor brokerage and
clearance fees (914) (5) 4,091 29
Other operating expenses 36,488 27 18,287 15
----------------- -----------------
Total operating expenses 487,174 16 259,874 9
----------------- -----------------
Income before allocations to
partners / net income $ 117,553 30 % $ 60,681 18 %
================= =================
- -----------------------------------------------------------------------------------------------------------------
24
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
BASIS OF PRESENTATION
For internal analysis, the Partnership broadly categorizes its revenues as
trade revenue (revenue from customer buy or sell transactions of securities)
and net fee revenue (sources other than trade revenue including asset fees,
account and activity fees and net interest income). In the Partnership'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 (2007 VERSUS 2006)
For 2007, net revenue increased 18% ($604.7 million) to $4.066 billion, while
income before allocations to partners increased 30% ($117.6 million) to $508.2
million. The Partnership's profit margin based on income before allocations to
partners increased to 12.3% in 2007, from 11.1% in 2006. Year over year, the
Partnership's net revenue increased due primarily to increased customer
dollars invested, growth in customer asset values, higher account and activity
fees, and higher net interest income. Operating expenses increased in 2007 due
primarily to growth in sales compensation related to the increase in net
revenues and to costs associated with the continued expansion and enhancement
of the Partnership's branch office network. The Partnership added 914
financial advisors during the twelve months ended December 31, 2007, ending
the year with 11,202 financial advisors, an increase of 9% from 10,288 as of
December 31, 2006.
Trade revenue of $2.278 billion comprised 56% of net revenue for 2007, down
from 57% for 2006. Conversely, net fee revenue comprised 44% for 2007, up from
43% in 2006. Trade revenue of $2.278 billion, increased 16% ($314.3 million)
in 2007 due primarily to an increase in customer dollars invested (the
principal amount of customer's buy and sell transactions generating a
commission). Total customer dollars invested were $109.6 billion during 2007,
a 15% ($13.9 billion) increase from 2006. The Partnership's margin earned on
each $1,000 invested increased to $20.40 in 2007 from $20.30 in 2006.
Commissions revenue increased 12% ($194.5 million) during 2007 to $1.858
billion. Commissions revenue increased year over year due primarily to a 14%
($8.7 billion) increase in customer dollars invested to $71.0 billion in 2007,
compared to $62.3 billion in 2006. Underlying the increase in commissions
revenue, mutual fund commissions increased 13% ($148.0 million) and insurance
commissions increased 17% ($40.1 million), which together represented 97% of
the increase in commissions revenue. The following table summarizes
commissions revenue year over year:
Years ended (in millions)
-----------------------------------------------
December 31, December 31, %
2007 2006 Change
---------------------- ----------------------- ----------
Mutual funds $ 1,257.9 $ 1,109.9 13
Equities 327.3 320.8 2
Insurance 272.4 232.3 17
Corporate bonds 0.6 0.7 (14)
---------------------- ----------------------- ----------
$ 1,858.2 $ 1,663.7 12
====================== ======================= ==========
Principal transactions revenue increased 44% ($117.6 million) to $384.6
million during 2007 due primarily to an increase in customer dollars invested.
Customers invested $37.4 billion in principal transactions in 2007 compared to
$32.2 billion in 2006, an increase of 16% ($5.2 billion). The Partnership's
margin earned on principal transactions on each $1,000 invested increased to
$10.30 during
25
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
2007 from $8.30 during 2006 primarily due to a shift to higher margin, longer
maturity fixed income products from lower margin, shorter maturity
certificates of deposit. Revenue from corporate bonds increased 61% ($55.1
million), municipal bonds increased 62% ($52.3 million), collateralized
mortgage obligations increased 18% ($2.4 million), unit investment trust
increased 13% ($1.9 million), certificates of deposit increased 10% ($3.9
million) and government bonds increased 8% ($2.0 million). Increased revenue
from corporate bonds and municipal bonds represent 91% of the increase in
principal transactions revenue. The increase was due to strong supply and
higher yield spreads for investment grade municipal and corporate bonds. The
following table summarizes principal transaction revenue year over year:
Years ended (in millions)
----------------------------------------------
December 31, December 31, %
2007 2006 Change
---------------------- ----------------------- ----------
Municipal bonds $ 137.0 $ 84.7 62
Corporate bonds 146.0 90.9 61
Government bonds 25.9 23.9 8
Collateralized mortgage obligations 16.0 13.6 18
Unit investment trusts 16.2 14.3 13
Certificates of deposit and other 43.5 39.6 10
---------------------- ----------------------- ----------
$ 384.6 $ 267.0 44
====================== ======================= ==========
Investment banking revenue increased 7% ($2.2 million) during 2007 to $34.7
million, due primarily to an increase in municipal offerings in the current
year.
Net fee revenue, which is fee revenue net of interest expense, increased 19%
($290.4 million) to $1.789 billion during 2007. Asset fees increased 25%
($220.8 million) to $1.099 billion due to net new money flowing into mutual
fund and insurance products coupled with the favorable impact of market
conditions through the fall of 2007 on customers' mutual fund and insurance
assets generating asset fees. Average customer mutual fund, insurance, and
money market assets increased $65.4 billion or 24% to $341.0 billion in 2007
compared to $275.6 billion in 2006.
Account and activity fees of $441.0 million increased 16% ($62.1 million) year
over year. Revenue received from sub-transfer agent services performed for
mutual fund companies increased 9% ($21.0 million) to $248.8 million, due to a
16% increase in the number of customer accounts for which the Partnership
provides mutual fund sub-transfer agent services. Offsetting the increase in
mutual fund sub-transfer agent fees was an $8.9 million (50%) decrease in fees
received from sub-transfer agent services related to money market accounts due
to a reduction in the number of money market accounts for which the
Partnership provides sub-transfer agent services. Custodial fee revenue grew
28% ($24.5 million) to $111.4 million, due to an 11% increase in the number of
retirement accounts for which the Partnership is custodian. In addition, the
annual fees charged on most retirement accounts was increased beginning
January 2007. Other revenue of $20.3 million decreased 54% ($23.9 million)
year over year primarily due to 2006 including $21 million in gains from three
sources ($8.1 million from the sale of banking assets by the Partnership's
banking subsidiary; $6.8 million from the exchange of the Partnership's NYSE
membership for shares in Archipelago in connection with the NYSE's initial
public offering; and $6.5 million from the sale of the Partnership's interest
in the investment advisor to the Federated Capital Income Fund).
Net interest and dividend income increased 16% ($31.4 million) to $228.8
million during 2007 due primarily to an increase in overnight and short-term
investing activities. Interest income increased 22% ($55.8 million) to $309.4
million in 2007 due to investing increased liquidity from customer credit
26
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
balances and investing the proceeds from an offering of limited partnership
interests, which closed on January 2, 2007. The average rate on the overnight
investment balances was relatively unchanged at 4.987% in 2007 and 4.976% in
2006, while the average investment balance increased 199% ($1.466 billion) to
$2.202 billion due to increased customer credit balances and proceeds from an
offering of Limited Partnership (LP) interests. Interest income from
customer loans decreased 10% ($19.7 million). Average customer margin loan
balances were $1.913 billion in 2007, compared to $2.160 billion in 2006, a
decrease of 11%. The average rate earned on customer loan balances increased
to approximately 8.94% during 2007 from approximately 8.84% during 2006.
Operating expenses increased 16% ($487.2 million) to $3.558 billion during
2007. Compensation and benefits costs increased 19% ($405.2 million) to $2.494
billion. Within compensation and benefits costs, sales compensation increased
19% ($214.3 million) due to increased revenues. Additionally, financial
advisor salary and subsidy increased 46% ($40.1 million) due to new financial
advisor compensation programs as well as increased numbers of financial
advisors participating in those programs. Variable compensation, including
bonuses and profit sharing paid to financial advisors, branch office
assistants, and headquarters associates, which expands and contracts in
relation to revenues, income before allocations to partners and the
Partnership's related profit margin, increased 36% ($98.1 million).
Headquarters and branch payroll expense increased 9% ($55.5 million) due to
increased salary and medical costs for existing and additional personnel
support as the Partnership grows its sales force. This was offset by a $29.3
million decrease due to the elimination of a special bonus program for certain
existing personnel in connection with the closing of the Partnership's LP
offering. On a full time equivalent basis, the Partnership had 4,894
headquarters associates and 11,319 branch staff associates as of December 31,
2007, compared to 4,331 headquarters associates and 10,594 branch staff
associates as of December 31, 2006.
Occupancy and equipment expense increased 10% ($27.5 million) to $301.1
million during 2007 due primarily to the growth in the number of branch
offices as the Partnership expands the number of financial advisors.
Communications and data processing expense increased 10% ($27.7 million) to
$300.6 million during 2007 due to increased costs related to the expansion and
enhancement of the Partnership's branch office network, including the
Partnership's conversion to a terrestrial communications network for its
branches from a satellite network. Other operating expenses increased 27%
($36.5 million) to $174.1 million primarily due to increased travel and
entertainment costs, professional and consulting expense and Managed Account
Program ("MAP") money manager expense due to increased MAP assets and related
revenues. Legal expenses decreased 78% ($39.6 million) to $11.1 million during
2007 due to reduced legal expense accruals associated with legal matters and
regulatory matters. (See Mutual Fund Matters below and Item 3 - Legal
Proceedings for more information).
RESULTS OF OPERATIONS (2006 VERSUS 2005)
For 2006, net revenue increased 10% ($320.6 million) to $3.462 billion, while
income before allocations to partners increased 18% ($60.7 million) to $390.7
million. The Partnership's profit margin based on income before allocations to
partners increased to 11.1% in 2006, from 10.3% in 2005. Year over year, the
Partnership's net revenue and income before allocations to partners increased
due primarily to growth in customer asset values, higher account and activity
fees, and higher net interest income. Operating expenses increased in 2006 due
primarily to growth in sales compensation related to the increase in net
revenues. The Partnership added 555 (6%) financial advisors during the twelve
months ended December 31, 2006, ending the year with 10,288 financial
advisors.
Trade revenue of $1.963 billion, which comprised 57% of net revenue, increased
7% ($122.6 million) in 2006 due primarily to an increase in customer dollars
invested (the principal amount of customers' buy
27
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
and sell transactions), partially offset by a lower gross margin earned on
customer dollars invested compared to the prior year. Total customer dollars
invested were $95.7 billion during 2006, a 14% ($12.0 billion) increase from
2005. The Partnership's margin earned on each $1,000 invested decreased to
$20.30 in 2006 from $21.80 in 2005. Year over year, customer dollars invested
shifted to shorter term fixed income products reducing the margin earned on
each $1,000 invested.
Commissions revenue increased 6% ($94.8 million) during 2006 to $1.664
billion. Commissions revenue increased year over year due primarily to a 7%
($4.3 billion) increase in customer dollars invested to $62.3 billion in 2006.
Underlying the increase in commissions revenue, mutual fund commissions
increased 7% ($74.6 million), equity commissions decreased .4% ($1.2 million)
and insurance commissions increased 10% ($21.4 million). The following table
summarizes commissions revenue year over year:
Years ended (in millions)
-----------------------------------------------
December 31, December 31, %
2006 2005 Change
---------------------- ----------------------- ----------
Mutual funds $ 1,109.9 $ 1,035.3 7
Equities 320.8 322.0 -
Insurance 232.3 210.9 10
Corporate bonds 0.7 0.7 -
---------------------- ----------------------- ----------
$ 1,663.7 $ 1,568.9 6
====================== ======================= ==========
Principal transactions revenue increased 12% ($28.2 million) to $267.0 million
during 2006 due primarily to an increase in customer dollars invested offset
by a shift in customer dollars invested from higher margin, longer maturity
fixed income products to lower margin, shorter maturity certificates of
deposit. Customers invested $32.2 billion in principal transactions in 2006,
an increase of 31% ($7.6 billion). The Partnership's margin earned on each
$1,000 invested decreased to $8.30 during 2006 from $9.70 during 2005. Revenue
from corporate bonds increased 69% ($37.2 million), certificates of deposit
increased 15% ($5.1 million) and government bonds increased 12% ($2.6 million)
while collateralized mortgage obligations decreased 48% ($12.5 million) and
unit investment trusts decreased 38% ($8.7 million). The following table
summarizes principal transaction revenue year over year:
Years ended (in millions)
----------------------------------------------
December 31, December 31, %
2006 2005 Change
---------------------- ----------------------- ----------
Municipal bonds $ 84.7 $ 80.3 5
Corporate bonds 90.9 53.7 69
Government bonds 23.9 21.3 12
Collateralized mortgage obligations 13.6 26.1 (48)
Unit investment trusts 14.3 23.0 (38)
Certificates of deposit and other 39.6 34.5 15
---------------------- ----------------------- ----------
$ 267.0 $ 238.9 12
====================== ======================= ==========
Investment banking revenue decreased 1% ($.4 million) during 2006 to $32.5
million, due primarily to a decrease in municipal offerings in the current
year.
Net fee revenue of $1.498 billion, comprising 43% of net revenue, increased
15% ($198.0 million) during 2006. Asset fees increased 22% ($160.9 million) to
$877.8 million due to net new money flowing into
28
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
these products coupled with the favorable impact of market conditions on
customers' mutual fund and insurance assets generating asset fees. Average
customer mutual fund and insurance assets increased $45.9 billion or 21% to
$259.9 billion for 2006 compared to $214.0 billion for 2005.
Account and activity fees of $378.9 million increased 13% ($43.8 million) year
over year due to growth in customer accounts. Revenue received from mutual
fund and money market sub-transfer agent services increased 15% ($30.3
million) to $227.8 million, due primarily to a 15% increase in the number of
customer accounts for which the Partnership provides mutual fund sub-transfer
agent services. The number of retirement accounts for which the Partnership is
custodian increased by 11%, resulting in custodial fee revenue growth of 10%
($7.8 million) to $86.0 million. Other revenue of $44.2 million decreased 53%
($49.8 million) year over year. The decrease between years is primarily
attributable to a $70 million gain in 2005 that did not recur in 2006 compared
to $21 million in gains in 2006 that did not occur in 2005. During 2006, other
income includes $21 million in gains from three sources ($8.1 million from the
sale of banking assets by the Partnership's banking subsidiary; $6.8 million
from the exchange of the Partnership's NYSE membership for shares in
Archipelago in connection with the NYSE's initial public offering; $6.5
million from the sale of the Partnership's interest in the investment advisor
to the Federated Capital Income Fund). The Partnership's results for 2005
include a $70 million gain from the sale of a profit sharing interest in a
mutual fund company.
Net interest and dividend income increased 28% ($43.1 million) to $197.4
million during 2006 due primarily to an increase in overnight investing
activities and an increase in interest rates. Interest income from overnight
investing activities increased 325% ($30.5 million) to $39.9 million. The
average rate on these balances increased to 5.0% in 2006 from 3.2% in 2005,
and the average investment balance increased 202% ($492.2 million) to $736.2
million due to increased customer credit balances. Interest income from
customer loans increased 9% ($15.9 million). Average customer margin loan
balances were $2.160 billion in 2006, compared to $2.451 billion in 2005, a
decrease of 12%. The average rate earned on customer loan balances increased
to approximately 8.84% during 2006 from approximately 7.09% during 2005.
Operating expenses increased 9% ($259.9 million) to $3.071 billion during
2006. Compensation and benefits costs increased 14% ($261.2 million) to $2.088
billion. Within compensation and benefits costs, sales compensation increased
13% ($129.6 million) due to increased revenue and financial advisor salary and
subsidy which increased 33% ($21.5 million) due to new financial advisor
compensation programs. Variable compensation, including bonuses and profit
sharing paid to financial advisors, branch office assistants, and headquarters
associates, which expands and contracts in relation to revenues, income before
allocations to partners and the Partnership's related profit margin, increased
26% ($58.3 million). Headquarters and branch payroll expense increased 9%
($52.2 million) due to increased salary and medical costs for existing
personnel and additional support at both the headquarters and in the branches
as the Partnership increased the number of financial advisors. On a full time
equivalent basis, the Partnership had 4,331 headquarters associates and 10,594
branch staff associates as of December 31, 2006, compared to 4,096
headquarters associates and 10,103 branch staff associates as of December 31,
2005.
Occupancy and equipment expense increased 5% ($13.5 million) to $273.6 million
during 2006 due primarily to the growth in the number of branch offices as the
Partnership expands the number of financial advisors and the accrual in the
second quarter of 2006 of $3.6 million of additional expense related to the
planned sublease of excess space in the Canada headquarter building.
Communications and data processing expense increased 4% ($9.8 million) to
$272.9 million during 2006 due to increased costs related to the continued
expansion and enhancement of the Partnership's branch office network,
including the Partnership's conversion to a terrestrial communications network
for its branches from a satellite network. Other operating expenses increased
15% ($18.3 million) to $137.6 million primarily due to increased travel and
entertainment costs and Managed Account Program ("MAP") money manager
29
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
expense due to increased MAP assets. Legal expenses decreased 56% ($63.2
million) to $50.7 million during 2006 due to reduced costs associated with
legal matters and regulatory settlements. (See Mutual Fund Matters below and
Item 3 - Legal Proceedings for more information).
MUTUAL FUND MATTERS
There are regulatory proposals being considered that could significantly
impact the disclosure and potentially the amount of compensation that
broker-dealers derive from mutual funds and annuity products. The Partnership
believes it is likely in the future that broker-dealers will be required to
provide more disclosure to their clients with respect to payments received by
them from the sales of these products. It is also possible that such payments
may be restricted by law or regulation. For additional discussion, refer to
"Item 1A-Risk Factors, Regulatory Initiatives" in this Form 10-K.
The Partnership's percent of its total revenue from sales and services related
to mutual fund and annuity products remained consistent at 65% for 2007 and
2006. The Partnership derived 25% of its total revenue in 2007 and 30% of its
total revenue in 2006 from one mutual fund vendor. Significant reductions in
the revenues from these mutual fund sources could have a material impact on
the Partnership's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's capital subject to mandatory redemption excluding the
reserve for anticipated withdrawals, at December 31, 2007, was $1,328.3
million, compared to partnership capital, of $907.4 million at December 31,
2006. The increase is primarily due to the retention of general partner
earnings ($105.2 million) and the issuance of limited partner, subordinated
limited partner and general partner interests ($293.6 million, $22.4 million
and $8.0 million, respectively), offset by redemption of limited partner and
subordinated limited partner interests ($7.4 million and $0.9 million,
respectively). It has been the Partnership's practice to retain approximately
28% of income allocated to general partners. For 2007, 2006 and 2005, the
Partnership retained 27.6%, 29.5% and 23.6%, respectively, of income allocated
to general partners.
At December 31, 2007, the Partnership had $378.1 million in cash and cash
equivalents and $1.6 billion in cash segregated under federal regulations.
Lines of credit were in place at such date aggregating to $1.240 billion
($1.140 billion of which is through uncommitted lines of credit) where actual
borrowing availability is primarily 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, 2007.
The Partnership believes that the liquidity provided by existing cash
balances, other highly liquid assets and borrowing arrangements will be
sufficient to meet the Partnership's capital and liquidity requirements.
Depending on conditions in the capital markets and other factors, the
Partnership will, from time to time, consider the issuance of debt, the
proceeds of which could be used to meet growth needs or for other purposes.
The Partnership's growth has 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.
On January 2, 2007, $293.6 million of limited partner interests were issued to
employees of the Partnership. The funds will be used for general Partnership
purposes.
30
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
There were no significant changes in the Partnership's financial commitments
and obligations for the year ended December 31, 2007, except for construction
commitments related to the construction of the new office and garage
facilities. For further disclosure regarding these construction commitments,
see Note 15 of the Notes to the Financial Statements. In addition, the
Partnership plans to finance approximately 75% of the office and garage
facilities with loans secured by the facilities with the remaining 25%
financed from the Partnership's existing capital resources. The Partnership
has not yet obtained commitments for such financing.
The following table summarizes the Partnership's financing commitments and
obligations, as of December 31, 2007, excluding customer accounts due on
demand. Subsequent to December 31, 2007, these commitments and obligations
could fluctuate based on the changing business environment. The Interest on
Financing Commitments is based upon the stated rates of the underlying
instruments, which range from 4.31% to 8.23%. For further disclosure regarding
long term debt and liabilities subordinated to claims of general creditors,
see Notes 9 and 10, respectively, of the Notes to the Financial Statements.
Payments Due by Period
----------------------
2008 2009 2010 2011 2012 Thereafter Total
----------------------------------------------------------------------------------
Long-term debt $ 1,742 $ 802 $ 863 $ 927 $ 997 $ 5,503 $ 10,834
Liabilities subordinated to
claims of general creditors 14,200 3,700 53,700 53,700 50,000 100,000 275,300
Rental commitments 109,053 37,629 25,722 18,215 14,208 92,270 297,097
----------------------------------------------------------------------------------
Financing commitments and
obligations 124,995 42,131 80,285 72,842 65,205 197,773 583,231
Interest on financing commitments 21,042 19,825 17,644 13,626 9,603 8,297 90,037
----------------------------------------------------------------------------------
Total financing commitments
and obligations $ 146,037 $ 61,956 $ 97,929 $ 86,468 $ 74,808 $ 206,070 $ 673,268
==================================================================================
For the year ended December 31, 2007, cash and cash equivalents increased
$66.1 million. Cash provided by operating activities was $265.9 million. The
primary sources of cash from operating activities include income before
allocations to partners adjusted for depreciation, an increase in net payable
to customers, a decrease in securities owned and an increase in accrued
compensation and employee benefits. These increases to cash and cash
equivalents were partially offset primarily by increases in securities
purchased under agreements to resell, net receivable from brokers, dealers and
clearing organizations and segregated cash. Cash used in investing activities
was $112.1 million consisting primarily of capital expenditures supporting the
Partnership's operations and for construction of new office space. (See Item 2
- - Properties for more information). Cash used in financing activities was
$87.6 million, consisting primarily of partnership withdrawals and
distributions ($376.6 million), redemption of partnership interests ($8.3
million) and repayment of subordinated debt ($23.2 million), offset by
issuance of general partner, limited partner and subordinated limited partner
interests ($324.0 million).
For the year ended December 31, 2006, cash and cash equivalents increased
$51.2 million. Cash provided by operating activities was $533.1 million. The
primary sources of cash from operating activities include income before
allocations to partners adjusted for depreciation, a decrease in net
receivables from customers, a decrease in receivable from mortgages and loans
and an increase in accrued compensation and employee benefits. These increases
to cash and cash equivalents were partially offset by a decrease in payable to
depositors and an increase in segregated cash. Cash used in investing
activities was $84.2 million consisting primarily of capital expenditures
supporting the Partnership's operations. Cash used in financing activities was
$397.7 million, consisting primarily of partnership withdrawals and
distributions ($314.4 million), redemption of partnership interests ($27.8
million),
31
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
repayment of subordinated debt ($45.7 million) and repayment of Federal Home
Loan Bank advances ($30.5 million), offset by issuance of general partner and
subordinated limited partner interests ($38.5 million).
As a result of its activities as a broker-dealer, Edward Jones, the
Partnership's principal subsidiary, is subject to the Net 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, 2007,
Edward Jones' Net Capital of $798.1 million was 42.9% of aggregate debit items
and its Net Capital in excess of the minimum required was $761.0 million. Net
Capital after anticipated withdrawals, which are scheduled subordinated debt
principal payments through June 30, 2008, as a percentage of aggregate debit
items was 42.9%. Net capital and the related capital percentages may fluctuate
on a daily basis.
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 recorded at fair 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
32
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
in circumstances that would result in a change in the useful life.
Included in management's discussion and analysis of financial condition and
results of operations, and in the quantitative and qualitative disclosures
about market risk, and in the notes to the financial statements (See 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
will adopt SFAS 157 for the fiscal year beginning January 1, 2008. The
Partnership has completed an assessment of the implications of SFAS 157 and
has concluded that it will not have a material impact on its consolidated
financial condition, results of operations, or cash flows.
In February 2007, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities,
including an amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No.
159 permits entities to choose, at specified election dates, to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. Unrealized gains and losses
must be reported on items for which the fair value option has been elected in
earnings at each subsequent reporting date. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. The Partnership has elected
not to measure at fair value financial instruments not otherwise required to
be measured at fair value.
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.
33
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Some of the factors that might cause differences include, but are not limited
to, the following: (1) regulatory actions; (2) litigation, including that
involving mutual fund matters; (3) changes in legislation; (4) actions of
competitors; (5) changes in technology; (6) a fluctuation or decline in the
market value of securities; (7) rising interest rates; (8) securities theft;
(9) the ability of customers, other broker-dealers, banks, depositories and
clearing organizations to fulfill contractual obligations; and (10) general
economic conditions. These forward-looking statements were based on
information, plans, and estimates at the date of this report, and we do not
undertake to update any forward-looking statements to reflect changes in
underlying assumptions or factors, new information, future events or other
changes.
34
PART II
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The SEC issued market risk disclosure requirements to enhance disclosures of
accounting policies for derivatives and other financial instruments and to
provide quantitative and qualitative disclosures about market risk inherent in
derivatives and other financial instruments. Various levels of management
within the Partnership manage the firm's risk exposure. Position limits in
trading and inventory accounts are established and monitored on an ongoing
basis. Credit risk related to various financing activities is reduced by the
industry practice of obtaining and maintaining collateral. The Partnership
monitors its exposure to counterparty risk through the use of credit exposure
information, the monitoring of collateral values and the establishment of
credit limits.
The Partnership is exposed to market risk from changes in interest rates. Such
changes in interest rates impact the income from interest earning assets,
primarily receivables from customers on margin balances, and may have an
impact on the expense from liabilities that finance these assets. At December
31, 2007, amounts receivable from customers were $1.990 billion. Liabilities
include amounts payable to customers and other interest and non-interest
bearing liabilities.
The Partnership performed an analysis of its financial instruments and
assessed the related interest rate risk and materiality in accordance with the
rules. Under current market conditions and based on current levels of interest
earning assets and the liabilities that finance these assets, the Partnership
estimates that a 100 basis point increase in short-term interest rates could
increase its annual net interest income by approximately $25 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 $42 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, 2007 will not have a
material adverse effect on the consolidated financial position or results of
operations of the Partnership.
35
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements Included in this Item
Page No.
Management's Report on Internal Control over Financial Reporting ............. 37
Report of Independent Registered Public Accounting Firm ...................... 38
Consolidated Statements of Financial Condition as of
December 31, 2007 and 2006 ................................................... 40
Consolidated Statements of Income for the years ended
December 31, 2007, 2006 and 2005 ............................................. 42
Consolidated Statements of Changes in Partnership Capital
Subject to Mandatory Redemption for the years ended
December 31, 2007, 2006 and 2005.............................................. 43
Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006 and 2005.............................................. 45
Notes to Consolidated Financial Statements.................................... 46
36
PART II
Item 8. Financial Statements and Supplementary Data, continued
MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Management of The Jones Financial Companies, L.L.L.P. (the
"Partnership"), is responsible for establishing and maintaining adequate
internal control over financial reporting. The Partnership's internal control
over financial reporting is a process designed under the supervision of the
Partnership's chief executive and chief financial officers to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Partnership's financial statements for external purposes in
accordance with U.S. generally accepted accounting principles.
As of the end of the Partnership's 2007 fiscal year, management conducted
an assessment of the effectiveness of the Partnership's internal control over
financial reporting based on the framework established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on this assessment, management has
determined that the Partnership's internal control over financial reporting as
of December 31, 2007 was effective.
Our internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions of assets;
provide reasonable assurances that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures are being
made only in accordance with authorizations of management of the Partnership;
and provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Partnership's assets that
could have a material effect on our financial statements.
The Partnership's internal control over financial reporting as of
December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report
appearing on page 38, which expresses an unqualified opinion on the
effectiveness of the Partnership's internal control over financial reporting
as of December 31, 2007.
37
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, 2007 and 2006, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2007
in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedules listed in the index appearing under Item 15(a)(2) present fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also in our
opinion, the Partnership maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Partnership's management is responsible for these financial statements and
financial statement schedules, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management's
Report on Internal Control over Financial Reporting. Our responsibility is to
express opinions on these financial statements, on the financial statement
schedules, and on the Partnership's internal control over financial reporting
based on our audits (which was an integrated audit in 2007). We conducted our
audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
38
PART II
Item 8. Financial Statements and Supplementary Data, continued
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 28, 2008
39
PART II
Item 8. Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
December 31, December 31,
(Dollars in thousands) 2007 2006
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 378,141 $ 311,992
Cash segregated under federal regulations 1,620,129 1,312,806
Securities purchased under agreements to resell 595,000 415,000
Receivable from:
Customers 1,989,962 2,043,980
Brokers, dealers and clearing organizations 439,378 310,715
Mutual funds, insurance companies and other 173,610 142,143
Securities owned, at fair value
Inventory securities 87,524 129,609
Investment securities 136,628 145,552
Equipment, property and improvements, at cost,
net of accumulated depreciation and amortization 328,668 310,987
Other assets $ 75,338 $ 72,831
------------------ -------------------
TOTAL ASSETS $ 5,824,378 $ 5,195,615
================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
40
PART II
Item 8. Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES
December 31, December 31,
(Dollars in thousands) 2007 2006
- ---------------------------------------------------------------------------------------------------------------------------------
Payable to:
Customers $ 3,326,854 $ 3,162,223
Brokers, dealers and clearing organizations 66,469 44,593
Securities sold, not yet purchased, at fair value 5,410 9,353
Accrued compensation and employee benefits 497,135 438,497
Accounts payable and accrued expenses 191,596 224,681
Long-term debt 10,834 14,389
------------------ -------------------
4,098,298 3,893,736
------------------ -------------------
Liabilities subordinated to claims of general creditors 275,300 298,500
------------------ -------------------
Commitments and contingencies (Notes 15 and 16)
Partnership capital subject to mandatory redemption,
net of reserve for anticipated withdrawals 1,328,342 907,386
Reserve for anticipated withdrawals 122,438 95,993
------------------ -------------------
Total partnership capital subject to mandatory redemption 1,450,780 1,003,379
------------------ -------------------
TOTAL LIABILITIES $ 5,824,378 $ 5,195,615
================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
41
PART II
Item 8. Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(Dollars in thousands, ------------------------------------------------------------
except per unit information) 2007 2006 2005
- ------------------------------------------------------------------------------------------------------------------------
Revenue:
Commissions $ 1,858,187 $ 1,663,680 $ 1,568,893
Asset fees 1,098,621 877,771 716,904
Account and activity fees 441,027 378,905 335,105
Principal transactions 384,609 267,038 238,884
Interest and dividends 309,357 253,607 209,734
Investment banking 34,723 32,505 32,892
Other revenue 20,343 44,249 94,038
------------------- ------------------- -------------------
Total revenue 4,146,867 3,517,755 3,196,450
Interest expense 80,603 56,218 55,468
------------------- ------------------- -------------------
Net revenue 4,066,264 3,461,537 3,140,982
------------------- ------------------- -------------------
Operating expenses:
Compensation and benefits 2,493,645 2,088,492 1,827,260
Communications and data processing 300,574 272,879 263,043
Occupancy and equipment 301,119 273,607 260,114
Payroll and other taxes 140,422 121,976 112,565
Legal 11,098 50,711 113,940
Postage and shipping 58,023 51,718 51,366
Advertising 61,943 55,841 49,440
Floor brokerage and clearance fees 17,096 18,010 13,919
Other operating expenses 174,125 137,637 119,350
------------------- ------------------- -------------------
Total operating expenses 3,558,045 3,070,871 2,810,997
------------------- ------------------- -------------------
Income before allocations to partners 508,219 390,666 329,985
Allocations to partners:
Limited partners 82,650 34,035 33,679
Subordinated limited partners 44,346 37,885 39,587
General partners 381,223 318,746 256,719
------------------- ------------------- -------------------
Net income $ - $ - $ -
=================== =================== ===================
Income before allocations to limited partners
per weighted average $1,000 equivalent
limited partnership unit outstanding $ 165.92 $ 161.95 $ 157.11
=================== =================== ===================
Weighted average $1,000 equivalent
limited partnership units outstanding 498,132 210,157 214,366
=================== =================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
42
PART II
Item 8. Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY REDEMPTION
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Dollars in thousands) Capital Capital Capital Total
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL SUBJECT TO
MANDATORY REDEMPTION, JANUARY 1, 2005 234,296 115,951 457,994 808,241
Reserve for anticipated withdrawals (16,721) (3,469) (36,377) (56,567)
---------------------------------------------------------------------------
Partnership capital subject to mandatory
redemption, net of reserve of anticipated
withdrawals, January 1, 2005 217,575 112,482 421,617 751,674
===========================================================================
Issuance of partnership interests - 24,207 - 24,207
Redemption of partnership interests (5,361) (1,491) (26,900) (33,752)
Income allocated to partners 33,679 39,587 256,719 329,985
Withdrawals and distributions (11,861) (25,474) (118,408) (155,743)
---------------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL SUBJECT TO
MANDATORY REDEMPTION, DECEMBER 31, 2005 234,032 149,311 533,028 916,371
Reserve for anticipated withdrawals (21,818) (14,114) (77,827) (113,759)
---------------------------------------------------------------------------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, December 31, 2005 $ 212,214 $ 135,197 $ 455,201 $ 802,612
===========================================================================
Issuance of partnership interests $ - $ 8,270 $ 30,217 $ 38,487
Redemption of partnership interests (3,882) (18,336) (5,554) (27,772)
Income allocated to partners 34,034 37,885 318,747 390,666
Withdrawals and distributions (13,096) (25,513) (162,005) (200,614)
---------------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL SUBJECT TO
MANDATORY REDEMPTION, DECEMBER 31, 2006 229,270 137,503 636,606 1,003,379
Reserve for anticipated withdrawals (20,938) (12,372) (62,683) (95,993)
---------------------------------------------------------------------------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, December 31, 2006 $ 208,332 $ 125,131 $ 573,923 $ 907,386
===========================================================================
The accompanying notes are an integral part of these consolidated financial statements.
43
PART II
Item 8. Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY REDEMPTION, (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Dollars in thousands) Capital Capital Capital Total
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of partnership interests 293,563 22,408 8,038 324,009
Redemption of partnership interests (7,409) (862) - (8,271)
Income allocated to partners 82,650 44,346 381,223 508,219
Withdrawals and distributions (31,937) (32,890) (215,736) (280,563)
---------------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL SUBJECT TO
MANDATORY REDEMPTION, DECEMBER 31, 2007 545,199 158,133 747,448 1,450,780
Reserve for anticipated withdrawals (50,713) (11,456) (60,269) (122,438)
---------------------------------------------------------------------------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, December 31, 2007 $ 494,486 $ 146,677 $ 687,179 $ 1,328,342
===========================================================================
The accompanying notes are an integral part of these consolidated financial statements.
44
PART II
Item 8. Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
----------------------------------------------
(Dollars in thousands) 2007 2006 2005
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ - $ - $ -
Adjustments to reconcile net income to net
cash provided by operating activities -
Income before allocations to partners 508,219 390,666 329,985
Depreciation and amortization 94,451 90,281 89,191
Changes in assets and liabilities:
Cash segregated under federal regulations (307,323) (1,312,804) 49
Securities purchased under agreements to resell (180,000) 64,000 (204,000)
Net payable to/receivable from customers 218,649 1,340,509 156,156
Net receivable from brokers, dealers and
clearing organizations (106,787) (100,706) (15,416)
Receivable from mutual funds, insurance companies
and other (31,467) (21,162) (28,015)
Receivable from mortgages and loans - 133,997 15,401
Securities owned, net 47,066 (9,379) (26,459)
Other assets (2,507) 1,979 (3,526)
Payable to depositors - (104,411) (12,926)
Accrued compensation and employee benefits 58,638 84,231 55,319
Accounts payable and accrued expenses (33,085) (24,073) 68,512
--------------- -------------- --------------
Net cash provided by operating activities 265,854 533,128 424,271
--------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, property and improvements, net (112,132) (84,249) (89,396)
--------------- -------------- --------------
Net cash used in investing activities (112,132) (84,249) (89,396)
--------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment)/Issuance of Bank Loans - (8,500) 8,500
(Repayment)/Issuance of Federal Home Loan Bank
advances, net - (30,544) (3,384)
Repayment of long-term debt (3,555) (9,324) (8,110)
Repayment of subordinated liabilities (23,200) (45,700) (43,225)
Issuance of partnership interests 324,009 38,487 24,207
Redemption of partnership interests (8,271) (27,772) (33,752)
Withdrawals and distributions from partnership capital (376,556) (314,373) (212,310)
--------------- -------------- --------------
Net cash used in financing activities (87,573) (397,726) (268,074)
--------------- -------------- --------------
Net increase in cash and cash equivalents 66,149 51,153 66,801
CASH AND CASH EQUIVALENTS,
Beginning of year 311,992 260,839 194,038
--------------- -------------- --------------
End of year $ 378,141 $ 311,992 $ 260,839
=============== ============== ==============
Cash paid for interest $ 80,935 $ 57,623 $ 56,529
=============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
45
PART II
Item 8. Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
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, 2007, 2006 and 2005 because of the timing
of the Partnership's financial reporting process.
The Partnership operates as a single business segment. The Partnership's
principal operating subsidiary, Edward D. Jones & Co., L.P. ("Edward Jones"),
is comprised of three registered broker-dealers primarily serving individual
investors. Edward Jones primarily derives its revenues from the retail
brokerage business through the sale of listed and unlisted securities,
insurance products, investment banking and principal transactions and as a
distributor of mutual fund shares, and revenue related to assets held by and
account services provided to its clients. Edward Jones conducts business
throughout the United States of America, Canada and the United Kingdom with
its customers, various brokers, dealers, clearing organizations, depositories
and banks. Trust services are offered to Edward Jones clients through Edward
Jones Trust Company, a wholly owned subsidiary of the Partnership. See Note 8
regarding the sale by the Partnership's wholly owned subsidiary Boone National
Savings and Loan Association, F.A. of its non-trust banking services.
The consolidated financial 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
46
PART II
Item 8. Financial Statements and Supplementary Data, continued
control the risks associated with these activities by requiring customers to
maintain margin collateral in compliance with various regulatory and internal
guidelines.
REVENUE RECOGNITION. 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 $1,620,129 and $1,312,806
was segregated in a special reserve bank account for the benefit of customers,
as of December 31, 2007 and 2006, 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 fair value of the underlying collateral as determined daily,
plus accrued interest thereon, must equal or exceed 102% of the carrying
amount of the transaction. It is the Partnership's policy to have such
underlying resale agreement collateral delivered to the Partnership or
deposited in its accounts at its custodian banks. Resale agreements are
carried at the amount at which the securities will be subsequently resold as
specified in the agreements.
47
PART II
Item 8. Financial Statements 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
recorded at fair 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 value.
LEASE ACCOUNTING. The Partnership enters into lease agreements for certain
headquarters facilities as well as branch office locations. The associated
lease expense is recognized on a straight-line basis over the minimum lease
terms.
INCOME TAXES. Income taxes 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. Under the
48
PART II
Item 8. Financial Statements and Supplementary Data, continued
provisions of SFAS No. 150, the obligation to redeem a partner's capital in
the event of a partner's death is one of the Statement's criteria requiring
capital to be classified as a liability.
Since the Partnership is obligated to redeem a partner'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 prior to the issuance of SFAS No.
150 was classified in the Partnership's statement of income as net income. In
accordance with SFAS No 150, these allocations are now classified as a
reduction of income before allocations to partners, which results in a
presentation of $0 net income for the years ended December 31, 2007, 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
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 in any year in which there is a net loss and the
Partnership is not dissolved or liquidated. Thereafter, subordinated limited
partners and general partners are allocated any remaining net income based on
formulas in the Partnership Agreement.
NOTE 2 - RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
Receivable from and payable to customers include margin balances and amounts
due on cash transactions. The value of securities owned by customers and held
as collateral for these receivables is not reflected in the consolidated
financial statements. Substantially all amounts payable to customers are
subject to withdrawal upon customer request. The Partnership pays interest on
certain credit balances in customer accounts.
NOTE 3 - RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING
ORGANIZATIONS
The components of receivable from and payable to brokers, dealers and clearing
organizations are as follows:
2007 2006
---- ----
Receivable from carrying broker $ 361,303 $ 233,363
Receivable from money market funds 47,390 31,311
Dividends receivable 10,256 29,245
Receivable from clearing organizations 7,396 5,516
Securities failed to deliver 7,071 6,524
Deposits paid for securities borrowed 1,108 3,061
Other 4,854 1,695
----------- -----------
Total receivable from brokers, dealers
and clearing organizations $ 439,378 $ 310,715
=========== ===========
Securities failed to receive $ 47,623 $ 30,727
Payable to clearing organizations 17,821 10,519
Deposits paid for securities loaned - 2,859
Other 1,025 488
----------- -----------
Total payable to brokers, dealers and
clearing organizations $ 66,469 $ 44,593
=========== ===========
49
PART II
Item 8. Financial Statements and Supplementary Data, continued
Receivable from carrying broker represents balances and deposits with the
Partnership's Canadian carrying broker. Receivable from clearing organizations
represents balances and deposits with clearing organizations. Securities
failed to deliver/receive represent the contract value of securities which
have not been delivered or received by settlement date.
NOTE 4 - RECEIVABLE FROM MUTUAL FUNDS, INSURANCE COMPANIES, AND OTHER
Receivable from mutual funds, insurance companies and other is primarily
composed of amounts due to the Partnership for asset based fees and fees for
sub-transfer agent accounting services from the mutual fund vendors and
insurance companies.
NOTE 5- SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
Securities owned and securities sold, not yet purchased are summarized as
follows (at fair value):
2007 2006
------------------------------ -------------------------------
Securities Securities
Sold, Sold,
Securities not yet Securities not yet
Owned Purchased Owned Purchased
------------ ------------ ---------- -------------
Inventory securities:
Certificates of deposit $ 1,022 $ 246 $ 10,573 $ 1,206
U.S. and Canadian government
and U.S. agency obligations 4,800 1,139 4,487 3,446
State and municipal obligations 56,129 200 58,475 132
Corporate bonds and notes 7,434 2,629 39,033 2,961
Collateralized mortgage obligations 1,731 26 1,968 40
Equities 15,174 934 14,380 1,425
Unit investment trusts 1,234 236 693 143
------------ ------------ ------------ -------------
$ 87,524 $ 5,410 $ 129,609 $ 9,353
============ ============ ============ =============
Investment securities:
U.S. government and agency
obligations held by U.S. broker-
dealer $ 25,114 $ 37,456
U.S. and Canadian government and
U.S. agency obligations held by
foreign broker-dealers 24,335 26,952
Mutual funds 82,824 74,301
Equities 4,355 6,843
------------ ------------
$ 136,628 $ 145,552
============ ============
The Partnership attempts to reduce its exposure to market price
fluctuations of its inventory securities through the sale of U.S. government
securities and, to a limited extent, the sale of fixed income futures
50
PART II
Item 8. Financial Statements and Supplementary Data, continued
contracts. The amount of the securities purchased or sold will fluctuate on a
daily basis due to changes in inventory securities owned, interest rates and
market conditions. Futures contracts are settled daily, and any gain or loss
is recognized in principal transactions revenue. The notional amount of
futures contracts sold was $9,000 and $25,000 at December 31, 2007 and 2006,
respectively.
NOTE 6 - EQUIPMENT, PROPERTY AND IMPROVEMENTS
Equipment, property and improvements are summarized as follows:
2007 2006
---------- ----------
Land $ 15,706 $ 12,822
Buildings and improvements 421,052 376,076
Equipment, furniture and fixtures 718,112 671,551
----------- -----------
Total equipment, property and improvements 1,154,870 1,060,449
Accumulated depreciation and amortization (826,202) (749,462)
----------- -----------
Equipment, property and improvements, net $ 328,668 $ 310,987
=========== ===========
Depreciation and amortization expense on equipment, property and improvements
is included in the Consolidated Statements of Income under Communications and
Data Processing, and Occupancy and Equipment.
NOTE 7 - BANK LOANS
As of December 31, 2007, Edward Jones had bank lines of credit aggregating
$1,240,000 of which $1,140,000 were through uncommitted facilities. Actual
borrowing availability is primarily based on the value of securities owned and
customers' margin securities. There were no bank loans outstanding under these
lines as of December 31, 2007 or 2006.
Interest is at a fluctuating rate based on short-term lending rates. During
the year ended December 31, 2007, Edward Jones had bank loans outstanding for
five days with an average daily outstanding balance of $157,200 at an average
interest rate of 5.16%. During the year ended December 31, 2006, Edward Jones
had no outstanding bank loans.
During 2006, Bank Loans included of a $10,000 unsecured bank line of credit,
which was terminated as of February 26, 2007. There were no amounts
outstanding under this line of credit as of December 31, 2006.
NOTE 8 - SALE OF THE ASSOCIATION'S BANKING BUSINESS
The Partnership's wholly owned subsidiary Boone National Savings and Loan
Association, F.A. (the "Association"), made commercial, real estate, and other
loans primarily to customers in central Missouri. The Association's division
Edward Jones Trust Company offers Trust services to Edward Jones' clients. 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
51
PART II
Item 8. Financial Statements and Supplementary Data, continued
of $16.2 million adjusted for the Association's net assets purchased or
liabilities assumed by Commerce. The Partnership recognized an after-tax gain
of $8.1 million when the sale closed on July 20, 2006. With the closing of the
Purchase Agreement, the Association is no longer engaged in the business of
banking through Boone National Savings and Loan. The Association was renamed
Edward Jones Trust Company and continues the trust business that was conducted
by Edward Jones Trust Company, formerly a division of the Association.
During 2006, the receivable from mortgages and loans was primarily composed of
the Association's adjustable rate mortgage loans, commercial and other loans,
net of discounts, deferred origination fees and the allowance for loan losses.
The carrying amounts of the receivables approximated their fair values. The
amount payable to depositors was composed of the Association's various savings
instruments offered to its customers, which included transaction accounts and
certificates of deposit with maturities ranging from 90 days to 72 months. The
carrying amounts of these deposits approximated their fair values.
The Association had no loans from the Federal Home Loan Bank ("FHLB") as of
December 31, 2006.
As of December 31, 2006, the Association's net assets not purchased by
Commerce and remaining on the Consolidated Statements of Financial Condition
aggregated $1.0 million. As of December 31, 2007, there are no amounts from
the Association's net assets not purchased remaining on the Consolidated
Statement of Financial Condition. The income from operations for the
discontinued banking business included in Income before allocation to partners
was $0.663 million for the year ended December 31, 2006. The revenue and
expense activity related to the discontinued operations was not material to
the Partnership's financial results.
NOTE 9 - LONG-TERM DEBT
Long-term debt is composed of the following:
2007 2006
----------- -----------
Note payable, collateralized by real estate, fixed rate of 7.28%,
principal and interest due in monthly installments,
with a final installment on June 1, 2017. $ 9,838 $ 10,532
Notes payable, collateralized by real estate, fixed rate of 8.23%,
principal and interest due in monthly installments,
with a final installment on April 5, 2008. 588 2,261
Notes payable, collateralized by real estate, fixed rate of 4.31%,
principal and interest due in monthly installments,
with a final installment on April 5, 2008. 408 1,596
----------- -----------
$ 10,834 $ 14,389
=========== ===========
52
PART II
Item 8. Financial Statements and Supplementary Data, continued
Scheduled annual principal payments, as of December 31, 2007 are as follows:
Principal
Year Payment
---------- ---------
2008 $ 1,742
2009 802
2010 863
2011 927
2012 997
Thereafter 5,503
---------
$ 10,834
=========
The real estate notes payable of $10,834 at December 31, 2007 are
collateralized by land and buildings with a cost basis of $39,175 and a
carrying value of $23,192 at December 31, 2007.
The Partnership has estimated the fair value of the long-term debt to be
approximately $11,416 and $14,651 as of December 31, 2007 and 2006,
respectively.
NOTE 10 - LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Liabilities subordinated to claims of general creditors consist of:
2007 2006
----------- -----------
Capital notes, 7.33%, due in annual installments of $50,000
commencing on June 12, 2010, with a final installment
on June 12, 2014. $ 250,000 $ 250,000
Capital notes, 7.79%, due in annual installments ranging
from $3,700 to $12,700, commencing on August 15, 2005,
with a final installment of $3,700 on August 15, 2011. 14,800 27,500
Capital notes, 8.18%, due in annual installments of $10,500,
with a final installment on September 1, 2008. 10,500 21,000
----------- -----------
$ 275,300 $ 298,500
=========== ===========
53
PART II
Item 8. Financial Statements and Supplementary Data, continued
Required annual principal payments, as of December 31, 2007, are as follows:
Principal
Year Payment
---------- ---------
2008 $ 14,200
2009 3,700
2010 53,700
2011 53,700
2012 50,000
Thereafter 100,000
---------
$ 275,300
=========
The capital note agreements contain restrictions which, among other things,
requires Edward Jones to maintain certain financial ratios, restricts
encumbrance of assets and creation of indebtedness and limit the withdrawal of
its partnership capital. As of December 31, 2007, Edward Jones was required,
under the note agreements, to maintain minimum partnership capital subject to
mandatory redemption of $400,000 and Net Capital of $139,450 (see Note 12).
Edward Jones is in compliance with all restrictions as of December 31, 2007
and 2006.
The subordinated liabilities are subject to cash subordination agreements
approved by the New York Stock Exchange, Inc. and, therefore, are included in
Edward Jones' computation of Net Capital under the SEC's uniform Net Capital
rule. The Partnership has estimated the fair value of the subordinated capital
notes to be approximately $292,000 and $311,000 as of December 31, 2007 and
2006, respectively.
NOTE 11 - PARTNERSHIP CAPITAL SUBJECT TO MANDATORY REDEMPTION
As more fully described under "Partnership Capital Subject to Mandatory
Redemption" in Note 1, the Partnership's capital has been classified as a
liability under SFAS No. 150 as "Partnership capital subject to mandatory
redemption." The firm's partnership capital subject to mandatory redemption,
net of reserve for anticipated withdrawals of $1,328,342 consists of $494,486
of limited partnership capital issued in $1,000 units, $146,677 of
subordinated limited partnership capital and $687,179 of general partnership
capital as of December 31, 2007.
The limited partnership capital subject to mandatory redemption is held by
current and former employees and general partners of the Partnership. Limited
partners are guaranteed a minimum 7.5% return on the face amount of their
capital. Expense related to the 7.5% return was $37,355, $15,765, and $16,095,
for the years ended December 31, 2007, 2006 and 2005, respectively, and is
included as a component of Interest Expense. The 7.5% return is paid to
limited partners regardless of the Partnership's earnings.
The subordinated limited partnership capital subject to mandatory redemption
is held by current and former general partners of the Partnership. Each
subordinated limited partner receives a varying percentage of the net income
of the Partnership. The subordinated limited partner capital subject to
mandatory redemption is subordinated to the limited partnership capital.
NOTE 12 - NET CAPITAL REQUIREMENTS
As a result of its activities as a broker-dealer, Edward Jones is subject to
the Net Capital provisions of Rule 15c3-1 of the Securities Exchange Act of
1934 and the capital rules of the New York Stock
54
PART II
Item 8. Financial Statements and Supplementary Data, continued
Exchange, Inc. Under the alternative method permitted by the rules, Edward
Jones must maintain minimum Net Capital equal to the greater of $250 or 2% of
aggregate debit items arising from customer transactions. The Net Capital rule
also provides that partnership capital may not be withdrawn if resulting Net
Capital would be less than 5% of aggregate debit items. Additionally, certain
withdrawals require the consent of the SEC to the extent they exceed defined
levels, even though such withdrawals would not cause Net Capital to be less
than 5% of aggregate debit items.
At December 31, 2007, Edward Jones' Net Capital of $798,139 was 42.9% of
aggregate debit items and its Net Capital in excess of the minimum required
was $760,953. Net Capital after anticipated withdrawals, which are scheduled
subordinated debt payments through June 30, 2008, as a percentage of aggregate
debit items was 42.9%. Net Capital and the related capital percentages may
fluctuate on a daily basis.
At December 31, 2007, the Partnership's foreign broker-dealer subsidiaries and
Edward Jones Trust Company were in compliance with regulatory capital
requirements in the jurisdictions in which they operate.
NOTE 13 - OTHER REVENUE
Included in other revenue in 2006 are an $8,100 gain from the sale of the
Association's banking operations, $6,800 in unrealized gains from the receipt
of shares in exchange for the Partnership's New York Stock Exchange ("NYSE")
membership as a result of the merger between the NYSE and Archipelago, and a
$6,500 gain from the sale of the Partnership's interest in the investment
advisor to Federated's Capital Income Fund.
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Partnership maintains profit sharing plans covering all eligible
employees. Contributions to the plans are at the discretion of the
Partnership. Additionally, participants may contribute on a voluntary basis.
Approximately $127,100, $94,600 and $76,400 were provided by the Partnership
for its contributions to the plans for the years ended December 31, 2007, 2006
and 2005, respectively.
NOTE 15 - COMMITMENTS
The Partnership leases headquarters office space, furniture, computers and
communication equipment under various operating leases. Additionally, branch
offices are leased generally for terms of three to five years. Rent expense,
which is recognized on a straight-line basis over the minimum lease term, was
$202,100, $188,800, and $187,700 for the years ended December 31, 2007, 2006
and 2005, respectively.
The Partnership's noncancelable lease commitments greater than one year as of
December 31, 2007, are summarized below:
Year
----------
2008 $109,053
2009 37,629
2010 25,722
2011 18,215
2012 14,208
Thereafter 92,270
--------
$297,097
========
55
PART II
Item 8. Financial Statements and Supplementary Data, continued
The Partnership's annual rent expense is greater than its annual future lease
commitments because the annual future lease commitments include only non
cancelable lease payments greater than one year.
During 2007, the Partnership executed a construction agreement for the
construction of a 205,000 square foot building and related parking garage on
land it owns at its St. Louis, Missouri North Campus location. The building
and garage are expected to be completed by November 2008. The Partnership
estimates that the total cost for construction of the office building and the
garage will be approximately $67.8 million. As of December 31, 2007, the
Partnership has executed $62.7 million in general and subcontractor
commitments related to the construction agreement.
Subsequent to December 31, 2007, the Partnership executed agreements to
construct an additional 370,000 square foot office building and garage on land
it owns at its St. Louis, Missouri North Campus location, a 225,000 square
foot addition and parking garage at an existing building at its St. Louis,
Missouri, South Campus location and a parking garage at its Tempe, Arizona
Campus. The Partnership estimates total construction cost of the three
agreements to be $279.7 million, with estimated completion dates during 2009.
As of February 29, 2008, the Partnership has executed $82.9 million in general
and subcontractor commitments related to the above mentioned construction
projects.
NOTE 16 - CONTINGENCIES
In the normal course of business, the Partnership has been named, from time to
time, as a defendant in various legal actions, including arbitrations, class
actions and other litigation. Certain of these legal actions include claims
for substantial compensatory and/or punitive damages or claims for
indeterminate amounts of damages. The Partnership 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.
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.
56
PART II
Item 8. Financial Statements and Supplementary Data, continued
NOTE 17 - RELATED PARTIES
Edward Jones owns a 49.5% limited partnership interest in the investment
advisor to the Edward Jones Money Market Fund. The Partnership does not have
management responsibility with regard to the advisor. Approximately 2.7%, 2.3%
and 2.0% of the Partnership's revenues were derived from the advisor and the
fund during 2007, 2006 and 2005, respectively.
NOTE 18 - QUARTERLY INFORMATION
(Unaudited)
Quarters Ended
--------------
2006 March 31, June 30, September 29, December 31,
--------- -------- ------------- ------------
Total revenue $ 880,305 $ 877,321 $ 844,249 $ 915,880
Income before allocations to
partners 95,564 98,075 96,827 100,200
Income before allocations to
partners per weighted average
$1,000 equivalent limited
partnership unit outstanding $ 39.31 $ 40.77 $ 40.24 $ 41.63
2007 March 30, June 29, September 28, December 31,
- ---- --------- -------- ------------- ------------
Total revenue $ 992,605 $ 1,063,887 $ 1,051,977 $ 1,038,398
Income before allocations to
partners 114,154 159,460 128,149 106,456
Income before allocations to
partners per weighted average
$1,000 equivalent limited
partnership unit outstanding $ 37.27 $ 52.06 $ 41.84 $ 34.75
57
PART II
ITEM 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 its management of the effectiveness of
the design and operation of our disclosure controls and procedures. In
designing and evaluating our disclosure controls and procedures, we recognize
that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control
objectives, and we were required to apply our judgment in evaluating and
implementing possible controls and procedures. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that, as of
the date of completion of the evaluation, our disclosure controls and
procedures were effective to ensure that information required to be disclosed
by us in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms. We will continue to review and document our disclosure
controls and procedures, including our internal controls and procedures for
financial reporting, on an ongoing basis, and may from time to time make
changes aimed at enhancing their effectiveness and to ensure that our systems
evolve with our business.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. 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.
58
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 29, 2008, the Partnership was composed of 326 general partners,
11,220 limited partners and 187 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, as it relies on the core values and beliefs of the
Partnership as well as the Partnership Agreement. Subject to the foregoing,
the Partnership is managed by its 326 general partners.
Douglas E. Hill voluntarily retired as the Managing General Partner of the
Registrant on December 31, 2005. Mr. Hill remains a partner of the
Partnership. Effective January 1, 2006, James D. Weddle assumed the role of
Managing Partner. He has been a general partner for 23 years.
The Executive Committee of the Partnership, throughout 2007, was composed of
James D. Weddle, Brett Campbell, Norman Eaker, Tim Kirley, Steven Novik, Gary
D. Reamey and James A. Tricarico. The purpose of the Executive Committee is to
provide counsel and advice to the Managing Partner in discharging his
functions. Furthermore, in the event the position of Managing Partner is
vacant, the Executive Committee shall succeed to all of the powers and duties
of the Managing Partner.
None of the general partners are appointed for any specific term nor are there
any special arrangements or understandings pursuant to their appointment other
than as contained in the Partnership Agreement.
Following 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
29, 2008:
Name Age Partner Area of responsibility
- -------------------------------------------------------------------------------------------------------------------
James D. Weddle 54 1984 Managing Partner
Brett Campbell 48 1993 Products, Services and Marketing
Norman Eaker 51 1984 Operations, Service, Information
Systems & Human Resources
Tim Kirley 53 1994 United Kingdom Operations
Steven Novik 58 1983 Finance
Gary D. Reamey 52 1984 Canadian Operations
James A. Tricarico 55 2006 Legal and Compliance
- -------------------------------------------------------------------------------------------------------------------
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 and the Operations Chairman of the Securities Industry
and Financial Markets Association.
Gary Reamey is a director for the Investment Industry Association of Canada.
59
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 eight percent is allocated among the general partners based on the
discretion of the Managing Partner, with input from the Executive Committee
and other division leaders. As a partnership, the executive compensation
program does not have any bonus, stock awards, option awards, non-equity
incentive plan compensation, or any other elements besides those disclosed
below.
SALARY 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 3.0% in
2007, .03% to 3.05% in 2006 and 0.03% to 3.0% in 2005. 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 2007 and 2006, $0.2 million
and $0.3 million, respectively was allocated by the Managing Partner. No
amounts were paid to the individuals listed below. No additional amounts were
allocated to any general partner in 2005.
The Partnership is not required to have a compensation committee.
60
PART III
Item 11. Executive Compensation, continued
The following table identifies the compensation of the firm's Managing Partner
("CEO"), the Principal Financial Officer ("CFO"), and the three other most
highly compensated executive officers, based on total compensation in 2007
(including respective shares of profit participation).
Summary Compensation Table
Net Income
Deferred Allocated
Compen- to General
Year Salaries sation Partners Total
- -------------------------------------------------------------------------------------------------------------------
James D. Weddle 2007 $250,000 $13,140 $10,521,751 $10,784,891
CEO 2006 250,000 11,682 9,108,322 9,370,004
2005 175,000 9,954 6,578,395 6,763,349
Steven Novik 2007 175,000 13,140 7,891,313 8,079,453
CFO 2006 175,000 11,682 7,167,204 7,353,886
2005 175,000 9,954 6,072,365 6,257,319
Gary D. Reamey 2007 175,000 13,140 9,469,575 9,657,715
General Partner- 2006 175,000 11,682 8,361,738 8,548,420
Canadian Operations 2005 150,000 9,954 7,084,426 7,244,380
Norman Eaker 2007 175,000 13,140 8,417,401 8,605,541
General Partner- 2006 175,000 11,682 7,167,204 7,353,886
Operations, Service, 2005 175,000 9,954 6,072,365 6,257,319
Information Systems &
Human Resources
Brett Campbell 2007 175,000 13,140 7,715,951 7,904,091
General Partner- 2006 175,000 11,682 6,181,714 6,368,396
Products, Services, & 2005 150,000 9,954 5,480,384 5,640,338
Marketing
- -------------------------------------------------------------------------------------------------------------------
<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 years 2007 and 2006.
Accordingly, the Partnership is not required to report his compensation as a
named executive officer of the Partnership for fiscal years 2007 and 2006.
However, if Mr. Hill had been an executive officer during that period, he
would have been one of the five most highly compensated executive officers and
would have been included in the table.
61
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), 277 of the general partners also own
limited partnership interests and 46 of the general partners also own
subordinated limited partnership interests, as noted in the table below.
As of February 29, 2008:
Name of Amount of
Beneficial Beneficial % of
Title of Class Owner Ownership Class
- -------------------------------------------------------------------------------------------------------------------
Limited Partnership All General
Interests Partners as
a Group $45,672,200 9%
Subordinated All General
Limited Partnership Partners as
Interests a Group $56,659,857 32%
- -------------------------------------------------------------------------------------------------------------------
62
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, with some discounts to
commissions and fees provided.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees paid by the Partnership to its auditors,
PricewaterhouseCoopers LLP.
(Dollars in thousands) 2007 2006
------------------ -----------------
Fees paid by the Partnership:
Audit fees (1) $ 2,403 $ 1,253
Audit-related fees (2) 695 1,908
Tax fees (3) 1,027 507
All other (4) 175 180
------------------ -----------------
Total fees $ 4,300 $ 3,848
================== =================
<FN>
(1) Audit fees in 2007 include fees related to the services performed for
the Sarbanes-Oxley Act, which are included in the audit-related fees
for the year 2006.
(2) Audit-related fees consist primarily of fees for internal control
reviews, attestation/agreed-upon procedures, employee benefit plan
audits, and consultations concerning financial accounting and
reporting standards.
(3) Tax fees consist of fees for tax compliance, consultation on tax
matters, and other tax planning and advice.
(4) 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 2007 and 2006. No services were provided under the de minimis fee
exception to the audit committee pre-approval requirements.
63
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:
Management's Report on Internal Control over Financial Reporting .........................37
Report of Independent Registered Public Accounting Firm...................................38
Consolidated Statements of Financial Condition as of
December 31, 2007 and 2006................................................................40
Consolidated Statements of Income for the years ended
December 31, 2007, 2006 and 2005..........................................................42
Consolidated Statements of Changes in Partnership Capital
Subject to Mandatory Redemption for the years ended December 31,
2007, 2006 and 2005.......................................................................43
Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006 and 2005..........................................................45
Notes to Consolidated Financial Statements ...............................................46
(2) The following financial statements are included in Schedule I:
Parent Company Only Condensed Statements of Financial Condition as
of December 31, 2007 and 2006.............................................................71
Parent Company Only Condensed Statements of Income for the years
ended December 31, 2007, 2006 and 2005....................................................72
Parent Company Only Condensed Statements of Cash Flows for the
years ended December 31, 2007, 2006 and 2005..............................................73
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.
64
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 28, 2008
---------------------------------------------------
By (Signature and Title) /s/ Steven Novik
---------------------------------------------------
Steven Novik, Chief Financial Officer
Date March 28, 2008
---------------------------------------------------
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
There have been no annual reports sent to security holders covering the
registrant's last fiscal year nor have there been any proxy statements, form
of proxy or other proxy soliciting material sent to any of registrant's
security holders.
65
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2007
Exhibit
Number 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* Sixteenth Restated Certificate of Limited Partnership of the Jones
Financial Companies, L.L.L.P., dated as of July 11, 2007, as amended,
incorporated herein by reference to Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 29, 2007.
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
66
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, CONTINUED
March 9, 1994, incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 25, 1994.
10.7* 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
67
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, CONTINUED
15, 2011, incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 24, 1999.
10.15* 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
68
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, CONTINUED
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.
10.22* 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.
10.25* Stipulation of Settlement of Class Action, dated December 11, 2006
and Amendment to Stipulation of Settlement of Class Action dated July
1, 2007, incorporated herein by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended September 28, 2007.
10.26* Joint Stipulation of Class Action Settlement and Release dated
September 28, 2007, incorporated herein by reference to Exhibit 10.1 to
the Company's Form 8-K dated October 4, 2007.
10.27* Amended Joint Stipulation of Class Action Settlement and Release
dated October 4, 2007, incorporate herein by reference to Exhibit 10.2
to the Company's Form 8-K dated October 4, 2007.
21** Subsidiaries of the Registrant
23.1** 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** Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant
to section 302 of the Sarbanes-Oxley Act of 2002.
31.2** Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant
to section 302 of the Sarbanes-Oxley Act of 2002.
69
32.1** Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002.
32.2** Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002.
99.1* Order Instituting Administrative and Cease and Desist proceedings,
Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist
Order Pursuant to Section 8A of the Securities Act of 1933 and Sections
15(b) and 21C of the Securities Exchange Act of 1934, dated December
22, 2004, incorporated herein by reference to Exhibit 99.1 to the
Company's Form 8-K dated December 27, 2004.
99.2* NASD Letter of Acceptance, Waiver and Consent, dated December 22,
2004, incorporated herein by reference to Exhibit 99.2 to the Company's
Form 8-K dated December 27, 2004.
99.3* NYSE Stipulation of Facts and Consent to Penalty, dated December 22,
2004, incorporated herein by reference to Exhibit 99.3 to the Company's
Form 8-K dated December 27, 2004.
99.4* Deferred Consideration Agreement, dated December 22, 2004,
incorporated herein by reference to Exhibit 99.4 to the Company's Form
8-K dated December 27, 2004.
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.
** Filed herewith.
70
Schedule I
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31, December 31,
(Dollars in thousands) 2007 2006
- ------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 8,884 $ 1,607
Securities purchased under agreements to resell 91,000 -
Investment in subsidiaries 1,351,545 1,000,755
Others assets 5,876 5,244
---------------------------- ----------------------------
TOTAL ASSETS $ 1,457,305 $ 1,007,606
============================ ============================
LIABILITIES
Payable to limited partners, accounts payable
and accrued expenses $ 6,525 $ 4,227
Partnership capital subject to mandatory
redemption 1,450,780 1,003,379
---------------------------- ----------------------------
TOTAL LIABILITIES $ 1,457,305 $ 1,007,606
============================ ============================
These financial statements should be read in conjunction with the notes to the
consolidated financial statements of The Jones Financial Companies, L.L.L.P.
71
Schedule I
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
Years Ended
---------------------------------------------------------------
(Dollars in thousands) December 31, December 31, December 31,
2007 2006 2005
- -------------------------------------------------------------------------------------------------------------------
NET REVENUE
Subsidiary earnings $ 499,416 $ 396,554 $ 330,098
Management fee income 61,628 36,007 33,510
Other 9,030 (359) 996
------------------- ------------------- -------------------
Total revenue 570,074 432,202 364,604
Interest expense 37,364 15,753 16,042
------------------- ------------------- -------------------
Net revenue 532,710 416,449 348,562
------------------- ------------------- -------------------
OPERATING EXPENSES
Compensation and benefits 24,566 20,455 17,645
Payroll and other taxes (96) 85 672
Other operating expenses 21 5,243 260
------------------- ------------------- -------------------
Total operating expenses 24,491 25,783 18,577
------------------- ------------------- -------------------
INCOME BEFORE ALLOCATIONS
TO PARTNERS $ 508,219 $ 390,666 $ 329,985
Allocations to partners (508,219) (390,666) (329,985)
------------------- ------------------- -------------------
NET INCOME $ - $ - $ -
=================== =================== ===================
These financial statements should be read in conjunction with the notes to the consolidated financial
statements of The Jones Financial Companies, L.L.L.P.
72
Schedule I
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended
------------------------------------------------
December 31, December 31, December 31,
(Dollars in thousands) 2007 2006 2005
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ - $ - $ -
Adjustments to reconcile net income to net cash
provided by operating activities -
Income before allocations to partners 508,219 390,666 329,985
Increase in securities purchased under agreements to resell (91,000) - -
Increase in investment in subsidiaries (350,790) (95,293) (107,753)
Decrease in other assets and liabilities, net 1,666 6,011 1,773
---------------- --------------- ---------------
Net cash provided by operating activities 68,095 301,384 224,005
---------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of partnership interests 324,009 38,487 24,207
Redemption of partnership interests (8,271) (27,772) (33,752)
Withdrawals and distributions from
partnership capital (376,556) (314,373) (212,310)
---------------- --------------- ---------------
Net cash used in financing activities (60,818) (303,658) (221,855)
---------------- --------------- ---------------
Net (decrease) increase in cash and
cash equivalents 7,277 (2,274) 2,150
CASH AND CASH EQUIVALENTS,
Beginning of year 1,607 3,881 1,731
---------------- --------------- ---------------
End of year $ 8,884 $ 1,607 $ 3,881
================ =============== ===============
These financial statements should be read in conjunction with the notes to the
consolidated financial statements of The Jones Financial Companies, L.L.L.P.
73