Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report 26 125K
2: EX-3.2 Articles of Incorporation/Organization or By-Laws 1 7K
3: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) 2± 8K
4: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) 2± 8K
5: EX-32.1 Certification per Sarbanes-Oxley Act (Section 906) 1 6K
6: EX-32.2 Certification per Sarbanes-Oxley Act (Section 906) 1 6K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 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.
-----------------------------------------------------------------------------
(Exact name of registrant as specified in its Partnership Agreement)
MISSOURI 43-1450818
------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12555 Manchester Road
Des Peres, Missouri 63131
------------------------------------------------------------------------------
(Address of principal executive office)
(Zip Code)
(314) 515-2000
------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ X ]
Indicated by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
As of the filing date, there were no voting securities held by non-affiliates
of the registrant.
2
THE JONES FINANCIAL COMPANIES, L.L.L.P.
INDEX
Page
Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition.....................4
Consolidated Statements of Income..................................6
Consolidated Statements of Changes in Partnership Capital
Subject to Mandatory Redemption................................7
Consolidated Statements of Cash Flows..............................8
Notes to Consolidated Financial Statements.........................9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk........23
Item 4. Controls and Procedures...........................................23
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................24
Item 1A. Risk Factors......................................................25
Item 6. Exhibits..........................................................25
Signatures........................................................26
3
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
June 29, December 31,
(Dollars in thousands) 2007 2006
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 312,282 $ 311,992
Cash segregated under federal regulations 1,275,000 1,312,806
Securities purchased under agreements to resell 818,000 415,000
Receivable from:
Customers 1,964,094 2,043,980
Brokers, dealers and clearing organizations 337,317 310,715
Mutual funds, insurance companies, and other 160,035 142,143
Securities owned, at market value
Inventory securities 117,626 129,609
Investment securities 147,458 145,552
Equipment, property and improvements, at cost,
net of accumulated depreciation 314,845 310,987
Other assets 72,215 72,831
------------- -------------
TOTAL ASSETS $ 5,518,872 $ 5,195,615
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
4
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES
(Unaudited)
June 29, December 31,
(Dollars in thousands) 2007 2006
---------------------------------------------------------------------------------------------------------------------
Payable to:
Customers $ 3,167,831 $ 3,162,223
Brokers, dealers and clearing organizations 52,607 44,593
Securities sold, not yet purchased, at market value 9,799 9,353
Accounts payable and accrued expenses 199,101 224,681
Accrued compensation and employee benefits 401,977 438,497
Long-term debt 12,641 14,389
------------- -------------
3,843,956 3,893,736
------------- -------------
Liabilities subordinated to claims of general creditors 298,500 298,500
------------- -------------
Commitments and contingencies (See Notes)
Partnership capital subject to mandatory redemption,
net of reserve for anticipated withdrawals 1,282,196 907,386
Reserve for anticipated withdrawals 94,220 95,993
------------- -------------
Total partnership capital subject to mandatory redemption 1,376,416 1,003,379
------------- -------------
TOTAL LIABILITIES $ 5,518,872 $ 5,195,615
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
5
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
----------------------------- ----------------------------
(Dollars in thousands, June 29, June 30, June 29, June 30,
except per unit information) 2007 2006 2007 2006
---------------------------------------------------------------------------------------- ----------------------------
Revenue:
Trade Revenue
Commissions $ 488,992 $415,555 $ 972,756 $ 857,502
Principal transactions 97,633 76,691 163,991 134,268
Investment banking 4,133 9,712 10,544 17,602
Fee Revenue
Asset fees 272,573 214,429 524,949 419,278
Account and activity fees 109,051 92,895 214,208 184,614
Interest and dividends 79,930 64,806 156,636 123,623
Other revenue 11,575 3,233 13,409 20,740
------------ ---------- ------------ ------------
Total revenue 1,063,887 877,321 2,056,493 1,757,627
Interest expense 20,063 14,968 40,232 29,313
------------ ---------- ------------ ------------
Net revenue 1,043,824 862,353 2,016,261 1,728,314
------------ ---------- ------------ ------------
Operating expenses:
Compensation and benefits 634,621 513,617 1,218,445 1,033,842
Communications and data processing 71,383 71,322 145,384 136,397
Occupancy and equipment 74,768 69,817 154,359 136,969
Payroll and other taxes 33,618 30,564 74,312 65,258
Legal (4,764) 11,438 (77) 29,538
Advertising 14,102 14,560 29,344 29,530
Postage and shipping 14,054 13,285 28,150 26,626
Floor brokerage and clearance fees 4,743 4,624 8,493 9,169
Other operating expenses 41,839 35,051 84,237 67,347
------------ ---------- ------------ ------------
Total operating expenses 884,364 764,278 1,742,647 1,534,676
------------ ---------- ------------ ------------
Income before allocations to partners 159,460 98,075 273,614 193,638
Allocations to partners:
Limited partners 25,976 8,591 44,648 16,908
Subordinated limited partners 14,117 9,676 24,620 19,451
General partners 119,367 79,808 204,346 157,279
------------ ---------- ------------ ------------
Net Income $ - $ - $ - $ -
============ ========== ============ ============
Income before allocations to partners
per weighted average $1,000
equivalent limited partnership unit outstanding $ 52.06 $ 40.77 $ 89.33 $ 80.08
============ ========== ============ ============
Weighted average $1,000 equivalent
limited partnership units outstanding 498,942 210,716 499,809 211,138
============ ========== ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
6
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY REDEMPTION
SIX MONTHS ENDED JUNE 29, 2007 AND JUNE 30, 2006
(Unaudited)
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Dollars in thousands) Capital Capital Capital Total
------------------------------------------------------------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY
REDEMPTION, December 31, 2005 $ 234,032 $ 149,311 $ 533,028 $ 916,371
Reserve for anticipated withdrawals (21,818) (14,114) (77,827) (113,759)
----------- ----------- ----------- -------------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, December 31, 2005 212,214 135,197 455,201 802,612
Issuance of partnership interests - 7,523 26,947 34,470
Redemption of partnership interests (1,658) (18,186) (3,068) (22,912)
Income allocated to partners 16,908 19,451 157,279 193,638
Withdrawals and distributions (1,389) (16,760) (81,912) (100,061)
----------- ----------- ----------- -------------
TOTAL PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY
REDEMPTION, JUNE 30, 2006 226,075 127,225 554,447 907,747
Reserve for anticipated withdrawals (15,519) (2,690) (26,044) (44,253)
----------- ----------- ----------- -------------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, June 30, 2006 $ 210,556 $ 124,535 $ 528,403 $ 863,494
=========== =========== =========== =============
TOTAL PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY
REDEMPTION, DECEMBER 31, 2006 $ 229,270 $ 137,503 $ 636,606 $ 1,003,379
Reserve for anticipated withdrawals (20,938) (12,372) (62,683) (95,993)
----------- ----------- ----------- -------------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, December 31, 2006 208,332 125,131 573,923 907,386
Issuance of partnership interests 293,562 21,222 8,038 322,822
Redemption of partnership interests (3,802) (612) - (4,414)
Income allocated to partners 44,648 24,620 204,346 273,614
Withdrawals and distributions (1,602) (19,203) (102,187) (122,992)
----------- ----------- ----------- -------------
TOTAL PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY
REDEMPTION, JUNE 29, 2007 541,138 151,158 684,120 1,376,416
Reserve for anticipated withdrawals (43,047) (5,417) (45,756) (94,220)
----------- ----------- ----------- -------------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, June 29, 2007 $ 498,091 $ 145,741 $ 638,364 $ 1,282,196
=========== =========== =========== =============
The accompanying notes are an integral part of these consolidated financial statements.
7
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
-------------------------------
June 29, June 30,
(Dollars in thousands) 2007 2006
------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ - $ -
Adjustments to reconcile net income to net
cash provided by operating activities -
Income before allocations to partners 273,614 193,638
Depreciation 46,928 47,788
Changes in assets and liabilities:
Cash segregated under federal regulations 37,806 -
Securities purchased under agreements to resell (403,000) (71,000)
Net receivable from customers 85,494 162,156
Net receivable from brokers, dealers and
clearing organizations (18,588) (13,186)
Receivable from mutual funds, insurance companies
and other (17,892) (17,305)
Securities owned, net 10,523 22,823
Other assets 616 2,409
Payable to depositors - (2,102)
Accounts payable and accrued expenses (25,580) 24,287
Accrued compensation and employee benefits (36,520) (33,554)
----------- -----------
Net cash (used in)/provided by operating activities (46,599) 315,954
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, property and improvements, net (50,786) (36,496)
----------- -----------
Net cash used in investing activities (50,786) (36,496)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Federal Home Loan Bank advances, net - (2,580)
Repayment of long-term debt (1,748) (7,634)
Repayment of subordinated debt - (10,200)
Issuance of partnership interests 322,822 34,470
Redemption of partnership interests (4,414) (22,912)
Withdrawals and distributions from partnership capital (218,985) (213,820)
----------- -----------
Net cash provided by/(used in) financing activities 97,675 (222,676)
----------- -----------
Net increase in cash and cash equivalents 290 56,782
CASH AND CASH EQUIVALENTS,
Beginning of period 311,992 260,841
----------- -----------
End of period $ 312,282 $ 317,623
=========== ===========
Cash paid for interest $ 39,840 $ 29,572
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
8
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per unit information)
BASIS OF PRESENTATION
THE PARTNERSHIP'S BUSINESS AND BASIS OF ACCOUNTING. The accompanying
consolidated financial statements include the accounts of The Jones Financial
Companies, L.L.L.P. and all wholly owned subsidiaries (collectively, the
"Partnership"). All material intercompany balances and transactions have been
eliminated in consolidation. Non-controlling minority interests owned are
accounted for under the equity method. The results of the Partnership's
subsidiary in Canada for the six months ended May 31, 2007 and 2006 are
included in the Partnership's consolidated financial statements 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, 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. Edward Jones Trust Company ("EJTC"), a wholly owned subsidiary of
the Partnership, offers trust services to Edward Jones customers.
The consolidated financial statements have been prepared under the accrual
basis of accounting in conformity with accounting principles generally
accepted in the United States of America ("GAAP") which require the use of
certain estimates by management in determining the Partnership's assets,
liabilities, revenues and expenses. Actual results could differ from these
estimates.
Substantially all of the Partnership's short-term financial assets and
liabilities are carried at fair value or contracted amounts which approximate
fair value.
Under the terms of the Partnership Agreement, a partner's capital will be
redeemed by the Partnership in the event of the partner's death, resignation
or termination. In the event of the partner's death, the Partnership must
redeem the partner's capital within six months. Limited partners withdrawing
from the Partnership due to termination or resignation are repaid their
capital in three equal annual installments beginning the month after their
resignation or termination. The capital of general partners resigning or
terminated from the Partnership is converted to subordinated limited
partnership capital. Subordinated limited partners are repaid their capital in
four equal annual installments beginning the month after their request for
withdrawal of contributed capital. The Partnership's managing partner has the
discretion to waive these withdrawal restrictions. All current and future
partnership capital is subordinate to all current and future liabilities of
the Partnership, including the liabilities subordinated to claims of general
creditors.
The interim financial information included herein is unaudited. However, in
the opinion of management, such information includes all adjustments,
consisting primarily of normal recurring accruals, which are necessary for a
fair presentation of the results of interim operations. Certain prior period
amounts have been reclassified to conform to the current year presentation.
9
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The results of operations for the six months ended June 29, 2007 and June 30,
2006 are not necessarily indicative of the results to be expected for the full
year. These consolidated financial statements should be read in conjunction
with the Partnership's Annual Report on Form 10-K for the year ended December
31, 2006.
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 in the period earned.
Commissions consist of charges to customers for the purchase or sale of
securities, insurance products and mutual fund shares.
Asset fees revenue consists primarily of service fees and other revenues
received under agreements with mutual fund and insurance companies based on
the underlying value of the Partnership's customers' assets invested in those
companies' products. 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 includes fees received from mutual fund
companies for sub-transfer agent accounting services performed by the
Partnership and self-directed IRA custodian account fees. It also includes
other activity based revenues from customers, mutual fund companies and
insurance companies.
Principal transactions revenue is the result of the Partnership's
participation in market-making activities in over-the-counter corporate
securities, municipal obligations, U.S. Government obligations, including
general obligations and revenue bonds, unit investment trusts and
mortgage-backed securities.
Interest and dividend income is earned primarily on margin account balances,
cash equivalents, cash segregated under federal regulations, securities
purchased under agreement to resell, inventory securities and investment
securities.
Investment banking revenues are derived from the Partnership's underwriting
and distribution of securities on behalf of issuers.
PARTNERSHIP CAPITAL SUBJECT TO MANDATORY REDEMPTION
The Financial Accounting Standards Board Statement of Financial Accounting
Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity," established standards for
classifying and measuring certain financial instruments with characteristics
of both liabilities and equity. Since the Partnership is obligated to redeem a
partner's capital after a partner's death, SFAS No. 150 requires all of the
Partnership's equity capital to be classified as a liability. Income before
allocations to partners prior to the issuance of the Statement was classified
on the Partnership's statement of income as net income. Under SFAS No. 150,
these allocations are now considered interest expense and are classified as a
reduction of income before allocations to partners, which results in a
presentation of $0 net income for the six month periods ended June 29, 2007
and June 30, 2006. The financial statement presentations required to comply
with GAAP do not alter the Partnership's treatment of income, income
allocations or equity capital for any other purposes. In addition, SFAS No.
150 does not have any effect on, nor is it applicable to, the Partnership's
subsidiaries' financial statements.
Net income, as defined in the Partnership Agreement, is now equivalent to
income before allocations to partners in the Consolidated Statements of
Income. Such income, if any, for each calendar year is allocated to the
Partnership's three classes of capital in accordance with the formulas
prescribed in the
10
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Partnership Agreement. First, limited partners are allocated net income in
accordance with the prescribed formula for their share of net income.
Thereafter, subordinated limited partners and general partners are allocated
any remaining net income based on formulas in the Partnership Agreement.
Limited partners do not share in the net loss in any year in which there is
net loss and the Partnership is not dissolved or liquidated.
Partnership capital subject to mandatory redemption, net of reserve for
anticipated withdrawals, of $1,282,196 consists of $498,091 of limited
partnership capital issued in $1,000 units, $145,741 of subordinated limited
partnership capital and $638,364 of general partnership capital as of June 29,
2007. The reserve for anticipated withdrawals consists of current year profits
to be withdrawn over the next year.
Limited partnership capital is held by current and former employees,
subordinated limited partners and general partners of the Partnership. Limited
partners are guaranteed a minimum 7.5% return on the face amount of their
capital. Expense related to the 7.5% return was $18,800 and $7,900 for the six
months ended June 29, 2007 and June 30, 2006, respectively, and is included as
a component of Interest Expense. The 7.5% return is paid to limited partners
regardless of the Partnership's earnings.
Subordinated limited partnership capital is held by current and former general
partners of the Partnership. Subordinated limited partners receive a varying
percentage of the net income of the Partnership based on their capital
invested. Subordinated limited partner capital is subordinated to the limited
partnership capital.
NET CAPITAL REQUIREMENTS
As a result of its activities as a broker-dealer, Edward Jones is subject to
the Net Capital provisions of Rule 15c3-1 of the Securities Exchange Act of
1934 and the capital rules of the New York Stock Exchange, Inc. ("NYSE").
Under the alternative method permitted by the rules, Edward Jones must
maintain minimum Net Capital equal to the greater of $.250 million or 2% of
aggregate debit items arising from customer transactions. The Net Capital
rules also provide that partnership capital may not be withdrawn if resulting
Net Capital would be less than 5% of aggregate debit items. Additionally,
certain withdrawals require the consent of the Securities and Exchange
Commission ("SEC") to the extent they exceed defined levels, even though such
withdrawals would not cause Net Capital to be less than 5% of aggregate debit
items.
At June 29, 2007, Edward Jones's Net Capital of $602.5 million was 32.5% of
aggregate debit items and its Net Capital in excess of the minimum required
was $565.4 million. Net Capital after anticipated withdrawals, which are
scheduled subordinated debt payments through December 31, 2007, as a
percentage of aggregate debit items was 31.3%. Net capital and the related
capital percentages may fluctuate on a daily basis.
At June 29, 2007, the Partnership's foreign broker-dealer subsidiaries and
EJTC were in compliance with regulatory capital requirements in the
jurisdictions in which they operate.
11
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONTINGENCIES
In the normal course of business, the Partnership has been named, from time to
time, as a defendant in various legal actions, including arbitrations, class
actions and other litigation. Certain of these legal actions include claims
for substantial compensatory and/or punitive damages or claims for
indeterminate amounts of damages. The Partnership is also involved, from time
to time in investigations and proceedings by governmental and self-regulatory
agencies, certain of which may result in adverse judgments, fines or
penalties. In recent years, the number of legal actions and investigations has
increased with a focus on mutual fund issues among many firms in the financial
services industry, including the Partnership.
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, that the outcome of
these actions will not have a material adverse effect on the consolidated
financial condition of the Partnership, although the outcome could be material
to the Partnership's future operating results for a particular period or
periods. For additional discussions, refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in the
Partnership's Annual Report on Form 10-K for the fiscal year ended December
31, 2006, and Part II, Item I "Legal Proceedings" in this Form 10-Q.
Also, in the normal course of business, the Partnership enters into contracts
which contain indemnification provisions, such as purchase contracts, service
agreements, escrow agreements, sales of assets, outsourcing agreements and
leasing arrangements. Under the provisions of these contracts, the Partnership
may indemnify counterparties to the contracts for certain aspects of the
Partnership's past conduct if other parties fail to perform, or if certain
events occur. These indemnification provisions will vary based upon the
contract. The Partnership may in turn obtain indemnifications from other
parties in certain contracts. These indemnification provisions are not
expected to have a material impact on the Partnership's consolidated results
of operations or financial condition.
12
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BASIS OF PRESENTATION
We are providing certain information in this discussion of our results of
operations, including a measure of income before allocations to partners, that
may be considered financial measures not in accordance with GAAP. We believe
that these figures are helpful in allowing the reader to more accurately
assess the ongoing nature of our operations and measure our performance more
consistently. We use the presented financial measures internally to understand
and assess the performance of our business. Therefore, we believe that this
information is meaningful in addition to the information contained in the GAAP
presentation of financial information. The presentation of this additional
financial information is not intended to be considered in isolation or as a
substitute for the financial information prepared and presented in accordance
with GAAP.
For internal analysis, the Partnership broadly categorizes its revenues as
trade revenue (revenue from buy or sell transactions on securities) and net
fee revenue (sources other than trade revenue). In the Partnership's
Consolidated Statements of Income, trade revenue is comprised of commissions,
principal transactions and investment banking. Net fee revenue is comprised of
asset fees, account and activity fees, interest and dividends net of interest
expense and other revenues.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 29, 2007 AND JUNE 30,
2006
For the second quarter of 2007, net revenue increased 21% ($181.5 million) to
$1.04 billion, while income before allocations to partners increased 63%
($61.4 million) to $159.5 million. The Partnership's profit margin based on
income before allocations to partners increased to 15.0% in the second quarter
of 2007, from 11.2% in the second quarter of 2006. The Partnership's net
revenue increased primarily due to increased customer dollars invested (the
principal amount of customers' buy and sell transactions, which, in general,
individually generate more than $50 (fifty dollars) in trade revenue), growth
in customer asset values, higher account and activity fees, and higher net
interest income. Operating expenses increased due primarily to growth in sales
compensation related to the increase in net revenues and to costs associated
with the continued expansion and enhancement of the Partnership's branch
office network. The Partnership added 640 financial advisors during the twelve
months ended June 29, 2007, ending the quarter with 10,639 financial advisors,
an increase of 6% from 9,999 as of June 30, 2006.
TRADE REVENUE
Trade revenue comprised 57% of net revenue for the second quarter of 2007,
down from 58% for the second quarter of 2006. Conversely, net fee revenue
comprised 43% for the second quarter of 2007, up from 42% in the second
quarter of 2006.
Trade revenue of $590.8 million increased 18% ($88.8 million) during the
second quarter of 2007 compared to the same period in the prior year. Trade
revenue increased primarily due to an increase in customer dollars invested
when compared to the second quarter of 2006. Total customer dollars invested
were $24.9 billion during the second quarter of 2007, a 17% ($3.6 billion)
increase from the second quarter of 2006. The Partnership's margin earned on
each $1,000 invested increased to $23.70 for the second quarter of 2007 from
$23.60 in 2006.
13
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Commissions revenue increased 18% ($73.4 million) for the second quarter of
2007 to $489.0 million. Customers invested $17.1 billion in commissions
transactions in the second quarter of 2007 compared to $14.0 billion in the
second quarter of 2006, a 22% increase. Revenue from mutual fund commissions
increased 21% ($58.2 million) and insurance commissions increased 23% ($12.7
million), which represented substantially all of the increase in commissions
revenue. The following table summarizes commissions revenue quarter over
quarter:
[Download Table]
Quarter ended (in millions)
-----------------------------
June 29, June 30, %
2007 2006 Change
--------- --------- --------
Mutual funds $ 339.2 $ 281.0 21
Equities 82.1 79.6 3
Insurance 67.5 54.8 23
Corporate bonds 0.2 0.2 -
--------- --------- --------
$ 489.0 $ 415.6 18
========= ========= ========
Principal transactions revenue increased 27% ($20.9 million) to $97.6 million
during the second quarter of 2007 due primarily to an increase in customer
dollars invested. Customers invested $7.7 billion in principal transactions in
the second quarter of 2007 compared to $6.6 billion in the second quarter of
2006, an increase of 17%. The Partnership's margin earned on principal
transactions on each $1,000 invested increased to $12.40 during the second
quarter of 2007 from $11.40 during the second quarter of 2006 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 39% ($10.5 million), municipal bonds increased 30% ($7.7 million),
unit investment trust increased 62% ($1.6 million), collateralized mortgage
obligations increased 35% ($1.1 million), and certificates of deposit
increased 2% ($0.2 million), while government bonds decreased 3% ($0.2
million). The following table summarizes principal transaction revenue quarter
over quarter:
[Download Table]
Quarter ended (in millions)
-----------------------------
June 29, June 30, %
2007 2006 Change
--------- --------- --------
Corporate bonds $ 37.3 $ 26.8 39
Municipal bonds 33.3 25.6 30
Certificates of deposit 11.5 11.3 2
Government bonds 7.1 7.3 (3)
Collateralized mortgage obligations 4.2 3.1 35
Unit investment trusts 4.2 2.6 62
--------- --------- --------
$ 97.6 $ 76.7 27
========= ========= ========
Investment banking revenue decreased 57% ($5.6 million) during the second
quarter of 2007 to $4.1 million, due primarily to a decrease in municipal
offerings in the current quarter.
14
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
NET FEE REVENUE
Net fee revenue, which is Fee Revenue net of Interest expense, increased 26%
($92.7 million) to $453.1 million during the second quarter of 2007. Asset
fees increased 27% ($58.1 million) to $272.6 million due primarily to the
favorable impact of market conditions on customers' mutual fund and insurance
assets generating asset fees coupled with net new money flowing into these
products. Average customer mutual fund, insurance, and money market assets
increased $71.0 billion or 27% to $338.0 billion in the second quarter of 2007
compared to $267.1 billion in the second quarter of 2006.
Account and activity fees of $109.1 million increased 17% ($16.2 million)
quarter over quarter. Revenue received from sub-transfer agent services
performed for mutual fund companies increased 8% ($4.3 million) to $61.5
million, due to a 14% increase in the number of customer accounts for which
the Partnership provides mutual fund sub-transfer agent services. Offsetting
the increase in mutual fund fees was a $2.5 million (54%) 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. Other revenue of $11.6
million increased 258% ($8.3 million) quarter over quarter primarily due to a
$5.1 million increase in the value of the deferred compensation plan
investments.
Net interest and dividend income increased 20% ($10.0 million) to $59.9
million during the second quarter of 2007 due primarily to an increase in
overnight investing activities and an increase in interest rates. Interest
income increased 23% ($15.1 million) to $79.9 million during the second
quarter of 2007 due to increased interest rates, customer credit balances, and
investing the proceeds from the Limited Partnership offering, which closed on
January 2, 2007. The average funds invested in cash equivalents and securities
purchased under agreements to resell during the second quarter of 2007 was
$2.3 billion, compared to $616.2 million in the second quarter of 2006. The
average rate earned on these investments increased to 5.21% during the second
quarter of 2007 from 4.83% during the second quarter of 2006. These increases
were offset by reduced interest income from customer loans, which decreased
10% ($4.9 million). While the average rate earned on customer loan balances
increased due to the increase in short-term interest rates during the past
year to approximately 9.13% during the second quarter of 2007 from
approximately 8.78% during the second quarter of 2006, the average customer
loan balance decreased 14% ($300.9 million) to $1.9 billion. In addition,
interest expense increased 34% ($5.1 million) to $20.1 million during the
second quarter of 2007 due to increased 7.5% guaranteed payment on the
additional Limited Partnership interests outstanding during the quarter.
Operating expenses increased 16% ($120.1 million) to $884.4 million during the
second quarter of 2007. Compensation and benefits costs increased 24% ($121.0
million) to $634.6 million. Within compensation and benefits costs, sales
compensation increased 24% ($65.2 million) due to increased revenues.
Additionally, financial advisor salary and subsidy increased 38% ($8.1
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 59% ($37.7 million).
Headquarters and branch payroll expense increased 7% ($10.2 million) due to
increased salary and medical costs for existing personnel and additional
support in the branches as the Partnership grows its sales force. This was
offset by a $7.4 million decrease due to the elimination of a special bonus
program for certain existing personnel in connection with the closing of the
offering of limited partnership interests. On a full time equivalent basis,
the Partnership had 4,580 headquarters associates and 11,039 branch staff
associates as of June 29, 2007, compared to 4,189 headquarters associates and
10,463 branch staff associates as of June 30, 2006.
Legal expenses decreased 142% ($16.2 million) during the second quarter of
2007 due to reduced legal expense accruals associated with legal matters and
regulatory settlements. Additionally, the Partnership
15
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
reversed approximately $9.5 million of legal expense accruals established
prior to 2007 due to the final determination and refund of sales loads to
current and former customers that were improperly imposed in prior years
pertaining to certain mutual fund Net Asset Value transfer programs. The
Partnership refunded approximately $19.0 million including interest to 21,000
current and former customers which was charged against previously established
legal expense accruals. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in the Partnership's
Annual Report on Form 10-K for the Fiscal year ended December 31, 2006 and
Part II, Item 1 "Legal Proceedings" in this Form 10-Q for additional
discussion on regulatory settlements). Other operating expenses increased 19%
($6.8 million) during the second quarter of 2007 primarily due to increased
travel and entertainment costs and Managed Account Program ("MAP") money
manager expense due to increased MAP assets and revenues.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 29, 2007 AND JUNE 30, 2006
For the first six months of 2007, net revenue increased 17% ($287.9 million)
to $2.016 billion, while income before allocations to partners increased 41%
($80.0 million) to $273.6 million. The Partnership's profit margin based on
income before allocations to partners increased to 13.3% for the first six
months of 2007, from 11.0% in the first six months of 2006. The Partnership's
net revenue increased primarily due to increased customer dollars invested
(the principal amount of customers' buy and sell transactions, which, in
general, individually generate more than $50 (fifty dollars) in trade
revenue), growth in customer asset values, higher account and activity fees,
and higher net interest income. Operating expenses increased due primarily to
growth in sales compensation related to the increase in net revenues and costs
associated with the continued expansion and enhancement of the Partnership's
branch office network.
TRADE REVENUE
Trade revenue comprised 57% of net revenue for the first six months of 2007,
down from 58% for the first six months of 2006. Conversely, net fee revenue
comprised 43% for the first six months of 2007, up from 42% in the
corresponding period.
Trade revenue of $1.147 billion increased 14% ($137.9 million) during the
first six months of 2007 compared to the same period in the prior year. Trade
revenue increased due primarily to an increase in customer dollars when
compared to the first six months of 2006. Total customer dollars invested were
$48.1 billion during the first six months of 2007, a 15% ($6.1 billion)
increase from the first six months of 2006. The Partnership's margin earned on
each $1,000 invested decreased to $23.80 for the first six months of 2007 from
$24.00 in 2006.
Commissions revenue increased 13% ($115.3 million) for the first six months of
2007 to $972.8 million. Commissions revenue increased year over year due
primarily to a 17% ($4.9 billion) increase in customer dollars invested to
$33.7 billion. Underlying the increase in commissions revenues, mutual fund
commissions increased 17% ($101.4 million) and insurance commissions increased
14% ($15.9 million). The following table summarizes commissions revenue year
over year:
16
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
[Download Table]
Six Months ended (in millions)
--------------------------------
June 29, June 30, %
2007 2006 Change
--------- --------- --------
Mutual funds $ 682.3 $ 580.9 17
Equities 162.9 164.9 (1)
Insurance 127.2 111.3 14
Corporate bonds 0.4 0.4 -
--------- --------- --------
$ 972.8 $ 857.5 13
========= ========= ========
Principal transactions revenue increased 22% ($29.7 million) to $164.0 million
during the first six months of 2007 due primarily to an increase in customer
dollars invested and an increase in the margin. Customers invested $14.0
billion in principal transactions in the first six months of 2007 compared to
$12.3 billion in the first six months of 2006. The Partnership's margin earned
on principal transactions on each $1,000 invested increased to $11.40 during
the first six months of 2007 from $10.70 during the first six months of 2006
primarily due to a shift into higher margin fixed income products from lower
margin certificates of deposit. Revenue from corporate bonds increased 44%
($18.6 million), municipal bonds increased 20% ($9 million,) and certificates
of deposit increased 6% ($1.3 million), while government bonds decreased 9%
($1.2 million). The following table summarizes principal transaction revenue
year over year:
[Download Table]
Six Months ended (in millions)
--------------------------------
June 29, June 30, %
2007 2006 Change
--------- --------- --------
Corporate bonds $ 60.8 $ 42.2 44
Municipal bonds 54.2 45.2 20
Certificates of deposit 21.6 20.3 6
Government bonds 11.7 12.9 (9)
Unit investment trusts 8.1 7.0 16
Collateralized mortgage obligations 7.6 6.7 13
--------- --------- --------
$ 164.0 $ 134.3 22
========= ========= ========
Investment banking revenue decreased 40% ($7.1 million) during the first six
months of 2007 to $10.5 million, due primarily to a decrease in municipal
offerings.
NET FEE REVENUE
Net fee revenue, which is Fee Revenue net of Interest expense, increased 21%
($150.0 million) to $869.0 million during the first six months of 2007. Asset
fees increased 25% ($105.7 million) to $524.9 million due primarily to the
favorable impact of market conditions on customers' mutual fund and insurance
assets generating asset fees coupled with net new money flowing into these
products. Average customer mutual fund, insurance, and money market assets
increased 25% ($65.4 billion) to $326.6 billion in the first six months of
2007 compared to $261.3 billion in the first six months of 2006.
Account and activity fees of $214.2 million increased 16% ($29.6 million) year
over year. Revenue received from sub-transfer agent services performed for
mutual fund companies increased 9% ($9.9
17
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
million) to $120.9 million. The number of customer accounts for which the
Partnership provides mutual fund sub-transfer agent services increased by 14%.
Offsetting the increase in mutual fund fees is a $4.2 million (47%) 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. Other revenue of $13.4
million decreased 35% ($7.3 million) year over year. The decrease between
years is primarily attributable to $11.0 million in gains in 2006 that did not
recur in 2007. Included in 2006 are a $4.5 million gain from the receipt of
shares in exchange for the Partnership's NYSE membership as a result of the
merger between the NYSE and Archipelago and a $6.5 million gain from the sale
of the Partnership's interest in the investment advisor to Federated's Capital
Income Fund.
Net interest and dividend income increased 23% ($22.1 million) to $116.4
million during the first six months of 2007 due primarily to an increase in
overnight investing activities and an increase in interest rates. Interest
income increased 27% ($33.0 million) to $156.6 million during the first six
months of 2007 due to increased interest rates, customer credit balances, and
investing the proceeds from the Limited Partnership offering, which closed on
January 2, 2007. The average funds invested in cash equivalents and securities
purchased under agreements to resell during the first six months of 2007 was
$2.2 billion, compared to $580.1 million in the first six months of 2006. The
average rate earned on these investments increased to 5.21% during the first
six months of 2007 from 4.60% during the first six months of 2006. These
increases were offset by reduced interest income from customer loans, which
decreased 9% ($8.3 million). While the average rate earned on customer loan
balances increased due to the increase in short-term interest rates during the
past year to approximately 9.13% during the first six months of 2007 from
approximately 8.55% during the first six months of 2006, the average customer
loan balance decreased 15% ($329.5 million) to $1.9 billion. In addition,
interest expense increased 37% ($10.9 million) to $40.2 million during the
first six months of 2007 due to increased 7.5% guaranteed payment on the
additional Limited Partnership interests outstanding during the quarter.
Operating expenses increased 14% ($208.0 million) to $1.743 billion during the
first six months of 2007. Compensation and benefits costs increased 18%
($184.6 million) to $1.218 billion. Within compensation and benefits costs,
sales compensation increased 18% ($101.7 million) due to increased revenues.
Additionally, financial advisor salary and subsidy increased 41% ($16.7
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 36% ($49.6 million).
Headquarters payroll expense decreased 0.2% ($0.3 million) in the first six
months of 2007. While salary and medical costs for personnel continued to
increase, this increase was offset by a $14.6 million decrease due to the
elimination of a special bonus program for certain existing personnel in
connection with the closing of the offering of limited partnership interests.
Branch payroll expense increased 11% ($17.8 million) to $179.8 million due to
increased salary and medical costs for existing personnel and additional
support in the branches as the Partnership increased its sales force.
Communications and data processing expense increased 7% ($9.0 million) to
$145.4 million in the first six months of 2007 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. Through June
29, 2007, approximately 8,561 branches have been converted to the new
communications network. Other operating expenses increased 25% ($16.9 million)
primarily due to increased travel and entertainment costs and MAP money
manager expense due to increased MAP assets and revenues.
Legal expenses decreased 100% ($29.6 million) during the first six months of
2007 due to reduced legal expense accruals associated with legal matters and
regulatory settlements and the reversal of previously established expense
accruals pertaining to the mutual fund NAV transfer programs (as discussed in
the "Results of Operations for the Three Months ended June 29, 2007 and June
30, 2006"). Also, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in
18
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
the Partnership's Annual Report on Form 10-K for the fiscal year ended
December 31, 2006, and Part II, Item 1 "Legal Proceedings" in this Form 10-Q
for additional discussion on legal matters and regulatory settlements.
MUTUAL FUND MATTERS
In recent years, mutual fund and annuity products have come under increased
scrutiny from various state and federal regulatory authorities in connection
with several industry issues including market timing, late trading, the
failure of various broker-dealers to provide breakpoint discounts to mutual
fund purchasers, the sale of certain mutual fund share classes, mutual fund
net asset value transfer programs and the manner in which mutual fund and
annuity companies compensate broker-dealers.
The Partnership has received information requests and subpoenas from various
regulatory and enforcement authorities regarding the Partnership's mutual fund
compensation arrangements, mutual fund sales practices and other mutual fund
issues. The Partnership is voluntarily cooperating with each inquiry. Also,
the Partnership has been named as a defendant in various class actions on
behalf of purchasers of recommended mutual funds.
For additional discussions of mutual fund matters, refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 2006, and Part II, Item 1 "Legal Proceedings" in this Form
10-Q.
There are regulatory proposals being considered that could significantly
impact the disclosure and potentially the amount of compensation that
broker-dealers derive from mutual funds and annuity products. The Partnership
believes it is likely in the future that broker-dealers will be required to
provide more disclosure to their clients with respect to payments received by
them from the sales of these products. It is also possible that such payments
may be restricted by law or regulation. For additional discussion, refer to
"Item 1A-Risk Factors, Regulatory Initiatives" included in the Partnership's
Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
The Partnership derived 67% of its total revenue from sales and services
related to mutual fund and annuity products in the first six months of 2007
and 66% in the first six months of 2006. The Partnership derived 28% of its
total revenue for the first six months of 2007 and 30% of its total revenue
for the first six months of 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 at June 29, 2007,
excluding the reserve for anticipated withdrawals, was $1.3 billion, compared
to $907.4 million at December 31, 2006. The increase is primarily due to the
retention of General Partner earnings ($56.4 million) and the issuance of
limited partners, general partners and subordinated limited partner interests
($293.6 million, $8.0 million and $21.2 million, respectively), offset by
redemption of general partner, subordinated limited partner and limited
partner interests ($102.2 million, $19.8 million and $5.4 million,
respectively).
At June 29, 2007, the Partnership had $312.3 million in cash and cash
equivalents. In addition, the Partnership had $818.0 million in securities
purchased under agreements to resell, which have maturities of less than one
week. Also, the Partnership had $1.275 billion in cash segregated under
federal regulations, which was not available for general use. Lines of credit
are in place aggregating $1.24 billion ($1.14 billion of which is through
uncommitted lines of credit where actual borrowing availability
19
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
is based on securities owned and customers' margin securities which serve as
collateral for the loans). No amounts were outstanding under these lines at
June 29, 2007 and June 30, 2006.
The Partnership believes that the liquidity provided by existing cash
balances, other highly liquid assets and borrowing arrangements will be
sufficient to meet the Partnership's capital and liquidity requirements.
Depending on conditions in the capital markets and other factors, the
Partnership will, from time to time, consider the issuance of debt, the
proceeds of which could be used to meet growth needs or for other purposes.
The Partnership's growth has been financed through sales of limited
partnership interests to its employees and existing limited partners,
subordinated limited partnership interests to its current or retiring general
partners, retention of general partner earnings, private placements of
subordinated debt, long-term secured debt and operating leases under which the
Partnership rents facilities, furniture, fixtures, computers and communication
equipment.
The Partnership has executed a construction agreement for the construction of
a 200,000 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 October 2008. The Partnership estimates that the
total cost for construction of the office building and the garage will be
approximately $68.0 million. As of June 29, 2007, the Partnership has executed
$31.0 million in subcontract commitments related to the construction
agreement. The Partnership plans to finance approximately 75% of the office
and garage facility 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.
For the six months ended June 29, 2007, cash and cash equivalents were
unchanged at $312.3 million. Cash used in operating activities was $46.6
million. The primary uses of cash from operating activities include an
increase in securities purchased under agreements to resell and decreases in
accrued compensation and employee benefits and accounts payable and accrued
expenses. These decreases to cash and cash equivalents were partially offset
by a decrease in net receivables from customers and income before allocations
to partners adjusted for depreciation. Cash used in investing activities was
$50.8 million consisting of capital expenditures supporting the growth of the
Partnership's operations. Cash provided by financing activities was $97.7
million, consisting primarily of issuance of partnership interests ($322.8
million), offset by partnership withdrawals and distributions ($219.0 million)
and redemption of partnership interests ($4.4 million). Included in the
issuance of partnership interests were $294 million of limited partner
interests that were issued to employees of the Partnership on January 2, 2007.
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 rules also provide that partnership capital may not be withdrawn
if resulting Net Capital would be less than 5% of aggregate debit items.
Additionally, certain withdrawals require the consent of the SEC to the extent
they exceed defined levels, even though such withdrawals would not cause Net
Capital to be less than 5% of aggregate debit items. At June 29, 2007, Edward
Jones's Net Capital of $602.5 million was 32.5% of aggregate debit items and
its Net Capital in excess of the minimum required was $565.4 million. Net
Capital after anticipated withdrawals, which are scheduled subordinated debt
principal payments through December 31, 2007, as a percentage of aggregate
debit items was 31.3%. Net capital and the related capital percentage may
fluctuate on a daily basis.
20
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
CRITICAL ACCOUNTING POLICIES
The Partnership's financial statements are prepared in accordance with GAAP,
which require judgment and involve estimation processes to determine its
assets, liabilities, revenues and expenses which may affect its results of
operations.
The Partnership believes that of its significant accounting policies, the
following critical policies may involve a higher degree of judgment and
complexity.
Customers' transactions are recorded on a settlement date basis with the
related revenue and expenses recorded on a trade date basis. The Partnership
may be exposed to risk of loss in the event customers, other brokers and
dealers, banks, depositories or clearing organizations are unable to fulfill
contractual obligations. For transactions in which it extends credit to
customers, the Partnership seeks to control the risks associated with these
activities by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines.
Securities owned and sold, not yet purchased, including inventory securities
and investment securities, are valued at market value which is determined by
using quoted market or dealer prices.
The Partnership provides for potential losses that may arise out of
litigation, regulatory proceedings and other contingencies to the extent that
such losses are probable and can be estimated, in accordance with SFAS No. 5,
"Accounting for Contingencies". The Partnership regularly monitors its
exposures for potential losses. The Partnership's total liability with respect
to litigation represents the best estimate of probable losses after
considering, among other factors, the progress of each case, the Partnership's
experience and discussions with legal counsel.
The Partnership's periodic evaluation of the estimated useful lives of
equipment, property and improvements is based on the original life determined
at the time of purchase and any events or changes in circumstances that would
result in a change in the useful life.
For additional discussions of the Partnership's accounting policies, refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies" included in the Partnership's
Annual Report on Form 10-K for the Fiscal year ended December 31, 2006.
THE EFFECTS OF INFLATION
The Partnership's net assets are primarily monetary, consisting of cash,
securities inventories and receivables less liabilities. Monetary net assets
are primarily liquid in nature and would not be significantly affected by
inflation. Inflation and future expectations of inflation influence securities
prices, as well as activity levels in the securities markets. As a result,
profitability and capital may be impacted by inflation and inflationary
expectations. Additionally, inflation's impact on the Partnership's operating
expenses may affect profitability to the extent that additional costs are not
recoverable through increased prices of services offered by the Partnership.
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q and, in particular, Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
forward-looking statements within the meaning of the federal securities laws.
You can identify forward-looking statements by the use of the words "believe,"
"expect," "anticipate," "intend," "estimate," "project," "will," "should," and
other expressions which predict or indicate future events and trends and which
do not relate to historical matters. You should not rely on forward-looking
statements because they involve known and unknown risks, uncertainties and
other factors, some of which are beyond the control of the Partnership. These
risks, uncertainties and
21
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
other factors may cause the actual results, performance or achievements of the
Partnership to be materially different from the anticipated future results,
performance or achievements expressed or implied by the forward-looking
statements.
Some of the factors that might cause differences include, but are not limited
to, the following: (1) regulatory actions; (2) litigation, including that
involving mutual fund matters; (3) changes in legislation; (4) actions of
competitors; (5) changes in technology; (6) a fluctuation or decline in the
market value of securities; (7) rising interest rates; (8) securities theft;
(9) the ability of customers, other broker-dealers, banks, depositories and
clearing organizations to fulfill contractual obligations; and (10) general
economic conditions. These forward-looking statements were based on
information, plans and estimates at the date of this report, and we do not
undertake to update any forward-looking statements to reflect changes in
underlying assumptions or factors, new information, future events or other
changes.
22
PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The SEC issued market risk disclosure requirements to enhance disclosures of
accounting policies for derivatives and other financial instruments and to
provide quantitative and qualitative disclosures about market risk inherent in
derivatives and other financial instruments. Various levels of management
within the Partnership manage the Partnership's risk exposure. Position limits
in trading and inventory accounts are established and monitored on an ongoing
basis. Credit risk related to various financing activities is reduced by the
industry practice of obtaining and maintaining collateral. The Partnership
monitors its exposure to counterparty risk through the use of credit exposure
information, the monitoring of collateral values and the establishment of
credit limits.
The Partnership is exposed to market risk from changes in interest rates. Such
changes in interest rates impact the income from interest earning assets,
primarily receivables from customers on margin balances, and may have an
impact on the expense from liabilities that finance these assets. At June 29,
2007, amounts receivable from customers were $1.964 billion. Liabilities
include amounts payable to customers and other interest and non-interest
bearing liabilities.
Under current market conditions and based on current levels of interest
earning assets and the liabilities that finance these assets, the Partnership
estimates that a 100 basis point increase in short-term interest rates could
increase its annual net interest income by approximately $19.8 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 $32.5 million. A decrease in short-term interest rates has a
more significant impact on net interest income because under the current low
interest rate environment, the Partnership's interest bearing liabilities are
less sensitive to changes in short-term interest rates compared to its
interest earning assets.
There were no material changes in the Partnership's exposure to market risk
and changes in interest rates during the six months ended June 29, 2007 that
would have a material adverse effect on the consolidated financial position or
results of operations of the Partnership.
ITEM 4. CONTROLS AND PROCEDURES
Based upon an evaluation performed as of the end of the period covered by this
report, the Partnership's certifying officers, the Chief Executive Officer and
the Chief Financial Officer, have concluded that the Partnership's disclosure
controls and procedures were effective.
There have been no changes in the Partnership's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Partnership's internal control over financial reporting.
23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following information supplements the discussion in Part I, Item 3 "Legal
Proceedings" in the Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 2006, and Part II, Item 1 "Legal Proceedings" in the
Partnership's Quarterly Report on Form 10-Q for the fiscal quarter ended March
30, 2007:
On April 17, 2007, the Market Regulation Department staff of NASD advised
Edward Jones that it had made a preliminary determination to recommend that
disciplinary action be brought against Edward Jones in connection with certain
municipal and corporate bond transactions occurring during the period January
1, 2004 through June 30, 2004. The NASD staff alleged that in 37 municipal
bond transactions and 9 corporate bond transactions, Edward Jones violated
NASD and MSRB rules by failing to sell the bonds to customers at a price that
was fair, taking into consideration all relevant circumstances, including
market conditions with respect to each bond at the time of the transaction,
the expense involved and that Edward Jones was entitled to a profit. The NASD
staff also alleged that in one transaction with a customer, Edward Jones
failed to use reasonable diligence to ascertain the best inter-dealer market
and failed to buy or sell in such market so that the resultant price to its
customer was as favorable as possible under prevailing market conditions. As a
result the NASD staff alleges violations of NASD Rules 2110 ("Standards of
Commercial Honor and Principles of Trade"), 2320 ("Best Execution and
Interpositioning"), 2440 ("Fair Prices and Commissions"), and IM-2440
("Mark-Up Policy"), and MSRB Rules G-17 ("Disclosure of Material Facts") and
G-30 ("Prices and Commissions"). The NASD staff has given Edward Jones the
opportunity to furnish the staff with a written submission setting forth its
position on the matters raised, and Edward Jones has filed such a submission.
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. Each of the suits claimed that the Partnership
failed to adequately disclose its revenue sharing arrangements with certain
designated Preferred Mutual Fund Families. Hearings for final approval of the
settlement are scheduled for October 18, 2007. For a more detailed description
of the settlement, see Part I, Item 3 "Legal Proceedings" in the Partnership's
Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
On July 25, 2007, the Commonwealth of Virginia State Corporation Commission,
Division of Securities and Retail Franchising, advised Edward Jones that a
Rule of Show Cause may be issued against the Firm based upon its investigation
of the activities of a former Financial Advisor for the period January 1, 1998
through July 9, 2001. On April 4, 2007, Virginia alleged that the Firm
conducted activity constituting a violation of the Virginia Securities Act
including unlawful offers and sales, failure to supervise and failure to
maintain adequate books and records. Virginia provided Edward Jones with the
opportunity to furnish a written submission setting forth its position on the
matters raised, and Edward Jones has filed such a submission. The parties are
currently engaged in substantive discussions.
See also "Contingencies" in Part I, Item 1, "Financial Statements" and "Mutual
Fund Matters" in Part I, Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this Form 10-Q.
24
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed on Form
10-K for the fiscal year ended December 31, 2006.
ITEM 6. EXHIBITS
Exhibit
Number Page Description
3.1 * Sixteenth Amended and Restated Agreement of Registered
Limited Liability Limited Partnership of The Jones
Financial Companies, L.L.L.P., dated as of May 12, 2006,
incorporated herein by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2006.
3.2 27 Sixteenth Restated Certificate of Limited Partnership of
the Jones Financial Companies, L.L.L.P., dated as of July
11, 2007, as amended.
3.3 * Form of Limited Partnership Agreement of Edward D. Jones &
Co., L.P., incorporated by reference to Exhibit 2 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
31.1 28 Certification pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 302 of the Sarbanes-Oxley act
of 2002.
31.2 29 Certification pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 302 of the Sarbanes-Oxley act
of 2002.
32.1 30 Certification pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley act
of 2002.
32.2 31 Certification pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley act
of 2002.
<FN>
* Incorporated by reference to previously filed exhibits.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
THE JONES FINANCIAL COMPANIES, L.L.L.P.
-------------------------------------------
(Registrant)
Date: August 8, 2007 /s/ James D. Weddle
-------------------------------------------
James D. Weddle, Chief Executive Officer
Date: August 8, 2007 /s/ Steven Novik
-------------------------------------------
Steven Novik, Chief Financial Officer
26
Dates Referenced Herein and Documents Incorporated by Reference
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