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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004 Commission file number 0-16633
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THE JONES FINANCIAL COMPANIES, L.L.L.P.
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(Exact name of registrant as specified in its Partnership Agreement)
MISSOURI 43-1450818
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12555 Manchester Road
Des Peres, Missouri 63131
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (314) 515-2000
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Securities registered pursuant to Section 12(b) of the act:
Name of each exchange
Title of each class on which registered
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NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
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(Title of Class)
Indicate by check mark 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 an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
As of March 24, 2005 there were no voting securities held by non-affiliates
of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE None
PART I
ITEM 1. BUSINESS
The Jones Financial Companies, L.L.L.P. is organized under the Revised
Uniform Limited Partnership Act of the State of Missouri. Unless expressly
stated otherwise or the context otherwise requires, the terms "Registrant"
and "Partnership" refer to The Jones Financial Companies, L.L.L.P. and any
or all of its consolidated subsidiaries. The Partnership is the successor to
Whitaker & Co., which was established in 1871 and dissolved on October 1,
1943, the organization date of Edward D. Jones & Co., L.P. ("EDJ"), the
Partnership's principal subsidiary. EDJ was reorganized on August 28, 1987,
which date represents the organization date of The Jones Financial
Companies, L.L.L.P.
The Partnership's principal operating subsidiary, EDJ, is a registered
broker-dealer primarily serving individual investors. EDJ derives its
revenues from the sale of listed and unlisted securities and insurance
products, investment banking, principal transactions and as a distributor of
mutual fund shares. EDJ conducts business throughout the United States of
America, Canada and the United Kingdom with its customers, various brokers
and dealers, clearing organizations, depositories and banks.
The Partnership is a member firm of the New York, Chicago and London stock
exchanges, a participating organization in the Toronto stock exchange and is
a registered broker-dealer with the National Association of Securities
Dealers, Inc. ("NASD").
As of February 25, 2005, the Partnership was composed of 265 general
partners, 4,812 limited partners and 153 subordinated limited partners.
ORGANIZATIONAL STRUCTURE
At December 31, 2004, the Partnership was organized as follows: The
Partnership owns 100% of the outstanding common stock of EDJ Holding
Company, Inc., and 100% of the outstanding common stock of LHC, Inc.
("LHC"), each of which is a Missouri corporation. The Partnership also holds
all of the partnership equity of Edward D. Jones & Co., L.P., and EDJ
Leasing Co., L.P., each of which is a Missouri limited partnership. EDJ
Holding Company, Inc. and LHC, Inc. are the general partners of Edward D.
Jones & Co., L.P. and EDJ Leasing Co., L.P., respectively. In addition, the
Partnership owns 100% of the outstanding common stock of Conestoga
Securities, Inc., a Missouri corporation, and also owns, as a limited
partner, 49.5% of Passport Research Ltd., a Pennsylvania limited
partnership, which acts as an investment advisor to a money market mutual
fund and as a limited partner, 49.5% of Passport Research II Ltd., a
Pennsylvania limited partnership, which acts as an investment advisor to a
mutual fund. The Partnership owns 100% of the partnership equity of Edward
Jones, an Ontario, Canada limited partnership, and all of the common stock
of Edward D. Jones & Co. Canada Holding Co., Inc., an Ontario, Canada
corporation, its general partner. Through its Canadian entities, the
Partnership owns all of the partnership equity of Edward Jones Insurance
Agency, an Ontario, Canada limited partnership, all of the common stock of
Edward D. Jones & Co. Agency Holding Co., Inc., an Ontario, Canada
corporation, its general partner, and 100% of the common stock of Edward
Jones Insurance Agency (Quebec) Inc., a Canada corporation. The Partnership
also owns 100% of the equity of Edward Jones Limited, a U.K. private limited
company, which owns 100% of the equity of Edward Jones Nominees Limited. The
Partnership owns 100% of the equity of Boone National Savings and Loan
Association, F.A., (the "Association"), a federally chartered stock savings
and loan association. The Partnership also owns 100% of the equity of EJ
Mortgage L.L.C., a Missouri limited liability company. EJ Mortgage L.L.C.
owns 50% of Edward Jones Mortgage, a joint venture. The Partnership holds
all of the partnership equity in a Missouri limited partnership, EDJ
Ventures, Ltd. Conestoga Securities, Inc., is the general partner of EDJ
Ventures, Ltd.
2
PART I
Item 1. Business, continued
The Partnership is the sole member of Edward Jones Insurance Agency Holding,
L.L.C., a Missouri limited liability company; California Agency Holding,
L.L.C., a California limited liability company and Edward Jones Insurance
Agency of New Mexico, L.L.C., a New Mexico limited liability company. Edward
Jones Insurance Agency Holding, L.L.C. is the sole member of Edward Jones
Insurance Agency of Wyoming, L.L.C., a Wyoming limited liability company.
The Partnership and Edward Jones Insurance Agency Holding, L.L.C. are
members of Edward Jones Insurance Agency of Massachusetts, L.L.C., a
Massachusetts limited liability company. Edward Jones Insurance Agency
Holding, L.L.C. and California Agency Holding, L.L.C. are members of Edward
Jones Insurance Agency of California, L.L.C., a California limited liability
company. All of the insurance agencies engage in general insurance brokerage
activities.
The Partnership holds all of the partnership equity of Unison Investment
Trusts, L.P., d/b/a Unison Investment Trusts, Ltd., a Missouri limited
partnership, which has sponsored unit investment trusts. The general partner
of Unison Investment Trusts, L.P., Unison Capital Corp., Inc., a Missouri
corporation, is wholly owned by LHC. EDJ owns 50% of issued common stock of
S-J Capital Corp., a Missouri corporation. Conestoga owns 100% of the
outstanding stock of CIP Management, Inc., which is the managing general
partner of CIP Management, L.P. CIP Management, L.P. is the managing general
partner of Community Investment Partners II, L.P., Community Investment
Partners III, L.P., L.L.L.P., Community Investment Partners IV, L.P.,
L.L.L.P. and Community Investment Partners V, L.P., L.L.L.P., business
development companies. EDJ owns 7% of the Customer Account Protection
Company Holdings, Inc. ("CAPCO"), a captive insurance group.
During 2002, the Partnership's affiliates, Edward Jones Insurance Agency of
Nevada, Inc., Edward Jones Insurance Agency of Alabama, L.L.C., EJ Insurance
Agency of Ohio and EDJ Insurance Agency of Texas, Inc., were dissolved. The
Partnership's affiliates, Edward Jones Nominees PEP Limited and Edward Jones
Nominees ISA Limited, both 100% owned by Edward Jones Limited, a U.K.
private limited company, were also dissolved in 2002. During 2003, the
Partnership's affiliate, Edward Jones Insurance Agency of Montana, L.L.C.,
was dissolved. During 2004, the Partnership's affiliates, Edward Jones
Insurance Agency of Michigan, L.L.C. and Cornerstone Mortgage Investment
Group II, Inc., were dissolved.
Within the past five years, the Registrant has added several new legal
entities. During 2000, Edward Jones Nominees Limited, Edward Jones Nominees
PEP Limited and Edward Jones Nominee ISA Limited, all three of which are
U.K. private limited companies, were organized. During 2002, 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. During 2004, Passport Research II Ltd.,
a Pennsylvania limited partnership, was organized.
3
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):
2004 2003 2002
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Commissions
Mutual funds $ 986,598 $ 841,516 $ 614,609
Listed 249,410 214,431 214,247
Insurance 202,069 163,242 154,681
Over-the-counter 65,961 50,416 51,182
Asset fees 581,810 464,465 429,744
Account and activity fees 304,591 254,290 217,338
Principal transactions 304,124 350,662 403,329
Interest and dividends 153,076 132,114 137,579
Investment banking 27,934 43,817 41,055
Gain on investments - - 8,186
Other revenue 15,792 23,909 8,132
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Total revenue $2,891,365 $2,538,862 $2,280,082
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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 as collateral for the borrowings securities owned by margin
customers having an aggregate market value generally up to 140% of the debit
balance in margin accounts. 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.
COMMISSIONS
Commissions revenue primarily comprises charges to customers for the sale of
securities, mutual fund shares and insurance products. The following briefly
describes the Partnership's sources of commissions revenue.
4
PART I
Item 1. Business, continued
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 BROKERAGE 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 brokerage commissions between periods is
largely a function of market conditions.
INSURANCE. The Partnership has executed agency agreements with various
national insurance companies. EDJ is able to offer life insurance, long-term
care insurance, fixed and variable annuities and other types of insurance to
its customers through its investment representatives who hold insurance
sales licenses. As an agent for the insurance company, the Partnership
receives commission on the purchase price of the policy.
OVER-THE-COUNTER TRANSACTIONS. Partnership activities in unlisted
(over-the-counter) 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 vendors.
The revenue sharing agreements involving the Partnership vary, with the
investment advisers or distributors of some products providing a percentage
of average assets held by the Partnership's customers. Other vendors provide
a payment to the Partnership of the underlying management fees based on the
underlying assets of the Partnership's customers. In addition, the
Partnership may receive profit sharing participation or the revenue sharing
agreement may pay the Partnership a flat dollar amount. (See Item 3 - Legal
Proceedings for the current status of revenue sharing as it relates to the
Partnership).
The Partnership does not manage any mutual fund, although it is a limited
partner of Passport Research, Ltd., an advisor to a money market mutual fund
and a limited partner of Passport Research II, Ltd., an advisor to a mutual
fund. The Partnership does not have management responsibility for these
advisors. 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. Revenues from this source, although not significant, have grown
in recent years.
5
PART I
Item 1. Business, continued
The Partnership offers trust services to its customers through the Edward
Jones Trust Company ("EJTC"), a division of the Association. The Association
is an investment advisor under the Investment Advisors Act of 1940. It
offers investment advisory services through EJTC.
ACCOUNT AND ACTIVITY FEES
Revenue sources include, sub-transfer agent accounting services, IRA
custodial services fees, and other product fees.
The Partnership charges fees to certain mutual funds for sub-transfer agent
accounting services. Such fees are received for maintaining customer account
information and providing other administrative services for the mutual
funds. EDJ is also the custodian for its IRA accounts and charges customers
an annual fee for its services. Account and activity fees also include sales
based revenue sharing fees pursuant to arrangements with certain mutual fund
and insurance vendors. These arrangements vary and are based on either a
percentage of the underwriter's concession retained by the fund distribution
company or a specified number of basis points on the Partnership's current
year fund sales (See Item 3 - Legal Proceedings for the current status of
revenue sharing as it relates to the Partnership). The Partnership receives
revenue from offering mortgage loans to its customers through a joint
venture and a co-branded credit card with a major credit card company. In
addition, the Partnership earns transaction 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 wherein 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 brokerage transactions, revenue from
over-the-counter and principal transactions is highly influenced by the
volume of business and securities prices, as well as by the increasing
number of investment representatives employed by the Partnership over the
periods indicated.
INTEREST AND DIVIDENDS
Interest and dividend income is earned primarily on margin account balances,
inventory securities and investment securities. Interest is also earned by
the Association on its loan portfolio. The Partnership is exposed to market
risk for changes in interest rates. The Partnership's interest income is
impacted by the level of interest rates it charges its customers and the
level of customers' loan balances.
INVESTMENT BANKING
The Partnership's investment banking activities are performed by its
Syndicate and Underwriting 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.
6
PART I
Item 1. Business, continued
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 Underwriting 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 Securities and Exchange Commission's uniform Net
Capital rule.
The Securities Act of 1933 and other applicable laws and regulations impose
substantial potential liabilities on underwriters for material misstatements
or omissions in the prospectus used to describe the offered securities. In
addition, there exists a potential for possible conflict of interest between
an underwriter's desire to sell its securities and its obligation to its
customers not to recommend unsuitable securities. In recent years, there has
been an increasing incidence of litigation in these areas. These lawsuits
are frequently brought for the benefit of large classes of purchasers of
underwritten securities. Such lawsuits often name underwriters as defendants
and typically seek substantial amounts in damages.
BUSINESS OPERATIONS
RESEARCH DEPARTMENT. The Partnership maintains a Research Department to
provide specific investment recommendations and market information for
retail customers. The Department supplements its own research with the
services of various independent research services.
CUSTOMER ACCOUNT ADMINISTRATION AND OPERATIONS. Operations associates are
responsible for activities relating to customer securities and the
processing of transactions with other broker-dealers, exchanges and clearing
organizations. These activities include receipt, identification, and
delivery of funds and securities, internal financial controls, accounting
and personnel functions, office services, storage of customer securities and
the handling of margin accounts. The Partnership processes substantially all
of its own transactions for its United States and United Kingdom entities.
In Canada, the Partnership has entered into an introducing/carrying broker
arrangement with National Bank Correspondent Network ("NBCN"), as part of
the National Bank of Canada group of Companies.
It is important that the Partnership maintain current and accurate books and
records from both a profit viewpoint as well as for regulatory compliance.
To expedite the processing of orders, the Partnership's branch office system
is linked to the St. Louis headquarters office through an extensive
communications network. Orders for securities are generally captured at the
branch electronically, routed to St. Louis and 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.
7
PART I
Item 1. Business, continued
There is considerable fluctuation during any one year and from year to year
in the volume of transactions the Partnership processes. The Partnership
records transactions and posts its books on a daily basis. The Partnership
has a computerized branch office communication system which is principally
utilized for entry of security orders, quotations, messages between offices,
research of various customer account information, and cash and security
receipts functions. Operations personnel monitor day-to-day operations to
determine compliance with applicable laws, rules and regulations. Failure to
keep current and accurate books and records can render the Partnership
liable to disciplinary action by governmental and self-regulatory
organizations.
The Partnership clears and settles virtually all of its listed and
over-the-counter equities, municipal bond, corporate bond, mutual fund and
annuity transactions for its U.S. broker-dealer through the National
Securities Clearing Corporation ("NSCC"), and Depository Trust Company
("DTC") both located in New York, New York.
In conjunction with clearing and settling transactions with NSCC, the
Partnership holds customer securities on deposit with the Depository Trust
Company 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 CREST. CREST effects clearing of
securities on the London Stock Exchange. In conjunction with clearing and
settling transactions with CREST, the Partnership's United Kingdom operation
holds customer securities on deposit with CREST in lieu of maintaining
physical custody of the certificates. The Partnership's United Kingdom
operation also uses DTC for custody of United States securities, a major
independent brokerage firm for custody of non-United Kingdom and non-United
States securities, and individual unit trust vendors for custody of unit
trust holdings.
As the carrying broker in Canada, NBCN handles the routing and settlement of
customer transactions. Transactions are settled through the Canadian
Depository for Securities ("CDS"), of which NBCN is a member. CDS effects
clearing of securities on the Toronto, Montreal and TSX Venture stock
exchanges. Customer securities on deposit are also held with CDS.
The Partnership is substantially dependent upon the operational capacity and
ability of NSCC/DTC/CREST/NBCN/CDS. Any serious delays in the processing of
securities transactions encountered by NSCC/DTC/CREST/NBCN/CDS may result in
delays of delivery of cash or securities to the Partnership's customers.
These services are performed for the Partnership under contracts which may
be changed or terminated at will by either party.
Automated Data Processing, Inc., ("ADP"), ADP Wilco Ltd. (a subsidiary of
ADP) and NBCN provide automated data processing services for customer
account activity and related records for the United States, United Kingdom
and Canada, respectively.
The Partnership does not employ its own floor broker for transactions on
exchanges. The Partnership has arrangements with other brokers to execute
the Partnership's transactions in return for a commission based on the size
and type of trade. If, for any reason, any of the Partnership's clearing,
settling or executing agents were to fail, the Partnership and its customers
would be subject to possible loss. To the extent that the Partnership would
not be able to meet the obligations of the customers, such customers might
experience delays in obtaining the protections afforded them.
8
PART I
Item 1. Business, continued
Customers are protected from 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 insurance coverage
maintained by the Partnership in The United States and the United Kingdom.
Excess SIPC coverage in the United States is provided by CAPCO, of which the
Partnership is a 7% owner. SIPC provides protection for customer accounts
for up to $500,000, including up to $100,000 for cash claims. FSCS covers
100% of the first (pound)30,000 and 90% for the next (pound)20,000, for a
maximum protection of (pound)48,000 for all investment business. CIPF limits
coverage to $1,000,000 total, which can be any combination of securities and
cash. The coverage provided by SIPC, ICS and CIPF, and protection in excess
limits thereof, would be available to customers of the Partnership in the
event of insolvency.
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 265 general partners, the Partnership has
approximately 31,400 full and part-time employees. This includes 9,497
registered salespeople as of February 25, 2005. The Partnership's
salespersons are generally compensated on a commission basis and may, in
addition, be entitled to bonus compensation based on their respective branch
office profitability and the profitability of the Partnership. The
Partnership has in the past paid bonuses to its non-registered employees on
an informal basis, but there can be no assurance that such bonuses will be
paid for any given period or will be within any specific range of amounts.
Employees of the Partnership are bonded under a blanket policy as required
by NYSE rules. The annual aggregate amount of coverage is $50,000,000
subject to a $2,000,000 deductible provision, per occurrence.
The Partnership maintains an initial training program for prospective
salespeople that spans four months that includes concentrated instruction
and on-the-job training in a branch office. During the first phase, the
trainee spends 60 days studying Series 7 examination materials and taking
the examination. After passing the examination, trainees spend one week in a
comprehensive training program in a central location followed by three weeks
at a designated location to conduct market research and prepare for opening
the office. The trainee then spends three weeks of on-the-job training in a
branch location reviewing investments, office procedures and sales
techniques. Next, the trainee returns to his or her designated location for
one week to continue building a prospect base. One final week is then spent
in a central location to complete the initial training program. Four months
later, the investment representative attends an additional training class in
a central location and subsequently, EDJ offers periodic continuing training
to its experienced sales force. EDJ's basic brokerage payout is similar to
its competitors.
The Partnership considers its employee relations to be good and believes
that its compensation and employee benefits which include medical, life and
disability insurance plans and profit sharing and deferred compensation
retirement plans, are competitive with those offered by other firms
principally engaged in the securities business.
BRANCH OFFICE NETWORK. The Partnership operates 9,105 branch offices as of
February 25, 2005, primarily staffed by a single investment representative
and a branch office assistant. The Partnership operates 8,494 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 523 offices as of February 25, 2005 and the
United Kingdom (through 88 offices as of February 25, 2005).
9
PART I
Item 1. Business, continued
COMPETITION. The Partnership is subject to intensive competition in all
phases of its business from other securities firms, many of which are
substantially larger than the Partnership in terms of capital, brokerage
volume and underwriting activities. In addition, the Partnership encounters
competition from other organizations such as banks, insurance companies, and
others offering financial services and advice. The Partnership also competes
with a number of firms offering discount brokerage services, usually with
lower levels of service to individual customers. With minor exceptions,
customers are free to transfer their business to competing organizations at
any time. There is intense competition among firms for salespeople with good
sales production records. In recent periods, the Partnership has experienced
increasing efforts by competing firms to hire away its registered
representatives, although the Partnership believes that its rate of turnover
of investment representatives is not higher than that of other firms
comparable to the Partnership.
REGULATION. The securities industry in the United States is subject to
extensive regulation under both federal and state laws. The SEC is the
federal agency responsible for the administration of the federal securities
laws. The Partnership's principal subsidiary is registered as a
broker-dealer and investment advisor with the SEC. Much of the regulation of
broker-dealers has been delegated to self-regulatory organizations,
principally the NASD, and national securities exchanges such as the NYSE,
which has been designated by the SEC as the Partnership's primary regulator.
These self-regulatory organizations adopt rules (which are subject to
approval by the SEC) that govern the industry and conduct periodic
examinations of the Partnership's operations. Securities firms are also
subject to regulation by state securities administrators in those states in
which they conduct business. EDJ or an affiliate is registered as a
broker-dealer in all 50 states, Puerto Rico, Canada and the United Kingdom.
EDJ conducts business in Canada through a subsidiary partnership which is
regulated by the Investment Dealers Association of Canada and in the United
Kingdom through a subsidiary which is regulated by The Financial Services
Authority. As a federally chartered savings and loan, the Association is
subject to regulation by the Office of Thrift Supervision ("OTS").
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customer funds and securities,
customer payment and margin requirements, capital structure of securities
firms, record-keeping and the conduct of directors, officers and employees.
Additional legislation, changes in rules promulgated by the SEC and
self-regulatory organizations, and/or changes in the interpretation or
enforcement of existing laws and rules, may directly affect the operations
and profitability of broker-dealers. The SEC, self-regulatory organizations
and state securities commissions may conduct administrative proceedings
which can result in censure, fine, suspension or expulsion of a
broker-dealer, its officers or employees. The principal purpose of
regulation and discipline of broker-dealers is the protection of customers
and the securities markets, rather than protection of the creditors and
stockholders of broker-dealers. Recently, the Partnership has been the
subject of significant regulatory actions by various agencies that have the
authority to regulate its activities (See Item 3 - Legal Proceedings for
more information).
UNIFORM NET CAPITAL RULE. As a broker-dealer and a member firm of the NYSE,
the Partnership is subject to the uniform Net Capital rule ("Rule")
promulgated by the SEC. The Rule is designed to measure the general
financial integrity and liquidity of a broker-dealer and the minimum Net
Capital deemed necessary to meet the broker-dealer's continuing commitments
to its customers. The Rule provides for two methods of computing Net Capital
and the Partnership has adopted what is generally referred to as the
alternative method. Minimum required Net Capital under the alternative
method is equal to 2% of the aggregate debit items, as defined. The Rule
prohibits withdrawal of equity capital whether by payment of dividends,
repurchase of stock or other means, if Net Capital would thereafter be less
than 5% of aggregate debit items. Additionally, certain withdrawals require
the consent of the SEC to the extent they exceed defined levels even though
such withdrawals would not cause Net Capital to be less than 5% of aggregate
debit items. In computing Net Capital, various adjustments are made to
exclude assets which are not readily convertible into cash and to provide a
conservative statement 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 uniform Net Capital rule.
10
PART I
Item 1. Business, continued
The firm has other operating subsidiaries, including the Association and
broker-dealer subsidiaries in Canada and the United Kingdom. These wholly
owned subsidiaries are required to maintain specified levels of liquidity
and capital standards. Each subsidiary is in compliance with the applicable
capital requirements in the jurisdictions in which they operate as of
December 31, 2004 and 2003.
ITEM 2. PROPERTIES
The Partnership conducts its United States headquarters operations from
three locations in St. Louis County, Missouri and one location in Tempe,
Arizona, comprising a total of 25 separate buildings. Twenty-two buildings
are owned by the Partnership and three buildings are leased through
long-term operating leases. In addition, the Partnership leases its Canadian
home office facility in Mississauga, Ontario through an operating lease and
has an operating lease for its United Kingdom home office located in London,
England. The Partnership also maintains facilities in 9,105 branch locations
(as of February 25, 2005) which are located in the United States, Canada
and the United Kingdom and are rented under predominantly cancelable leases.
The Partnership believes that its properties are both suitable and adequate
to meet the current and future growth projections of the organization.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Partnership is named, from time to
time, as a defendant in various legal actions, including arbitrations, class
actions and other litigation. Certain of these legal actions include claims
for substantial compensatory and/or punitive damages or claims for
indeterminate amounts of damages. The Partnership is involved, from time to
time, in investigations and proceedings by governmental and self-regulatory
agencies, certain of which may result in adverse judgments, fines or
penalties. Recently, 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.
MUTUAL FUND MATTERS. In December 2004, the Partnership entered into certain
agreements and orders with the SEC, NASD, NYSE and the U.S. Attorney for the
Eastern District of Missouri ("USAO") to resolve threatened enforcement
actions in connection with the Partnership's disclosure practices regarding
the receipt of revenue sharing from preferred family mutual funds. The
agreements and orders require the Partnership to make a payment of $75
million into a FAIR FUND, pursuant to Section 308 of the Sarbanes-Oxley Act
of 2002, that will, in turn, be distributed to those Partnership customers
who purchased so-called Preferred Family mutual fund shares from January 1,
1999 through December 2004. The Partnership has designated seven mutual fund
companies as Preferred Family mutual funds. The Preferred Family mutual
funds constitute a significant portion of the Partnership's revenue derived
from mutual funds.
In addition, the Partnership is required to offer a free switch to customers
who held Preferred Family mutual fund shares as of December 2004 that would
allow, in general, the Partnership's customers to switch their holdings in a
Preferred Family mutual fund to any other buy-eligible mutual fund offered
by the Partnership without payment by the customer of the normal sales load.
Buy-eligible mutual funds are those the Partnership has authorized its
investment representatives to offer to customers. The Partnership is also
required to make ongoing additional disclosures to customers concerning
revenue sharing arrangements with Preferred Family mutual funds and to alter
various policies, practices, training and other internal procedures
including restructuring the Partnership's Investment Representatives' bonus
system, pursuant to the agreements and orders. Furthermore, the Partnership
was required and has engaged an Independent Consultant to review the
Partnership's policies and procedures and to report to the SEC, NASD, NYSE
and USAO the Partnership's compliance with the agreements and orders.
Additionally, in connection with the settlements, the Partnership's Managing
Partner has agreed to voluntarily retire as the Partnership's Managing
Partner effective December 31, 2005. The Partnership is in the process of
implementing the required undertakings, including evaluating a succession
plan for the Managing Partner. For the year ended December 31, 2004, related
settlement expenses were included in the consolidated statements of income
as Other Operating Expenses.
11
PART I
Item 3. Legal Proceedings, continued
In addition to the regulatory matters, the Partnership has been named as a
defendant in nine civil class action matters arising out of the
Partnership's revenue sharing arrangements and sales practices associated
with Preferred Family mutual funds. In general, each of these cases allege
that the Partnership designated, and recommended to its customers, seven
mutual fund families ("Preferred Families"), in consideration for the
receipt of sales and asset based revenue sharing payments. Plaintiffs allege
that the Partnership was obliged to fully disclose the nature and extent of
its revenue sharing arrangements to customers and that the Partnership
failed to make adequate disclosure. Although each case is somewhat
different, in general, the cases seek disgorgement of all revenue sharing
payments received by the Partnership from January 1, 1999 through December
2004, which amounts to approximately $375 million, plus other unspecified
damages, attorneys fees and injunctive relief. The nine civil class actions
have been consolidated into the following three groups of cases.
Spahn IRA, et al. v. Edward D. Jones & Co., L.P., et al. - This
- --------------------------------------------------------
case, and five other companion cases filed in January or February 2004, have
been consolidated under this case caption before the United States District
Court for the Eastern District of Missouri. The Amended and Consolidated
Complaint alleges that the Partnership violated Section Section 10(b),
12(2), and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder, by failing to adequately disclose its revenue sharing
arrangements to customers. Plaintiffs seek to represent a class of all
persons who purchased shares of the Preferred Family mutual funds from
January 25, 1999 through December 2004. The Partnership has filed a Motion
to Dismiss the Amended and Consolidated Complaint, which motion is in the
process of being briefed. No class has been certified in these cases.
Enriquez, et al. v. Edward D. Jones & Co., L.P., et al. - This case
- -------------------------------------------------------
was filed in the Circuit Court for the City of St. Louis, Missouri in
January 2004. Plaintiffs allege that the Partnership breached fiduciary
duties to its customers by receiving revenue sharing payments in exchange
for the mere holding of mutual fund shares under management without making a
disclosure to those customers. In addition, Plaintiffs allege that the
Partnership was unjustly enriched by the receipt of revenue sharing
associated with those customers mutual fund shares held under management.
Plaintiffs seek to represent a class of all Partnership customers who held
Preferred Family mutual fund shares during the period of January 1999
through December 2004. The Partnership filed a Motion to Dismiss the
Petition, which was denied in January 2005. The Partnership is seeking a
discretionary appellate review of the dismissal order. No class has been
certified in this case, although a request for class certification has been
filed.
Bressler, et al. v. Edward D. Jones & Co., L.P. - This and another
- -----------------------------------------------
case have been consolidated under this caption before the Superior Court for
Los Angeles, California. This case was filed in February 2004. Plaintiffs,
in their Amended and Consolidated Complaint, allege that the Partnership
violated Section 17200 of the California Business and Professions Code by
failing to disclose the receipt of revenue sharing associated with customers
holding of mutual fund shares under management at the partnership. In
addition, Plaintiffs allege that the Partnership breached fiduciary duties
by accepting account fees and revenue sharing incident to the holding of
mutual fund shares without adequate disclosures, as well as alleging unjust
enrichment. The Plaintiffs only seek to represent California resident
customers of the Partnership who held Preferred Family mutual fund shares
from January 1999 through 2004. It is estimated that California residents
account for approximately 5% to 5.5% of the Partnership's business. The
Partnership has filed a Motion to Dismiss the Amended and Consolidated
Complaint, which has yet to be heard by the Court. No class has yet been
certified.
12
PART I
Item 3. Legal Proceedings, continued
In addition to the foregoing civil class action litigation, the California
Attorney General has commenced a civil action against the Partnership on
essentially the same allegations present in the civil class actions. On
December 20, 2004, the California Attorney General filed: People of the
State of California vs. Edward D. Jones & Co., L.P. in the Superior Court
for Sacramento, California. The California Attorney General alleges that
Edward Jones violated Sections 25401 and 2516(a) of the California
Corporations Code by failing to adequately disclose to California resident
customers purchasing mutual fund shares, the Partnership's revenue sharing
arrangements. The Complaint seeks unspecified damages, attorney's fees,
injunctive relief and a civil monetary penalty of $25,000 for each alleged
violation of the Corporations Code. The Partnership removed the case to
federal court and filed a motion to dismiss. The California Attorney General
has filed a motion to have the case remanded back to state court. No hearing
has yet occurred on any of the pending motions.
On March 24, 2005, the staff of the Missouri Securities Division advised EDJ
that it was in the process of drafting a petition to the Commissioner of
Securities to request an order for the institution of civil proceedings
against EDJ and certain individuals. The petition will request that the
order seek sanctions for failure to supervise revenue sharing and balanced
portfolios. EDJ, the individuals and the staff will engage in discussions
regarding the proposed petition during which EDJ and the individuals will
vigorously oppose the staff's proposed recommendation.
On February 15, 2005, the staff of the Enforcement Division of the NASD
advised EDJ that it had preliminarily concluded that it would recommend an
enforcement action against EDJ. The NASD staff alleged that EDJ violated
NASD rules by recommending to its customers that they purchase B class
mutual fund shares when A class shares of the same funds generally would
have been more advantageous financially, depending on the anticipated
holding period, without having reasonable grounds to believe that the
recommendation was in the customers' best interests. The NASD staff also
alleged that EDJ's supervisory procedures with respect to the sale of B
class mutual fund shares were deficient. The NASD staff alleges violations
of NASD Rules 2110 ("Standards of Commercial Honor and Principles of
Trade"), 2310 ("Recommendations to Customers (Suitability)") and 3010
("Supervision"). The NASD staff has proposed a settlement that would involve
payment by EDJ of a fine of approximately $1.7 million, restitution to
customers in a manner and amount to be determined and the potential
retention of an independent consultant. The NASD staff has requested that
EDJ file a "Wells Submission" setting forth its responses and defenses to
the allegations and the requested relief. The Partnership intends to file a
Wells Submission with the NASD. EDJ believes it has meritorious defenses to
the allegations and intends to vigorously oppose the proposed
recommendation.
In view of the inherent difficulty of predicting the outcome of such
matters, particularly in cases in which claimants seek substantial or
indeterminate damages, or actions which are in very preliminary stages, the
Partnership cannot predict with certainty the eventual loss or range of loss
related to such matters. The Partnership believes, based on current
knowledge and after consultation with counsel, that the outcome of these
actions will not have a material adverse effect on the consolidated
financial condition of the Partnership, although the outcome could be
material to the Partnership's future operating results for a particular
period or periods.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
PART II
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:
2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Total revenue $ 2,891 $ 2,539 $ 2,280 $ 2,154 $ 2,228
Income before allocations
to partners/net income $ 217 $ 203 $ 149 $ 149 $ 230
Income before allocations
to partners/net income
per weighted average
$1,000 equivalent
limited partnership
unit outstanding $ 126.43 $ 108.08 $ 87.44 $ 96.89 $ 179.21
Weighted average
$1,000 equivalent
limited partnership
units outstanding 219,885 224,389 230,970 236,696 175,436
- ------------------------------------------------------------------------------------------------------------------
14
PART II
Item 6. Selected Financial Data, continued
Summary Consolidated Statements of Financial Condition Data:
2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------
Total assets $4,100 $3,723 $3,258 $3,158 $3,170
====== ====== ====== ====== ======
Bank Loans $ 34 $ 24 $ 14 $ 14 $ 218
Long-term debt 32 40 49 46 30
Other liabilities exclusive
of subordinated
liabilities and partnership
capital subject to
mandatory redemption 2,839 2,466 2,056 2,217 2,035
Subordinated liabilities 387 408 429 206 232
Total partnership capital
subject to mandatory
redemption /
partnership captital 808 785 710 675 655
------ ------ ------ ------ ------
Total liabilities and
partnership capital $4,100 $3,723 $3,258 $3,158 $3,170
------ ------ ------ ------ ------
15
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).
2004 vs. 2003 2003 vs. 2002
------------------------------ ------------------------------
Amount Percentage Amount Percentage
- -------------------------------------------------------------------------------------------------------------------
Revenue:
Commissions $234,433 18% $234,886 23%
Asset fees 117,345 25 34,721 8
Account and activity fees 50,301 20 36,952 17
Principal transactions (46,538) (13) (52,667) (13)
Interest and dividends 20,962 16 (5,465) (4)
Investment banking (15,883) (36) 2,762 7
Gain on investments - - (8,186) -
Other (8,117) (34) 15,777 194
-------- --------
Total revenue 352,503 14 258,780 11
Interest expense (2,400) (4) 2,304 4
-------- --------
Net revenue 354,903 14 256,476 12
-------- --------
Operating Expenses:
Compensation and benefits 220,044 15 169,116 13
Communications and data
processing 15,430 6 133 -
Occupancy and equipment 15,522 7 18,971 9
Payroll and other taxes 10,537 12 9,019 11
Postage and shipping 1,725 4 714 2
Advertising (1,363) (3) (2,533) (6)
Floor brokerage and
clearance fees (881) (6) (35) -
Other operating expenses 80,472 61 6,696 5
-------- --------
Total operating expenses 341,486 15 202,081 10
-------- --------
Income before allocations to
partners / net income $ 13,417 7% $ 54,395 37%
- -------------------------------------------------------------------------------------------------------------------
16
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations, continued
BASIS OF PRESENTATION
Due to the adoption of Statement of Financial Accounting Standards ("SFAS")
No. 150 on January 1, 2004, we are providing certain information in this
discussion of our results of operations, including a measure of income
before allocations to partners that may be considered financial measures not
in accordance with Generally Accepted Accounting Principles ("GAAP") in the
United States of America. We believe that these figures are helpful in
allowing the reader to more accurately assess the ongoing nature of our
operations and measure our performance more consistently. We use the
presented financial measures internally to understand and assess the
performance of our business. Therefore, we believe that this information is
meaningful in addition to the information contained in the GAAP presentation
of financial information. The presentation of this additional financial
information is not intended to be considered in isolation or as a substitute
for the financial information prepared and presented in accordance with
GAAP. See the New Accounting Standards note to the consolidated financial
statements for further discussion of these items.
For internal analysis, the Partnership broadly categorizes its revenues as
trade revenue (revenue from customer buy or sell transactions of securities)
and net fee revenue (sources other than trade revenue including asset fees,
account and activity fees and net interest income). In the Partnership's
Consolidated Statements of Income, trade revenue is composed of commissions,
principal transactions and investment banking. Net fee revenue is composed
of asset fees, account and activity fees, interest and dividends net of
interest expense and other revenues.
RESULTS OF OPERATIONS (2004 VERSUS 2003)
For 2004, net revenue increased 14% ($354.9 million) to $2.835 billion,
while income before allocations to partners increased 7% ($13.4 million) to
$216.7 million. The Partnership's profit margin based on income before
allocations to partners decreased to 7.5% in 2004, from 8.0% in 2003. Year
over year, the Partnership's net revenue and income before allocations to
partners increased due primarily to an increase in customer activity, growth
in customer asset values and higher account and activity fees. Operating
expenses increased in 2004 due primarily to growth in sales compensation
related to the increase in net revenues, costs associated with regulatory
settlements and costs associated with the continued expansion and
enhancement of its branch office network. The Partnership added 84 (1%)
Investment Representatives ("IRs") during the twelve months ended December
31, 2004, ending the year with 9,493 IRs.
Trade revenue of $1.836 billion, which comprised 65% of net revenue,
increased 10% ($172.0 million) in 2004 due primarily to an increase in
customer dollars invested (the principal amount of customers' buy and sell
transactions generating trade revenue), partially offset by a lower gross
margin earned on customer dollars invested compared to the prior year. Total
customer dollars invested in the U.S. were $67.3 billion during 2004, a 15%
($8.6 billion) increase from the $58.7 billion invested during 2003. The
Partnership's margin earned in the U.S. on each $1,000 invested decreased to
$26.10 in 2004 from $27.40 in 2003 due to overall margin compression in the
Partnership's product offerings.
Commissions revenue increased 18% ($234.4 million) during 2004 to $1.504
billion. Commissions revenue increased year over year due primarily to a 24%
($9.3 billion) increase in underlying customer dollars invested in the U.S.
in mutual funds, equities and insurance products to $47.8 billion in 2004
from $38.5 billion in 2003. Underlying the increase in commissions revenue,
mutual fund commissions increased 17% ($145.1 million), equity commissions
increased 19% ($50.7 million) and insurance commissions increased 24% ($38.9
million). The following table summarizes commissions revenue year over year:
17
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations, continued
(in millions) Years ended
-----------------------------------
December 31, December 31,
2004 2003
------------ ------------
Mutual funds $ 986.6 $ 841.5
Equities 315.0 264.3
Insurance 202.1 163.2
Corporate bonds 0.3 0.6
------------ ------------
$1,504.0 $1,269.6
============ ============
Principal transactions revenue decreased 13% ($46.6 million) to $304.1
million during 2004 due to a decrease in customer dollars invested in fixed
income products and a shift to lower margin shorter maturity products.
Customers in the U.S. invested $18.7 billion in principal transactions in
2004 compared to $19.1 billion in 2003, a decrease of 2%. The Partnership's
margin earned in the U.S. on each $1,000 invested decreased to $15.30 during
2004 from $17.40 during 2003. Revenue from municipal bonds decreased 27%
($40.2 million) and collateralized mortgage obligations decreased 34% ($12.6
million) while corporate bonds increased 8% ($7.0 million). The following
table summarizes principal transaction revenue year over year:
(in millions) Years ended
-----------------------------------
December 31, December 31,
2004 2003
------------ ------------
Municipal bonds $107.2 $147.4
Corporate bonds 93.0 86.0
Government bonds 35.1 40.4
Collateralized mortgage obligations 24.8 37.4
Unit investment trusts 23.7 26.1
Certificates of deposit and other 20.3 13.4
------------ ------------
$304.1 $350.7
============ ============
Investment banking revenue decreased 36% ($15.9 million) during 2004 to
$27.9 million, due primarily to a decrease in syndicate corporate debt
offerings in the current year.
Net fee revenue of $999.4 million, comprising 35% of net revenue, increased
22% ($182.9 million) during the 2004. Asset fees increased 25% ($117.3
million) to $581.8 million due to the favorable impact of market conditions
on customers' mutual fund and insurance assets generating asset fees.
Average customer mutual fund and insurance assets increased $43.4 billion or
33% to $174.3 billion for 2004 compared to $130.9 billion for 2003.
Account and activity fees, and other revenue of $320.4 million increased 15%
($42.1 million) year over year. Revenue for 2003 includes a business
interruption insurance claim of $7.0 million pertaining to September 11,
2001, which is included in other revenue. Excluding this item, account and
activity, and other fees have increased 18% ($49.1 million) over the prior
year due to growth in customer accounts and increased fees related to mutual
fund and insurance sales. Revenue received from mutual fund and money market
sub-transfer agent services increased 22% ($31.5 million) to $172.0 million,
due primarily to a 20% increase in the number of customer accounts for which
the Partnership provides mutual fund sub-transfer agent services. The number
of retirement accounts for which the Partnership is custodian
18
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations, continued
increased by 15%, resulting in custodial fee revenue growth of 16% ($9.5
million) to $68.8 million. Fee revenue from mutual fund and insurance sales
increased 41% ($4.4 million) to $15.4 million due to higher sales volumes.
Interest and dividend income, net of interest expense, increased 32% ($23.4
million) to $97.2 million during 2004 due primarily to an increase in
customer margin loans outstanding and an increase in interest rates.
Interest income from customer loans increased 24% ($24.2 million). Average
customer margin loan balances were $2.343 billion in 2004, compared to
$1.985 billion in 2003, an increase of 18%. The average rate earned on
customer loan balances increased to approximately 5.24% during 2004 from
approximately 5.07% during 2003.
Operating expenses increased 15% ($341.5 million) to $2.619 billion during
2004. Compensation and benefits costs increased 15% ($220.0 million) to
$1.674 billion. Within compensation and benefits costs, sales compensation
increased 16% ($128.7 million) due to increased revenue. Variable
compensation, including bonuses and profit sharing paid to IRs, branch
office assistants and headquarters associates, which expands and contracts
in relation to revenues, income before allocations to partners and the
Partnership's related profit margin, increased 52% ($60.9 million). Payroll
expense increased 8% ($35.5 million) due to increased costs for existing
personnel and additional support at both the headquarters and in the
branches as the Partnership grows its sales force. On a full time equivalent
basis, the Partnership had 4,030 headquarters associates and 9,858 branch
staff associates as of December 31, 2004, compared to 3,887 headquarters
associates and 9,567 branch staff associates as of December 31, 2003.
Occupancy and equipment expenses increased 7% ($15.5 million) and
communications and data processing increased 6% ($15.4 million) due to
changes in estimated useful lives of equipment as the Partnership plans to
replace certain computer equipment and to growth in the number of branch
offices as the Partnership expands its sales force. Payroll and other taxes
increased 12% ($10.5 million) due to higher sales compensation, variable
compensation and payroll expense as well as the increased number of full
time equivalent associates.
Other operating expenses increased 61% ($80.5 million) to $212.7 million
during 2004. The increase is due primarily to regulatory settlements reached
in December 2004 and the related legal and professional expenses (See Mutual
Fund Matters below and Item 3 - Legal Proceedings for more information).
MUTUAL FUND MATTERS
Recently, 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 and the manner in which mutual fund and annuity companies
compensate broker-dealers.
On February 15, 2005, the staff of the Enforcement Division of the NASD
advised EDJ that it had preliminarily concluded that it would recommend an
enforcement action against EDJ. The NASD staff alleged that EDJ violated
NASD rules by recommending to its customers that they purchase B class
mutual fund shares when A class shares of the same funds generally would
have been more advantageous financially, depending on the anticipated
holding period, without having reasonable grounds to believe that the
recommendation was in the customers' best interests. The NASD staff also
alleged that EDJ's supervisory procedures with respect to the sale of B
class mutual fund shares were deficient. The NASD staff alleges violations
of NASD Rules 2110 ("Standards of Commercial Honor and Principles of
Trade"), 2310 ("Recommendations to Customers (Suitability)") and 3010
("Supervision"). The NASD staff has proposed a settlement that would involve
payment by EDJ of a fine of approximately $1.7 million, restitution to
customers in a manner and amount to be determined and the potential
retention of an
19
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations, continued
independent consultant. The NASD staff has requested that EDJ file a "Wells
Submission" setting forth its responses and defenses to the allegations and
the requested relief. The Partnership intends to file a Wells Submission
with the NASD. EDJ believes it has meritorious defenses to the allegations
and intends to vigorously oppose the proposed recommendation.
In December 2004, the Partnership entered into settlement agreements with
the Securities and Exchange Commission, National Association of Securities
Dealers, the New York Stock Exchange and the U.S. Attorney's Office for the
Eastern District of Missouri primarily related to allegations that the
Partnership failed to adequately disclose revenue sharing payments that it
received from a group of mutual fund families and 529 savings plans that the
Partnership recommended to its customers. The agreements and orders require
the Partnership to make a payment of $75 million into a FAIR FUND, pursuant
to Section 308 of the Sarbanes-Oxley Act of 2002, that will in turn be
distributed to its customers who purchased so-called Preferred Family mutual
fund shares from January 1, 1999 through December 2004. The Partnership has
designated seven mutual fund companies as Preferred Family mutual funds. The
Preferred Family mutual funds constitute a significant portion of the
Partnership's revenue derived from mutual funds.
In addition, the Partnership is required to offer a free switch to customers
who held Preferred Family mutual fund shares as of December 2004 that would
allow, in general, the Partnership's customers to switch their holdings in a
Preferred Family mutual fund to some other buy-eligible mutual fund offered
by the Partnership without the normal sales load. Buy-eligible mutual funds
are those the Partnership has authorized its investment representatives to
offer to customers. The Partnership is also required to make ongoing
additional disclosures to customers concerning revenue sharing arrangements
with Preferred Family mutual funds and to alter various policies, practices,
training and other internal procedures including restructuring the
Partnership's investment representative bonus system, pursuant to the
agreements and orders. Furthermore, the Partnership was required and has
engaged an independent consultant to review the Partnership's compliance
with the agreements and orders. In connection with the $75 million payment,
the Partnership recorded a charge of $50 million in December 2004 with the
remaining $25 million charged against previously established reserves. The
$50 million reduction in net income before allocations to partners was
specially allocated to subordinated limited partners and general partners.
Subordinated limited partners are either current or retired general
partners. Additionally, in connection with the settlements, the
Partnership's Managing Partner has agreed to voluntarily retire as the
Partnership's Managing Partner effective December 31, 2005 and to absorb a
disproportionate allocation of the reduction of income allocated to general
partners (See Item 11 - Executive Compensation). For the year ended December
31, 2004, related settlement expenses were included in the consolidated
statements of income as Other Operating Expenses. (See Item 3 - Legal
Proceedings for more information.)
On March 24, 2005, the staff of the Missouri Securities Division advised EDJ
that it was in the process of drafting a petition to the Commissioner of
Securities to request an order for the institution of civil proceedings
against EDJ and certain individuals. The petition will request that the
order seek sanctions for failure to supervise revenue sharing and balanced
portfolios. EDJ, the individuals and the staff will engage in discussions
regarding the proposed petition during which EDJ and the individuals will
vigorously oppose the staff's proposed recommendation.
During 2003, a task force organized by the Securities and Exchange
Commission ("SEC"), The National Association of Securities Dealers, Inc.
("NASD"), the Securities Industry Association, and the Investment Company
Institute examined the ability of broker-dealers to deliver breakpoint
discounts in the sale of front-end sales load mutual fund shares commonly
known as A shares. Breakpoint discounts are reductions in sales loads based
upon the amount invested by the customer. The task force recommended
significant changes in procedures for gathering information from clients and
sharing information with mutual funds to better enable broker-dealers to
meet their obligations to deliver breakpoint discounts to
20
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations, continued
clients purchasing A shares.
The NASD issued a notice to its members in August 2003 requiring restitution
where member firms were aware that customers did not receive the breakpoint
discounts to which they were entitled. After issuing the August notice, the
NASD directed almost 450 securities firms, including the Partnership, to
notify its customers who purchased Class A mutual funds since January 1,
1999, that they may be due refunds as a result of the firms' failure to
provide breakpoint discounts. During 2004, the Partnership notified its
customers that they may not have received breakpoint discounts to which they
may have been entitled. As of December 31, 2004, the Partnership had made
approximately $3.5 million in restitution payments. The Partnership does not
anticipate that additional restitution payments will be significant, nor are
they expected to exceed reserves established by the Partnership for
potential refunds.
The Partnership has received information requests and subpoenas from various
regulatory and enforcement authorities regarding the Partnership's mutual
fund compensation arrangements, mutual fund sales practices and other mutual
fund issues. The Partnership is voluntarily cooperating with each inquiry.
Also, the Partnership has been named as a defendant in various class actions
on behalf of purchasers of recommended mutual funds. For additional
discussions, refer to "Item - 3 Legal Proceedings".
In addition to the regulatory actions directed at the Partnership, there are
various regulatory and legislative proposals being considered that could
significantly impact the compensation that broker-dealers derive from mutual
funds and annuity products. It is likely in the future that broker-dealers
will be required to provide more disclosure to their clients with respect to
payments received by them from the sales of these products. It is also
possible that such payments may be restricted by law or regulation. The
Partnership derived 66% of its total revenue from sales and services related
to mutual fund and annuity products in 2004 and 62% in 2003 with 31% of its
total revenue in 2004 and 28% in 2003 being derived from one vendor.
Significant reductions in the revenues from these products could have a
material adverse impact on the Partnership.
RESULTS OF OPERATIONS (2003 VERSUS 2002)
For 2003, net revenue increased 12% ($256.5 million) to $2.481 billion,
while net income increased $54.4 million and the profit margin increased to
8.0% from 6.5%. Year over year, the Partnership's net revenue and net income
increased due primarily to an increase in customer activity as well as
growth in customers' assets and accounts. Additionally, the underlying
trends between the years were different. For 2002, customer activity and
customer asset values became progressively weaker throughout the year as
securities prices and interest rates declined. In 2003, customer activity
and customer asset values increased throughout the year due to a more
favorable securities market as the year progressed. Operating expenses
increased in 2003 due primarily to growth in sales compensation related to
the increase in net revenues and to additional costs as the Partnership
continued to expand its branch office network. The Partnership added 237
Investment Representatives ("IRs") during 2003, ending the year with 9,409
IRs, an increase of 3%.
Trade revenue increased 13% ($185.0 million) during 2003 due primarily to an
increase in customer dollars invested (customers' buy and sell transactions
generating trade revenue), and to higher gross margins earned on customer
dollars invested compared to the prior year. Total customer dollars invested
in the U.S. were $58.7 billion during 2003, a 9% ($4.9 billion) increase
from 2002. The firm's margin earned in the U.S. on each $1,000 invested
increased to $27.40 in 2003 from $26.60 in 2002 due primarily to a shift in
product mix. Year over year, customer dollars invested shifted to higher
margin mutual fund products, primarily from fixed income products.
21
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations, continued
Commissions revenue increased 23% ($234.9 million) during 2003. Commissions
revenue increased year over year due primarily to a 23% increase in customer
dollars invested in the U.S. in mutual funds, insurance and individual
equities to $38.5 billion in 2003 from $31.2 billion in 2002. Underlying the
increase in commissions revenues, mutual fund commissions increased 37%
($226.9 million), while insurance commissions increased 6% ($8.6 million).
The following table summarizes commissions revenue year over year:
(in millions) Years ended
-----------------------------------
December 31, December 31,
2003 2002
------------ ------------
Mutual funds $ 841.5 $ 614.6
Equities 264.3 264.7
Insurance 163.2 154.6
Corporate bonds 0.6 0.8
------------ ------------
$1,269.6 $ 1,034.7
============ ============
Principal transactions revenue decreased 13% ($52.7 million) during 2003 due
to a decrease in customer dollars invested in fixed income products.
Customers in the U.S. invested $19.1 billion in principal transactions in
2003 compared to $21.1 billion in 2002, a decrease of 10%. Revenue from
municipal bonds decreased 14% ($24.5 million), government bonds decreased
31% ($18.0 million), while collateralized mortgage obligations decreased 14%
($6.2 million). The following table summarizes principal transaction revenue
year over year:
(in millions) Years ended
-----------------------------------
December 31, December 31,
2003 2002
------------ ------------
Municipal bonds $147.4 $171.9
Corporate bonds 86.0 89.0
Government bonds 40.4 58.4
Collateralized mortgage obligations 37.4 43.6
Unit investment trusts 26.1 18.9
Certificates of deposit and other 13.4 21.6
------------ ------------
$350.7 $403.4
============ ============
Net fee revenue increased 9% ($71.5 million) during 2003. Net fee revenue in
2003 includes a business interruption insurance claim of $7.0 million
pertaining to September 11, 2001, which is included in other revenue. Net
fee revenue in 2002 includes an $8.2 million gain from the sale of the
Partnership's London Stock Exchange and Toronto Stock Exchange holdings.
Asset fees increased 8% ($34.7 million) due to the favorable impact of
market conditions increasing customers' mutual fund and insurance assets
generating asset fees. Average customer mutual fund and insurance assets
increased $16.3 billion to $130.9 billion in 2003 compared to $114.6 billion
in 2002.
Account and activity fees, and other revenue increased 20% ($45.7 million)
year over year, excluding the business interruption insurance claim in 2003.
The major elements of the increase were sub-transfer agent fees and
retirement account fees. Revenue received from sub-transfer agent services
performed for mutual fund companies increased 16% ($18.9 million) due to a
22% increase in the number of customer accounts the Partnership provides
mutual fund sub-transfer agent services for. The number of retirement
22
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations, continued
accounts increased by 16%, resulting in custodial fee revenue growth of 18%
($8.9 million).
Net interest and dividend income decreased 10% ($7.8 million) during 2003 as
the interest rates charged on customers' margin loans continued to decrease,
and the source of funds borrowed shifted. Interest income from customer
loans outstanding decreased 6% ($6.7 million). The average rate earned on
customer loan balances decreased to approximately 5.07% during 2003 from
approximately 5.62% during 2002. Average customer margin loan balances were
$1.985 billion in 2003, compared to $1.911 billion in 2002, an increase of
4%. Subordinated debt interest expense increased 26% ($6.4 million) due to
the issuance of $250 million of subordinated debt in June 2002. Partially
offsetting these decreases to net interest income is a $1.8 million decrease
in bank loan interest expense due to reduced bank borrowings and a $1.6
million increase in interest income from investing excess funds in reverse
repurchase agreements. The firm has been in a net investing position for
substantially all of 2003 compared with a net borrowing position in 2002
prior to the issuance of the subordinated debt in June 2002.
Operating expenses increased 10% ($202.1 million) during 2003. Compensation
and benefits costs increased 13% ($169.1 million). Within compensation and
benefits costs, sales compensation increased 11% ($86.6 million) due to
increased revenue. Variable compensation, including bonuses and profit
sharing paid to IRs, branch office assistants and headquarters associates,
which expands and contracts in relation to revenues, net income and the
firm's profit margin, increased 53% ($40.5 million). Payroll expense
increased 10% ($43.1 million) due to increased costs for existing personnel
and additional support in the branches as the firm grows its sales force. On
a full time equivalent basis, the Partnership had 3,887 headquarters
associates and 9,567 branch staff associates as of December 31, 2003,
compared to 3,938 headquarters associates and 9,177 branch staff associates
as of December 31, 2002.
Occupancy and equipment expenses increased 9% ($19.0 million) due primarily
to growth in the number of branch offices as the firm expands its sales
force.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's capital subject to mandatory redemption at December 31,
2004, excluding the reserve for anticipated withdrawals, was $751.7 million,
compared to partnership equity capital, excluding the reserve for
anticipated withdrawals, of $727.3 million at December 31, 2003. The
increase is primarily due to the net retention of General Partner and
Subordinated Limited Partner earnings ($17.0 million) and the issuance, net
of redemptions, of Subordinated Limited Partner interests ($12.3 million),
offset by redemption of Limited Partner interests ($4.9 million). It has
been the Partnership's practice to retain approximately 30% of income
allocated to general partners. For 2004, as a result of the regulatory
settlements the Partnership retained approximately only 13% of income
allocated to general partners.
At December 31, 2004, the Partnership had $194.1 million in cash and cash
equivalents. Lines of credit are in place aggregating $1.160 billion ($1.110
billion of which is through uncommitted lines of credit where actual
borrowing availability is based on securities owned and customers' margin
securities which serve as collateral for the loans). No amounts were
outstanding under these lines at December 31, 2004.
The Partnership believes that the liquidity provided by existing cash
balances, other highly liquid assets and borrowing arrangements will be
sufficient to meet the Partnership's capital and liquidity requirements.
Depending on conditions in the capital markets and other factors, the
Partnership will, from time to time, consider the issuance of debt, the
proceeds of which could be used to meet growth needs or for other purposes.
The Partnership's growth in recent years has been financed through sales of
limited partnership interests to its employees, retention of earnings,
private placements of subordinated debt, long-term secured debt
23
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations, continued
and operating leases under which the Partnership rents facilities,
furniture, fixtures, computers and communication equipment. There were no
significant changes in the Partnership's financial commitments and
obligations for the year ended December 31, 2004.
The following table summarizes the Partnership's financing commitments and
obligations, as of December 31, 2004, excluding customer accounts due on
demand. Subsequent to December 31, 2004, these commitments and obligations
could fluctuate based on the changing business environment.
Payments Due by Period
----------------------
Total 2005 2006 2007 2008 2009 Thereafter
---------------------------------------------------------------------------
Bank Loans $ 33,928 $ 12,465 $ 5,055 $ 4,085 $ 1,410 $ 640 $ 10,273
Long-term debt 31,823 8,110 9,324 3,555 1,742 802 8,290
Liabilities subordinated to
claims of general creditors 387,425 43,225 45,700 23,200 14,200 3,700 257,400
Rental commitments 343,956 105,775 52,934 33,162 21,731 17,513 112,841
---------------------------------------------------------------------------
Total financing commitments
and obligations $797,132 $169,575 $113,013 $64,002 $39,083 $22,655 $388,804
===========================================================================
For the year ended December 31, 2004, cash and cash equivalents increased
$6.1 million. Cash provided by operating activities was $310.1 million. The
primary sources of cash from operating activities include income before
allocations to partners adjusted for depreciation, a net decrease in
inventory securities and an increase in accounts payable and accrued
expenses. These increases to cash and cash equivalents were partially offset
by growth in the customer margin loans. Cash used in investing activities
was $81.7 million consisting of capital expenditures supporting the
Partnership's operations. Cash used in financing activities was $222.4
million, consisting primarily of partnership withdrawals ($201.1 million)
and repayment of subordinated debt ($20.7 million).
For the year ended December 31, 2003, cash and cash equivalents increased
$12.0 million. Cash provided by operating activities was $291.7 million. The
primary sources of cash from operating activities include net income
adjusted for depreciation, a decrease in inventory levels, an increase in
accrued compensation and employee benefits, and an increase in customer
credit balances. Cash used in investing activities was $121.3 million
consisting primarily of capital expenditures attributable to the
Partnership's expansion of its headquarters and branch facilities required
as the Partnership grows its sales force, including $60.4 million paid for
two headquarter buildings previously leased under synthetic operating
leases. Cash used in financing activities was $158.4 million, consisting
primarily of partnership withdrawals ($130.4 million) and repayment of
subordinated debt ($20.7 million).
As a result of its activities as a broker-dealer, EDJ, the Partnership's
principal subsidiary, is subject to the Net Capital provisions of Rule
15c3-1 of the Securities Exchange Act of 1934 and the capital rules of the
New York Stock Exchange. Under the alternative method permitted by the
rules, EDJ must maintain minimum Net Capital, as defined, 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, 2004, EDJ's Net Capital of $614.2 million was
25.1% 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 June 30,
2005, as a percentage of aggregate debit items was 24.7%. Net capital and
the related capital percentages may fluctuate on a daily basis.
24
PART II
Item 7. 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
accounting principles generally accepted in the United States of America,
which may require judgment and involve estimation processes to determine its
assets, liabilities, revenues and expenses which affect its results of
operations.
The Partnership believes that of its significant accounting policies, the
following critical policies may involve a higher degree of judgment and
complexity.
Customers' transactions are recorded on a settlement date basis with the
related revenue and expenses recorded on a trade date basis. The Partnership
may be exposed to risk of loss in the event customers, other brokers and
dealers, banks, depositories or clearing organizations are unable to fulfill
contractual obligations. For transactions in which it extends credit to
customers, the Partnership seeks to control the risks associated with these
activities by requiring customers to maintain margin collateral in
compliance with various regulatory and internal guidelines.
Securities owned and sold, not yet purchased, including inventory securities
and investment securities, are valued at market value which is determined by
using quoted market or dealer prices.
The following significant accounting policies require estimates that involve
a higher degree of judgment and complexity.
The Partnership provides for potential losses that may arise out of
litigation, regulatory proceedings and other contingencies to the extent
that such losses can be estimated, in accordance with SFAS No. 5,
"Accounting for Contingencies." See Item 3 - Legal Proceedings, Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Mutual Fund Matters and Note 16 to the consolidated financial
statements for further discussion of these items. The Partnership regularly
monitors its exposures for potential losses. The Partnership's total
liability with respect to litigation represents the best estimate of
probable losses after considering, among other factors, the progress of each
case, the Partnership's experience and discussions with legal counsel.
The Association's periodic evaluation of the adequacy of its allowance for
loan losses is based on past loan loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower's ability
to repay, the estimated value of any underlying collateral and current
economic conditions.
The Partnership's periodic evaluation of the estimated useful lives of
equipment, property and improvements is based on the original life
determined at the time of purchase and any events or changes in
circumstances that would result in a change in the useful life.
Included in management's discussion and analysis of financial condition and
results of operations, and in the quantitative and qualitative disclosures
about market risk, and in the notes to the financial statements (See Note 1
to the consolidated financial statements), are additional discussions of the
Partnership's accounting policies.
25
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations, continued
THE EFFECTS OF INFLATION
The Partnership's net assets are primarily monetary, consisting of cash,
securities inventories and receivables less liabilities. Monetary net assets
are primarily liquid in nature and would not be significantly affected by
inflation. Inflation and future expectations of inflation influence
securities prices, as well as activity levels in the securities markets. As
a result, profitability and capital may be impacted by inflation and
inflationary expectations. Additionally, inflation's impact on the
Partnership's operating expenses may affect profitability to the extent that
additional costs are not recoverable through increased prices of services
offered by the Partnership.
NEW ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 establishes standards for classifying
and measuring certain financial instruments with characteristics of both
liabilities and equity. The provisions of SFAS No. 150 were adopted in the
Partnership's financial statements beginning with the quarter ended March
26, 2004.
Under the provisions of SFAS No. 150, the obligation to redeem a partner's
capital in the event of a partner's death is one of the statement's criteria
requiring equity capital to be classified as a liability. Since the
Partnership is obligated to redeem a partner's capital after a partner's
death, the Statement requires all of the Partnership's equity capital to be
classified as a liability. Income allocable to limited, subordinated limited
and general partners was previously classified on the Partnership's
statement of income as net income. In accordance with SFAS No. 150, these
allocations are now considered interest expense and are classified as a
reduction of income before allocations to partners, which results in a
presentation of $0 net income for the year ended December 31, 2004. The
financial statement presentations required to comply with SFAS No. 150 do
not alter the Partnership's treatment of income, income allocations or
equity capital for any other purposes. In addition, SFAS No. 150 does not
have any effect on, nor is it applicable to, the Partnership's subsidiaries'
financial statements.
Net income, as defined in the Partnership Agreement, is now equivalent to
income before allocations to partners on the Consolidated Statements of
Income. Such income, if any, for each calendar year is allocated to the
Partnership's three classes of capital in accordance with the formulas
prescribed in the Partnership Agreement. First, limited partners are
allocated net income (as defined in the Partnership Agreement) in accordance
with the prescribed formula for their share of net income. Limited partners
do not share in the net loss (as defined in the Partnership Agreement) in
any year in which there is a net loss and the Partnership is not dissolved
or liquidated. Thereafter, subordinated limited partners and general
partners are allocated any remaining net income based on formulas in the
Partnership Agreement.
The Partnership does not qualify as an accelerated filer under the
Sarbanes-Oxley Act of 2002 with regard to Section 404 of the Act concerning
Management Assessment of Internal Controls. The provisions of Section 404
will be applicable to the Partnership's financial statements effective for
the quarter ended March 31, 2006. The Partnership is currently preparing for
implementation of this requirement.
26
PART II
Item 7. Management's Discussion And Analysis of Financial Condition and
Results of Operations, continued
FORWARD-LOOKING STATEMENTS
This report on Form 10-K, and in particular Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
forward-looking statements within the meaning of the federal securities
laws. You can identify forward-looking statements by the use of the words
"believe," "expect," "anticipate," "intend," "estimate," "project," "will,"
"should," and other expressions which predict or indicate future events and
trends and which do not relate to historical matters. You should not rely on
forward-looking statements, because they involve known and unknown risks,
uncertainties and other factors, some of which are beyond the control of the
Partnership. These risks, uncertainties and other factors may cause the
actual results, performance or achievements of the Partnership to be
materially different from the anticipated future results, performance or
achievements expressed or implied by the forward-looking statements.
Some of the factors that might cause differences include, but are not
limited to, the following: (1) general economic conditions; (2) actions of
competitors; (3) regulatory actions; (4) changes in legislation; (5) changes
in technology; (6) a fluctuation or decline in the market value of
securities; (7) rising interest rates; (8) securities theft; (9) litigation,
including that involving mutual fund matters; and (10) the ability of
customers, other broker-dealers, banks, depositories and clearing
organizations to fulfill contractual obligations. These forward-looking
statements were based on information, plans, and estimates at the date of
this report, and we do not promise to update any forward-looking statements
to reflect changes in underlying assumptions or factors, new information,
future events or other changes.
27
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, 2004, amounts receivable from customers were $2.499 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 $15.6
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 $26.3 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, 2004 will not
have a material adverse effect on the consolidated financial position or
results of operations of the Partnership.
28
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements Included in this Item
Page No.
Report of Independent Registered Public Accounting Firm ..... 30
Consolidated Statements of Financial Condition as of
December 31, 2004 and 2003 .................................. 31
Consolidated Statements of Income for the years ended
December 31, 2004, 2003 and 2002 ............................ 33
Consolidated Statements of Changes in Partnership Capital
for the years ended December 31, 2004, 2003 and 2002......... 34
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002............................. 35
Notes to Consolidated Financial Statements................... 36
29
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 and of cash flows present fairly, in all material
respects, the consolidated financial position of The Jones Financial
Companies, L.L.L.P. and subsidiaries (the "Partnership") at December 31,
2004 and 2003, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2004 in conformity
with accounting principles generally accepted in the United States of
America. These consolidated financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We conducted
our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance
about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
March 24, 2005
30
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) 2004 2003
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents $ 194,089 $ 187,980
Securities purchased under agreements to resell 275,000 290,000
Receivable from:
Customers 2,498,688 2,134,655
Brokers, dealers and clearing organizations 221,535 155,083
Mortgages and loans 150,377 126,060
Securities owned, at market value
Inventory securities 48,730 115,775
Investment securities 220,048 214,644
Equipment, property and improvements, at cost,
net of accumulated depreciation 316,814 330,626
Other assets 174,222 168,336
---------- ----------
TOTAL ASSETS $4,099,503 $3,723,159
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
31
PART II
Item 8. Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES AND PARTNERSHIP CAPITAL
December 31, December 31,
(Dollars in thousands) 2004 2003
- -----------------------------------------------------------------------------------------------------
Bank loans $ 33,928 $ 23,656
Payable to:
Customers 2,131,217 1,924,882
Brokers, dealers and clearing organizations 71,535 43,551
Depositors 117,337 107,988
Securities sold, not yet purchased, at market value 38,808 20,318
Accrued compensation and employee benefits 285,754 248,729
Accounts payable and accrued expenses 193,435 120,908
Long-term debt 31,823 39,691
---------- ----------
2,903,837 2,529,723
---------- ----------
Liabilities subordinated to claims of general creditors 387,425 408,150
---------- ----------
Commitments and contingencies (Note 15 and Note 16)
Partnership capital subject to mandatory redemption,
net of reserve for anticipated withdrawals 751,674 -
Reserve for anticipated withdrawals 56,567 -
---------- ----------
Total partnership capital subject to mandatory redemption 808,241 -
---------- ----------
Total liabilities 4,099,503 2,937,873
---------- ----------
Partnership capital net of reserve for anticipated withdrawals - 727,280
Reserve for anticipated withdrawals - 58,006
---------- ----------
Total partnership capital - 785,286
---------- ----------
TOTAL LIABILITIES AND PARTNERSHIP CAPITAL $4,099,503 $3,723,159
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
32
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) 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------
Revenue:
Commissions $1,504,038 $1,269,605 $1,034,719
Asset fees 581,810 464,465 429,744
Account and activity fees 304,591 254,290 217,338
Principal transactions 304,124 350,662 403,329
Interest and dividends 153,076 132,114 137,579
Investment banking 27,934 43,817 41,055
Gain on investments - - 8,186
Other revenue 15,792 23,909 8,132
---------- ---------- ----------
Total revenue 2,891,365 2,538,862 2,280,082
Interest expense 55,913 58,313 56,009
---------- ---------- ----------
Net revenue 2,835,452 2,480,549 2,224,073
---------- ---------- ----------
Operating expenses:
Compensation and benefits 1,674,444 1,454,400 1,285,284
Communications and data processing 278,314 262,884 262,751
Occupancy and equipment 253,031 237,509 218,538
Payroll and other taxes 102,074 91,537 82,518
Postage and shipping 45,005 43,280 42,566
Advertising 40,075 41,438 43,971
Floor brokerage and clearance fees 13,077 13,958 13,993
Other operating expenses (See Note 17) 212,705 132,233 125,537
---------- ---------- ----------
Total operating expenses 2,618,725 2,277,239 2,075,158
---------- ---------- ----------
Income before allocations to partners 216,727 203,310 148,915
Allocations to partners:
Limited partners 27,800 - -
Subordinated limited partners 22,555 - -
General partners 166,372 - -
---------- ---------- ----------
Net income $ - $ 203,310 $ 148,915
========== ========== ==========
Net income allocated to:
Limited partners $ - $ 24,252 $ 20,196
Subordinated limited partners - 21,680 15,889
General partners - 157,378 112,830
---------- ---------- ----------
$ - $ 203,310 $ 148,915
========== ========== ==========
Income before allocations to partners/net
income per weighted average $1,000 equivalent
limited partnership unit outstanding $ 126.43 $ 108.08 $ 87.44
========== ========== ==========
Weighted average $1,000 equivalent
limited partnership units outstanding 219,885 224,389 230,970
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
33
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
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Dollars in thousands) Capital Capital Capital Total
- --------------------------------------------------------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL $ 247,718 $ 86,654 $ 340,344 $ 674,716
Reserve for anticipated withdrawals (14,490) (4,199) (17,083) (35,772)
--------- --------- --------- ---------
Partnership capital net of reserve for
anticipated withdrawals,
December 31, 2001 233,228 82,455 323,261 638,944
Issuance of partnership interests - 13,709 - 13,709
Redemption of partnership interests (4,562) (865) - (5,427)
Net Income 20,196 15,889 112,830 148,915
Withdrawals and distributions (9,023) (12,766) (64,407) (86,196)
--------- --------- --------- ---------
TOTAL PARTNERSHIP CAPITAL 239,839 98,422 371,684 709,945
Reserve for anticipated withdrawals (11,173) (3,123) (14,278) (28,574)
--------- --------- --------- ---------
Partnership capital net of reserve for
anticipated withdrawals,
December 31, 2002 228,666 95,299 357,406 681,371
Issuance of partnership interests - 9,829 - 9,829
Redemption of partnership interests (6,166) (1,190) - (7,356)
Net Income 24,252 21,680 157,378 203,310
Withdrawals and distributions (8,907) (13,212) (79,749) (101,868)
--------- --------- --------- ---------
TOTAL PARTNERSHIP CAPITAL 237,845 112,406 435,035 785,286
Reserve for anticipated withdrawals (15,345) (8,468) (34,193) (58,006)
--------- --------- --------- ---------
Partnership capital net of reserve for
anticipated withdrawals,
December 31, 2003 222,500 103,938 400,842 727,280
Required reclassification of partnership
capital pursuant to SFAS No. 150
(See Note 1) (222,500) (103,938) (400,842) (727,280)
--------- --------- --------- ---------
Partnership capital net of reserve for
anticipated withdrawals,
December 31, 2004 $ - $ - $ - $ -
--------- --------- --------- ---------
Included in Total Partnership Capital as of December 31, 2003, 2002 and
2001 are Reserves for anticipated withdrawals which the Partnership
distributed to its General and Limited Partners subsequent to year end.
The accompanying notes are an integral part of these consolidated
financial statements.
34
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) 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ - $ 203,310 $ 148,915
Adjustments to reconcile net income to net
cash provided by/(used in) operating activities -
Income before allocations to partners 216,727 - -
Depreciation and amortization 95,476 88,785 89,295
Gain on sales of investments - - (8,186)
Changes in assets and liabilities:
Securities purchased under agreements to resell 15,000 (225,000) 15,000
Net receivable from customers (157,698) 77,008 (8,486)
Net receivable from brokers, dealers and
clearing organizations (38,468) (42,167) (163,498)
Receivable from mortgages and loans (24,317) (13,101) (12,177)
Securities owned, net 80,131 113,940 (90,675)
Other assets (5,886) (10,933) (4,154)
Bank loans 10,272 9,828 149
Payable to depositors 9,349 (1,736) 5,774
Accrued compensation and employee benefits 37,025 91,679 (23,372)
Accounts payable and accrued expenses 72,527 62 (712)
--------- --------- ---------
Net cash provided by/(used in) operating activities 310,138 291,675 (52,127)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, property and improvements, net (81,664) (121,282) (89,352)
Proceeds from sales of investments - - 8,257
--------- --------- ---------
Net cash used in investing activities (81,664) (121,282) (81,095)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt - - 13,100
Repayment of long-term debt (7,868) (9,672) (10,022)
Issuance of subordinated liabilities - - 250,000
Repayment of subordinated liabilities (20,725) (20,725) (26,725)
Issuance of partnership interests 12,727 9,829 13,709
Redemption of partnership interests (5,375) (7,356) (5,427)
Withdrawals and distributions from partnership capital (201,124) (130,442) (121,968)
--------- --------- ---------
Net cash (used in)/provided by financing activities (222,365) (158,366) 112,667
--------- --------- ---------
Net increase/(decrease) in cash and cash equivalents 6,109 12,027 (20,555)
CASH AND CASH EQUIVALENTS,
Beginning of year 187,980 175,953 196,508
--------- --------- ---------
End of year $ 194,089 $ 187,980 $ 175,953
========= ========= =========
Cash paid for interest $ 56,429 $ 58,813 $ 60,201
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
35
PART II
Item 8. Financial Statements and Supplementary Data, continued
THE JONES FINANCIAL COMPANIES, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit information)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE PARTNERSHIP'S BUSINESS AND BASIS OF ACCOUNTING. The accompanying
consolidated financial statements include the accounts of The Jones
Financial Companies, L.L.L.P. and all wholly owned subsidiaries
(collectively, the "Partnership"). All material intercompany balances and
transactions have been eliminated in consolidation. Non-controlling minority
interests are accounted for under the equity method.
The Partnership operates as a single business segment. The Partnership's
principal operating subsidiary, Edward D. Jones & Co., L.P. ("EDJ'"), is
comprised of three registered broker-dealers primarily serving individual
investors. EDJ primarily derives its revenues from the retail brokerage
business through the sale of listed and unlisted securities, insurance
products, investment banking and principal transactions and as a distributor
of mutual fund shares. EDJ conducts business throughout the United States of
America, Canada and the United Kingdom with its customers, various brokers,
dealers, clearing organizations, depositories and banks. Boone National
Savings and Loan Association, F.A. (the "Association"), a wholly owned
subsidiary of the Partnership, makes commercial, real estate, and other
loans primarily to customers in Central Missouri. Additionally, the
Association offers trust services to EDJ customers through its division, the
Edward Jones Trust Co.
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 resignation or termination. The Partnership's managing
partner has the discretion to waive these withdrawal restrictions. All
current and future partnership capital is subordinate to all current and
future liabilities of the Partnership, including the liabilities
subordinated to claims of general creditors.
TRANSACTION RISK. The Partnership's securities activities involve execution,
settlement and financing of various securities transactions for customers.
The Partnership may be exposed to risk of loss in the event customers, other
brokers and dealers, banks, depositories or clearing organizations are
unable to fulfill contractual obligations. For transactions in which it
extends credit to customers, the Partnership seeks to control the risks
associated with these activities by requiring customers to maintain margin
collateral in compliance with various regulatory and internal guidelines.
36
PART II
Item 8. Financial Statements and Supplementary Data, continued
REVENUE RECOGNITION. Customer transactions are recorded on a settlement date
basis and the related commissions, principal transactions and investment
banking revenues are recorded on a trade date basis. All other forms of
revenue are recorded on an accrual basis.
Commissions comprise charges to customers for the sale of securities,
insurance products and mutual fund shares.
Asset fees revenue is composed primarily of service fees and other revenues
received under agreements with mutual fund and insurance companies based on
the underlying value of the Partnership's customers' assets invested in
those companies' products. The asset-based portion of the Partnership's
revenues related to its interest in the Edward Jones Money Market Fund is
also included in asset fees revenue.
Account and activity fees revenue includes fees received from mutual fund
companies for sub-transfer agent accounting services performed by the
Partnership and self-directed IRA custodian account fees. It also includes
other transaction fee revenues from customers, mutual fund companies and
insurance companies.
Principal transactions revenue is the result of the Partnership's
participation in market-making activities in over-the-counter corporate
securities, municipal obligations, U.S. Government obligations, including
general obligations and revenue bonds, unit investment trusts and
mortgage-backed securities.
Interest and dividend income is earned primarily on margin account balances,
inventory securities and investment securities.
Investment banking revenues are derived from the Partnership's underwriting
and distribution of securities on behalf of issuers or existing holders of
securities.
FOREIGN EXCHANGE. Assets and liabilities denominated in foreign currencies
are translated at the exchange rates at the end of the period. Revenue and
expenses denominated in foreign currencies are translated using the
prevailing exchange rate on the date of the transaction. Foreign exchange
gains and losses are included in Other Revenue in the consolidated
statements of income.
CASH AND CASH EQUIVALENTS. The Partnership considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE. The Partnership participates in short-term resale
agreements and repurchase agreements collateralized by U.S. government and
agency securities. The market value of the underlying collateral as
determined daily, plus accrued interest thereon, must equal or exceed 102%
of the carrying amount of the transaction. It is the Partnership's policy to
have such underlying resale agreement collateral deposited in its accounts
at its custodian banks. Repurchase transactions require the Partnership to
deposit collateral with the lender. Resale and repurchase agreements are
carried at the amount at which the securities will be subsequently
resold/repurchased as specified in the agreements.
SECURITIES BORROWING AND LENDING ACTIVITIES. Securities borrowed and
securities loaned transactions are reported as collateralized financings.
Securities borrowed transactions require the Partnership to deposit cash or
other collateral with the lender. In securities loaned transactions, the
Partnership receives collateral in the form of cash or other collateral.
Collateral for both securities borrowed and securities loaned is based on
102% of the market value of the underlying securities loaned. The
Partnership monitors the market value of securities borrowed and loaned on a
daily basis, with additional collateral obtained or refunded as necessary.
Securities borrowed and securities loaned are included in receivable
37
PART II
Item 8. Financial Statements and Supplementary Data, continued
from and payable to brokers, dealers and clearing organizations in the
consolidated statements of financial condition.
COLLATERAL. The Partnership reports as assets collateral it has pledged in
secured borrowings and other arrangements when the secured party cannot sell
or repledge the assets or the Partnership can substitute collateral or
otherwise redeem it on short notice. The Partnership does not report as an
asset collateral it has received in secured lending and other arrangements
when the debtor has the right to redeem or substitute the collateral on
short notice.
MORTGAGES AND LOANS. Loans that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are reported at
their outstanding principal adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans.
SECURITIES OWNED AND SOLD, NOT YET PURCHASED. Securities owned and sold, not
yet purchased, including inventory securities and investment securities, are
valued at market value which is determined by using quoted market or dealer
prices.
EQUIPMENT, PROPERTY AND IMPROVEMENTS. Equipment, including furniture and
fixtures, is recorded at cost and depreciated using straight-line and
accelerated methods over estimated useful lives of two to twelve years.
Buildings are depreciated using the straight-line method over their useful
lives, which are estimated at thirty years. Leasehold improvements are
amortized based on the term of the lease or the economic useful life of the
improvement, whichever is less. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation or amortization
is removed from the accounts. The cost of maintenance and repairs is charged
against income as incurred, whereas significant enhancements are
capitalized. Long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that the book value of the asset may
not be fully recoverable. If impairment is indicated, the asset value is
written down to its fair market value.
SEGREGATED CASH. Cash of $51 was segregated in a special reserve bank
account for the benefit of customers, and is included in Cash and Cash
Equivalents as of December 31, 2004 and 2003 under Rule 15c3-3 of the
Securities and Exchange Commission ("SEC").
INCOME TAXES. Income taxes have not been provided for in the consolidated
financial statements since The Jones Financial Companies, L.L.L.P. is
organized as a partnership and each partner is liable for their own tax
payments.
RECLASSIFICATION. Certain prior year balances have been reclassified to
conform with the current year presentation.
NEW ACCOUNTING STANDARDS. In May 2003, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 establishes standards for classifying
and measuring certain financial instruments with characteristics of both
liabilities and equity. The provisions of SFAS No. 150 were adopted in the
Partnership's financial statements beginning with the quarter ended March
26, 2004.
Under the provisions of SFAS No. 150, the obligation to redeem a partner's
capital in the event of a partner's death is one of the statement's criteria
requiring equity capital to be classified as a liability. Since the
Partnership is obligated to redeem a partner's capital after a partner's
death, the Statement requires all of the Partnership's equity capital to be
classified as a liability. Income allocable to limited, subordinated limited
and general partners was previously classified on the Partnership's
statement of income as net income. In accordance with SFAS No. 150, these
allocations are now considered interest
38
PART II
Item 8. Financial Statements and Supplementary Data, continued
expense and are classified as a reduction of income before allocations to
partners, which results in a presentation of $0 net income for the year
ended December 31, 2004. The financial statement presentations required to
comply with SFAS No. 150 do not alter the Partnership's treatment of income,
income allocations or equity capital for any other purposes. In addition,
SFAS No. 150 does not have any effect on, nor is it applicable to, the
Partnership's subsidiaries' financial statements.
Net income, as defined in the Partnership Agreement, is now equivalent to
income before allocations to partners on the Consolidated Statements of
Income. Such income, if any, for each calendar year is allocated to the
Partnership's three classes of capital in accordance with the formulas
prescribed in the Partnership Agreement. First, limited partners are
allocated net income (as defined in the Partnership Agreement) in accordance
with the prescribed formula for their share of net income. Limited partners
do not share in the net loss (as defined in the Partnership Agreement) in
any year in which there is a net loss and the Partnership is not dissolved
or liquidated. Thereafter, subordinated limited partners and general
partners are allocated any remaining net income based on formulas in the
Partnership Agreement.
NOTE 2 - RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
Accounts 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:
2004 2003
-------- --------
Receivable from clearing organizations $196,403 $131,911
Receivable from money market funds 6,523 7,134
Deposits paid for securities borrowed 6,447 4,307
Securities failed to deliver 5,552 2,795
Dividends receivable 4,196 5,653
Other 2,414 3,283
-------- --------
Total receivable from brokers, dealers
and clearing organizations $221,535 $155,083
======== ========
Securities failed to receive $ 59,668 $ 23,855
Securities loaned 8,203 9,953
Other 3,664 9,743
-------- --------
Total payable to brokers, dealers and
clearing organizations $ 71,535 $ 43,551
======== ========
Receivable from clearing organizations represents balances and deposits with
clearing organizations and the Partnership's Canadian carrying broker.
Securities failed to deliver/receive represent the contract value of
securities which have not been received or delivered by settlement date.
39
PART II
Item 8. Financial Statements and Supplementary Data, continued
NOTE 4 - RECEIVABLE FROM MORTGAGES AND LOANS
Receivable from mortgages and loans is composed of the Association's
primarily adjustable rate mortgage loans, commercial and other loans, net of
discounts, deferred origination fees and the allowance for loan losses. The
carrying amounts of the receivables approximate their fair values.
NOTE 5 - SECURITIES OWNED AND SOLD, NOT YET PURCHASED
Securities owned and sold, not yet purchased are summarized as follows (at
market value):
2004 2003
-------------------------- -------------------------
Securities Securities
Sold, Sold,
Securities not yet Securities not yet
Owned Purchased Owned Purchased
---------- ---------- ---------- ----------
Inventory securities:
Certificates of deposit $ 5,519 $23,194 $ 7,487 $ 3,241
U.S. and Canadian government
and U.S. agency obligations 8,246 11,947 13,251 7,319
State and municipal obligations 22,426 206 60,605 519
Corporate bonds and notes, and
collateralized mortgage obligations 8,421 3,314 27,767 3,995
Equities 333 72 2,872 5,141
Unit investment trusts 3,785 75 3,793 103
-------- ------- -------- -------
$ 48,730 $38,808 $115,775 $20,318
======== ======= ======== =======
Investment securities:
U.S. government and agency
obligations held by U.S. broker-
dealer $121,558 $145,238
U.S. and Canadian government and
U.S. agency obligations held by
foreign broker-dealers 39,731 17,651
Mutual funds 58,759 51,755
-------- --------
$220,048 $214,644
======== ========
The Partnership attempts to reduce its exposure to market price fluctuations
of its inventory securities through the sale of U.S. government securities
and, to a limited extent, the sale of fixed income futures contracts. The
amount of the securities purchased or sold will fluctuate on a daily basis
due to changes in inventory securities owned, interest rates and market
conditions. Futures contracts are settled daily, and any gain or loss is
recognized in principal transactions revenue. The notional amount of futures
contracts sold was $6,000 and $12,000 at December 31, 2004 and 2003,
respectively.
40
PART II
Item 8. Financial Statements and Supplementary Data, continued
NOTE 6 - EQUIPMENT, PROPERTY AND IMPROVEMENTS
Equipment, property and improvements are summarized as follows:
2004 2003
--------- ---------
Land $ 12,915 $ 12,915
Buildings and improvements 326,324 312,025
Equipment, furniture and fixtures 631,981 588,235
--------- ---------
Total equipment, property and improvements 971,220 913,175
Accumulated depreciation and amortization (654,406) (582,549)
--------- ---------
Equipment, property and improvements, net $ 316,814 $ 330,626
========= =========
Depreciation expense on equipment, property and improvements is included in
the consolidated statements of income under Communications and Data
Processing, and Occupancy and Equipment. During 2003, the Partnership
purchased, for a cost of $60,400, two buildings, one in Tempe, Arizona, and
one in St. Louis, Missouri. Both buildings were previously occupied by the
Partnership under operating leases.
NOTE 7 - BANK LOANS
The Partnership borrows from banks on a short-term basis primarily to
finance customer margin balances and inventory securities. As of December
31, 2004, the Partnership had bank lines of credit aggregating $1,160,000 of
which $1,110,000 were through uncommitted facilities. Actual borrowing
availability under the uncommitted facilities is primarily based on the
value of securities owned and customers' margin securities. At December 31,
2004, collateral with a market value $1,455,900 was available to support
secured bank loans of EDJ. There were no bank loans outstanding under these
lines as of December 31, 2004 or 2003.
The Association had loans from The Federal Home Loan Bank ("FHLB") of
$33,928 and $23,656 as of December 31, 2004 and 2003, respectively. The
interest rates on these loans as of December 31, 2004 and 2003 ranged from
1.38% to 7.40% and from 1.23% to 7.40%, respectively. At December 31, 2004
and 2003, $6,000 of these loans were callable at the discretion of the FHLB.
At December 31, 2004 and 2003, $76,076 and $53,744, respectively, of
receivable from mortgages and loans were pledged as collateral to the FHLB
for these loans. Bank loans outstanding at the Association approximate their
fair value.
41
PART II
Item 8. Financial Statements and Supplementary Data, continued
The Association's scheduled bank loan maturities, as of December 31, 2004,
are as follows:
Maturity
Year Amount
---- --------
2005 $12,465
2006 5,055
2007 4,085
2008 1,410
2009 640
Thereafter 10,273
-------
$33,928
=======
Interest is at a fluctuating rate based on short-term lending rates. During
the year ended December 31, 2004, EDJ had bank loans outstanding for
twenty-one days with an average daily outstanding balance of $29,810 at an
average interest rate of 2.26%. During the year ended December 31, 2003, EDJ
had bank loans outstanding for one day of $50,000 at an interest rate of
1.98%. During 2002, the average aggregate short-term bank loans outstanding
was $179,000 and the average interest rate was 2.7%. During 2004, 2003 and
2002, the Association's average aggregate bank loans outstanding were
$30,800, $19,000 and $13,900, respectively, and the average interest rate
was 3.69%, 4.58% and 5.73%, respectively.
NOTE 8 - PAYABLE TO DEPOSITORS
Amounts payable to depositors are composed of the Association's various
savings instruments offered to its customers, which include transaction
accounts and certificates of deposit with maturities ranging from 90 days to
72 months. The carrying amounts of the deposits approximate their fair
values.
42
PART II
Item 8. Financial Statements and Supplementary Data, continued
NOTE 9 - LONG-TERM DEBT
Long-term debt is composed of the following:
2004 2003
------- -------
Note payable, collateralized by equipment, interest paid quarterly at a
variable rate (3.81% at December 31, 2004 and 2.90% at December 31,
2003) based on LIBOR plus applicable margin, due in annual installments
of $5,000, with a final installment of $6,000 on September 30, 2006. $11,000 $16,000
Note payable, collateralized by real estate, fixed rate of 7.28%, principal
and interest due in monthly installments, with a final installment
on June 1, 2017. 11,777 12,335
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. 5,220 6,528
Notes payable, collateralized by real estate, fixed rate of 4.31% as of
December 31, 2004 and 6.52% as of December 31, 2003, principal and
interest due in monthly installments, with a final installment
on April 5, 2008. 3,826 4,828
------- -------
$31,823 $39,691
======= =======
Scheduled annual principal payments, as of December 31, 2004 are as follows:
Principal
Year Payment
---- ---------
2005 $ 8,110
2006 9,324
2007 3,555
2008 1,742
2009 802
Thereafter 8,290
-------
$31,823
=======
The real estate notes payable of $20,823 at December 31, 2004 are
collateralized by land and buildings with a cost basis of $39,030 and a
carrying value of $27,354 at December 31, 2004. The $11,000 equipment note
payable as of December 31, 2004 is collateralized by equipment with a cost
basis of $26,455 and a carrying value of $5,044 at December 31, 2004.
Certain notes payable agreements contain restrictions that among other
things, require maintenance of a fixed charge coverage ratio of 1.0 to 1.0
and minimum net capital of $14,000, as defined in the agreement. The
Partnership is in compliance with all debt covenants and restrictions as of
December 31, 2004 and 2003.
43
PART II
Item 8. Financial Statements and Supplementary Data, continued
The Partnership has estimated the fair value of the long-term debt to be
approximately $31,079 and $41,200 as of December 31, 2004 and 2003,
respectively.
NOTE 10 - LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Liabilities subordinated to claims of general creditors consist of:
2004 2003
---- ----
Capital notes, 7.33%, due in annual installments of $50,000
commencing on June 12, 2010, with a final installment
on June 12, 2014. $250,000 $250,000
Capital notes, with rates ranging from 7.51% to 7.79%,
due in annual installments ranging from $3,700 to
$25,000, commencing on August 15, 2005, with a
final installment of $3,700 on August 15, 2011. 75,000 75,000
Capital notes, 8.18%, due in annual installments of $10,500,
with a final installment on September 1, 2008. 42,000 52,500
Capital notes, 7.95%, due in annual installments
of $10,225, with a final installment
of $10,200 on April 15, 2006. 20,425 30,650
-------- --------
$387,425 $408,150
======== ========
Required annual principal payments, as of December 31, 2004, are as follows:
Principal
Year Payment
---- ---------
2005 $ 43,225
2006 45,700
2007 23,200
2008 14,200
2009 3,700
Thereafter 257,400
--------
$387,425
========
The capital note agreements contain restrictions which, among other things,
require maintenance of certain financial ratios, restrict encumbrance of
assets and creation of indebtedness and limit the withdrawal of partnership
capital subject to mandatory redemption. As of December 31, 2004, the
Partnership was required, under the note agreements, to maintain minimum
partnership capital subject to mandatory redemption of $400,000 and Net
Capital of $183,211 (see Note 12).
44
PART II
Item 8. Financial Statements and Supplementary Data, continued
The subordinated liabilities are subject to cash subordination agreements
approved by the New York Stock Exchange, Inc. and, therefore, are included
in the Partnership's computation of Net Capital under the SEC's uniform Net
Capital rule. The Partnership has estimated the fair value of the
subordinated capital notes to be approximately $403,140 and $428,000 as of
December 31, 2004 and 2003, respectively.
NOTE 11 - PARTNERSHIP CAPITAL SUBJECT TO MANDATORY REDEMPTION
As more fully described under "New Accounting Standards" in Note 1, the
firm's partnership capital has been classified as a liability under SFAS No.
150 as "Partnership capital subject to mandatory redemption." The firm's
partnership capital subject to mandatory redemption, net of reserve for
anticipated withdrawals of $751,674 consists of $217,575 of limited
partnership capital issued in $1,000 units, $112,482 of subordinated limited
partnership capital and $421,617 of general partnership capital as of
December 31, 2004.
The limited partnership capital subject to mandatory redemption is held by
current and former employees and general partners of the Partnership.
Limited partners are guaranteed a minimum 7.5% return on the face amount of
their capital. Expense related to the 7.5% return was $16,492, $16,868 and
$17,307 for the years ended December 31, 2004, 2003 and 2002, 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.
45
PART II
Item 8. Financial Statements and Supplementary Data, continued
The following table summarizes the activity in partnership capital subject
to mandatory redemption during the year ended December 31, 2004 along with
the amount of partnership capital subject to mandatory redemption
anticipated to be withdrawn subsequent to December 31, 2004.
Subordinated
Limited Limited General
Partnership Partnership Partnership
Capital Capital Capital Total
----------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL SUBJECT TO
MANDATORY REDEMPTION, JANUARY 1, 2004 $237,845 $112,406 $ 435,035 $ 785,286
Reserve for anticipated withdrawals (15,345) (8,468) (34,193) (58,006)
-------- -------- --------- ---------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, January 1, 2004 222,500 103,938 400,842 727,280
Issuance of partnership interests - 12,727 - 12,727
Redemption of partnership interests (4,925) (450) - (5,375)
Income allocated to partners 27,800 22,555 166,372 216,727
Withdrawals and distributions (11,079) (22,819) (109,220) (143,118)
-------- -------- --------- ---------
TOTAL PARTNERSHIP CAPITAL SUBJECT TO
MANDATORY REDEMPTION, DECEMBER 31, 2004 234,296 115,951 457,994 808,241
Reserve for anticipated withdrawals (16,721) (3,469) (36,377) (56,567)
-------- -------- --------- ---------
Partnership capital subject to mandatory
redemption, net of reserve for anticipated
withdrawals, December 31, 2004 $217,575 $112,482 $ 421,617 $ 751,674
NOTE 12 - NET CAPITAL REQUIREMENTS
As a result of its activities as a broker-dealer, EDJ is subject to the Net
Capital provisions of Rule 15c3-1 of the Securities Exchange Act of 1934 and
the capital rules of the New York Stock Exchange, Inc. Under the alternative
method permitted by the rules, EDJ must maintain minimum Net Capital equal
to the greater of $250 or 2% of aggregate debit items arising from customer
transactions. The Net Capital rule also provides that partnership capital
may not be withdrawn if resulting Net Capital would be less than 5% of
aggregate debit items. Additionally, certain withdrawals require the consent
of the SEC to the extent they exceed defined levels, even though such
withdrawals would not cause Net Capital to be less than 5% of aggregate
debit items.
At December 31, 2004, EDJ's Net Capital of $614,243 was 25.1% of aggregate
debit items and its Net Capital in excess of the minimum required was
$565,387. Net Capital after anticipated withdrawals, which are scheduled
subordinated debt payments through June 30, 2005, as a percentage of
aggregate debit items was 24.7%. Net Capital and the related capital
percentages may fluctuate on a daily basis.
46
PART II
Item 8. Financial Statements and Supplementary Data, continued
At December 31, 2004, the Partnership's foreign broker-dealer subsidiaries
and the Association were in compliance with regulatory capital requirements
in the jurisdictions in which they operate.
NOTE 13 - OTHER REVENUE / GAIN ON INVESTMENTS
During 2003, the Partnership received a business interruption insurance
claim of $6,950 pertaining to September 11, 2001, which is included in Other
Revenue.
During 2002, the Partnership sold all of the shares it received from its
memberships in the London Stock Exchange and Toronto Stock Exchange when
they demutualized. The Partnership realized an $8,186 gain on the sale of
these shares.
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 $63,300, $47,900 and $35,600 were provided by the Partnership
for its contributions to the plans for the years ended December 31, 2004,
2003 and 2002, 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
was $190,700, $183,500 and $179,400 for the years ended December 31, 2004,
2003 and 2002, respectively.
The Partnership's noncancelable lease commitments greater than one year as
of December 31, 2004, are summarized below:
Year
----
2005 $105,775
2006 52,934
2007 33,162
2008 21,731
2009 17,513
Thereafter 112,841
--------
$343,956
========
47
PART II
Item 8. Financial Statements and Supplementary Data, continued
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. Recently, 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 believes, based on current
knowledge and after consultation with counsel, that the outcome of these
actions will not have a material adverse effect on the consolidated
financial condition of the Partnership, although the outcome could be
material to the Partnership's future operating results for a particular
period or periods.
Also, in the normal course of business, the Partnership enters into
contracts which contain indemnification provisions, such as purchase
contracts, service agreements, escrow agreements, sales of assets,
outsourcing agreements and leasing arrangements. Under the provisions of
these contracts, the Partnership may indemnify counterparties to the
contracts for certain aspects of the Partnership's past conduct if other
parties fail to perform, or if certain events occur. These indemnification
provisions will vary based upon the contract. The Partnership may in turn
obtain indemnifications from other parties in certain contracts. These
indemnification provisions are not expected to have a material impact on the
Partnership's results of operations or financial condition.
NOTE 17 - REGULATORY SETTLEMENTS
In December 2004, the Partnership entered into settlement agreements with
the Securities and Exchange Commission, National Association of Securities
Dealers, the New York Stock Exchange and the U.S. Attorney's Office for the
Eastern District of Missouri primarily related to allegations that the
Partnership failed to adequately disclose revenue sharing payments that it
received from a group of mutual fund families and 529 savings plans that the
Partnership recommended to its customers. As part of the agreement, the
Partnership, without admitting or denying the allegations or findings,
consented to various undertakings that included enhanced disclosure of
revenue sharing arrangements to customers and payment of $75,000 into a FAIR
FUND established pursuant to Section 308 of the Sarbanes-Oxley Act of 2002
for distribution to the Partnership's customers. In connection with the
$75,000 payment, the Partnership recorded a charge of $50,000 in December
2004 with the remaining $25,000 charged against previously established
reserves. The $50,000 reduction in net income before allocations to partners
was specially allocated to subordinated limited partners and general
partners. Additionally, in connection with the settlements, the
Partnership's Managing Partner has agreed to voluntarily retire as the
Partnership's Managing Partner effective December 31, 2005. For the year
ended December 31, 2004, related settlement expenses were included in the
consolidated statements of income as Other Operating Expenses.
48
PART II
Item 8. Financial Statements and Supplementary Data, continued
NOTE 18 - RELATED PARTIES
EDJ owns a 49.5% limited partnership interest in the investment advisor to
the Edward Jones Money Market Fund and a 49.5% limited partnership interest
in the investment advisor to the Federated Capital Income Fund. The
Partnership does not have management responsibility with regard to the
advisors.
Approximately 2% of the Partnership's revenues were derived from the
advisors and these funds during 2004 and 3% for 2003 and 2002.
NOTE 19 - QUARTERLY INFORMATION
(Unaudited)
Quarters Ended
--------------
March 28, June 27, September 26, December 31,
--------- -------- ------------ -----------
2003
Total revenue $542,661 $637,213 $652,396 $706,592
Net income 24,742 53,918 53,772 70,878
Net income per weighted average
$1,000 equivalent limited
partnership unit outstanding $ 13.15 $ 28.67 $ 28.58 $ 37.68
March 26, June 25, September 24, December 31,
--------- -------- ------------- ------------
2004
Total revenue $725,029 $728,841 $686,397 $751,098
Income before allocations to
partners 60,939 72,453 58,910 24,425
Income before allocations to
partners per weighted average
$1,000 equivalent limited
partnership unit outstanding $ 28.89 $ 34.34 $ 27.92 $ 35.28*
*The $50,000 reduction in net income before allocations to partners related
to regulatory settlements (See Note 17) was specially allocated to
subordinated limited partners and general partners, and was not allocated to
limited partners.
49
PART II
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As required by Rule 13a-15
under the Securities Exchange Act of 1934, as of the end of the period
covered by this Annual Report on Form 10-K, the Partnership's certifying
officers, the Chief Executive Officer and the Chief Financial Officer,
carried out an evaluation with the participation of our management of the
effectiveness of the design and operation of our disclosure controls and
procedures. In designing and evaluating our disclosure controls and
procedures, we recognize that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and we were required to apply our
judgment in evaluating and implementing possible controls and procedures.
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that they believe that, as of the date of completion
of the evaluation, our disclosure controls and procedures were reasonably
effective to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities
and Exchange Commission'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.
50
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 25, 2005, the Partnership was composed of 265 general
partners, 4,812 limited partners and 153 subordinated limited partners.
Under the terms of the Partnership Agreement, Douglas E. Hill is designated
Managing Partner and in said capacity has primary responsibility for
administering the Partnership's business, determining its policies,
controlling the management and conduct of the Partnership's business and has
the power to appoint and dismiss general partners of the Partnership and to
fix the proportion of their respective interests in the Partnership. The
Partnership does not have a formal code of ethics for executives. It relies
on the core values and beliefs of the Partnership as well as the Partnership
Agreement. The Partnership is in the process of developing a code of ethics
and program. Subject to the foregoing, the Partnership is managed by its 265
general partners.
Effective January 1, 2004, John W. Bachmann retired as Managing Partner of
the Partnership. Also, effective January 1, 2004, Douglas E. Hill assumed
the role of Managing Partner. He has been a partner for 29 years. In
connection with the settlements described in Item 3 - Legal Proceedings of
this Form 10-K, Mr. Hill has agreed to voluntarily retire as the Managing
General Partner of the Registrant on December 31, 2005. Mr. Hill currently
plans to remain a partner of the Partnership after that date.
The Executive Committee of the Partnership, throughout 2004, was composed of
Douglas E. Hill, Michael R. Holmes, Richie L. Malone, Steven Novik, Darryl
L. Pope and Lawrence R. Sobol. Darryl L. Pope retired as of December 31,
2004, as a result of reaching age 65, the mandatory retirement age under the
Partnership's organizational documents. Mr. Pope is currently a subordinated
limited partner of the Registrant. Michael R. Holmes retired as of December
31, 2004, as well, and has also been a subordinated limited partner since
that date. Furthermore, Norman Eaker, a general partner of the Registrant
since 1984 and a member of the Registrant's Management Committee, was
appointed to the Executive Committee as of January 15, 2005. 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 25, 2005:
Name Age Partner Area of responsibility
- --------------------------------------------------------------------------
Douglas E. Hill 60 1974 Managing Partner
Richie L. Malone 56 1979 Information Systems
Steven Novik 55 1983 Finance & Accounting
Lawrence R. Sobol 54 1977 General Counsel
Norman Eaker 48 1984 Global Operations
- --------------------------------------------------------------------------
Each member of the Executive Committee has been a general partner of the
Partnership for more than five preceding years.
Richie L. Malone is a director of F5 Networks, Inc., Seattle, Washington.
51
PART III
Item 10. Directors and Executive Officers of the Registrant, continued
Norman Eaker is a member of the Board of Directors of the Depository Trust &
Clearing Corporation, the Board of Trustees of the CUSIP Agency, the
Operations Committee of the Securities Industry Association and the Board of
Governors of the Chicago Stock Exchange. Effective March 31, 2005, Mr. Eaker
will no longer serve on the Board of Governors of the Chicago Stock
Exchange.
ITEM 11. EXECUTIVE COMPENSATION
The following table identifies the compensation of the firm's Managing
Partner and the five highest compensated individuals of the Partnership
during the three most recent years (including respective shares of profit
participation).
(1) (2) (3) (4)
Net Income
Deferred Allocated
Compen- to General Total
Year Salaries sation Partners (1) (2) (3) (4)
- ---------------------------------------------------------------------------------------------------------------
Douglas E. Hill (4) 2004 $225,000 $8,508 $1,576,498 $1,810,006
2003 200,000 7,160 4,287,876 4,495,036
2002 181,250 5,620 3,119,026 3,305,896
Richie L. Malone 2004 175,000 8,508 4,365,620 4,549,128
2003 175,000 7,160 4,192,168 4,374,328
2002 163,750 5,620 3,012,976 3,182,346
Gary D. Reamey 2004 150,000 8,508 4,365,621 4,524,129
2003 150,000 7,160 4,054,043 4,211,203
2002 138,750 5,620 2,998,277 3,142,647
James D. Weddle 2004 175,000 8,508 4,053,790 4,237,298
2003 175,000 7,160 3,897,020 4,079,180
2002 163,750 5,620 2,795,363 2,964,733
Steven Novik 2004 175,000 8,508 3,741,961 3,925,469
2003 175,000 7,160 3,601,872 3,784,032
2002 163,750 5,620 2,458,919 2,628,289
Norman Eaker 2004 175,000 8,508 3,741,961 3,925,469
2003 175,000 7,160 3,607,446 3,789,606
2002 156,250 5,620 2,458,919 2,620,789
- ---------------------------------------------------------------------------------------------------------------
52
PART III
Item 11. Executive Compensation, continued
(1) Each non-selling general partner receives a salary generally ranging
from $90,000 - $225,000 annually. Selling general partners do not
receive a specified salary, rather, they receive the net sales
commissions earned by them (none of the six individuals listed above
earned any such commissions). Additionally, general partners who are
principally engaged in sales are entitled to office bonuses based on
the profitability of their respective branch office, on the same basis
as the office bonus program established for all investment
representative employees.
(2) Each general partner is a participant in the Partnership's profit
sharing plan which covers all eligible employees. Contributions to
the plan, which are within the discretion of the Partnership, are
made annually and have historically been determined based on
approximately twenty-four percent of the Partnership's net income.
Allocation of the Partnership's contribution among participants is
determined by each participant's relative level of eligible earnings,
including in the case of general partners, their net income
participation.
(3) Each general partner is entitled to participate in the annual net
income of the Partnership based upon the respective percentage
interest in the Partnership of each partner. Interests in the
Partnership held by each general partner ranged from 0.03% to 3.0% in
2004 and 2003, and 0.03% to 3.1% in 2002. At the discretion of the
Managing Partner, the partnership agreement provides that, generally,
the first eight percent of net income allocable to general partners
be distributed on the basis of individual merit or otherwise as
determined by the Managing Partner. Thereafter, the remaining net
income allocable to general partners is distributed based upon each
individual's percentage interest in the Partnership. Net income
allocated to general partners excludes income required to be
reinvested under the Partnership Agreement.
Net income allocable to general partners is the amount remaining
after payment of interest and earnings on capital invested to limited
partners and subordinated limited partners.
(4) Under the settlement agreement with the U.S. Attorney's Office for
the Eastern District of Missouri, Mr. Hill absorbed a
disproportionate allocation of the settlement cost of approximately
$3.1 million reducing Mr. Hill's 2004 net income allocated to general
partners and his total remuneration presented in the foregoing table.
In the absence of the settlement agreement, Mr. Hill's 2004 net
income allocated to general partners and the total presented in the
above table would have been $4,677,451 and $4,910,959, respectively.
53
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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), 214 of the general partners also own
limited partnership interests and 48 of the general partners also own
subordinated limited partnership interests, as noted in the table below.
As of February 25, 2005:
Name of Amount of
Beneficial Beneficial % of
Title of Class Owner Ownership Class
- -----------------------------------------------------------------------------
Limited Partnership All General
Interests Partners as
a Group $25,241,000 12%
Subordinated All General
Limited Partnership Partners as
Interests a Group $35,235,387 27%
- -----------------------------------------------------------------------------
54
PART III
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the ordinary course of its business the Partnership has extended credit
to certain of its partners and employees in connection with their purchase
of securities. Such extensions of credit have been made on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with non-affiliated persons, and did
not involve more than the normal risk of collectability or present other
unfavorable features. The Partnership also, from time to time and in the
ordinary course of business, enters into transactions involving the purchase
or sale of securities from or to partners or employees and members of their
immediate families, as principal. Such purchases and sales of securities on
a principal basis are effected on substantially the same terms as similar
transactions with unaffiliated third parties.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees paid by the Partnership to its auditors,
PricewaterhouseCoopers LLP.
(Dollars in thousands) 2004 2003
------ ------
Fees paid by the Partnership:
Audit fees $1,112 $ 897
Audit-related fees (1) 692 375
Tax fees (2) 813 488
All other (3) 68 133
------ ------
Total fees $2,685 $1,893
====== ======
(1) Audit-related fees consist primarily of fees for internal control
reviews, attestation/agreed-upon procedures, employee benefit plan
audits, and consultations concerning financial accounting and reporting
standards.
(2) Tax fees consist of fees for tax compliance, consultation on tax
matters, and other tax planning and advice.
(3) All other fees consist primarily of information technology advisory
services.
The audit committee pre-approved all audit and non-audit related services in
fiscal year 2004. No services were provided under the deminimis fee
exception to the audit committee pre-approval requirements.
55
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Page No.
INDEX
(a) (1) The following financial statements are included in Part II, Item 8:
Report of Independent Registered Public Accounting Firm................30
Consolidated Statements of Financial Condition as of
December 31, 2004 and 2003.............................................31
Consolidated Statements of Income for the years ended
December 31, 2004, 2003 and 2002.......................................33
Consolidated Statements of Changes in Partnership Capital
for the years ended December 31, 2004, 2003 and 2002...................34
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002.......................................35
Notes to Consolidated Financial Statements ............................36
(2) The following financial statements are included in Schedule I:
Parent Company Only Condensed Statements of Financial Condition as
of December 31, 2004 and 2003..........................................62
Parent Company Only Condensed Statements of Income for the years
ended December 31, 2004, 2003 and 2002.................................63
Parent Company Only Condensed Statements of Cash Flows for the
years ended December 31, 2004, 2003 and 2002...........................64
Report of Independent Registered Public Accounting Firm................65
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.
56
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/ Douglas E. Hill
----------------------------------------
Douglas E. Hill, Chief Executive Officer
Date March 30, 2005
----------------------------------------
By (Signature and Title) /s/ Steven Novik
----------------------------------------
Steven Novik, Chief Financial Officer
Date March 30, 2005
----------------------------------------
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.
57
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
Exhibit
Number Page Description
3.1 * Fifteenth Amended and Restated Agreement of Registered
Limited Liability Limited Partnership of The Jones
Financial Companies, L.L.L.P., dated as of May 14, 2004,
incorporated herein by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 25, 2004.
3.2 * Fifteenth Restated Certificate of Limited Partnership of
the Jones Financial Companies, L.L.L.P., dated as of
January 4, 2004, as amended, incorporated herein by
reference to Exhibit 3.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 25, 2004.
3.3 * Form of Limited Partnership Agreement of Edward D. Jones
& Co., L.P., incorporated by reference to Exhibit 2 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1993.
10.1 * Form of Cash Subordination Agreement between the
Registrant and Edward D. Jones & Co., incorporated
herein by reference to Exhibit 10.1 to the Company's
registration statement of Form S-1 (Reg. No. 33-14955).
10.2 * Agreements of Lease between EDJ Leasing Company and
Edward D. Jones & Co., L.P., dated August 1, 1991,
incorporated herein by reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the year ended
September 27, 1991.
10.3 * Edward D. Jones & Co., L.P. Note Purchase Agreement
dated as of May 8, 1992, incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 26, 1992.
10.4 * Purchase and Sale Agreement by and between EDJ Leasing
Co., L.P. and the Resolution Trust Corporation
incorporated herein by reference to Exhibit 10.21 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992.
10.5 * Master Lease Agreement between EDJ Leasing Company and
Edward D. Jones & Co., L.P., dated March 9, 1993, and
First Amendment to Lease dated March 9, 1994,
incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 25, 1994.
10.6 * Mortgage Note and Amendment to Deed of Trust between EDJ
Leasing Co., L.P. and Nationwide Insurance Company dated
March 9, 1994, incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 25, 1994.
58
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, CONTINUED
10.7 * Mortgage Note; Deed of Trust and Security Agreement;
Assignment of Leases, Rents and Profits; and
Subordination and Attornment Agreement between EDJ
Leasing Co., L.P. and Nationwide Insurance Company dated
April 6, 1994, incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 25, 1994.
10.8 * Note Purchase Agreement by Edward D. Jones & Co., L.P.,
for $92,000,000 aggregate principal amount of 7.95%
subordinated capital notes due April 15, 2006,
incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 24, 1994.
10.9 * Master Lease Agreement and Addendum by and between
Edward D. Jones & Co., L.P. and General Electric Capital
Corporated dated April 21, 1994, incorporated herein by
reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 24, 1994.
10.10 * Agreement and Plan of Acquisition between The Jones
Financial Companies and Boone National Savings and Loan
Association, F.A., incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994.
10.11 * Mortgage Note; South Second Deed of Trust and Security
Agreement between EDJ Leasing Co., L.P. and Nationwide
Life Insurance Company dated August 31, 1995,
incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 29, 1995.
10.12 * Mortgage Note; North Second Deed of Trust and Security
Agreement between EDJ Leasing Co., L.P. and Nationwide
Life Insurance Company dated August 31, 1995,
incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 29, 1995.
10.13 * Note Purchase Agreement by Edward D. Jones & Co., L.P.
for $94,500,000 aggregate principal amount of 8.18%
subordinated capital notes due September 1, 2008,
incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 27, 1996.
10.14 * Note Purchase Agreement by Edward D. Jones & Co., L.P.
for $75,000,000 aggregate principal amount of
subordinated capital notes with rates ranging from 7.51%
to 7.79% due September 15, 2011, incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 24, 1999.
59
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, CONTINUED
10.15 * Lease between Eckelkamp Office Center South, L.L.C., a
Missouri Limited Liability Company, as Landlord and
Edward D. Jones & Co., L.P., a Missouri Limited
Partnership, as Tenant, dated February 3, 2000,
incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 2001.
10.16 * Master Agreement dated as of November 30, 2000 among
Edward D. Jones & Co., L.P., as Lessee, Construction
Agent and Guarantor, Atlantic Financial Group, Ltd.,
(registered to do business in Arizona as AFG Equity,
Limited Partnership) as Lessor, Suntrust Bank and
Certain Financial Institutions Parties Hereto, as
Lenders, and Suntrust Bank as agent, and joined in by
The Jones Financial Companies, L.L.L.P., incorporated
herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
10.17 * Master Lease Agreement dated as of November 30, 2000
between Atlantic Financial Group, Ltd. (registered to do
business in Arizona as AFG Equity, Limited Partnership),
as Lessor, and Edward D. Jones & Co., L.P., as Lessee,
incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31,
2001.
10.18 * Master Lease Agreement between Edward D. Jones & Co.,
L.P. and Fleet Capital Corporation dated as of August
22, 2001, incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
10.19 * Credit Agreement dated as of August 27, 2001 between EDJ
Leasing Co., L.P. and Southtrust Bank, incorporated
herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
10.20 * Master Lease Agreement between EDJ Leasing Co., L.P. and
Edward D. Jones & Co., L.P. dated August 27, 2001,
incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31,
2001.
10.21 * Master Agreement dated as of September 18, 2001 among
Edward D. Jones & Co., L.P., as Lessee, Construction
Agent and Guarantor, Atlantic Financial Group, Ltd.,
(registered to do business in Missouri as Atlantic
Financial Group, L.P.) as Lessor, Suntrust Bank and
Certain Financial Institutions Parties Hereto, as
Lenders, and Suntrust Bank, as Agent and joined in by
The Jones Financial Companies, L.L.L.P, incorporated
herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
10.22 * Master Lease Agreement dated as of September 18, 2001
between Atlantic Financial Group, Ltd. (registered to do
business in Missouri as Atlantic Financial Group, L.P.),
as Lessor, and 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.
60
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K, CONTINUED
10.23 * Note Purchase Agreement by Edward D. Jones & Co., L.P.,
for $250,000,000 aggregate principal amount of 7.33%
subordinated capital notes due June 12, 2014,
incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June
28, 2002.
21 66 Subsidiaries of the Registrant.
23.1 69 Consent of Independent Registered Public Accounting
Firm, filed herewith.
24 * Delegation of Power of Attorney to Managing Partner
contained within Exhibit 3.1.
31 70 Certification pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 302 of the Sarbanes-Oxley
Act of 2002.
32 72 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.
* Incorporated by reference to previously filed exhibits.
61
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) 2004 2003
- --------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 1,731 $ 4,364
Investment in subsidiaries 797,710 769,985
Others assets 9,173 11,744
-------- --------
TOTAL ASSETS $808,614 $786,093
======== ========
LIABILITIES AND PARTNERSHIP CAPITAL:
Payable to limited partners, accounts payable
and accrued expenses $ 373 $ 807
Partnership capital subject to mandatory
redemption 808,241 -
-------- --------
TOTAL LIABILITIES 808,614 807
TOTAL PARTNERSHIP CAPITAL - 785,286
TOTAL LIABILITIES AND PARTNERSHIP
-------- --------
CAPITAL $808,614 $786,093
======== ========
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.
62
Schedule I (continued)
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
Years Ended
----------------------------------------------------
(Dollars in thousands, December 31, December 31, December 31,
except per unit information) 2004 2003 2002
- --------------------------------------------------------------------------------------------
NET REVENUE
Subsidiary earnings $ 216,908 $ 200,978 $ 148,066
Management fee income 34,864 36,265 35,661
Other 339 645 (280)
--------- --------- ---------
Total revenue 252,111 237,888 183,447
Interest expense 16,507 16,880 17,325
--------- --------- ---------
Net revenue 235,604 221,008 166,122
--------- --------- ---------
OPERATING EXPENSES
Compensation and benefits 18,682 17,532 17,065
Payroll and other taxes 103 75 115
Other operating expenses 92 91 27
--------- --------- ---------
Total operating expenses 18,877 17,698 17,207
--------- --------- ---------
INCOME BEFORE ALLOCATIONS
TO PARTNERS $ 216,727 $ 203,310 $ 148,915
Allocations to partners (216,727) - -
--------- --------- ---------
NET INCOME $ - $ 203,310 $ 148,915
========= ========= =========
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.
63
Schedule I (continued)
THE JONES FINANCIAL COMPANIES, L.L.L.P.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands) 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ - $ 203,310 $ 148,915
Adjustments to reconcile net income to net cash
provided by operating activities -
Income before allocations to partners 216,727 - -
Increase in investment in subsidiaries (27,725) (68,237) (34,396)
Decrease (increase) in other assets and liabilities, net 2,137 (6,160) (1,091)
--------- --------- ---------
Net cash provided by operating activities 191,139 128,913 113,428
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of partnership interests 12,727 9,829 13,709
Redemption of partnership interests (5,375) (7,356) (5,427)
Withdrawals and distributions from
partnership capital (201,124) (130,442) (121,968)
--------- --------- ---------
Net cash used in financing activities (193,772) (127,969) (113,686)
--------- --------- ---------
Net (decrease) increase in cash and
cash equivalents (2,633) 944 (258)
CASH AND CASH EQUIVALENTS,
Beginning of year 4,364 3,420 3,678
--------- --------- ---------
End of year $ 1,731 $ 4,364 $ 3,420
========= ========= =========
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.
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM ON FINANCIAL STATEMENT SCHEDULES
To The Jones Financial Companies, L.L.L.P.:
Our audits of the consolidated financial statements referred to in our
report dated March 24, 2005 appearing in the Form 10-K of The Jones
Financial Companies, L.L.L.P. also included audits of the financial
statement schedules listed in Item 15(a)(2) of this Form 10-K. In our
opinion, these financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with
the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
March 24, 2005
65