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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 24, 2005 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
------------------- ---------------------
NONE NONE
- ----------------------------- --------------------------
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 the filing date, there were no voting securities held by non-
affiliates of the registrant.
THE JONES FINANCIAL COMPANIES, L.L.L.P.
INDEX
Page
Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition............................................3
Consolidated Statements of Income.........................................................5
Consolidated Statements of Changes in Partnership Capital Subject to Mandatory
Redemption............................................................................6
Consolidated Statements of Cash Flows.....................................................7
Notes to Consolidated Financial Statements................................................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...............................18
Item 4. Controls and Procedures..................................................................18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................19
Item 6. Exhibits.................................................................................19
Signatures...............................................................................20
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
(Unaudited)
March 24, December 31,
(Dollars in thousands) 2005 2004
- ------------------------------------------------------------------------------------ --------------
Cash and cash equivalents $ 223,327 $ 194,089
Securities purchased under agreements to resell 115,000 275,000
Receivable from:
Customers 2,484,241 2,498,688
Brokers, dealers and clearing organizations 225,724 221,535
Mortgages and loans 147,844 150,377
Securities owned, at market value
Inventory securities 77,132 48,730
Investment securities 209,074 220,048
Equipment, property and improvements, at cost,
net of accumulated depreciation 303,652 316,814
Other assets 202,791 174,222
-------------- --------------
TOTAL ASSETS $ 3,988,785 $ 4,099,503
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES
(Unaudited)
March 24, December 31,
(Dollars in thousands) 2005 2004
- ------------------------------------------------------------------------------------ --------------
Payable to:
Customers $ 2,075,501 $ 2,131,217
Brokers, dealers and clearing organizations 77,281 71,535
Depositors 109,991 117,337
Securities sold, not yet purchased, at market value 20,797 38,808
Accounts payable and accrued expenses 167,244 193,435
Accrued compensation and employee benefits 270,031 285,754
Federal Home Loan Bank advances 37,266 33,928
Long-term debt 31,065 31,823
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2,789,176 2,903,837
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Liabilities subordinated to claims of general creditors 387,425 387,425
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Commitments and contingencies (See Notes) - -
Partnership capital subject to mandatory redemption,
net of reserve for anticipated withdrawals 774,799 751,674
Reserve for anticipated withdrawals 37,385 56,567
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Total partnership capital subject to mandatory redemption 812,184 808,241
-------------- --------------
TOTAL LIABILITIES $ 3,988,785 $ 4,099,503
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
4
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
-------------------------------
(Dollars in thousands, March 24, March 26,
except per unit information) 2005 2004
- -----------------------------------------------------------------------------------------
Revenue:
Trade Revenue
Commissions $ 390,879 $ 405,274
Principal transactions 55,708 65,604
Investment banking 7,691 4,524
Fee Revenue
Asset fees 165,511 141,272
Account and activity fees 83,596 74,432
Interest and dividends 45,796 33,200
Other revenue 6,616 723
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Total revenue 755,797 725,029
Interest expense 13,559 13,967
------------- --------------
Net revenue 742,238 711,062
------------- --------------
Operating expenses:
Compensation and benefits 443,527 426,896
Communications and data processing 65,433 68,169
Occupancy and equipment 64,188 61,794
Payroll and other taxes 31,390 31,915
Advertising 17,622 11,072
Postage and shipping 15,182 10,718
Floor brokerage and clearance fees 3,570 3,135
Other operating expenses 37,346 36,424
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Total operating expenses 678,258 650,123
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Income before allocations to partners 63,980 60,939
Allocations to partners:
Limited partners 6,632 6,405
Subordinated limited partners 8,099 6,722
General partners 49,249 47,812
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Net Income $ - $ -
============= ==============
Income before allocations to partners
per weighted average $1,000
equivalent limited partnership unit outstanding $ 30.64 $ 28.89
============= ==============
Weighted average $1,000 equivalent
limited partnership units outstanding 216,449 221,703
============= ==============
The accompanying notes are an integral part of these consolidated financial statements
5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL
SUBJECT TO MANDATORY REDEMPTION
THREE MONTHS ENDED MARCH 24, 2005 AND MARCH 26, 2004
(Unaudited)
Subordinated
Limited Limited General
Partnership Partnership Partnership
(Dollars in thousands) Capital Capital Capital Total
- ------------------------------------------------------------------------------------------------------------------------
TOTAL PARTNERSHIP CAPITAL SUBJECT TO
MANDATORY REDEMPTION, JANUARY 1,
2004 $ 237,845 $ 112,406 $ 435,035 $ 785,286
Reserve for anticipated withdrawals (15,345) (8,468) (34,193) (58,006)
------------- ------------- ------------- ------------
Partnership capital subject to mandatory
redemption, net of reserves for anticipated
withdrawals, January 1, 2004 222,500 103,938 400,842 727,280
Issuance of partnership interests - 10,878 - 10,878
Redemption of partnership interests (1,109) (50) - (1,159)
Income allocated to partners 6,405 6,722 47,812 60,939
Withdrawals and distributions (8) (252) (1,649) (1,909)
------------- ------------- ------------- ------------
TOTAL PARTNERSHIP CAPITAL SUBJECT TO
MANDATORY REDEMPTION, MARCH 26, 2004 227,788 121,236 447,005 796,029
Reserve for anticipated withdrawals (6,397) (6,470) (32,967) (45,834)
------------- ------------- ------------- ------------
Partnership capital subject to mandatory
redemption, net of reserves for anticipated
withdrawals, March 26, 2004 $ 221,391 $ 114,766 $ 414,038 $ 750,195
============= ============= ============= ============
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 reserves for anticipated
withdrawals, December 31, 2004 217,575 112,482 421,617 751,674
Issuance of partnership interests - 20,471 - 20,471
Redemption of partnership interests (1,426) - (16,738) (18,164)
Income allocated to partners 6,632 8,099 49,249 63,980
Withdrawals and distributions (7) (154) (5,616) (5,777)
------------- ------------- ------------- ------------
TOTAL PARTNERSHIP CAPITAL SUBJECT TO
MANDATORY REDEMPTION, MARCH 24, 2005 222,774 140,898 448,512 812,184
Reserve for anticipated withdrawals (6,625) (7,945) (22,815) (37,385)
------------- ------------- ------------- ------------
Partnership capital subject to mandatory
redemption, net of reserves for anticipated
withdrawals, March 24, 2005 $ 216,149 $ 132,953 $ 425,697 $ 774,799
============= ============= ============= ============
The accompanying notes are an integral part of these consolidated financial statements.
6
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
---------------------------
March 24, March 26,
(Dollars in thousands) 2005 2004
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ - $ -
Adjustments to reconcile net income to net
cash provided by operating activities -
Income before allocations to partners 63,980 60,939
Depreciation and amortization 21,725 24,277
Changes in assets and liabilities:
Securities purchased under agreements to resell 160,000 97,000
Net receivable from customers (41,269) (99,251)
Net receivable from brokers, dealers and
clearing organizations 1,557 (64,788)
Receivable from mortgages and loans 2,533 (3,848)
Securities owned, net (35,439) 46,628
Other assets (28,569) (6,340)
Payable to depositors (7,346) 373
Accounts payable and accrued expenses (26,191) 11,688
Accrued compensation and employee benefits (15,723) (1,269)
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Net cash provided by operating activities 95,258 65,409
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, property and improvements, net (8,563) (8,877)
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Net cash used in investing activities (8,563) (8,877)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Federal Home Loan Bank advances, net 3,338 2,999
Repayment of long-term debt (758) (694)
Issuance of partnership interests 20,471 10,878
Redemption of partnership interests (18,164) (1,159)
Withdrawals and distributions from partnership capital (62,344) (59,915)
------------ ------------
Net cash used in financing activities (57,457) (47,891)
------------ ------------
Net increase in cash and cash equivalents 29,238 8,641
CASH AND CASH EQUIVALENTS,
Beginning of period 194,089 187,980
------------ ------------
End of period $ 223,327 $ 196,621
============ ============
Cash paid for interest $ 11,197 $ 10,988
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
7
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE JONES FINANCIAL COMPANIES, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per unit information)
BASIS OF PRESENTATION
THE PARTNERSHIP'S BUSINESS AND BASIS OF ACCOUNTING. The accompanying
consolidated financial statements include the accounts of The Jones
Financial Companies, L.L.L.P. and all wholly owned subsidiaries
(collectively, the "Partnership"). All material intercompany balances and
transactions have been eliminated in consolidation. Non-controlling minority
interests owned are accounted for under the equity method.
The Partnership operates as a single business segment. The Partnership's
principal operating subsidiary, Edward D. Jones & Co., L.P. ("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 the partner's death, the Partnership must
redeem the partner's capital within six months. Limited partners withdrawing
from the Partnership due to termination or resignation are repaid their
capital in three equal annual installments beginning the month after their
resignation or termination. The capital of general partners resigning or
terminated from the Partnership is converted to subordinated limited
partnership capital. Subordinated limited partners are repaid their capital
in four equal annual installments beginning the month after their request
for withdrawal of contributed capital. The Partnership's managing partner
has the discretion to waive these withdrawal restrictions. All current and
future partnership capital is subordinate to all current and future
liabilities of the Partnership, including the liabilities subordinated to
claims of general creditors.
The interim financial information included herein is unaudited. However, in
the opinion of management, such information includes all adjustments,
consisting primarily of normal recurring accruals, which are necessary for a
fair presentation of the results of interim operations. Certain prior period
amounts have been reclassified to conform to the current year presentation.
8
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The results of operations for the three months ended March 24, 2005 and
March 26, 2004 are not necessarily indicative of the results to be expected
for the full year. These consolidated financial statements should be read in
conjunction with the Partnerships Annual Report on Form 10-K for the year
ended December 31, 2004.
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 revenues.
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.
PARTNERSHIP CAPITAL SUBJECT TO MANDATORY REDEMPTION
In May 2003, the Financial Accounting Standard 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.
Since the Partnership is obligated to redeem a partner's capital after a
partner's death, accounting principles generally accepted in the United
States require all of the Partnership's equity capital to be classified as a
liability. Income allocable to limited, subordinated limited and general
partners must be classified on the Partnership's statement of income as
interest expense and is classified as a reduction of income before
allocations to partners, which results in a presentation of $0 net income
for the quarters ended March 24, 2005 and March 26, 2004. The financial
statement presentations required to comply with GAAP do not alter the
Partnership's treatment of income, income allocations or equity capital for
any other purposes. In addition, SFAS No. 150 does not have any effect on,
nor is it applicable to, the Partnership's subsidiaries' financial
statements.
9
PART I. FINANCIAL INFORMATION
Item 1. 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 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 firm's partnership capital subject to mandatory redemption, net of
reserve for anticipated withdrawals of $774,799, consists of $216,149 of
limited partnership capital issued in $1,000 units, $132,953 of subordinated
limited partnership capital and $425,697 of general partnership capital as
of March 24, 2005. Reserve for anticipated withdrawals consists of current
year profits to be withdrawn over the next year. The $7,945 of Subordinated
Limited Partnership reserve for anticipated withdrawals does not include
$4,520 of subordinated limited partnership capital redemptions scheduled to
be paid within the next twelve months.
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 $4,059 and $4,158 for
the quarter ended March 24, 2005 and March 26, 2004, respectively, and is
included as a component of Interest Expense. The 7.5% return is paid to
limited partners regardless of the Partnership's earnings.
The subordinated limited partnership capital subject to mandatory redemption
is held by current and former general partners of the Partnership. Each
subordinated limited partner receives a varying percentage of the net income
of the Partnership. The subordinated limited partner capital subject to
mandatory redemption is subordinated to the limited partnership capital.
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, as
amended, 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 the resulting Net Capital would
be less than 5% of aggregate debit items. Additionally, certain withdrawals
require the consent of the Securities and Exchange Commission ("SEC") to the
extent they exceed defined levels, even though such withdrawals would not
cause Net Capital to be less than 5% of aggregate debit items.
At March 24, 2005, EDJ's Net Capital of $598,738 was 24.7% of debit items
and its Net Capital in excess of the minimum required was $550,167. Net
Capital as a percentage of aggregate debit items after anticipated
withdrawals, which are scheduled subordinated debt principal payments
through September 30, 2005, was 22.9%. Net capital and the related capital
percentage may fluctuate on a daily basis.
At March 24, 2005, the Partnership's foreign broker-dealer subsidiaries were
in compliance with regulatory capital requirements in the jurisdictions in
which they operate.
10
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONTINGENCIES
In the normal course of business, the Partnership has been named from time
to time as a defendant in various legal actions, including arbitrations,
class actions and other litigation. Certain of these legal actions include
claims for substantial compensatory and/or punitive damages or claims for
indeterminate amounts of damages. The Partnership is involved from time to
time in investigations and proceedings by governmental and self-regulatory
agencies, certain of which may result in adverse judgments, fines and/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. For additional discussions, refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the Partnership's Annual Report on Form 10-K for the Fiscal year
ended December 31, 2004.
Also, in the normal course of business, the Partnership enters into contract
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.
11
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BASIS OF PRESENTATION
Due to the adoption of 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.
For internal analysis, the Partnership broadly categorizes its revenues as
trade revenue (revenue from buy or sell transactions on securities) and net
fee revenue (sources other than trade revenue). In the Partnership's
Consolidated Statements of Income, trade revenue is 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 FOR THE THREE MONTHS ENDED MARCH 24, 2005 AND
MARCH 26, 2004
For the first three months of 2005, net revenue increased 4% ($31.2 million)
to $742.2 million, while income before allocations to partners increased 5%
($3.0 million) to $64.0 million. The Partnership's profit margin based on
income before allocations to partners increased to 8.5% in the first quarter
of 2005, from 8.4% in the first quarter of 2004. The Partnership's net
revenue, income before allocations to partners and profit margin increased
due primarily to growth in customer asset values and higher account and
activity fees. Operating expenses increased due primarily to growth in sales
compensation related to the increase in net revenues and to costs associated
with the continued expansion and enhancement of the Partnership's branch
office network. The Partnership added 161 Investment Representatives ("IRs")
during the twelve months ended March 24, 2005, ending the quarter with 9,543
IRs, an increase of 2%.
TRADE REVENUE
Trade revenue comprised 61% of net revenue for the first quarter of 2005,
down from 67% for the first quarter of 2004. Conversely net fee revenue
comprised 39% for the first quarter of 2005, up from 33% in the
corresponding period.
Trade revenue of $454.3 million decreased 4% ($21.1 million) during the
first quarter of 2005 due primarily to a decrease in customer dollars
invested (the principal amount of customers' buy and sell transactions
generating trade revenue) and a lower gross margin earned on customer
dollars invested compared to the first quarter of 2004. Total customer
dollars invested were $17.6 billion during the first quarter of 2005, a 1%
($0.2 billion) decrease from the first quarter of 2004. The Partnership's
margin earned on each $1,000 invested decreased to $25.90 in the first
quarter of 2005 from $26.60 in the first quarter of 2004. Year over year,
customer dollars invested shifted to fixed income products, primarily from
mutual funds and individual equities.
12
PART I. FINANCIAL INFORMATION
Commissions revenue decreased 4% ($14.4 million) for the first quarter of
2005 to $390.9 million. Commissions revenue decreased year over year due
primarily to a 5% ($0.7 billion) decrease in customer dollars invested to
$12.9 billion. Underlying the decrease in commissions revenues, mutual fund
commissions decreased 4% ($10.9 million) and equity commissions decreased 7%
($5.5 million). The following table summarizes commissions revenue quarter
over quarter:
(in millions) Quarter ended
-----------------------------------
March 24, March 26,
2005 2004
------------ ------------
Mutual funds $ 264.8 $ 275.7
Equities 78.3 83.8
Insurance 47.7 45.7
Corporate bonds 0.1 0.1
------------ ------------
$ 390.9 $ 405.3
=========== ============
Principal transactions revenue decreased 15% ($9.9 million) to $55.7 million
during the first quarter of 2005 due primarily to a shift in customer
dollars invested from higher margin longer maturity bonds to lower margin
shorter maturity certificates of deposit. The Partnership's margin earned on
principal transactions on each $1,000 invested decreased to $11.90 during
the first quarter of 2005 from $15.10 during the first quarter of 2004.
Customers invested $4.5 billion in principal transactions in the first
quarter of 2005 compared to $4.2 billion in the first quarter of 2004, an
increase of 7%. Revenue from corporate bonds decreased 29% ($6.1 million),
government bonds decreased 28% ($2.4 million) and municipal bonds decreased
11% ($2.1 million), while certificates of deposit increased 78% ($2.9
million). The following table summarizes principal transaction revenue
quarter over quarter:
(in millions) Quarter ended
-----------------------------------
March 24, March 26,
2005 2004
------------ ------------
Municipal bonds $ 17.4 $ 19.5
Corporate bonds 14.7 20.8
Certificates of deposit 6.5 3.6
Government bonds 6.2 8.6
Collateralized mortgage obligations 5.7 6.8
Unit investment trusts 5.2 6.3
------------ ------------
$ 55.7 $ 65.6
=========== ============
Investment banking revenue increased 70% ($3.2 million) during the first
quarter of 2005 to $7.7 million, due primarily to an increase in syndicate
corporate debt offerings in the current quarter.
NET FEE REVENUE
Net fee revenue, which is Fee Revenue net of interest expense, increased 22%
($52.3 million) to $288.0 million during the first quarter of 2005. Asset
fees increased 17% ($24.2 million) to $165.5 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 $33.4 billion or 20% to $197.9 billion in the first quarter
of 2005 compared to $164.6 billion in the first quarter of 2004.
13
PART I. FINANCIAL INFORMATION
Account and activity fees, and other revenue of $90.2 million increased 20%
($15.1 million) year over year. Revenue received from sub-transfer agent
services performed for mutual fund companies increased 16% ($6.5 million) to
$46.7 million, due to a 18% increase in the number of customer accounts for
which the Partnership provides mutual fund sub-transfer agent services. The
number of retirement accounts for which the Partnership is custodian
increased by 14%, resulting in custodial fee revenue growth of 10% ($1.9
million) to $21.0 million. Fee revenue from mutual fund and insurance sales
fees increased 48% ($1.5 million) to $4.6 million due to higher sales
volumes. The Partnership's gain on investment securities included in other
revenue increased $3.5 million year over year.
Net interest and dividend income increased 68% ($13.0 million) to $32.2
million during the first quarter of 2005 due to an increase in customer
margin loans outstanding and an increase in interest rates. Interest income
from customer loans increased 44% ($11.9 million). Average customer margin
loan balances were $2.4 billion in the first quarter of 2005, compared to
$2.1 billion in the first quarter of 2004, an increase of 14%. The average
rate earned on customer loan balances increased to approximately 6.30%
during the first quarter of 2005 from approximately 4.94% during the first
quarter of 2004.
Operating expenses increased 4% ($28.1 million) to $678.3 million during the
first quarter of 2005. Compensation and benefits costs increased 4% ($16.6
million) to $443.5 million. Within compensation and benefits costs, payroll
expense increased 13% ($15.8 million) due to increased salary and medical
costs for existing personnel and additional support in the branches as the
Partnership grows its sales force. On a full time equivalent basis, the
Partnership had 9,858 branch staff associates as of March 24, 2005, compared
to 9,599 branch staff associates as of March 26, 2004. Effective January 1,
2005, the Partnership implemented a special bonus program for certain
existing personnel. Related bonus expense for the first quarter of 2005 was
$6.5 million.
Advertising expenses increased 59% ($6.6 million) to $17.6 million during
the first quarter of 2005 primarily due to the launch of a new advertising
campaign in January 2005. Postage and shipping expense increased 42% ($4.5
million) to $15.2 million primarily due to mailing costs associated with the
Partnership's mutual fund settlements in December 2004 (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the Partnership's Annual Report on Form 10-K for the Fiscal year
ended December 31, 2004).
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, the sale of certain mutual fund share classes and the
manner in which mutual fund and annuity companies compensate broker-dealers.
The Partnership has received information requests and subpoenas from various
regulatory and enforcement authorities regarding the Partnership's mutual
fund compensation arrangements, mutual fund sales practices and other mutual
fund issues. The Partnership is voluntarily cooperating with each inquiry.
Also, the Partnership has been named as a defendant in various class actions
on behalf of purchasers of recommended mutual funds. For additional
discussions of these matters, refer to "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in the
Partnership's Annual Report on Form 10-K for the Fiscal year ended December
31, 2004.
14
PART I. FINANCIAL INFORMATION
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 68% of its total revenue from sales and services related
to mutual fund and annuity products in the first quarter of 2005 and 2004.
The Partnership derived 34% of its total revenue for the first quarter of
2005 and 31% for the first quarter of 2004 from one vendor. Significant
reductions in the revenues from these products could have a material impact
on the Partnership's Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's capital subject to mandatory redemption at March 24, 2005,
excluding the reserve for anticipated withdrawals, was $774.8 million,
compared to $751.7 million at December 31, 2004. The increase is primarily
due to the retention of General Partner earnings ($27.3 million) and the
issuance of Subordinated Limited Partner interests ($20.5 million), offset
by redemption of General Partner and Limited Partner interests ($16.7
million and $1.4 million, respectively), and General Partner withdrawals of
$5.7 million.
At March 24, 2005, the Partnership had $223.3 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 March 24, 2005. The Association had loans
from The Federal Home Loan Bank of $37.3 million as of March 24, 2005 which
were secured by mortgage loans.
The Partnership believes that the liquidity provided by existing cash
balances, other highly liquid assets and borrowing arrangements will be
sufficient to meet the Partnership's capital and liquidity requirements.
Depending on conditions in the capital markets and other factors, the
Partnership will, from time to time, consider the issuance of debt, the
proceeds of which could be used to meet growth needs or for other purposes.
The Partnership's growth in recent years has been financed through sales of
limited partnership interests to its employees, retention of general partner
earnings, private placements of subordinated debt, long-term secured debt
and operating leases under which the Partnership rents facilities,
furniture, fixtures, computers and communication equipment. There were no
significant changes in the Partnership's financial commitments and
obligations for the three months ended March 24, 2005.
For the three months ended March 24, 2005, cash and cash equivalents
increased $29.2 million. Cash provided by operating activities was $95.3
million. The primary sources of cash from operating activities include a
decrease in securities purchased under agreements to resell and income
before allocations to partners adjusted for depreciation. These increases to
cash and cash equivalents were partially offset by an increase in inventory
and a decrease in accounts payable and accrued expenses. Cash used in
investing activities was $8.6 million consisting primarily of capital
expenditures supporting the growth of the Partnership's operations. Cash
used in financing activities was $57.5 million, consisting primarily of
partnership withdrawals ($62.3 million) and redemption of partnership
interests ($18.2 million) offset by issuance of Subordinated Limited Partner
interests ($20.5 million).
15
PART I. FINANCIAL INFORMATION
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 $250,000 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 March 24, 2005, EDJ's Net Capital of $598.7 million was
24.7% of aggregate debit items and its Net Capital in excess of the minimum
required was $550.2 million. Net Capital after anticipated withdrawals,
which are scheduled subordinated debt principal payments through September
30, 2005, as a percentage of aggregate debit items was 22.9%. Net capital
and the related capital percentage may fluctuate on a daily basis.
CRITICAL ACCOUNTING POLICIES
The Partnership's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America,
which require judgment and involve estimation processes to determine its
assets, liabilities, revenues and expenses which may affect its results of
operations.
The Partnership believes that of its significant accounting policies, the
following critical policies may involve a higher degree of judgment and
complexity:
Customers' transactions are recorded on a settlement date basis with the
related revenue and expenses recorded on a trade date basis. The Partnership
may be exposed to risk of loss in the event customers, other brokers and
dealers, banks, depositories or clearing organizations are unable to fulfill
contractual obligations. For transactions in which it extends credit to
customers, the Partnership seeks to control the risks associated with these
activities by requiring customers to maintain margin collateral in
compliance with various regulatory and internal guidelines.
Securities owned and sold, not yet purchased, including inventory securities
and investment securities, are valued at market value which is determined by
using quoted market or dealer prices.
The 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." The Partnership regularly monitors its
exposures for potential losses. The Partnership's total liability with
respect to litigation represents the best estimate of probable losses after
considering, among other factors, the progress of each case, the
Partnership's experience and discussions with legal counsel.
The Association's periodic evaluation of the adequacy of its allowance for
loan losses is based on past loan loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower's ability
to repay, the estimated value of any underlying collateral and current
economic conditions.
The Partnership's periodic evaluation of the estimated useful lives of
equipment, property and improvements is based on the original life
determined at the time of purchase and any events or changes in
circumstances that would result in a change in the useful life.
For additional discussions of the Partnership's accounting policies, refer
to "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Critical Accounting Policies" included in the Partnership's
Annual Report on Form 10-K for the Fiscal year ended December 31, 2004.
16
PART I. FINANCIAL INFORMATION
THE EFFECTS OF INFLATION
The Partnership's net assets are primarily monetary, consisting of cash,
securities inventories and receivables less liabilities. Monetary net assets
are primarily liquid in nature and would not be significantly affected by
inflation. Inflation and future expectations of inflation influence
securities prices, as well as activity levels in the securities markets. As
a result, profitability and capital may be impacted by inflation and
inflationary expectations. Additionally, inflation's impact on the
Partnership's operating expenses may affect profitability to the extent that
additional costs are not recoverable through increased prices of services
offered by the Partnership.
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q, and in particular Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
forward-looking statements within the meaning of the federal securities
laws. You can identify forward-looking statements by the use of the words
"believe," "expect," "anticipate," "intend," "estimate," "project," "will,"
"should," and other expressions which predict or indicate future events and
trends and which do not relate to historical matters. You should not rely on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors, some of which are beyond the control of the
Partnership. These risks, uncertainties and other factors may cause the
actual results, performance or achievements of the Partnership to be
materially different from the anticipated future results, performance or
achievements expressed or implied by the forward-looking statements.
Some of the factors that might cause differences include, but are not
limited to, the following: (1) 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 undertake to update any forward-looking
statements to reflect changes in underlying assumptions or factors, new
information, future events or other changes except to the extent required by
applicable securities laws.
17
PART I. FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The SEC issued market risk disclosure requirements to enhance disclosures of
accounting policies for derivatives and other financial instruments and to
provide quantitative and qualitative disclosures about market risk inherent
in derivatives and other financial instruments. Various levels of management
within the Partnership manage the Partnership's risk exposure. Position
limits in trading and inventory accounts are established and monitored on an
ongoing basis. Credit risk related to various financing activities is
reduced by the industry practice of obtaining and maintaining collateral.
The Partnership monitors its exposure to counterparty risk through the use
of credit exposure information, the monitoring of collateral values and the
establishment of credit limits.
The Partnership is exposed to market risk from changes in interest rates.
Such changes in interest rates impact the income from interest earning
assets, primarily receivables from customers on margin balances, and may
have an impact on the expense from liabilities that finance these assets. At
March 24, 2005, amounts receivable from customers were $2.484 billion.
Liabilities include amounts payable to customers and other interest and
non-interest bearing liabilities.
Under current market conditions and based on current levels of interest
earning assets and the liabilities that finance these assets, the
Partnership estimates that a 100 basis point increase in short-term interest
rates could increase its annual net interest income by approximately $16.5
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 $27.9 million. A decrease in short-term
interest rates has a more significant impact on net interest income because
under the current low interest rate environment the Partnership's interest
bearing liabilities are less sensitive compared to its interest earning
assets.
There were no material changes in the Partnership's exposure to market risk
and changes in interest rates during the three months ended March 24, 2005
that would have a material adverse effect on the consolidated financial
position or results of operations of the Partnership.
ITEM 4. CONTROLS AND PROCEDURES
Based upon an evaluation performed as of the end of the period covered by
this report, the Partnership's certifying officers, the Chief Executive
Officer and the Chief Financial Officer, have concluded that the
Partnership's disclosure controls and procedures were effective.
There have been no significant changes in internal controls or other factors
that significantly affect these controls subsequent to the date of the
evaluation.
18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - See "Contingencies" in Part 1, Item 1
of this Form 10-Q and Part 1, Item 3 "Legal Proceedings" from
the Partnership's Annual Report on Form 10-K for the Fiscal
year ended December 31, 2004.
ITEM 6. Exhibits
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.
31. 21-22 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section
302 of the Sarbanes-Oxley act of 2002.
32. 23-24 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section
906 of the Sarbanes-Oxley act of 2002.
* Incorporated by reference to previously filed exhibits.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
(Registrant) THE JONES FINANCIAL COMPANIES, L.L.L.P.
-----------------------------------------
By (Signature and Title) /s/ Douglas E. Hill
-----------------------------------------
Douglas E. Hill, Chief Executive Officer
Date May 5, 2005
-----------------------------------------
By (Signature and Title) /s/ Steven Novik
-----------------------------------------
Steven Novik, Chief Financial Officer
Date May 5, 2005
-----------------------------------------
20