-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RGoKX5a4qlRawZ5//bpeRlBEux3EQ5C4uLbw/aio4b96EgmvKhWHo2Bb6bIUefW1 pvfTlnGdPY1h4rEwA89+Gg== 0001068800-05-000511.txt : 20050805 0001068800-05-000511.hdr.sgml : 20050805 20050805170027 ACCESSION NUMBER: 0001068800-05-000511 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050624 FILED AS OF DATE: 20050805 DATE AS OF CHANGE: 20050805 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JONES FINANCIAL COMPANIES LP LLP CENTRAL INDEX KEY: 0000815917 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 431450818 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16633 FILM NUMBER: 051003375 BUSINESS ADDRESS: STREET 1: 12555 MANCHESTER CITY: ST LOUIS STATE: MO ZIP: 63131 BUSINESS PHONE: 3148512000 FORMER COMPANY: FORMER CONFORMED NAME: JONES FINANCIAL COMPANIES L P DATE OF NAME CHANGE: 19920703 10-Q 1 jonesq.txt United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 24, 2005 Commission file number 0-16633 ------------- ------- THE JONES FINANCIAL COMPANIES, L.L.L.P. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its Partnership Agreement) MISSOURI 43-1450818 - ------------------------------------------------------------------------------ (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 12555 Manchester Road Des Peres, Missouri 63131 - ------------------------------------------------------------------------------ (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (314) 515-2000 ------------------ 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 - ------------------------------------------------------------------------------ (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.......21 Item 4. Controls and Procedures..........................................21 Part II. OTHER INFORMATION Item 1. Legal Proceedings................................................22 Item 6. Exhibits.........................................................23 Signatures.......................................................24 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements THE JONES FINANCIAL COMPANIES, L.L.L.P. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ASSETS
(Unaudited) June 24, December 31, (Dollars in thousands) 2005 2004 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 188,538 $ 194,089 Securities purchased under agreements to resell 56,000 275,000 Receivable from: Customers 2,481,024 2,498,688 Brokers, dealers and clearing organizations 201,388 221,535 Mortgages and loans 146,871 150,377 Securities owned, at market value Inventory securities 98,675 48,730 Investment securities 186,641 220,048 Equipment, property and improvements, at cost, net of accumulated depreciation 303,253 316,814 Other assets 212,151 174,222 ---------- ---------- TOTAL ASSETS $3,874,541 $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) June 24, December 31, (Dollars in thousands) 2005 2004 - --------------------------------------------------------------------------------------------------------------------- Payable to: Customers $1,907,610 $2,131,217 Brokers, dealers and clearing organizations 113,040 71,535 Depositors 108,299 117,337 Securities sold, not yet purchased, at market value 25,440 38,808 Accounts payable and accrued expenses 181,151 193,435 Accrued compensation and employee benefits 270,224 285,754 Federal Home Loan Bank advances 39,479 33,928 Long-term debt 30,294 31,823 ---------- ---------- 2,675,537 2,903,837 ---------- ---------- Liabilities subordinated to claims of general creditors 377,200 387,425 ---------- ---------- Commitments and contingencies (See Notes) Partnership capital subject to mandatory redemption, net of reserve for anticipated withdrawals 789,838 751,674 Reserve for anticipated withdrawals 31,966 56,567 ---------- ---------- Total partnership capital subject to mandatory redemption 821,804 808,241 ---------- ---------- TOTAL LIABILITIES $3,874,541 $4,099,503 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
4 PART I. FINANCIAL INFORMATION Item 1. Financial Statements THE JONES FINANCIAL COMPANIES, L.L.L.P. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended --------------------------- --------------------------- (Dollars in thousands, June 24, June 25, June 24, June 25, except per unit information) 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------------------------ Revenue: Trade Revenue Commissions $398,271 $362,298 $ 789,150 $ 767,572 Principal transactions 58,231 98,460 113,939 164,064 Investment banking 11,393 8,599 19,084 13,123 Fee Revenue Asset fees 176,419 144,622 341,930 285,894 Account and activity fees 84,965 77,399 168,561 151,831 Interest and dividends 50,866 35,938 96,662 69,138 Other revenue 4,124 1,525 10,740 2,248 -------- -------- ---------- ---------- Total revenue 784,269 728,841 1,540,066 1,453,870 Interest expense 14,026 14,015 27,585 27,982 -------- -------- ---------- ---------- Net revenue 770,243 714,826 1,512,481 1,425,888 -------- -------- ---------- ---------- Operating expenses: Compensation and benefits 457,710 418,861 901,237 845,757 Communications and data processing 67,052 68,520 132,485 136,689 Occupancy and equipment 64,696 62,385 128,884 124,179 Payroll and other taxes 28,068 26,052 59,458 57,967 Advertising 13,261 11,260 30,883 22,332 Postage and shipping 11,131 11,325 26,313 22,044 Floor brokerage and clearance fees 3,971 3,503 7,541 6,638 Other operating expenses 47,648 40,467 84,994 76,890 -------- -------- ---------- ---------- Total operating expenses 693,537 642,373 1,371,795 1,292,496 -------- -------- ---------- ---------- Income before allocations to partners 76,706 72,453 140,686 133,392 Allocations to partners: Limited partners 7,915 7,580 14,547 13,985 Subordinated limited partners 9,238 7,819 17,337 14,541 General partners 59,553 57,054 108,802 104,866 -------- -------- ---------- ---------- Net Income $ - $ - $ - $ - ======== ======== ========== ========== Income before allocations to partners per weighted average $1,000 equivalent limited partnership unit outstanding $ 36.73 $ 34.34 $ 67.37 $ 63.23 ======== ======== ========== ========== Weighted average $1,000 equivalent limited partnership units outstanding 215,491 220,734 215,927 221,177 ======== ======== ========== ========== 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 SIX MONTHS ENDED JUNE 24, 2005 AND JUNE 25, 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 (2,307) (100) - (2,407) Income allocated to partners 13,985 14,541 104,866 133,392 Withdrawals and distributions (1,078) (13,294) (61,653) (76,025) -------- -------- -------- -------- TOTAL PARTNERSHIP CAPITAL SUBJECT TO MANDATORY REDEMPTION, JUNE 25, 2004 233,100 115,963 444,055 793,118 Reserve for anticipated withdrawals (12,907) (1,247) (14,270) (28,424) -------- -------- -------- -------- Partnership capital subject to mandatory redemption, net of reserves for anticipated withdrawals, June 25, 2004 $220,193 $114,716 $429,785 $764,694 ======== ======== ======== ======== 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 - 22,891 - 22,891 Redemption of partnership interests (2,698) - (18,858) (21,556) Income allocated to partners 14,547 17,337 108,802 140,686 Withdrawals and distributions (1,018) (15,419) (55,454) (71,891) -------- -------- -------- -------- TOTAL PARTNERSHIP CAPITAL SUBJECT TO MANDATORY REDEMPTION, JUNE 24, 2005 228,406 137,291 456,107 821,804 Reserve for anticipated withdrawals (13,529) (1,919) (16,518) (31,966) -------- -------- -------- -------- Partnership capital subject to mandatory redemption, net of reserves for anticipated withdrawals, June 24, 2005 $214,877 $135,372 $439,589 $789,838 ======== ======== ======== ======== 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)
Six Months Ended ------------------------- June 24, June 25, (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 140,686 133,392 Depreciation and amortization 44,192 47,039 Changes in assets and liabilities: Securities purchased under agreements to resell 219,000 277,000 Net receivable from customers (205,943) (317,913) Net receivable from brokers, dealers and clearing organizations 61,652 (28,101) Receivable from mortgages and loans 3,506 (8,762) Securities owned, net (29,906) 78,766 Other assets (37,929) (9,663) Payable to depositors (9,038) 5,332 Accounts payable and accrued expenses (12,284) 16,146 Accrued compensation and employee benefits (15,530) (33,243) --------- --------- Net cash provided by operating activities 158,406 159,993 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment, property and improvements, net (30,631) (32,718) --------- --------- Net cash used in investing activities (30,631) (32,718) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Federal Home Loan Bank advances, net 5,551 10,155 Repayment of long-term debt (1,529) (1,402) Repayment of subordinated debt (10,225) (10,225) Issuance of partnership interests 22,891 10,878 Redemption of partnership interests (21,556) (2,407) Withdrawals and distributions from partnership capital (128,458) (134,031) --------- --------- Net cash used in financing activities (133,326) (127,032) --------- --------- Net (decrease)/increase in cash and cash equivalents (5,551) 243 CASH AND CASH EQUIVALENTS, Beginning of period 194,089 187,980 --------- --------- End of period $ 188,538 $ 188,223 ========= ========= Cash paid for interest $ 25,199 $ 27,866 ========= ========= 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 Company. 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 and six months ended June 24, 2005 and June 25, 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 Partnership's 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 consist of charges to customers for the sale of securities, insurance products and mutual fund shares. 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. Investment banking revenues are derived from the Partnership's underwriting and distribution of securities on behalf of issuers or existing holders of securities. Asset fees revenue consists primarily of service fees and other revenues received under agreements with mutual fund and insurance companies based on the underlying value of the Partnership's customers' assets invested in those companies' products. 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. Interest and dividend income is earned primarily on margin account balances, inventory securities and investment 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 of America ("GAAP") as promulagated in SFAS No. 150 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 in 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 three and six month periods ended June 24, 2005 and June 25, 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 in the Consolidated Statements of Income. Such income, if any, for each calendar year is allocated to the Partnership's three classes of capital in accordance with the formulas prescribed in the 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. Partnership capital subject to mandatory redemption, net of reserve for anticipated withdrawals of $789,838, consists of $214,877 of limited partnership capital issued in $1,000 units, $135,372 of subordinated limited partnership capital and $439,589 of general partnership capital as of June 24, 2005. The reserve for anticipated withdrawals consists of current year profits to be withdrawn over the next year. The $1,919 of Subordinated Limited Partnership reserve for anticipated withdrawals does not include $4,976 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 $8,100 and $8,300 for the six months ended June 24, 2005 and June 25, 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 June 24, 2005, EDJ's Net Capital of $598,664 was 24.7% of debit items and its Net Capital in excess of the minimum required was $550,233. Net Capital as a percentage of aggregate debit items after anticipated withdrawals, which are scheduled subordinated debt principal payments through December 31, 2005, was 23.4%. Net capital and the related capital percentage may fluctuate on a daily basis. At June 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 both the Partnership's Annual Report on Form 10-K for the Fiscal year ended December 31, 2004 and this Form 10-Q. Also, in the normal course of business, the Partnership enters into contracts which contain indemnification provisions, such as purchase contracts, service agreements, escrow agreements, sales of assets, outsourcing agreements and leasing arrangements. Under the provisions of these contracts, the Partnership may indemnify counterparties to the contracts for certain aspects of the Partnership's past conduct if other parties fail to perform, or if certain events occur. These indemnification provisions will vary based upon the contract. The Partnership may in turn obtain indemnifications from other parties in certain contracts. These indemnification provisions are not expected to have a material impact on the Partnership's 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 GAAP. We believe that these figures are helpful in allowing the reader to more accurately assess the ongoing nature of our operations and measure our performance more consistently. We use the presented financial measures internally to understand and assess the performance of our business. Therefore, we believe that this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. For internal analysis, the Partnership broadly categorizes its revenues as trade revenue (revenue from buy or sell transactions on securities) and net fee revenue (sources other than trade revenue). In the Partnership's Consolidated Statements of Income, trade revenue is 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 JUNE 24, 2005 AND JUNE 25, 2004 For the second quarter of 2005, net revenue increased 8% ($55.4 million) to $770.2 million, while income before allocations to partners increased 6% ($4.3 million) to $76.7 million. The Partnership's profit margin based on income before allocations to partners decreased to 9.8% in the second quarter of 2005, from 9.9% in the second quarter of 2004. The Partnership's net revenue and income before allocations to partners primarily increased due 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, costs associated with legal and regulatory settlements and to costs associated with the continued expansion and enhancement of the Partnership's branch office network. The Partnership added 223 Investment Representatives ("IRs") during the twelve months ended June 24, 2005, ending the quarter with 9,605 IRs, an increase of 2% from 9,382. TRADE REVENUE Trade revenue comprised 61% of net revenue for the second quarter of 2005, down from 66% for the second quarter of 2004. Conversely, net fee revenue comprised 39% for the second quarter of 2005, up from 34% in the second quarter of 2004. Trade revenue of $467.9 million decreased $1.5 million during the second quarter of 2005 compared to the same period in the prior year. Trade revenue decreased primarily due to a lower gross margin earned on customer dollars invested (the principal amount of customers' buy and sell transactions generating trade revenue) offset by an increase in customer dollars invested when compared to the second quarter of 2004. The Partnership's margin earned on each $1,000 invested decreased to $24.80 for the second quarter of 2005 from $26.50 in 2004. Quarter over quarter, customer dollars invested shifted to shorter term fixed income products reducing the margin earned on each $1,000 invested. Total customer dollars invested were $18.8 billion during the second quarter of 2005, a 6% ($1.1 billion) increase from the second quarter of 2004. 12 PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Commissions revenue increased 10% ($36.0 million) for the second quarter of 2005 to $398.3 million. Commissions revenue increased quarter over quarter due primarily to a 12% ($1.4 billion) increase in customer dollars invested to $13.2 billion. Underlying the increase in commissions revenues, mutual fund commissions increased 9% ($21.5 million) and equity commissions increased 15% ($10.7 million). The following table summarizes commissions revenue quarter over quarter:
Quarter ended (in millions) ------------------------------- June 24, June 25, 2005 2004 -------- -------- Mutual funds $263.8 $242.3 Equities 80.2 69.5 Insurance 54.1 50.4 Corporate bonds 0.2 0.1 ------ ------ $398.3 $362.3 ====== ======
Principal transactions revenue decreased 41% ($40.2 million) to $58.2 million during the second 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 and a decrease in customer dollars invested. The Partnership's margin earned on principal transactions on each $1,000 invested decreased to $10.01 during the second quarter of 2005 from $17.00 during the second quarter of 2004. Customers invested $5.2 billion in principal transactions in the second quarter of 2005 compared to $5.6 billion in the second quarter of 2004, a decrease of 7%. Revenue from municipal bonds decreased 50% ($18.9 million), corporate bonds decreased 65% ($20.0 million) and government bonds decreased 58% ($6.7 million) while certificates of deposit increased 136% ($5.7 million). The following table summarizes principal transaction revenue quarter over quarter:
Quarter ended (in millions) ------------------------------- June 24, June 25, 2005 2004 -------- -------- Municipal bonds $19.2 $38.1 Corporate bonds 11.0 31.0 Certificates of deposit 9.9 4.2 Unit investment trusts 6.7 5.9 Collateralized mortgage obligations 6.5 7.7 Government bonds 4.9 11.6 ----- ----- $58.2 $98.5 ===== =====
Investment banking revenue increased 33% ($2.8 million) during the second quarter of 2005 to $11.4 million, due primarily to an increase in syndicate corporate debt offerings in the current quarter. 13 PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued NET FEE REVENUE Net fee revenue, which is Fee Revenue net of interest expense, increased 23% ($56.9 million) to $302.3 million during the second quarter of 2005. Asset fees increased 22% ($31.8 million) to $176.4 million due primarily 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 $32.1 billion or 19% to $201.7 billion in the second quarter of 2005 compared to $169.6 billion in the second quarter of 2004. Account and activity fees, and other revenue of $89.1 million increased 13% ($10.2 million) quarter over quarter. Revenue received from sub-transfer agent services performed for mutual fund companies increased 14% ($6.1 million) to $48.9 million, due to a 17% 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 23% ($4.2 million) to $22.1 million. Net interest and dividend income increased 68% ($14.9 million) to $36.8 million during the second quarter of 2005 due primarily to an increase in interest rates combined with an increase in customer margin loans outstanding. Interest income from customer loans increased 47% ($13.7 million). The average rate earned on customer loan balances increased due to the increase in short-term interest rates during the past year to approximately 6.79% during the second quarter of 2005 from approximately 4.93% during the second quarter of 2004. Average customer margin loan balances were $2.5 billion in the second quarter of 2005, compared to $2.3 billion in the second quarter of 2004, an increase of 7%. Operating expenses increased 8% ($51.2 million) to $693.5 million during the second quarter of 2005. Compensation and benefits costs increased 9% ($38.8 million) to $457.7 million. Within compensation and benefits costs, sales compensation increased 4% ($8.5 million) due to increased revenues. Variable compensation, including bonuses and profit sharing paid to IRs, branch office assistants and headquarter associates, which expands and contracts in relation to revenues, income before allocations to partners and the Partnership's related profit margin, increased 28% ($12.4 million). Headquarters and branch payroll expense increased 14% ($17.8 million) due to increased salary and medical costs for existing personnel and additional support in the branches as the Partnership grows its sales force. In addition, effective January 1, 2005, the Partnership implemented a special bonus program for certain existing personnel. Related bonus expense for the second quarter of 2005 was $7.2 million. On a full time equivalent basis, the Partnership had 10,013 branch staff associates as of June 24, 2005, compared to 9,795 branch staff associates as of June 25, 2004. Payroll and other taxes increased 8% ($2.0 million) due to higher sales compensation, variable compensation and payroll expense as well as the increased number of full time equivalent associates. Advertising expenses increased 18% ($2.0 million) to $13.3 million during the second quarter of 2005 primarily due to the launch of a new advertising campaign in January 2005. Other operating expenses increased 18% ($7.2 million) due primarily to costs associated with legal and regulatory settlements. (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 for additional discussion on regulatory settlements). 14 PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 24, 2005 AND JUNE 25, 2004 For the first six months of 2005, net revenue increased 6% ($86.6 million) to $1.512 billion, while income before allocations to partners increased 6% ($7.3 million) to $140.7 million. The Partnership's profit margin based on income before allocations to partners decreased to 9.1% for the first six months of 2005, from 9.2% for the first six months of 2004. Year over year, the Partnership's net revenue and income before allocations to partners increased due primarily to growth in customer asset values, higher account and activity fees and higher net interest income. Operating expenses increased due primarily to growth in sales compensation related to the increase in net revenues, costs associated with legal and regulatory settlements and to costs associated with the continued expansion and enhancement of the Partnership's branch office network. TRADE REVENUE Trade revenue comprised 61% of net revenue for the first six months of 2005, down from 66% for the first six months of 2004. Conversely net fee revenue comprised 39% for the first six months of 2005, up from 34% in the corresponding period. Trade revenue of $922.2 million decreased 2% ($22.6 million) during the first six months of 2005 due primarily to lower gross margin earned on customer dollars invested partially offset by an increase in customer dollars invested when compared to the first six months of 2004. The Partnership's margin earned on each $1,000 invested decreased to $25.30 for the first six months of 2005 from $26.60 in 2004 primarily due to a shift in customer dollars invested to shorter term fixed income products with lower margins from longer term higher margin fixed income products. Total customer dollars invested were $36.4 billion during the first six months of 2005, a 2% ($0.8 billion) increase from the first six months of 2004. Commissions revenue increased 3% ($21.6 million) for the first six months of 2005 to $789.2 million. Commissions revenue increased year over year due primarily to a 4% ($0.8 billion) increase in customer dollars invested to $26.1 billion. Underlying the increase in commissions revenues, mutual fund commissions increased 2% ($10.4 million), equity commissions increased 4% ($5.3 million) and insurance commissions increased 6% ($5.8 million). The following table summarizes commissions revenue year over year:
Six months ended (in millions) ------------------------------- June 24, June 25, 2005 2004 -------- -------- Mutual funds $528.5 $518.1 Equities 158.6 153.3 Insurance 101.8 96.0 Corporate bonds 0.3 0.2 ------ ------ $789.2 $767.6 ====== ======
15 PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Principal transactions revenue decreased 31% ($50.1 million) to $113.9 million during the first six months 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 $11.20 during the first six months of 2005 from $16.20 during the first six months of 2004. Customers invested $9.6 billion in principal transactions during the first six months of 2005 compared to $9.8 billion during the first six months of 2004, a decrease of 2%. Revenue from corporate bonds decreased 50% ($26.1 million), municipal bonds decreased 37% ($21.0 million) and government bonds decreased 46% ($9.2 million), while certificates of deposit increased 109% ($8.6 million). The following table summarizes principal transaction revenue year over year:
Six months ended (in millions) ------------------------------- June 24, June 25, 2005 2004 -------- -------- Municipal bonds $ 36.6 $ 57.6 Corporate bonds 25.7 51.8 Certificates of deposit 16.5 7.9 Collateralized mortgage obligations 12.3 14.5 Unit investment trusts 11.8 12.1 Government bonds 11.0 20.2 ------ ------ $113.9 $164.1 ====== ======
Investment banking revenue increased 45% ($6.0 million) during the first six months of 2005 to $19.1 million, due primarily to an increase in syndicate corporate debt offerings in the current year. NET FEE REVENUE Net fee revenue increased 23% ($109.2 million) to $590.3 million during the first six months of 2005. Asset fees increased 20% ($56.0 million) to $341.9 million primarily 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 $32.7 billion or 20% to $200.0 billion in the first six months of 2005 compared to $167.3 billion in the first six months of 2004. Account and activity fees, and other revenue of $179.3 million increased 16% ($25.2 million) year over year. Revenue received from sub-transfer agent services performed for mutual fund companies increased 15% ($12.5 million) to $95.6 million, due to a 17% 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 17% ($6.1 million) to $43.2 million. The Partnership's gain on investment securities included in other revenue increased $2.9 million year over year. Net interest and dividend income increased 68% ($27.9 million) to $69.1 million during the first six months of 2005 due primarily to an increase in interest rates and an increase in customer margin loans outstanding. Interest income from customer loans increased 46% ($25.6 million). The average rate earned on customer loan balances increased to approximately 6.55% during the first six months of 2005 from approximately 4.94% during the first six months of 2004, as a result of increased short-term interest rates over the past year. Average customer margin loan balances were $2.5 billion in the first six months of 2005, compared to $2.3 billion in the first six months of 2004, an increase of 10%. 16 PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Operating expenses increased 6% ($79.3 million) to $1.372 billion during the first six months of 2005. Compensation and benefits costs increased 7% ($55.5 million) to $901.2 million. Within compensation and benefits costs, sales compensation increased 3% ($13.0 million) due to increased revenues. Variable compensation, including bonuses and profit sharing paid to IRs, branch office assistants and headquarter associates, which expands and contracts in relation to revenues, income before allocations to partners and the Partnership's related profit margin, increased 9% ($9.2 million). Headquarter and branch payroll expense increased 14% ($33.6 million) due to increased salary and medical costs for existing personnel and additional support in the branches as the Partnership grows its sales force. In addition, effective January 1, 2005, the Partnership implemented a special bonus program for certain existing personnel. Related bonus expense for the first six months of 2005 was $13.7 million. Advertising expenses increased 38% ($8.6 million) to $30.9 million during the first six months of 2005 primarily due to the launch of a new advertising campaign in January 2005. Postage and shipping expense increased 19% ($4.3 million) to $26.3 million primarily due to mailing costs associated with the Partnership's mutual fund settlements which were executed in December 2004. Other operating expenses have increased 11% ($8.1 million) primarily due to costs associated with regulatory settlements. (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 for additional discussion on regulatory settlements). 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. The NASD is examining the practices of certain broker-dealers, including EDJ, with respect to mutual fund net asset value ("NAV") transfer programs during the period from 2002 through June 2004. During this period, the prospectuses of several mutual fund companies provided that under certain circumstances investors were eligible to purchase shares at net asset value (i.e., without any deduction for a sales load). The NASD is investigating whether EDJ and other broker-dealers complied with the terms of the prospectuses with respect to these NAV transfer programs. In response to NASD requests for information, EDJ has identified transactions that involved payments by EDJ customers of front-end sales loads under circumstances where customers may have been eligible to purchase shares at NAV. The NASD has requested documents and information from EDJ, and EDJ is cooperating in the investigation. No determination of any amount that may be due to customers has been made at this time. On August 5, 2005, the Partnership entered into a consent order with the Missouri Securities Division to resolve the Division's investigation into the Partnership's disclosure of revenue sharing arrangements involving certain mutual fund companies. Under the terms of the consent order, the Partnership is to report on its compliance with its earlier consent orders and agreements with the SEC, USAO, NYSE and NASD regarding revenue sharing as well as reporting on the Partnership's mutual fund research program. In addition, the Partnership agreed to pay a $650,000 civil penalty for the benefit of Missouri's public schools and to pay $850,000 into other specified Missouri educational programs. 17 PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued For additional discussions of mutual fund matters, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Partnership's Annual Report on Form 10-K for the Fiscal year ended December 31, 2004. 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 67% of its total revenue from sales and services related to mutual fund and annuity products in the first six months of 2005 and 66% in the first six months of 2004. The Partnership derived 31% of its total revenue for the first six months of 2005 and 32% for the first six months of 2004 from one mutual fund vendor. Significant reductions in the revenues from these mutual fund sources could have a material impact on the Partnership's Results of Operations. LIQUIDITY AND CAPITAL RESOURCES The Partnership's capital subject to mandatory redemption at June 24, 2005, excluding the reserve for anticipated withdrawals, was $789.8 million, compared to $751.7 million at December 31, 2004. The increase is primarily due to the retention of General Partner earnings ($42.1 million) and the issuance of Subordinated Limited Partner interests ($22.9 million), offset by redemption of General Partner and Limited Partner interests ($18.9 million and $2.7 million, respectively), and General Partner withdrawals of $5.2 million. Additionally, $5.0 million of Subordinated Limited Partner capital is scheduled to be paid within the next twelve months. At June 24, 2005, the Partnership had $188.5 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 June 24, 2005. The Association had loans from The Federal Home Loan Bank of $39.5 million as of June 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 six months ended June 24, 2005. 18 PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued For the six months ended June 24, 2005, cash and cash equivalents decreased $5.6 million. Cash provided by operating activities was $158.4 million. The primary sources of cash from operating activities include a decrease in securities purchased under agreements to resell, a decrease in net receivable from brokers, dealers and clearing organizations, income before allocations to partners and depreciation. These increases to cash and cash equivalents were partially offset by a decrease in net receivable from customers and to growth in other assets and securities owned, net. Cash used in investing activities was $30.6 million consisting primarily of capital expenditures supporting the growth of the Partnership's operations. Cash used in financing activities was $133.3 million, consisting primarily of partnership withdrawals and distributions ($128.5 million), redemption of partnership interests ($21.6 million) and repayment of subordinated debt ($10.2 million) offset by issuance of Subordinated Limited Partner interests ($22.9 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 $250,000 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 June 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 December 31, 2005, as a percentage of aggregate debit items was 23.4%. 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. 19 PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued 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. 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) regulatory actions; (2) litigation, including that involving mutual fund matters; (3) changes in legislation; (4) actions of competitors; (5) changes in technology; (6) a fluctuation or decline in the market value of securities; (7) rising interest rates; (8) securities theft; (9) the ability of customers, other broker-dealers, banks, depositories and clearing organizations to fulfill contractual obligations; and (10) general economic conditions. These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not undertake to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes except to the extent required by applicable securities laws. 20 PART I. FINANCIAL INFORMATION ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The SEC issued market risk disclosure requirements to enhance disclosures of accounting policies for derivatives and other financial instruments and to provide quantitative and qualitative disclosures about market risk inherent in derivatives and other financial instruments. Various levels of management within the Partnership manage the Partnership's risk exposure. Position limits in trading and inventory accounts are established and monitored on an ongoing basis. Credit risk related to various financing activities is reduced by the industry practice of obtaining and maintaining collateral. The Partnership monitors its exposure to counterparty risk through the use of credit exposure information, the monitoring of collateral values and the establishment of credit limits. The Partnership is exposed to market risk from changes in interest rates. Such changes in interest rates impact the income from interest earning assets, primarily receivables from customers on margin balances, and may have an impact on the expense from liabilities that finance these assets. At June 24, 2005, amounts receivable from customers were $2.481 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 $16.8 million. Conversely, the Partnership estimates that a 100 basis point decrease in short-term interest rates could decrease the Partnership's annual net interest income by up to $27.6 million. A decrease in short-term interest rates has a more significant impact on net interest income because under the current low interest rate environment, the Partnership's interest bearing liabilities are less sensitive to changes in short-term interest rates compared to its interest earning assets. There were no material changes in the Partnership's exposure to market risk and changes in interest rates during the six months ended June 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. 21 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings The following information supplements the discussion in Part I, Item 3 "Legal Proceedings" in the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 2004: The NASD is examining the practices of certain broker-dealers, including EDJ, with respect to mutual fund net asset value ("NAV") transfer programs during the period from 2002 through June 2004. During this period, the prospectuses of several mutual fund companies provided that under certain circumstances investors were eligible to purchase shares at net asset value (i.e., without any deduction for a sales load). The NASD is investigating whether EDJ and other broker-dealers complied with the terms of the prospectuses with respect to these NAV transfer programs. In response to NASD requests for information, EDJ has identified transactions that involved payments by EDJ customers of front-end sales loads under circumstances where customers may have been eligible to purchase shares at NAV. The NASD has requested documents and information from EDJ, and EDJ is cooperating in the investigation. No determination of any amount that may be due to customers has been made at this time. The Partnership believes that any such amount 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. On August 5, 2005, the Partnership entered into a consent order with the Missouri Securities Division to resolve the Division's investigation into the Partnership's disclosure of revenue sharing arrangements involving certain mutual fund companies. Under the terms of the consent order, the Partnership is to report on its compliance with its earlier consent orders and agreements with the SEC, USAO, NYSE and NASD regarding revenue sharing as well as reporting on the Partnership's mutual fund research program. In addition, the Partnership agreed to pay a $650,000 civil penalty for the benefit of Missouri's public schools and to pay $850,000 into other specified Missouri educational programs. See also "Contingencies" in Part I, Item 1, "Financial Statements" and "Mutual Fund Matters" in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q. 22 PART II. OTHER INFORMATION 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. 25-26 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. 32. 27-28 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. 23 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 August 5, 2005 ---------------------------------------- By (Signature and Title) /s/ Steven Novik ---------------------------------------- Steven Novik, Chief Financial Officer Date August 5, 2005 ---------------------------------------- 24 EX-31.1 2 ex31p1.txt Exhibit 31.1 CHIEF EXECUTIVE OFFICER CERTIFICATION I, Douglas E. Hill, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Jones Financial Companies, L.L.L.P. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report. 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Partnership as of, and for, the periods presented in this quarterly report. 4. The Partnership's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Partnership and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Partnership, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the Partnership's disclosure controls and procedures and quarterly presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the Partnership's internal control over financial reporting that occurred during the Partnership's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Partnership's internal control over financial reporting; and 5. The Partnership's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Partnership's auditors and the Executive Committee: a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Partnership's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other associates who have a significant role in the Partnership's internal control over financial reporting. /s/ Douglas E. Hill --------------------------------------- Chief Executive Officer The Jones Financial Companies, L.L.L.P. August 5, 2005 25 EX-31.2 3 ex31p2.txt Exhibit 31.2 CHIEF FINANCIAL OFFICER CERTIFICATION I, Steven Novik, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Jones Financial Companies, L.L.L.P. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report. 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Partnership as of, and for, the periods presented in this quarterly report. 4. The Partnership's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Partnership and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Partnership, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the Partnership's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the Partnership's internal control over financial reporting that occurred during the Partnership's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Partnership's internal control over financial reporting; and 5. The Partnership's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Partnership's auditors and the Executive Committee: a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Partnership's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other associates who have a significant role in the Partnership's internal control over financial reporting. /s/ Steven Novik --------------------------------------- Chief Financial Officer The Jones Financial Companies, L.L.L.P. August 5, 2005 26 EX-32.1 4 ex32p1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of The Jones Financial Companies, L.L.L.P. on Form 10-Q for the period ending June 24, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Douglas E. Hill, Chief Executive Officer of the Partnership, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ Douglas E. Hill --------------------------------------- Chief Executive Officer The Jones Financial Companies, L.L.L.P. August 5, 2005 27 EX-32.2 5 ex32p2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of The Jones Financial Companies, L.L.L.P. on Form 10-Q for the period ending June 24, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven Novik, Chief Financial Officer of the Partnership, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ Steven Novik --------------------------------------- Chief Financial Officer The Jones Financial Companies, L.L.L.P. August 5, 2005 28 -----END PRIVACY-ENHANCED MESSAGE-----