FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended December 24,
1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition from to
period
Commission file number 1-9109
RAYMOND JAMES FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Florida No. 59-1517485
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
880 Carillon Parkway, St. Petersburg, Florida 33716
(Address of principal executive offices) (Zip Code)
(727) 573-3800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 the number of shares outstanding of each of the registrant's classes
of common stock, as of the close of the latest practicable date.
47,849,070 shares of Common Stock as of February 2, 1999
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Form 10-Q for the Quarter Ended December 24, 1998
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statement of Financial Condition as of
December 24, 1998 (unaudited) and September 25, 1998 2
Consolidated Statement of Operations (unaudited) for the
three period ended December 24, 1998 and
December 26, 1997 3
Consolidated Statement of Cash Flows (unaudited) for the
three months ended December 24, 1998 and December 26, 1997 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2. Management's Financial Discussion and Analysis 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11: Computation of Earnings Per Share 10
Exhibit 27: Financial Data Schedule - EDGAR version only
(filed electronically)
(b) Reports on Form 8-K: None
All other items required in Part II have been previously filed or
are not applicable for the quarter ended December 24, 1998.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(in thousands, except share amounts)
December 24, September 25,
1998 1998
(Unaudited)
ASSETS
Cash and cash equivalents $ 338,086 $ 296,817
Assets segregated pursuant to Federal Regulations:
Cash and cash equivalents 4 1
Securities purchased under agreements to resell 1,170,837 946,723
Securities owned:
Trading and investment account securities 179,080 105,892
Available for sale securities 372,243 385,676
Receivables:
Clients, net 848,618 893,839
Stock borrowed 1,205,933 852,744
Brokers, dealers and clearing organizations 30,373 112,838
Other 50,800 62,722
Investment in leveraged leases 23,491 23,297
Property and equipment, net 82,868 81,372
Deferred income taxes, net 32,864 32,841
Deposits with clearing organizations 21,664 21,206
Prepaid expenses and other assets 50,280 36,769
----------- ----------
$4,407,141 $3,852,737
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Loans payable $ 64,623 $ 44,767
Payables:
Clients 2,261,275 2,126,699
Stock loaned 1,168,526 828,102
Brokers, dealers and clearing organizations 52,858 43,227
Trade and other 162,617 99,690
Trading account securities sold but not yet
purchased 35,944 30,841
Accrued compensation and commissions 121,504 158,539
Income taxes payable 17,838 10,974
----------- ----------
3,885,185 3,342,839
Commitments and contingencies - -
Shareholders' equity:
Preferred stock; $.10 par value; authorized 10,000,000
shares; issued and outstanding -0- shares - -
Common stock; $.01 par value; authorized 100,000,000
shares; issued 48,997,995 shares 490 490
Additional paid-in capital 58,199 57,777
Unrealized gain (loss) on securities
available for sale, net of deferred taxes (221) 114
Retained earnings 473,208 459,099
----------- ---------
531,676 517,480
Less: 787,384 and 730,118 common shares
in treasury, at cost (9,720) (7,582)
----------- ----------
521,956 509,898
----------- ----------
$4,407,141 $3,852,737
=========== ==========
See Notes to Consolidated Financial Statements.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
Three Months Ended
December 24, December 26,
1998 1997
Revenues:
Securities commissions and fees $164,259 $143,054
Investment banking 11,530 31,271
Investment advisory fees 20,478 16,415
Interest 49,176 46,190
Correspondent clearing 1,068 1,119
Net trading profits 6,046 1,874
Financial service fees 8,297 8,313
Other 3,653 4,068
--------- --------
Total revenues 264,507 252,304
========= ========
Expenses:
Employee compensation and benefits 162,556 152,486
Communications and
information processing 10,761 9,785
Occupancy and equipment 9,858 7,518
Clearing and floor brokerage 2,760 3,030
Interest 31,841 29,419
Business development 9,128 6,579
Other 9,266 6,601
--------- --------
Total expenses 236,170 215,418
--------- --------
Income before provision for
income taxes 28,337 36,886
Provision for income taxes 10,858 14,141
--------- --------
Net income $ 17,479 $ 22,745
========= ========
Net income per share-basic* $ .36 $ .48
Net income per share-diluted* $ .36 $ .46
Cash dividends declared per
common share* $ .07 $ .06
Weighted-average common shares
outstanding-basic* 48,119 47,748
Weighted-average common and common 49,115 49,003
equivalent shares outstanding-diluted*
* Gives effect to the 3-for-2 stock split paid to shareholders in April 1998.
See Notes to Consolidated Financial Statements.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three Months Ended
December 24, December 26,
1998 1997
Cash flows from operating activities:
Net income $ 17,479 $ 22,745
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 4,860 3,596
(Increase) decrease in assets:
Available for sale investments 13,433 1,183
Deposits with clearing organizations (458) 13
Receivables:
Clients, net 45,221 (87,613)
Stock borrowed (353,189) (13,926)
Brokers, dealers and clearing organizations 82,465 (52,002)
Other 11,922 (6,463)
Trading account securities, net (68,085) (59,796)
Deferred income taxes (23) (3,386)
Prepaid expenses and other assets (13,705) (6,964)
Increase (decrease) in liabilities:
Payables:
Clients 134,576 126,252
Stock loaned 340,424 25,336
Brokers, dealers and clearing organizations 9,631 9,244
Trade and other 62,927 4,315
Accrued compensation (37,035) (27,839)
Income taxes payable 6,864 2,062
--------- ---------
Total adjustments 239,828 (85,988)
--------- --------
Net cash provided by operating activities 257,307 (63,243)
Cash flows from investing activities:
Additions to property and equipment, net (6,356) (16,036)
--------- ---------
Cash flows from financing activities:
Borrowings from banks and financial institutions 20,000 20,000
Repayments on loans (144) (14,215)
Exercise of stock options and employee stock
purchases 2,212 1,710
Purchase of treasury stock (4,430)
Sale of stock options 502
Cash dividends on common stock (3,370) (2,869)
Unrealized (loss) gain on securities
available for sale, net (335) 31
-------- ----------
Net cash provided by financing activities 14,435 4,657
----------- -----------
Net increase in cash and cash equivalents 265,386 (74,622)
Cash and cash equivalents at beginning of period 1,243,541 888,780
----------- -----------
Cash and cash equivalents at end of period $1,508,927 $ 814,158
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 29,932 $ 29,410
Cash paid for taxes $ 10,447 $ 15,465
See Notes to Consolidated Financial Statements.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 24, 1998
Basis of Consolidation
The consolidated financial statements include the accounts of Raymond
James Financial, Inc. and its consolidated subsidiaries (the "Company"). All
material intercompany balances and transactions have been eliminated in
consolidation. These statements reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods presented. All such adjustments made are of a normal,
recurring nature. The nature of the Company's business is such that the
results of any interim period are not necessarily indicative of results for a
full year.
Commitments and Contingencies
The Company has committed to lend to, or guarantee other debt for, Raymond
James Tax Credit Funds, Inc. ("RJTCF") up to $25 million upon request. RJTCF,
a wholly-owned subsidiary of the Company, is a sponsor of limited partnerships
qualifying for low income housing tax credits. The borrowings are secured by
properties under development. The commitment expires in November 1999, at
which time any outstanding balances will be due and payable. At December 24,
1998, there were loans of $4,783,000 and guarantees of $2,420,000 outstanding.
The Company is a defendant or co-defendant in various lawsuits incidental
to its securities business. The Company is contesting the allegations in these
cases and believes that there are meritorious defenses in each of these
lawsuits. In view of the number and diversity of claims against the Company,
the number of jurisdictions in which litigation is pending and the inherent
difficulty of predicting the outcome of litigation and other claims, the
Company cannot state with certainty what the eventual outcome of pending
litigation or other claims will be. In the opinion of management, based on
discussions with counsel, the outcome of these matters will not result in a
material adverse effect on the financial position or results of operations.
Capital Transactions
The Company's Board of Directors has, from time to time, adopted
resolutions authorizing the Company to repurchase its common stock for the
funding of its incentive stock option and stock purchase plans and other
corporate purposes. As of December 24, 1998, management has Board
authorization to purchase up to 2,500,000 shares.
At their meeting on November 19, 1998, the Board of Directors of the
Company declared
a quarterly cash dividend of $.07 per share, an increase of $.01 per post-split
share over the prior year.
Net Capital Requirements
The broker-dealer subsidiaries of the Company are subject to the
requirements of Rule 15c3-under the Securities Exchange Act of 1934. This rule
requires that aggregate indebtedness, as defined, shall not exceed fifteen
times net capital, as defined. Rule 15c3-1 also provides for an "alternative
net capital requirement" which, if elected, requires that net capital be equal
to the greater of $250,000 or two percent of aggregate debit items computed in
applying the formula for determination of reserve requirements. The New York
Stock Exchange may require a member organization to reduce its business if its
net capital is less than four percent of aggregate debit items and may prohibit
a member firm from expanding its business and declaring cash dividends if its
net capital is less than five percent of aggregate debit items. The net
capital positions of the Company's broker-dealer subsidiaries at December 24,
1998 were as follows (dollar amounts in thousands):
Raymond James & Associates, Inc.:
(alternative method elected)
Net capital as a percent of aggregate debit items 17.00%
Net capital $147,695
Required net capital $17,333
Investment Management & Research, Inc.:
Ratio of aggregate indebtedness to net capital .59
Net capital $14,325
Required net capital $559
Robert Thomas Securities, Inc.:
Ratio of aggregate indebtedness to net capital 1.68
Net capital $6,126
Required net capital $688
MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS
(Any statements containing forward looking information should be read in
conjunction with Management's Discussion and Analysis of Results of Operations
and Financial Condition in the Company's Annual Report on Form 10-K for the
year ended September 25, 1998).
Results of Operations - Three months ended December 24, 1998 compared with
three months ended December 26, 1997.
Following this past summer's sell-off, the equity markets staged a
remarkable comeback rally during the December 1998 quarter, aided by three cuts
by the Federal Reserve in short-term interest rates. With the exception of new
issue activity, which has been extremely sector-oriented and selective in light
of the recent market volatility, the Company's major lines of business regained
significant momentum during the quarter. Nonetheless, a 5% increase in
revenues, to $264.5 million, coupled with 10% expense growth, led to a 23%
decline in earnings from the prior year. In the preparation of fiscal 1999
budgets, the company has made expense control a top priority.
Securities commission revenues increased 15%, as transaction volume
remained at relatively high levels, particularly in equities. There were 3,339
Financial Advisors at the end of the quarter, a 10% increase over the prior
year.
Investment banking showed a dramatic 63% decline as new issue activity has
not recovered following the steep market decline of the previous quarter. The
Company managed only 2 offerings during the quarter as compared to 23 in the
prior year quarter. Merger and acquisition revenues were relatively flat.
Investment advisory fees increased 25% over the same quarter in the prior
year, a direct correlation to the increase in assets under management. This
increase is the result of both asset appreciation and net retail sales.
December 24, December 26, % Increase
1998 1997 (Decrease)
Assets Under Management (000's):
Eagle Asset Management, Inc. $ 5,489,741 $4,137,186 33%
Heritage Family of Mutual Funds 3,939,815 3,310,468 19%
Investment Advisory Services 2,089,231 1,425,051 47%
Awad Asset Management 681,591 817,721 (16%)
Carillon Asset Management 0 62,868 (100%)
Total Financial Assets Under ------------ ----------
Management $12,200,378 $9,753,294 25%
============ ==========
For the first time in 18 quarters, net interest income failed to set a
quarterly record. This was the combined result of a decline in margin balances,
lower spreads on client cash deposits, and a lower rate earned on fixed income
inventories and excess corporate cash.
Trading and investment profits includes approximately $4.8 million in
profits for the Company's own investment account. Although the Company has not
invested frequently, or recently, in equity positions, it did acquire several
positions, primarily in the securities industry, during the market downturn at
the beginning of the quarter and realized significant profits on these
positions.
Employee compensation increased 7% over the same quarter in the prior
year, the combined result of a 23% increase in administrative compensation, a
decline in incentive compensation related to declining net income and the 12%
increase in commission expense. The increase in administrative compensation
reflects the overall growth in firm expenses supporting current activity levels
and anticipated future growth.
Other expenses which have grown to support growth are data communication
and information processing (up 10%) and occupancy and equipment expenses (up
31%). Occupancy and equipment includes the costs related to the third
headquarters building at the home office complex completed in June 1998. Both
expense categories include expenses related to new computer and office
equipment.
Business development expenses increased due to the stadium naming rights
expense, travel and entertainment expenditures, and the first portion of the
expenses related to the reorganization of the Company's independent contractor
firms into Raymond James Financial Services, Inc.
The increase in other expense includes expenses related to some retail
client settlements and other legal expenses and accruals.
Financial Condition
The Company's total assets have increased 14% since fiscal year end,
reaching a record $4.4 billion. The rise was due to increases in matched-book
stock loan program balances and increased customer cash balances. Customer
cash balances are reflected as a customer payable, and the corresponding assets
are included in assets segregated pursuant to Federal Regulations.
Loans payable at December 24, 1998 includes $20 million related to short-
term borrowings under existing lines of credit in order to accommodate customer
settlement activity. These loans were repaid in full on December 28, 1998.
Liquidity and Capital Resources
Net cash provided by operating activities for the three months was
$257,307,000. The primary source of this increase was the aforementioned
increased customer cash balances, which does not give rise to cash available
for use in normal operations due to regulatory segregation requirements.
Investing and financing activities provided a net additional $8,079,000
over the last three months. Sources included the short-term borrowing to
accommodate customer settlement activity, employee stock purchases, and
exercises of stock options. The primary uses were purchases of treasury stock,
the payment of cash dividends, and purchases of property and equipment.
The parent company has an unsecured $50 million line for general corporate
purposes. In addition, Raymond James & Associates, Inc. has uncommitted lines
of credit aggregating $310 million.
The Company's broker-dealer subsidiaries are subject to requirements of
the Securities and Exchange Commission relating to liquidity and capital
standards (see Notes to Consolidated Financial Statements).
Year 2000
The widespread use of computer programs that rely on two-digit date
programs to perform computations and decision-making functions may cause
computer systems to malfunction in the year 2000 and lead to significant
business delays and disruptions in the U.S. and internationally.
The Company has revised all critical information technology (IT) internal
computer code that it has identified as requiring modification for Year 2000
compliance, and will begin full integration testing of the revised code during
the first quarter of fiscal 1999. All of the Company's securities transactions
are processed on software provided by Securities Industry Software (SIS), a
subsidiary of Automatic Data Processing, Inc., and the Company is closely
monitoring the progress of SIS in revising its software. Based on information
received to date, the Company believes that SIS will complete revision and
testing of its software on a timely basis. The Company is also monitoring
information received from third-party vendors regarding their progress in
modification of other software used by the Company, as well as the progress of
other industry suppliers, in addressing this issue.
With respect to non-IT systems, primarily those located at its
headquarters campus and those provided by its telecommunications and satellite
service providers, the Company has completed the inventory of all systems and
has begun the process of confirming the compliance status of its vendors. Most
of these vendors are major national or international companies which have been
addressing the Year 2000 issue for some time. The Company expects to complete
this process of third-party review by August of 1999.
With the exception of those discussed below, all of the Company's
subsidiaries are substantially dependent upon the Company's Year 2000
compliance program. Raymond James Bank, Raymond James Trust Company and
Heritage Asset Management, Inc. have received revised computer software from
the third-party vendors on whom they are dependent and have begun the testing
process, which they anticipate will be completed by June of 1999. Eagle Asset
Management, Inc. has completed assessment and inventory of its critical IT
requirements and is presently installing a new portfolio management system
which has been designed to be Year 2000 compliant. Installation is expected to
be completed by April of 1999 and system testing completed by July of 1999.
The Company will begin the process of developing contingency plans during
the second fiscal quarter.
The securities industry is scheduled to begin industry-wide testing for
Year 2000 compliance during the spring of 1999 and the Company anticipates that
it will be ready to participate in that testing program as it has completed
virtually all of its internal programming. To date, the Company's costs in
making system modifications have not been material and the Company does not
believe that remaining costs will have a material impact on the Company's
operations in fiscal 1999.
The impact of this problem on the securities industry will be material,
however, since virtually every aspect of the sale of securities and the
processing of transactions will be affected. Due to the enormous task facing
the securities industry, and the interdependent nature of securities
transactions, the Company may be adversely affected by this problem in the Year
2000 depending on whether it and the entities with whom it does business
address this issue successfully.
Effects of Inflation
The Company's assets are primarily liquid in nature and are not
significantly affected by inflation. Management believes that the changes in
replacement cost of property and equipment would not materially affect
operating results. However, the rate of inflation affects the Company's
expenses, including employee compensation, communications and occupancy, which
may not be readily recoverable through charges for services provided by the
Company.
RAYMOND JAMES FINANCIAL, INC.
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
Three Months Ended
December 24, December 26,
1998 1997
Net income $17,479 $22,745
-------- ---------
Weighted-average common
shares outstanding during the
period (2) 48,119 47,748
Additional shares assuming
exercise of stock
options and warrants (1)(2) 996 1,255
---------- ---------
Weighted-average diluted common
shares (2) 49,115 49,003
========== =========
Net income per share-basic (2) $ .36 $ .48
Net income per share-diluted(2) $ .36 $ .46
(1) Represents the number of shares of common stock issuable on the
exercise of dilutive employee stock options less the number of shares
of common stock which could have been purchased with the proceeds from
the exercise of such options. These purchases were assumed to have
been made at the average market price of the common stock during the
period, or that part of the period for which the option was
outstanding.
(2) Gives effect to the 3-for-2 stock split paid to shareholders April 2,
1998.
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.
RAYMOND JAMES FINANCIAL, INC.
(Registrant)
Date: February 3, 1999 /s/ Thomas A. James
Thomas A. James
Chairman and Chief
Executive Officer
/s/ Jeffrey P. Julien
Jeffrey P. Julien
Vice President - Finance
and Chief Financial
Officer
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<FISCAL-YEAR-END> SEP-24-1999
<PERIOD-END> DEC-24-1998
<CASH> 338,090,000
<RECEIVABLES> 929,791,000
<SECURITIES-RESALE> 1,170,837,000
<SECURITIES-BORROWED> 1,205,933,000
<INSTRUMENTS-OWNED> 551,323,000
<PP&E> 82,868,000
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<SHORT-TERM> 20,000,000
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