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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one) FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 25, 1998
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission file number 1-9109
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RAYMOND JAMES FINANCIAL, INC.
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(Exact name of registrant as specified in its charter)
Florida No. 59-1517485
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
880 Carillon Parkway, St. Petersburg, Florida 33716
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (727) 573-3800
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ---------------------------- -----------------------------------------
Common Stock, $.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 10, 1998: $1,065,305,696.
Number of common shares outstanding (December 10, 1998): 48,149,410
DOCUMENTS INCORPORATED BY REFERENCE
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Proxy Statement for Annual Meeting of Shareholders to be held on January 28,
1999. (The Company intends to file with the Commission a definitive proxy
statement pursuant to Regulation 14A prior to January 08, 1999.)
PART I
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ITEM 1. BUSINESS
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(a) General Description of Business
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Raymond James Financial, Inc. ("RJF") is a Florida-based holding company
that was incorporated in 1974 as a successor to the original corporation
founded in 1962. Its principal subsidiaries include Raymond James &
Associates, Inc. ("RJA"), Investment Management & Research, Inc. ("IM&R"),
Robert Thomas Securities, Inc. ("RTS"), Eagle Asset Management, Inc.
("Eagle"), Heritage Asset Management, Inc. ("Heritage") and Raymond James
Bank, FSB. All of these subsidiaries are wholly-owned by RJF. RJF and its
subsidiaries are hereinafter collectively referred to as the "Company".
RJF's principal subsidiary, RJA, was organized in Florida in 1962. RJA
is a full service broker-dealer engaged in most aspects of securities
distribution and investment banking. RJA also offers financial planning
services for individuals and provides clearing services for IM&R, RTS, and
several unaffiliated broker-dealers. The Company is the largest brokerage and
investment firm headquartered in the state of Florida. RJA is a member of
the New York Stock Exchange ("NYSE"), American Stock Exchange, Philadelphia
Stock Exchange, Boston Stock Exchange, Chicago Board Options Exchange, New
York Futures Exchange, Pacific Exchange and Chicago Stock Exchange. It is
also a member of the Securities Industry Association, National Association of
Securities Dealers (NASD), and Securities Investors Protection Corporation
(SIPC). SIPC provides insurance protection for clients' accounts of up to
$500,000 each (limited to $100,000 for claims for cash) in the event of RJA's
liquidation. In addition, RJA carries $49,500,000 per account of excess
client insurance. For the year ended September 25, 1998 the revenues of RJA
accounted for 59% of the consolidated revenues of the Company.
IM&R was formed in 1973 as an independent contractor financial planning
organization and participates in the distribution of all products and
services offered by RJA to its retail clients. IM&R is a member of the NASD
and SIPC, but not of any exchange, as it clears its trades on a fully-
disclosed basis through RJA.
RTS was organized in 1981, and serves independent contractor brokers who
do a majority of their business in individual securities. RTS, like IM&R, is
a member of the NASD and SIPC, but not of any exchange, as it also clears all
of its business on a fully-disclosed basis through RJA.
Eagle was formed in 1984 as a registered investment advisor to serve as
the discretionary manager for individual equity portfolios. Prior to the
inception of Eagle, the asset management operation had been a division of
RJA.
Heritage was organized in 1985 to act as the manager of the Company's
internally sponsored Heritage family of mutual funds.
Raymond James Bank was formed in 1994 in conjunction with the purchase
from the Resolution Trust Corporation of certain branches of a failed thrift.
Its primary purpose is to provide traditional banking products and services
to the
clients of the Company's broker-dealer subsidiaries.
(b) Financial Information - Revenues by Source
The Company's operations consist of various financial services provided
to its clients. The following table shows revenues by source for the last
three years:
Year Ended
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Sept. 25, Sept. 26, Sept. 27,
1998 % 1997 % 1996 %
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(dollar amounts in thousands)
Securities commissions:
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Listed products $ 132,211 12.2 $115,818 12.9 $ 90,536 12.5
Over-the-counter 163,410 15.1 148,791 16.6 133,543 18.5
Mutual funds 150,536 13.9 117,748 13.1 96,099 13.3
Asset-based fees 100,055 9.2 61,444 6.8 45,005 6.2
Annuities and other
insurance products 85,322 7.9 70,944 7.9 56,964 7.9
Other 127 .1 219 .1 340 .1
---------- ----- -------- ----- -------- -----
Total 631,661 58.4 514,964 57.4 422,487 58.5
---------- ----- -------- ----- -------- -----
Investment banking:
- -------------------
Underwriting management
fees 27,569 2.5 43,434 4.8 21,887 3.0
Merger and acquisition
fees 20,153 1.9 7,929 .9 12,009 1.7
New issue sales credits 51,446 4.8 47,639 5.3 31,189 4.3
Limited partnerships and
other 8,604 .8 10,086 1.2 7,511 1.1
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Total 107,772 10.0 109,088 12.2 72,596 10.1
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Investment advisory fees 79,485 7.3 55,194 6.2 50,715 7.0
Interest 202,255 18.6 155,746 17.4 126,453 17.5
Correspondent clearing 4,429 .4 4,502 .5 3,985 .6
Net trading and investment
profits 6,300 .6 12,797 1.4 12,243 1.7
Financial service fees 28,928 2.7 24,610 2.7 18,191 2.5
Other 22,077 2.0 20,060 2.2 15,082 2.1
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1,082,907 100.0 896,961 100.0 721,752 100.0
========== ===== ======= ===== ======= =====
Gain on sale of Liberty
Investment Mgmt., Inc.* - 30,646 -
Total revenues $1,082,907 $927,607 $721,752
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Securities commissions by
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broker-dealer:
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Raymond James & Associates,
Inc. $ 262,966 41.6 $222,771 43.3 $190,042 45.0
Investment Management &
Research, Inc. 230,999 36.6 185,384 36.0 149,181 35.3
Robert Thomas Securities,
Inc. 137,696 21.8 106,809 20.7 83,264 19.7
---------- ----- -------- ----- -------- -----
Total $ 631,661 100.0 $514,964 100.0 $422,487 100.0
========== ===== ======== ===== ======== =====
* See Note 16 of the Notes to Consolidated Financial Statements for details.
(c) Narrative Description of Business
---------------------------------
At September 25, 1998 the Company employed 3,790 individuals. RJA
employed 3,300 of these individuals, 578 of whom were full-time retail
Financial Advisors. In addition, 2,540 full-time Financial Advisors were
affiliated with the Company as independent contractors. Through its broker-
dealer subsidiaries, the Company provides securities services to
approximately 800,000 client accounts. No single client accounts for a
material percentage of the Company's total business.
The Company currently divides its business into five segments based on
the products and services offered. These segments are retail distribution,
institutional distribution, investment banking, asset management, and other.
RETAIL DISTRIBUTION
-------------------
The Company provides securities transaction and financial planning
services to its retail clients through the RJA retail branch system, its two
independent contractor firms (IM&R and RTS), and a general insurance agency.
RJA - Retail Sales
RJA's 57 retail branches are located primarily in the southeastern
U.S., with a majority in Florida. Branches are also located in Colorado,
Delaware, Georgia, Illinois, Iowa, North Carolina, Pennsylvania, South
Carolina, Tennessee, Texas and Washington D.C. Its 578 retail Financial
Advisors provide a broad range of financial products and services to their
clients. In most cases, RJA charges commissions to its retail clients, on
both exchange and over-the-counter equity transactions, in accordance with
its established commission schedule. In certain instances, varying
discounts from the schedule are given, generally based upon the client's
level of business, the trade size and other relevant factors. RJA also
distributes both taxable and tax-exempt fixed income products to its retail
clients, including municipal, corporate, government agency and mortgage-
backed bonds, preferred stock and unit investment trusts. In addition, a
growing number of clients are electing asset-based fee alternatives to the
traditional commission structure.
The retail Financial Advisors sell a number of professionally managed,
load mutual funds and offer, in addition, a selection of no-load funds. RJA
maintains dealer-sales agreements with most major distributors of mutual
fund shares sold through broker-dealers. Commissions on such sales
generally range from 1% to 5% of the dollar value of the transaction.
Alternative sales compensation structures typically include front-end
charges, "back-end" or contingent deferred sales charges, and an annual
charge in the form of a fund expense.
At September 25, 1998, the Company had 14 internally sponsored mutual
funds for which RJA acts as distributor. (See Heritage Asset Management,
Inc. description on page 8.) As the distributor of these funds, RJA has the
right to enter into dealer agreements with other broker-dealers for the sale
of Heritage funds to their clients.
Investment Management & Research, Inc.
IM&R participates in the distribution of all the products and services
offered by RJA to its retail clients through 1,336 independent contractor
Financial Advisors in 561 offices and 91 satellite offices throughout all 50
states. The number of Financial Advisors in these offices ranges from 1 to
18. Such Financial Advisors devote all or substantially all of their time
to the sale of securities and, while these independent contractors must
conduct all securities business through IM&R, their contracts permit them to
conduct insurance, real estate brokerage, accounting services or other
business for others or for their own account. Many IM&R Financial Advisors
are better characterized as financial planners than as stock brokers,
although they are not required to conduct their business as financial
planners. Independent contractors are responsible for all of their direct
costs and are paid a larger percentage of commissions to compensate them for
their added expenses.
Robert Thomas Securities, Inc.
RTS has 1,204 full-time independent contractor Financial Advisors in a
network of 434 branch offices and 164 satellite offices in 48 states. RTS
Financial Advisors primarily offer individual securities and investment
advice to individual investors and institutions. Of the branch locations,
there are 223 that compose the RTS Financial Institutions Division which
offers securities on a third-party basis to customers of financial
institutions such as banks, thrifts, and credit unions. RTS Financial
Advisors offer the full range of securities products and services of RJA.
RTS offices have the independence to set their own commissions on agency
business within the regulatory guidelines. Like IM&R, RTS branches and
their registered Financial Advisors may offer non-securities products or
services to clients outside of their relationship with RTS.
During fiscal 1999, IM&R and RTS will be merged into a single entity,
Raymond James Financial Services, Inc. ("RJFS")and will conduct business
under that name. The firms will initially operate as separate divisions of
RJFS.
Clients' transactions in securities are effected on either a cash or
margin basis. In margin transactions, the client pays a portion of the
purchase price, and RJA makes a loan to the client for the balance,
collateralized by the securities purchased or by other securities owned by
the client. Interest is charged to clients on the amount borrowed to
finance margin transactions. The financing of margin purchases is an
important source of revenue to RJA, since the interest rate paid by the
client on funds loaned by RJA exceeds RJA's cost of short-term funds. The
interest rate charged to a client on a margin loan depends on the average
loan balance in the client's account and ranges from prime plus 1% to prime
minus .75%.
Typically, broker-dealers utilize secured bank borrowings and equity
capital as the primary sources of funds to finance clients' margin account
borrowings. Since the inception of the Client Interest Program in 1981,
however, the Company's primary source of funds to finance clients' margin
account balances has been cash balances in clients' accounts which are
awaiting investment. In addition, pursuant to written agreements with
clients, broker-dealers are permitted by Securities and Exchange Commission
("SEC") and NYSE rules to lend client securities in margin accounts to other
brokers. SEC regulations, however, restrict the use of clients' funds
derived from pledging and lending clients' securities, as well as funds
awaiting investment, to the financing of margin account balances, and to the
extent not so used, such funds are required to be deposited in a special
account for the benefit of clients. The regulations also require
broker-dealers, within designated periods of time, to obtain possession or
control of, and to segregate, clients' fully paid and excess margin
securities.
Planning Corporation of America
Planning Corporation of America ("PCA"), a wholly-owned subsidiary of
RJA, is a general insurance agency and represents a number of insurance
companies. Through the Financial Advisors of the Company's broker-dealer
subsidiaries, PCA provides product and marketing support for a broad range
of insurance products, principally fixed and variable annuities, numerous
forms of life insurance, disability insurance and long-term care coverage.
INSTITUTIONAL DISTRIBUTION
--------------------------
The Company's institutional clients are serviced by RJA's
Institutional Equity and Fixed Income departments.
The 53 professionals in the Institutional Equity Sales and Sales
Trading Departments maintain relationships with over 800 institutional
clients. In addition to the Company's headquarters in St. Petersburg, FL,
institutional equity offices are located in New York, Houston, Dallas,
Princeton, San Diego, Toronto, Calgary, Brussels, Dusseldorf, Geneva,
London, Luxembourg, and Paris. A large percentage of their trades involve
stocks under coverage by the RJA Research Department.
In addition, RJA distributes to its institutional clients both taxable
and tax-exempt fixed income products, primarily municipal, corporate,
government agency and mortgage-backed bonds. RJA carries inventory
positions of taxable and municipal securities in both the primary and
secondary market. In addition to St. Petersburg, the Fixed Income Department
maintains institutional sales and trading offices in New York, Chicago,
Houston, Boston, Atlanta, Boca Raton, and Dublin, Ohio. To assist our
institutional clients, the department's Fixed Income Research Group provides
value-added analytical services and publishes research reports containing
both specific product information and information on topics of interest such
as market and regulatory developments.
In providing these securities brokerage services to its institutional
clients, RJA discounts its commissions substantially on institutional
transactions based on trade size and the amount of business conducted
annually with each institution.
The revenues and costs of RJA's back office operations are attributable
primarily to the two distribution segments above. RJA's operations/
administrative personnel are responsible for the execution of orders,
processing of securities transactions, custody of client securities,
receipt, identification and delivery of funds and securities, compliance
with regulatory and legal requirements, internal financial accounting and
controls and general office administration for most of the Company's
operations.
INVESTMENT BANKING/CAPITAL MARKETS
----------------------------------
Investment Banking activities include both equity and fixed income
products. This segment consists of the departments described below:
Investment Banking Group. The 60 professionals of RJA's Investment
Banking Group, located primarily in St. Petersburg with satellite offices in
New York, Dallas, Houston, and Calgary, are involved in a variety of
activities including public and private equity financing for corporate
clients, merger and acquisition advisory services, fairness opinions and
evaluations. The Company focuses on specific industry groups or strategic
business units ("SBUs") including Consumer, Financial and Business Services,
Healthcare, Information Technology, Environmental Real Estate, and Energy.
In addition, RJA acts as an underwriter or selling group member for
corporate bonds, agency bonds, preferred stock and unit investment trusts.
When underwriting new issue securities, RJA agrees to purchase the issue
through a negotiated sale or submits a competitive bid.
Research Department. The 38 analysts in this department publish
research on over 360 companies, primarily focused on emerging growth and mid-
cap companies in a broad range of industries. Proprietary research reports
are provided to both retail and institutional clients, and are supplemented
by research purchased from outside services to accommodate retail clients.
This department has distinguished itself through its extremely successful
long-term comparative results as reported by Zacks Investment Research each
quarter in the Wall Street Journal.
Over-the-Counter Equity Trading. Trading securities in the over-the-
counter ("OTC") market involves the purchase of securities from, and the
sale of securities to, clients of the Company or other dealers who may be
purchasing or selling securities for their own account or acting as agent
for their clients. Profits and losses are derived from the spreads between
bid and asked prices, as well as market trends for the individual securities
during the holding period. At September 25, 1998, RJA made markets in over
250 common stocks in the OTC market. RJA frequently acts as agent in the
execution of OTC orders for its clients and as such transacts these trades
with other dealers. When RJA receives a client order in a security in which
it makes a market, it may act as principal as long as it matches or improves
upon the best price in the dealer market, plus or minus a mark-up or
mark-down not exceeding the equivalent agency commission charge. Recently
adopted regulations require that client limit orders be satisfied prior to
the brokerage firm buying securities into or selling securities from their
own inventory at the same price.
Syndicate Department. The Syndicate Department coordinates the
marketing, distribution, pricing and stabilization of Raymond James' lead-
and co-managed equity underwritings. In addition to Raymond James' managed
and co-managed offerings, this department coordinates the firm's syndicate
and selling group activities in transactions managed by other investment
banking firms. Marketing and distribution activities are focused on the
firm's institutional and retail clients. The Syndicate department is also
responsible for the Corporate Client Services group which serves the firm's
Investment Banking and Research clients by providing specialized brokerage
services for corporations and their executives.
Public Finance. The 21 professionals in the Public Finance division
operate out of 7 offices (4 located throughout the State of Florida, one in
Birmingham, AL, one in New York, NY, and one in Pittsburg, PA), acting as
Financial Advisor or underwriter to various municipal agencies or political
subdivisions.
Partnership Investment Banking. The Company acts as the general
partner in equipment leasing and real estate limited partnerships. Most
significantly, Raymond James Tax Credit Funds, Inc. is the general partner
in funds that have invested nationwide in properties that qualify for low
income housing tax credits.
ASSET MANAGEMENT
----------------
The Company's asset management segment includes proprietary asset
management operations, internally sponsored mutual funds, outside money
management alternatives, and other asset-based fee programs.
Eagle Asset Management, Inc.
Eagle is a registered investment advisor with approximately $4.8
billion under management at September 25, 1998. Eagle's clients include
pension and profit sharing plans, retirement funds, foundations, endowments,
trusts and individuals. Accounts are managed on a discretionary basis in
accordance with the investment objective(s) specified by the client. Eagle
manages approximately $1 billion for institutional clients and $3.8 billion
for retail accounts.
Eagle's investment management fee generally ranges from .25%-1.0% of
asset balances per year depending upon the size and investment objective of
the account. In addition to the management fees, clients are required to pay
brokerage commissions (or more commonly, a fee in lieu thereof) for
transactions in their account.
Heritage Asset Management, Inc.
Heritage Asset Management, Inc. ("Heritage") serves as investment
advisor to the Heritage Family of Mutual Funds. Heritage also serves as
transfer agent or sub-transfer agent for all of the open-end funds and as
fund accountant or sub-fund accountant for all Heritage funds except the
Eagle International Equity Portfolio. Portfolio management for the Income-
Growth Trust, Aggressive Growth Fund, Growth Equity Fund, Mid Cap Growth
Fund, Value Equity Fund, and the First Puerto Rico Growth and Income Fund
are subcontracted. Portfolio management for the Small Cap Stock Fund is
subcontracted to Eagle and the Company's Awad Asset Management subsidiary.
Unaffiliated advisors are employed for the Municipal Money Market Fund,
Capital Appreciation Trust, High Yield Bond Fund and the Eagle International
Equity Portfolio.
Heritage also serves as an advisor to Raymond James Bank to make
recommendations and monitor the Bank's investment portfolio of mortgage-
backed securities.
Net assets at September 25, 1998 were as follows (in thousands):
Heritage Cash Trust:
Money Market Fund $2,545,803
Municipal Money Market Fund 548,371
Heritage Capital Appreciation Trust 131,922
Heritage Income-Growth Trust 105,815
Heritage Income Trust:
High Yield Bond Fund 54,559
Intermediate Government Fund 17,648
Heritage Series Trust:
Small Cap Stock Fund 262,707
Growth Equity Fund 79,722
Eagle International Equity Portfolio 42,462
Value Equity Fund 30,523
Mid Cap Stock Fund 26,737
Aggressive Growth Fund 13,971
Heritage U.S. Govt Income Fund
(closed-end) 38,686
First Puerto Rico Growth & Income Fund
(available to Puerto Rico Residents only) 48,468
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$3,947,394
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Awad Asset Management, Inc.
Awad Asset Management, Inc. ("Awad") is primarily a small and mid-cap
equity portfolio management subsidiary. Clients pay fees and/or commissions
for management of their accounts. Present fees range from .5% to 1.0% of
asset balances annually. In addition to private accounts, Awad also manages
a portion of the Heritage Small Cap Stock Fund Portfolio and other non-
affiliated mutual fund portfolios. Exclusive of the Heritage Small Cap Fund,
Awad had approximately $656 million under management at September 25, 1998.
RJA - Asset Management Services
RJA's Asset Management Services ("AMS") department manages programs
which offer investment advisory services to clients, as well as certain non-
advisory programs which offer fee-based alternatives to traditional
commission charges for transactions. The primary advisory service offered
by AMS is the Investment Advisory Services ("IAS") program. IAS maintains
an approved list of investment managers, most of which are unaffiliated with
the Company, establishes custodial facilities, monitors performance of
client accounts, provides clients with accounting and other administrative
services and assists investment managers with certain trading management
activities. IAS earns fees generally ranging from .5%-1.0% of asset
balances per annum, a portion of which is paid to investment managers who
direct the investment of the clients' accounts. At September 25, 1998, this
program had approximately $1.8 billion in assets under management through
agreements with 24 independent investment advisors and Awad, which is also
offered through this program.
Passport and a similar program offered by IM&R, known as IMPAC, offer
both a discretionary and non-discretionary advisory fee alternative that
allows clients to pay a quarterly fee plus low transaction charges in lieu
of commissions. Fees are based on the individual account size and are also
dependent on the type of securities in the accounts. In addition, AMS
collects an administrative fee of up to .175% of asset balances annually,
for which clients receive quarterly performance reporting and other
services. As of September 25, 1998, Passport and IMPAC had approximately
$3.55 billion and $592 million in assets, respectively, serviced by
Financial Advisors.
In addition to the foregoing programs, AMS also offers fee based
programs to clients who have contracted for portfolio management services
from outside money managers that are not a part of the IAS program.
Further, AMS administers other less significant asset-based fee programs.
Raymond James Realty Advisors, Inc.
The Company's Raymond James Realty Advisors subsidiary had become a
recognized manager of real estate portfolios for institutional clients.
During 1998 this portfolio management operation was sold, and its employees
were transferred to the new owner.
OTHER
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Aside from the retail and institutional distribution, investment
banking and asset management businesses, the Company operates a stock
borrow/stock loan program, offers bank and trust services, and has several
international joint ventures. These operations are grouped in the "other"
segment.
RJA - Stock Borrow/Stock Loan
RJA commenced this program in July 1987, involving the borrowing and
lending of securities from and to other broker-dealers. RJA generally acts
as an intermediary between broker-dealers and other financial institutions,
where it borrows from one party and lends to another. The borrower of the
securities puts up a cash deposit, commonly 102% of the market value of the
securities. This deposit, which is adjusted daily to reflect changes in
current market value, earns interest at a negotiated rate.
Raymond James Bank, FSB
Raymond James Bank, FSB, ("RJBank") received its federal savings bank
charter on May 6, 1994. RJBank provides residential and commercial loans and
FDIC-insured deposit accounts to clients of RJF's broker-dealer subsidiaries
and to the general public.
Access to RJBank's products and services is available nationwide
through the offices of its affiliated investment firms as well as through
convenient telephonic and electronic banking services, including ATM, point-
of-sale, 24-hour TeleDirect automated telephone banking, checkwriting,
direct deposit and ACH payments. As of September 30, 1998, RJBank had total
assets in excess of $500 million.
Raymond James Trust Company
Sound Trust Company
Raymond James Trust Company was chartered in 1992 and opened for
business in September 1992. This wholly-owned subsidiary of RJF was formed
primarily to provide personal trust services to existing clients of the
broker-dealer subsidiaries. Portfolio management of trust assets is often
subcontracted to the asset management operations of the Company. In October
1993, the Company acquired a second trust company, Sound Trust Company, in
Tacoma, Washington. This subsidiary provides personal trust services
primarily to broker-dealer clients outside the State of Florida. These two
subsidiaries had a combined total of $501 million in client assets at
September 25, 1998.
Raymond James Credit Corporation
Raymond James Credit Corporation ("RJCC") was formed in 1996 as a
regulated finance company. To date, this subsidiary has primarily provided
loans collateralized by control or restricted securities. RJCC is funded
with internal capital and by a $50 million line of credit with a commercial
bank. At September 25, 1998, RJCC had $45 million in outstanding loans.
Raymond James International Holdings, Inc.
Raymond James International Holdings, Inc.("RJIH") is a Delaware
corporation formed in 1994 to house the Company's foreign operations. To
date, such operations have consisted of brokerage and asset management joint
venture investments in India, South Africa, and France. Raymond James Latin
American Holdings, Inc. ("RJLAH") has been formed as a subsidiary of RJIH to
act as a holding company for investments and joint ventures in South
America. In October 1998, RJLAH became a joint venture partner in Raymond
James Argentina Sociedad de Bolsa SA, which will provide brokerage services,
investment banking, investment advisory and private banking services.
In addition, the "other" segment includes earnings on corporate cash
and several immaterial operations.
COMPETITION
The Company's subsidiaries compete with many larger, better capitalized
providers of financial services, including other securities firms, some of
which are affiliated with major financial services companies, insurance
companies, banking institutions and other organizations. They also compete
with a number of firms offering discount brokerage services, usually with
lower levels of service, to individual clients. The Company's subsidiaries
compete principally on the basis of service, product selection, location and
reputation in local markets.
REGULATION
Most of the Company's operations are subject to regulatory oversight by
governmental agencies and/or self regulatory organizations.
The securities industry in the United States is subject to extensive
regulation under federal and state laws. The SEC is the federal agency
charged with administration of the federal securities laws. Much of the
regulation of broker-dealers, however, has been delegated to self-regulatory
organizations, principally the NASD and the NYSE. These self-regulatory
organizations adopt rules (which are subject to approval by the SEC) for
governing the industry and conduct periodic examinations of member broker-
dealers. Securities firms are also subject to regulation by state
securities commissions in the states in which they are registered. RJA,
IM&R and RTS are currently registered in all 50 states.
See Notes 12 and 13 of the Notes to Consolidated Financial Statements
for further description of certain SEC regulations pertaining to, broker-
dealer Net Capital and Reserve Requirements.
The Company's investment advisory operations, including the Company-
sponsored mutual funds, are also subject to extensive regulation by the SEC.
Raymond James Bank, FSB, is subject to regulation by various federal
banking agencies, including the Office of Thrift Supervision and the Federal
Deposit Insurance Corporation.
The Company's two trust companies are subject to regulation by the
states in which they are chartered.
ITEM 2. PROPERTIES
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The Company owns a 610,000 square foot headquarters complex (three home
office buildings, a bank and trust headquarters building, and a five deck
parking garage). The complex covers approximately forty-five acres, and the
Company has the ability to build up to another 260,000 square feet on this
site. In addition, the Company leases 70,000 square feet in a nearby office
building. With the exception of a Company-owned RJA branch office building
in Crystal River, FL, RJA branches are leased with various expiration dates
through 2008. The IM&R headquarters office in Atlanta and Sound Trust
Company facility in Seattle are also under lease. See Note 9 to Consolidated
Financial Statements for further information regarding the Company's leases.
Leases for branch offices of IM&R and RTS are the responsibility of the
respective independent contractor registered representatives.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is a defendant or co-defendant in various lawsuits
incidental to its securities business. The Company is contesting the
allegations of the complaints 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.
As a result of the extensive regulation of the securities industry, the
Company's broker-dealer subsidiaries are subject to regular reviews and
inspections by regulatory authorities and self regulatory organizations which
can result in imposition of sanctions for regulatory violations, ranging from
non-monetary censure to fines and, in serious cases, temporary or permanent
suspension from business. In addition, from time to time regulatory agencies
and self regulatory organizations institute investigations into industry
practices which can result in the imposition of such sanctions. During the
course of the past fiscal year, the Company's primary broker-dealer
subsidiary resolved a number of regulatory and self regulatory investigations
by payment of fines that were immaterial in amount.
The Securities and Exchange Commission has initiated an investigation of
certain trading practices in the over-the-counter securities market during
1994 and 1995. Along with many other market makers, the Company has
submitted documents and cooperated with the S.E.C. in this investigation. The
Company does not anticipate that the resolution of this proceeding will have
a material effect on its business or operations. The Securities and Exchange
Commission, the Internal Revenue Service, and the National Association of
Securities Dealers, Inc., have been conducting reviews of investment banking
practices in connection with advance refunding transactions for
municipalities. The investigation has focused on the mark-ups charged by
investment banking firms for securities purchased by municipalities in
connection with these refundings. Along with other participants in the
municipal bond market, the Company has been providing documents and
furnishing information to regulators in connection with this investigation,
which is ongoing.
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 of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
----------------------------------------
AND RELATED SHAREHOLDER MATTERS
-------------------------------
The Company's common stock is traded on the NYSE under the symbol "RJF".
The following table sets forth for the periods indicated the high and low
trades for the common stock.
1998 1997
----------------- ----------------
High Low High Low
------ ------ ------ ------
First Quarter $26.63 $18.00 $13.67 $10.56
Second Quarter 29.13 21.63 17.00 12.42
Third Quarter 36.50 28.50 19.50 13.00
Fourth Quarter 32.63 17.07 24.75 17.17
Since the Company initiated payment of a cash dividend in 1985,
there have been 16 increases in the dividend rate, 7 of which were in the
form of stock splits and stock dividends. The dividend rate following the
April 2, 1998 stock split was $.06 per quarter.
The payment of dividends on the Company's common stock is subject to the
availability of funds from the Company's subsidiaries, including the broker-
dealer subsidiaries which may be subject to restrictions under the net
capital rules of the SEC and the NYSE. Such restrictions have never become
applicable with respect to the Company's dividend payments. (See Note 12 of
the Notes to Consolidated Financial Statements.)
At December 10, 1998 there were approximately 10,000 holders of the
Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
Year Ended
----------------------------------------------------------
Sept. 25, Sept. 26, Sept. 27, Sept. 29, Sept. 30,
1998 1997** 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Operating Results:
- ------------------
Revenues $1,082,907 $ 927,607 $ 721,752 $ 554,070 $ 507,136
Net income $ 92,704 $ 98,915 $ 65,978 $ 46,141 $ 42,069
Net income per
share - basic:* $ 1.92 $ 2.09 $ 1.41 $ .99 $ .88
Net income per
share - diluted:* $ 1.86 $ 2.04 $ 1.39 $ .98 $ .87
Weighted average
common shares
outstanding - basic:* 48,160 47,383 46,781 46,607 47,806
Weighted average common
and common equivalent
shares outstanding -
diluted:* 49,951 48,387 47,307 47,083 48,355
Cash dividends declared
per share* $ .24 $ .21 $ .17 $ .16 $ .14
Financial Condition:
- --------------------
Total assets $3,852,737 $3,278,645 $2,566,381 $2,012,715 $1,698,262
Long-term debt $ 44,767 $ 12,715 $ 12,909 $ 13,084 $ 13,243
Shareholders' equity $ 509,898 $ 423,276 $ 326,632 $ 266,193 $ 227,452
Shares outstanding* 48,268 47,695 47,012 46,382 46,112
Equity per share
at end of period* $ 10.56 $ 8.87 $ 6.95 $ 5.74 $ 4.93
* Gives effect to the common stock splits paid on April 2, 1998
and April 3, 1997.
** Amounts include the $30.6 million gain on the sale of Liberty
Investment Management, Inc. Excluding this gain, revenues were
$896,961,000, net income was $80,126,000, and basic and diluted
net income per share were $1.69 and $1.66, respectively. See Note
16 of the Notes to Consolidated Financial Statements for details.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITION
-----------------------
Results of Operations - Three Years Ended September 25, 1998
- ------------------------------------------------------------
Fiscal 1998 was the Company's fourteenth consecutive year of record
revenues, surpassing the $1 billion mark for the first time. Total revenues
of $1,083,000,000 represented an increase of 17% over the prior year, and an
even more impressive 21% increase when the 1997 results are adjusted to
exclude the one-time gain from the sale of the Company's interest in Liberty
Investment Management, Inc. ("Liberty") as described in Note 16 to the
Consolidated Financial Statements. Similarly, reported earnings of
$92,700,000 indicate a decline of 6% from the prior year. However, excluding
the prior year gain from the Liberty sale, earnings established a record,
rising 16%.
The first nine months of fiscal 1998 continued the extremely favorable
market trends of the prior two fiscal years. A slowdown occurred in the
fourth quarter, however, as equity markets suffered a steep decline. The
Company's continued focus on non-transaction dependent fee revenues, such as
investment advisory fees, interest and asset-based commission alternatives,
helped the Company achieve relatively consistent results in a volatile market
environment. For fiscal 1998, such fee-based revenues represented
approximately 40% of total revenues.
Year Ended
-----------------------------------------------
Sept. 25, % Incr. Sept. 26, Sept. 27,
1998 (Decr.) 1997 % Incr. 1996
-----------------------------------------------
Revenues: (000's) (000's) (000's)
Securities commissions
and fees $ $631,661 23% $ 514,964 22% $ 422,487
Investment banking 107,772 ( 1%) 109,088 50% 72,596
Investment advisory fees 79,485 44% 55,194 9% 50,715
Interest 202,255 30% 155,746 23% 126,453
Correspondent clearing 4,429 ( 2%) 4,502 13% 3,985
Net trading profits 6,300 (51%) 12,797 5% 12,243
Financial service fees 28,928 18% 24,610 35% 18,191
Other 22,077 10% 20,060 33% 15,082
---------- ---------- ----------
Gain on sale of Liberty - 30,646 -
---------- ---------- ----------
Total revenues $1,082,907 17% $ 927,607 29% $ 721,752
========== ========== ==========
The record transaction volumes in fiscal years 1998, 1997 and 1996
resulted in increased securities commissions from the sales of all product
lines during the period, with the largest absolute increase occuring in sales
of mutual funds. While the retail sales force has experienced double-digit
annual growth in headcount since fiscal 1996, as illustrated below, the
increased productivity of existing Financial Advisors has been an even
greater factor in the growth of commission revenues.
YEAR ENDED
--------------------------------------------
Sept. 25, Sept. 26, % Incr. Sept. 27,
1998 % Incr. 1997 (Decr.) 1996
--------- ------- -------- ------- ---------
Number of retail Financial Advisors
at yearend 3,117 10% 2,825 13% 2,503
Retail commission revenues (000's)$ 523,890 24% $ 422,316 26% $ 334,871
Retail new issue sales credits
(000's) $ 24,976 2% $ 24,472 49% $ 16,462
Number of institutional salesmen
at yearend 134 9% 123 (5%) 129
Institutional commission revenues
(000's) $ 107,771 16% $ 92,648 6% $ 87,616
Institutional new issue sales
credits (000's) $ 26,470 14% $ 23,167 57% $ 14,727
Number of trades processed 3,328,000 19% 2,803,000 11% 2,526,000
Investment banking revenues, including new issue sales credits,
decreased nominally to $108 million in 1998 from the record $109 million in
the prior year. Fiscal years 1997 and 1996 were record years for equity
underwriting activity, both in number of new issues and average offering
size. This pace continued only through the first half of fiscal 1998, at
which time small and mid-cap stocks began to weaken, particularly in certain
industry sectors, which slowed and eventually curtailed the new issue deal
flow. The number of managed and co-managed underwritings, the vast majority
of which were equity-related offerings, and the dollar volume of these
transactions were as follows: 1998 - 57 new issues for $6.0 billion; 1997 -
65 new issues for $7.8 billion; and 1996 - 38 new issues for $2.7 billion.
Merger and acquisition fees, although a less significant component, have been
a consistent revenue source during the past few years, reaching a record $20
million in 1998.
Investment advisory fees have risen commensurate with the generally
strong growth in assets under management. Exclusive of the Liberty effects,
financial assets under management suffered their first quarterly decline in
nearly four years during the September 1998 quarter, but still showed a 22%
increase for the fiscal year. Fee revenues increased at a much greater rate
as the asset decline occurred near the end of the year. Asset management
growth has benefited from both overall asset appreciation and record net
sales during the past two years. For fiscal 1997 and 1996, investment
advisory fees included $2.6 million and $9.7 million, respectively, in fees
from Liberty, which was sold in January 1997. Since 1995, real estate assets
under management had been increasing significantly as the Company's Raymond
James Realty Advisors subsidiary had become a recognized manager of
institutional real estate portfolios. During 1998 this portfolio management
operation was sold, and its employees were transferred to the new owner.
This transaction generated $3.7 million of performance fees which are
included in investment advisory fees.
Sept. 25, % Incr. Sept. 26, % Incr. Sept. 27,
1998 (Decr.) 1997 (Decr.) 1996
----------- ------- --------- ------- ----------
(000's) (000's) (000's)
Eagle Asset Management, Inc.* $ 4,804,967 29% $3,714,407 55% $2,388,922
Heritage Family of Mutual Funds 3,947,394 25% 3,160,910 33% 2,382,670
Investment Advisory Services 1,798,260 25% 1,433,018 46% 980,415
Awad Asset Management* 656,336 (19%) 814,315 66% 490,477
Carillon Asset Management - (100%) 53,448 5% 50,795
----------- ---------- -----------
Subtotal 11,206,957 22% 9,176,098 46% 6,293,279
Liberty Investment Mgmt., Inc.** - - - (100%) 5,468,913
Total Financial Assets Under ----------- ---------- -----------
Management $11,206,957 22% $9,176,098 (22%) $11,762,192
=========== ========== ===========
* Excludes balances included in the Heritage Family of Mutual Funds.
** See Note 16 of the Notes to Consolidated Financial Statements.
Net interest income continues to be a growing source of recurring
earnings. The components of interest earnings are as follows:
Sept. 25, Sept. 26, Sept. 27,
1998 1997 1996
---------- ---------- ---------
(balances in 000's)
Margin balances:
Average balance $ 701,742 $ 480,203 $ 386,422
Average rate 8.2% 8.1% 8.2%
---------- ---------- ---------
$ 57,697 $ 39,087 $ 31,529
Assets segregated
pursuant to
Federal Regulations:
Average balance 776,768 601,902 452,710
Average rate 5.6% 5.3% 5.4%
---------- ---------- ---------
43,163 32,148 24,538
Stock borrowed:
Average balance 1,154,703 1,004,735 947,412
Average rate 4.9% 4.8% 4.7%
---------- ---------- --------
57,049 48,606 44,361
Raymond James Bank, FSB 22,937 17,739 11,980
Other interest revenue 21,409 18,166 14,045
-------- -------- --------
Total interest revenue 202,255 155,746 126,453
-------- -------- --------
Client interest program:
Average balance 1,201,398 880,026 678,910
Average rate 4.8% 4.7% 4.8%
---------- ---------- --------
57,627 41,693 32,374
Stock loaned:
Average balance 1,119,287 980,000 941,937
Average rate 4.7% 4.5% 4.4%
---------- ---------- --------
53,200 44,238 41,165
Raymond James Bank, FSB 17,249 12,997 7,782
Other interest expense 2,933 2,413 2,150
-------- -------- --------
Total interest expense 131,009 101,341 83,471
-------- -------- --------
Net interest income $ 71,246 +31% $ 54,405 +27% $ 42,982
======== ======== ========
Net trading profits declined 51% from the prior year, primarily as a
result of the changes in the over-the-counter equity trading regulations and
practices. These changes have virtually eliminated the gross equity trading
profits and the Company expects that flat or negative over-the-counter equity
trading results will be the norm, not the exception. In the past, the
Company's trading profits had remained relatively consistent, derived
primarily from client order flow in both over-the-counter equity and fixed
income securities.
The growth in the Company's retail client base during the past two
fiscal years has led to increased financial service fees. There has been an
80% increase in the number of IRA accounts, a 53% increase in money market
processing fees, a 40% increase in postage and service charges for
transactions processed and a 135% increase in transaction fees arising from
the Company's retail asset-based fee account programs, an increasingly
popular alternative to the traditional commission-based pricing structure.
Fiscal 1998's other income includes $1.7 million related to the sale of
the real estate portfolio and property management subsidiaries and $2.4
million from the sale of the Company's specialist operations on the Chicago
Exchange. Other income in fiscal 1997 includes a gain of $2.5 million from
the Company's sale of its former headquarters building. For the first half of
1998 and in previous years, other income includes property management fees
from the operations which were sold by the Company in March 1998. These fees
had been increasing substantially through the years as the number of
apartment units under management increased.
Year Ended
----------------------------------------------
Sept. 25, % Incr. Sept. 26, % Incr. Sept. 27,
1998 %(Decr.) 1997 1996
--------- -------- --------- ------- -------
Expenses: (000's) (000's) (000's)
Employee compensation:
Sales commissions $432,602 25% $346,770 24% $279,670
Administrative and benefit costs 120,935 25% 96,549 21% 80,092
Incentive compensation 96,723 3% 94,091 47% 64,142
-------- -------- --------
Total employee compensation 650,260 21% 537,410 27% 423,904
Communications and information
processing 43,485 16% 37,491 23% 30,585
Occupancy and equipment 33,029 22% 27,175 14% 23,927
Clearance and floor brokerage 11,607 ( 1%) 11,708 16% 10,098
Interest 131,009 29% 101,341 21% 83,471
Business development 31,514 52% 20,755 29% 16,053
Other 31,767 2% 31,212 24% 25,189
-------- -------- --------
$932,671 22% $767,092 25% $613,227
======== ======== ========
Sales commission expense increased at a rate approximately proportionate
to the related revenues, with the slight variance being attributable to the
mix of independent contractor and employee Financial Advisors and the bracket
creep associated with higher average production.
Administrative and benefit compensation costs have been increasing at a
rate consistent with the growth in total revenues. The total number of
employees has increased over 40% in the past three years, with the most
significant increase occurring in the information systems area.
Incentive compensation expenses are based on departmental, subsidiary
and firm-wide profitability. Record underwriting activity in 1997 resulted
in a dramatic increase in investment banking departmental profits, having a
significant impact on incentive compensation. These revenues and the related
incentive compensation were basically flat from 1997 to 1998.
The continuing increases in communications and information processing
expense in fiscal 1998 and 1997 reflect the costs of further enhancement and
expansion of the Company's systems of internal communication and information
dissemination, as well as higher general business volume which gave rise to
increased costs for telephone, printing and supplies.
The completion and occupancy of the third headquarters building in the
spring of 1998 gave rise to much of the increased occupancy and equipment
expenses for that year. The increase in occupancy and equipment expense from
fiscal 1996 to 1997 is predominantly the increased depreciation on additional
information processing equipment, as well as expenses associated with
upgraded retail office space and Financial Advisor workstations over the past
two years.
Clearing and floor brokerage expense has not increased in proportion to
related revenues due to the increased productivity of floor brokers and other
cost saving measures implemented over the period.
Business development expenses rose dramatically in 1998 due to increased
advertising, both to recruit Financial Advisors and increase brand name
recognition; increased travel and related expenses, particularly by the
larger staff of investment bankers and research analysts; the inception of
the stadium naming rights contract; and costs associated with larger
conferences throughout the Company's operations. The increase in 1997 was
proportionate to the increase in total revenues and reflects the growth of
most of the same items.
While the Company was able to hold other expenses relatively constant in
1998, these expenses increased from 1996 to 1997 at a pace equal to the
growth in revenues. These expenses include fees paid to outside managers in
the Company's investment advisory services program, bank service charges,
legal expenses and provisions, and various state taxes.
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.
Liquidity and Capital Resources
- -------------------------------
Net cash from operating activities during the current year was $448
million. Cash was generated by increased client balances in the client
interest program net of increased customer margin balances and the
fluctuations in various asset and liability accounts.
Investing activities required $118 million during the year. Additions to
fixed assets consumed $46 million, of which $27.8 million was for the
construction of new buildings at the headquarters complex, the remainder
being for the purchase of computers, office furniture and equipment. Net
purchases, sales and maturations of investments consumed $72 million. These
investments were primarily mortgage-backed securities purchased by Raymond
James Bank, FSB ("RJ Bank").
Financing activities provided $25 million, the result of increased
mortgage financing and the exercise of stock options and employee stock
purchases, net of cash dividends paid and repurchases of the Company's common
stock.
The Company has loans payable consisting of debt in the amount of $40
million in the form of a mortgage on its headquarters office complex and a $5
million Federal Home Loan Bank advance at RJ Bank. The Company refinanced an
existing mortgage and obtained additional financing after the completion of
the third headquarters building for a total mortgage amount of $40 million.
The parent company has a commitment from a national bank for an
unsecured $50 million line of credit for general corporate purposes. In
addition, Raymond James & Associates, Inc. has uncommitted bank lines of
credit aggregating $310 million.
The Company's broker-dealer subsidiaries are subject to requirements of
the SEC relating to liquidity and capital standards (see Notes to
Consolidated Financial Statements).
Effects of Recently Issued Accounting Standards
- -----------------------------------------------
During June 1997 the Financial Accounting Standards Board ("FASB")
issued Statement No. 130, "Reporting Comprehensive Income," ("FAS 130") which
requires entities to report changes in equity that result from transactions
and economic events other than those with shareholders. The standard divides
comprehensive income into "net income" and "other comprehensive income."
Other comprehensive income includes available-for-sale items. The Company
will be required to present comprehensive income beginning in fiscal 1999.
Disclosure requirements will include showing aggregate net income plus other
comprehensive income adjustments in either a separate statement or below net
income in the statement of operations. The impact of adopting FAS 130 is not
anticipated to have a material effect on the Company's financial position or
results of operations.
Also during fiscal 1998, the FASB issued statement No. 133 "Accounting
for Derivative Instruments and Hedging Activities." This standard requires
that derivatives be recognized in the balance sheet at fair value.
Designation as hedges of specific assets or liabilities is permitted only if
certain conditions are met. Effective in fiscal 2000, the Company will be
required to record and mark to market any derivative financial instruments
and related underlying assets, liabilities and firm commitments. Based on
current operations, there should be minimal impact on the Company's financial
statements.
Market Risk
- -----------
During fiscal 1997 the Securities and Exchange Commission 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. The Company manages risk exposure involving
various levels of management. Position limits in trading and inventory
accounts are established and monitored on an ongoing basis. Current and
proposed underwriting, corporate development, merchant banking and other
commitments are subject to due diligence reviews by senior management, as
well as professionals in the appropriate business and support units involved.
Credit risk related to various financing activities is reduced by the
industry practice of obtaining and maintaining collateral. The Company
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 Company maintains inventories as detailed in Note 2 to the
Consolidated Financial Statements. The fair value of these securities at
September 25, 1998, was $106 million in long positions and $31 million in
short positions. The Company performed an entity-wide analysis of the
Company's financial instruments and assessed the related risk and materiality
in accordance with the rules. Based on this analysis, in the opinion of
management, the market risk associated with the Company's financial
instruments at September 25, 1998 will not have a material adverse effect on
the consolidated financial position or results of operations of the Company.
Effects of Inflation
- --------------------
The Company's assets are primarily liquid in nature and are not
significantly affected by inflation. Management believes that the
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.
Factors Affecting "Forward-Looking Statements"
- ----------------------------------------------
From time to time, the Company may publish "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities and Exchange Act of 1934, as amended, or
make oral statements that constitute forward-looking statements. These
forward-looking statements may relate to such matters as anticipated
financial performance future revenues or earnings, business prospects,
projected ventures, new products, anticipated market performance, and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. In order to comply with the
terms of the safe harbor, the Company cautions readers that a variety of
factors could cause the Company's actual results to differ materially from
the anticipated results or other expectations expressed in the Company's
forward-looking statements. These risks and uncertainties, many of which are
beyond the Company's control, include, but are not limited to: (i)
transaction volume in the securities markets, (ii) the volatility of the
securities markets, (iii) fluctuations in interest rates, (iv) changes in
regulatory requirements which could affect the cost of doing business, (v)
fluctuations in currency rates, (vi) general economic conditions, both
domestic and international, (vii) changes in the rate of inflation and
related impact on securities markets, (viii) competition from existing
financial institutions and other new participants in the securities markets,
(ix) legal developments affecting the litigation experience of the securities
industry, and (x) changes in federal and state tax laws which could affect
the popularity of products sold by the Company. The Company does not
undertake any obligation to publicly update or revise any forward-looking
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
(a) Financial statements, schedules and exhibits filed under this item are
listed in the index appearing on page F-1 of this report.
(b) QUARTERLY FINANCIAL INFORMATION
(In thousands, except per share data)
1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
Revenues $252,304 $267,538 $275,791 $287,274
Income before income taxes 36,886 40,534 36,341 36,475
Net income 22,745 24,700 22,791 22,468
Net income per share - basic* .48 .51 .47 .46
Net income per share - diluted* .45 .50 .46 .45
1997 1st Qtr. 2nd Qtr.** 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
Revenues $194,819 $249,995 $210,118 $272,675
Income before income taxes 27,998 62,128 27,945 42,444
Net income 17,168 38,130 17,140 26,477
Net income per share - basic* .37 .81 .35 .56
Net income per share - diluted* .36 .79 .35 .54
* Gives effect to the 3-for-2 common stock split paid on April 2,
1998 and April 3, 1997
** Amounts include the $30.6 million gain on the sale of Liberty
Investment Management, Inc. Excluding this gain, revenues were
$219,349,000 and net income was $19,341,000, and basic and diluted
net income per share were $.41 and $.40, respectively. See Note
16 of the Notes to Consolidated Financial Statements for details.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Executive officers of the registrant (including its significant
subsidiaries) who are not Directors of the registrant are as follows:
Richard K. Riess 49 Executive Vice President - RJF,
President and CEO of Eagle, and
Managing Director - Asset Management.
Jeffrey P. Julien 42 Vice President - Finance and Chief
Financial Officer, Director and/or
officer of certain RJF subsidiaries.
Barry S. Augenbraun 59 Senior Vice President and
Corporate Secretary.
Jennifer C. Ackart 34 Controller.
The information required by Item 10 relating to Directors of the registrant
is incorporated herein by reference to the registrant's definitive proxy
statement for the 1998 Annual Meeting of Shareholders. Such proxy statement
will be filed with the SEC prior to January 08, 1999.
ITEMS 11,12 AND 13.
The information required by Items 11, 12 and 13 is incorporated herein
by reference to the registrant's definitive proxy statement for the 1999
Annual Meeting of Shareholders. Such proxy statement will be filed with the
SEC prior to January 08, 1999.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
-------------------------------------------
REPORTS ON FORM 8-K
-------------------
(a) Exhibits required by this Item are either listed in the index appearing
on
page F-1 of this report or have been previously filed with the SEC.
(b) Financial statement schedules required by this Item are listed in the
index
appearing on page F-1 of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
St. Petersburg, State of Florida, on the 17th day of December, 1998.
RAYMOND JAMES FINANCIAL, INC.
By /s/ THOMAS A. JAMES
---------------------------------
Thomas A. James, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ THOMAS A. JAMES Chairman and Chief December 17, 1998
Thomas A. James Executive Officer
/s/ FRANCIS S. GODBOLD President and Director December 17, 1998
Francis S. Godbold
/s/ M. ANTHONY GREENE Executive Vice President December 17, 1998
M. Anthony Greene and Director
/s/ J. STEPHEN PUTNAM Executive Vice President December 17, 1998
J. Stephen Putnam and Director
/s/ ROBERT F. SHUCK Vice Chairman and Director December 17, 1998
Robert F. Shuck
/s/ JEFFREY P. JULIEN Vice President - Finance December 17, 1998
Jeffrey P. Julien (Chief Financial Officer)
/s/ JENNIFER C. ACKART Controller (Chief December 17, 1998
Jennifer C. Ackart Accounting Officer)
/s/ JONATHAN A. BULKLEY Director December 17, 1998
Jonathan A. Bulkley
/s/ ANGELA M. BIEVER Director December 17, 1998
Angela M. Biever
/s/ THOMAS S. FRANKE Director December 17, 1998
Thomas S. Franke
/s/ HARVARD H. HILL, JR. Director December 17, 1998
Harvard H. Hill, Jr.
/s/ HUNTINGTON A. JAMES Director December 17, 1998
Huntington A. James
/s/ PAUL W. MARSHALL Director December 17, 1998
Paul W. Marshall
/s/ DENNIS W. ZANK Director December 17, 1998
Dennis W. Zank
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
- ----------------------------------------------
INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
- -----------------------------------------------------
FINANCIAL STATEMENTS PAGE(S)
- --------------------
Report and Consent of Independent Certified Public Accountants F-2
Consolidated Statement of Financial Condition
as of September 25, 1998 and September 26, 1997 F-3
Consolidated Statement of Income for the Three Years Ended
September 25, 1998 F-4
Consolidated Statement of Changes in Shareholders' Equity
for the Three Years Ended September 25, 1998 F-5
Consolidated Statement of Cash Flows
for the Three Years Ended September 25, 1998 F-6-7
Summary of Significant Accounting Policies F-8-10
EXIHIBTS
- --------
Notes to Consolidated Financial Statements F-11-24
3.1 Amended and restated Articles of Incorporation of Raymond James Financial,
Inc. as filed with the Secretary of State Florida on March 9, 1998, and
as Exhibit 3 of Form 10Q filed on May 11, 1998
3.2 Amended and restated By-Laws of the Company, filed as Exhibit 3
of 10Q filed February 9, 1998
10.1 Raymond James Financial, Inc. Amended Stock Option Plan for Outside
Directors, dated December 12, 1986, incorporated by reference to
Exhibit 4.1 (b) to Registration Statement on Form S-8, No. 33-38350
10.2 Raymond James Financial, Inc. 1992 Incentive Stock Option Plan effective
August 20, 1992, incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-8, No. 33-60608; and amended on Form S-8, No. 333-59449
filed July 20, 1998
10.3 Raymond James Financial, Inc. Deferred Management Bonus
Plan, effective as of October 1, 1989*
10.4 Raymond James Financial, Inc. 1996 Stock Option Plan for
Key Management Personnel, dated November 21, 1996**
10.5 Termination and Release Agreement between Liberty
Asset Management, Inc. and Raymond James Financial, Inc.*
10.6 Raymond James Financial, Inc.'s 1998 Employee Stock
Purchase Plan S-8
11 Computation of Earnings per Share X-1
21 List of Subsidiaries X-2
23 Independent Auditor's Consent F-2
27 Financial Data Schedule - EDGAR version only
* Incorporated by reference as filed with the Company's Form 10-K on
December 23, 1996
** Incorporated by reference as filed with the Company's Form 10-K on
December 24, 1997
SCHEDULES AND EXHIBITS EXCLUDED
- -------------------------------
All schedules and exhibits not included are not applicable, not
required or would contain information which is included in the Consolidated
Financial Statements, Summary of Significant Accounting Policies, or the
Notes to Consolidated Financial Statements.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors and Shareholders of
Raymond James Financial, Inc.
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated financial statements listed in the index
appearing on page F-1 present fairly, in all material respects, the
financial position of Raymond James Financial, Inc. and its subsidiaries at
September 25, 1998 and September 26, 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended September 25, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Raymond James Bank, FSB, a wholly-owned subsidiary, which
statements reflect total assets of $510,580,000 and $328,519,000 at
September 25, 1998 and September 26, 1997, respectively, and total revenues
of $23,199,000, $17,712,000 and $12,121,000 for each of the three years in
the period ended September 25, 1998. Those statements were audited by
other auditors whose report thereon has been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for
Raymond James Bank, FSB, is based solely on the report of the other
auditors. We conducted our audits of the consolidated financial statements
in accordance with generally accepted auditing standards which require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits and the report of other auditors provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Tampa, Florida
November 13, 1998
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- ---------------------------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-54071, 33-60608 and 33-38390) of Raymond
James Financial, Inc. of our report dated November 13, 1998 appearing on
page F-2 of this Form 10-K.
PricewaterhouseCoopers LLP
Tampa, Florida
December 18, 1998
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
---------------------------------------------
(in thousands, except share amounts)
September 25, September 26,
1998 1997
------------- -------------
ASSETS
Cash and cash equivalents $ 296,817 $ 196,351
Assets segregated pursuant to Federal Regulations:
Cash and cash equivalents 1 375
Securities purchased under agreements to resell 946,723 692,054
Securities owned:
Trading and investment account securities 105,892 98,004
Available for sale securities 385,676 313,286
Receivables:
Clients, net 893,839 686,339
Stock borrowed 852,744 1,070,944
Brokers, dealers and clearing organizations 112,838 39,644
Other 62,722 38,118
Investment in leveraged leases 23,297 22,161
Property and equipment, net 81,372 51,674
Deferred income taxes, net 32,841 24,356
Deposits with clearing organizations 21,206 22,200
Prepaid expenses and other assets 36,769 23,139
----------- -----------
$3,852,737 $3,278,645
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Loans payable $ 44,767 $ 14,215
Payables:
Clients 2,126,699 1,487,158
Stock loaned 828,102 1,035,035
Brokers, dealers and clearing organizations 43,227 22,252
Trade and other 99,690 81,217
Trading account securities sold but not yet
purchased 30,841 55,298
Accrued compensation and commissions 158,539 141,781
Income taxes payable 10,974 18,413
----------- -----------
3,342,839 2,855,369
=========== ===========
Commitments and contingencies (Note 9) - -
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 490 326
Additional paid-in capital 57,777 52,599
Unrealized gain on securities available
for sale, net of deferred taxes 114 341
Retained earnings 459,099 377,981
----------- -----------
517,480 431,247
Less: 730,118 and 1,303,176 common shares
in treasury, at cost (7,582) (7,971)
----------- -----------
509,898 423,276
----------- -----------
$3,852,737 $3,278,645
=========== ===========
The accompanying Summary of Significant Accounting Policies and Notes to
Consolidated Financial Statements are integral parts of these financial
statements.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
(in thousands, except per share amounts)
Year Ended
-----------------------------------------
September 25, September 26, September 27,
1998 1997 1996
------------- ------------- -------------
Revenues:
Securities commissions and fees $ 631,661 $ 514,964 $ 422,487
Investment banking 107,772 109,088 72,596
Investment advisory fees 79,485 55,194 50,715
Interest 202,255 155,746 126,453
Correspondent clearing 4,429 4,502 3,985
Net trading profits 6,300 12,797 12,243
Financial service fees 28,928 24,610 18,191
Other 22,077 20,060 15,082
Gain on sale of Liberty
Investment Management, Inc. - 30,646 -
(Note 16) ---------- ---------- ----------
1,082,907 927,607 721,752
---------- ---------- ----------
Expenses:
Employee compensation 650,260 537,410 423,904
Communications and information
processing 43,485 37,491 30,585
Occupancy and equipment 33,029 27,175 23,927
Clearance and floor brokerage 11,607 11,708 10,098
Interest 131,009 101,341 83,471
Business development 31,514 20,755 16,053
Other 31,767 31,212 25,189
---------- ---------- ----------
932,671 767,092 613,227
---------- ---------- ----------
Income before provision for
income taxes 150,236 160,515 108,525
Provision for income taxes 57,532 61,600 42,547
---------- ---------- ----------
Net income $ 92,704 $ 98,915 $ 65,978
========== ========== ==========
Net income per share - basic $ 1.92 $ 2.09 $ 1.41
========== ========== ==========
Net income per share - diluted $ 1.86 $ 2.04 $ 1.39
========== ========== ==========
Weighted - average common shares
outstanding - basic 48,160 47,383 46,781
========== ========== ==========
Weighted - average common and common
equivalent shares outstanding - 49,951 48,387 47,307
diluted ========== ========== ==========
The accompanying Summary of Significant Accounting Policies and Notes to
Consolidated Financial Statements are integral parts of these financial
statements.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
---------------------------------------------------------
(in thousands, except share amounts)
Unrealized
Gain/(Loss)
Preferred Common on Secur- Treasury Total
Stock Stock Additional ities Avail- Stock Share-
Paid-in Retained able Common holders
Shares Amt. Shares Amt. Capital Earnings For Sale Shares Amt. Equity
-------------------------------------------------------------------------
Balance at
September 29,
1995 21,777 $217 $50,685 $231,029 $ 146 (1,163) $(15,884) $266,193
Net income 65,978 65,978
Cash dividends -
common stock
($.17 per share) (7,911) (7,911)
Purchase of
treasury shares (18) (367) (367)
Employee stock
purchases 585 106 1,455 2,040
Exercise of stock
options (1,250) 192 2,635 1,385
Tax benefit related
to non-qualified
option exercises 251 251
Net unrealized loss
on securities
available for sale (937) (937)
-------------------------------------------------------------------------
Balances at
September 27,
1996 21,777 217 50,271 289,096 (791) (883) (12,161) 326,632
Net income 98,915 98,915
Cash dividends -
common
stock ($.21
per share) (9,921) (9,921)
Employee stock
purchases 2,031 145 1,649 3,680
Exercise of
stock options (11) 211 2,541 2,530
Tax benefit
related to
non-qualified
option exercises 308 308
3-for-2 stock
split 10,888 109 (109) (342) -
Net unrealized
gain on
securities
available for
sale 1,132 1,132
-------------------------------------------------------------------------
Balances at
September
26, 1997 32,665 326 52,599 377,981 341 (869) (7,971) 423,276
-------------------------------------------------------------------------
Net income 92,704 92,704
Cash dividends
- common
stock ($.24
per share) (11,586) (11,586)
Purchase of
treasury shares (292) (5,346) (5,346)
Employee stock
purchases 4,271 261 2,274 6,545
Exercise of stock
options 197 403 3,461 3,658
Tax benefit related
to non-qualified
option exercises 539 539
3-for-2 stock
split 16,333 164 (164) (233) -
Corporate sale
of RJF put
options 335 335
Net unrealized
loss on
securities
available
for sale (227) (227)
--------------------------------------------------------------------------
Balances at
September
25, 1998 48,998 $490 57,777 $459,099 $ 114 (730) $ (7,582) $509,898
==========================================================================
The accompanying Summary of Significant Accounting Policies and Notes to
Consolidated Financial Statements are integral parts of these financial
statements.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(in thousands)
(continued on next page)
Year Ended
---------------------------------------------
September 25, September 26, September 27,
1998 1997 1996
---------------------------------------------
Cash flows from operating activities:
Net income $ 92,704 $ 98,915 $ 65,978
--------- --------- ---------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 16,321 13,312 11,299
Unrealized loss (gain) on investment
account securities 773 2,075 (806)
Unrealized loss (gain) and premium
amortization on available for sale
securities 1,395 (66) 958
(Gain) loss on sale of securities(1,130) 55 (199)
(Gain) loss on sale of property
and equipment (204) 55 155
Provision for bad debts (342) (380) 27
Provision for other accruals (1,825) (6,881) (1,690)
Decrease (increase) in assets:
Short-term investments - - 34,017
Receivables:
Clients (207,158) (226,779) (62,006)
Stock borrowed 218,200 (206,804) (88,852)
Brokers, dealers and clearing
organizations (73,194) (15,338) 24,829
Other (24,604) (9,138) (4,094)
Trading account securities, net (33,549) 25,975 (18,992)
Deferred income taxes (8,485) (3,167) (209)
Prepaid expenses and other
assets (13,772) (6,919) (11,664)
Increase (decrease) in liabilities:
Payables:
Clients 639,541 400,752 311,930
Stock loaned (206,933) 186,440 62,811
Brokers, dealers and clearing
organizations 20,975 (34,676) 39,386
Trade and other 20,298 34,091 (514)
Accrued compensation and
commissions 16,758 40,481 27,933
Income taxes payable (7,439) 8,008 4,234
--------- --------- ---------
Total adjustments 355,626 201,096 328,553
--------- --------- ---------
Net cash provided by operating
activities 448,330 300,011 394,531
--------- --------- ---------
The accompanying Summary of Significant Accounting Policies and Notes to
Consolidated Financial Statements are integral parts of these financial
statements.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(in thousands)
(continued from preceding page)
Year Ended
-----------------------------------------
September 25, September 26, September 27,
1998 1997 1996
------------- ------------- -------------
Cash flows from investing
activities:
Additions to property
and equipment (45,815) (25,456) (10,093)
Sales of investment
account securities 4,563 4,923 13,332
Sales of available for sale
securities - 18,732 37,718
Purchases of investment account
securities (3,007) (8,636) (3,139)
Purchases of available for sale
securities (187,213) (170,131) (164,373)
Security maturations and
repayments 113,206 48,153 42,213
----------- ----------- -----------
Net cash used in investing activities (118,266) (132,415) (84,342)
----------- ----------- -----------
Cash flows from financing activities:
Repayments on mortgage note (12,948) (193) (176)
Proceeds from mortgage financing 40,000 - -
Other borrowed funds 5,000 - 11,990
Repayments on borrowings (1,500) (10,490) (2,510)
Exercise of stock options and
employee stock purchases 10,742 6,518 3,676
Purchase of treasury stock (5,346) - (367)
Sale of stock options 335 - -
Cash dividends on common stock (11,586) (9,921) (7,911)
----------- ------------ -----------
Net cash provided by (used in)
financing activities 24,697 (14,086) 4,702
Net increase in cash and
cash equivalents 354,761 153,510 314,891
Cash and cash equivalents at
beginning of year 888,780 735,270 420,379
----------- ----------- -----------
Cash and cash equivalents at end of
year $1,243,541 $ 888,780 $ 735,270
=========== ============ ===========
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 129,367 $ 100,546 $ 88,599
=========== ============ ===========
Cash paid for taxes $ 73,456 $ 55,382 $ 41,371
=========== ============ ===========
The accompanying Summary of Significant Accounting Policies and Notes to
Consolidated Financial Statements are integral parts of these financial
statements.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
----------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Raymond James Financial, Inc. is a holding company which, through its
subsidiaries, is engaged principally in the securities brokerage business,
including the underwriting, distribution, trading and brokerage of equity and
debt securities and the sale of mutual funds and other investment products.
In addition, it provides investment management services for retail and
institutional clients and banking and trust services for retail clients. The
accounting and reporting policies of Raymond James Financial, Inc. and its
subsidiaries (the "Company") conform to generally accepted accounting
principles, the more significant of which are summarized below:
Basis of consolidation
- ----------------------
The consolidated financial statements include the accounts of Raymond
James Financial, Inc. and its subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
All consolidated subsidiaries are 100% owned by the Company except for
RJ Properties, Inc., which is 85% owned.
Reporting period
- ----------------
The Company's fiscal year ends on the last Friday in September of each
year.
Recognition of revenues
- -----------------------
Securities transactions and related commission revenues and expenses are
recorded on a trade date basis.
Revenues from investment banking are recorded at the time the
transaction is completed and the related income is reasonably determinable.
Investment banking revenues include sales credits earned in connection with
the distribution of the underwritten securities. Any warrants received in
connection with investment banking transactions are carried at a nominal
value until such time as the warrants are exercisable and the underlying
shares are salable.
The Company earns an advisory fee based on a client's portfolio value on
portfolios managed by its investment advisor subsidiaries. These fees are
recorded under the accrual method.
Management estimates and assumptions
- ------------------------------------
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Segment reporting
- -----------------
In the fourth quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of
Enterprise and Related Information" ("FAS 131"). FAS 131 supersedes FAS 14,
"Financial Reporting for Segments of a Business Enterprise", replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. FAS 131 also requires disclosures about
products and services, geographic areas, and major customers. The adoption
of FAS 131 did not affect the Company's financial position or results of
operations but did affect the disclosure of segment information (see Note
15).
Cash and cash equivalents
- -------------------------
The Company considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents for purposes of the
consolidated statement of cash flows. These consist primarily of shares of
money market funds and of U.S. Treasury Securities purchased under agreements
to resell, some of which are held in special reserve accounts, and are stated
at cost, which approximates market at fiscal yearend.
It is the Company's policy to obtain possession and control of
securities purchased under resale agreements. The net fair value of
securities purchased under resale agreements approximates their carrying
value, as such financial instruments are predominantly short-term in nature.
The Company monitors the risk of loss by assessing the market value of the
underlying securities as compared to the related receivable or payable,
including accrued interest, and requests additional collateral where deemed
appropriate. At September 25, 1998, and September 26, 1997, there were no
agreements with any individual counterparties where the risk of loss exceeded
10% of shareholders' equity.
Securities owned
- ----------------
The trading and investment account securities held by the brokerage
subsidiaries are classified as trading. Investment account securities not
readily marketable are carried at estimated fair value as determined by
management with unrealized gains and losses included in earnings. Trading
securities are carried at market value with realized and unrealized gains and
losses included in earnings. The Company accounts for other securities owned
in accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("FAS
115"). FAS 115 requires investments in debt and equity securities to be
classified as either "held to maturity," "trading," or "available for sale."
The accounting treatment for unrealized gains and losses on those securities
is then determined by the classification chosen. Securities available for
sale are carried at estimated market value, with unrealized gains and losses
reported as a separate component of shareholders' equity, net of deferred
taxes, and realized gains and losses, determined on a specific identification
basis, included in earnings.
Property and equipment
- ----------------------
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation. Depreciation of assets is provided principally
using the straight-line method for financial reporting purposes over the
estimated useful lives of the assets, which range from two to seven years for
furniture and equipment and fifteen to thirty-one years for buildings and
land improvements. Leasehold improvements are amortized using the straight-
line method over the shorter of the lease term or the estimated useful lives
of the assets. For income tax purposes,
assets are depreciated using accelerated methods.
Additions, improvements and expenditures for repairs and maintenance
that significantly extend the useful life of an asset are capitalized. Other
expenditures for repairs and maintenance are charged to operations in the
period incurred. Gains and losses on disposals of fixed assets are
reflected in income in the period realized.
Goodwill
- --------
Goodwill is stated at cost less accumulated amortization. Amortization
of goodwill is provided using the straight-line method for financial
reporting purposes over three years. Goodwill is reflected in prepaid
expenses and other assets.
Correspondent clearing
- ----------------------
Under clearing agreements, the Company clears trades for unaffiliated
correspondent brokers and retains a portion of commissions as a fee for its
services. The Company records clearing charges net of commissions remitted.
Total commissions generated by correspondents were $22,244,000, $21,334,000
and $18,742,000, and commissions remitted totaled $17,815,000, $16,832,000
and $14,757,000 for the years ended September 25, 1998, September 26, 1997
and September 27, 1996, respectively.
Income taxes
- ------------
The Company utilizes the asset and liability approach defined in
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109"). FAS 109 requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between the financial statement amounts and the tax bases of
assets and liabilities.
Net income per share
- --------------------
Net income per share is computed using weighted average common stock and
common stock equivalents outstanding. Common stock equivalents include
shares issuable under stock options and are determined under the treasury
stock method. All per share amounts have been restated to give retroactive
effect to the common stock dividends paid on April 2, 1998 and April 3, 1997
(see Note 10), as well as the implementation of Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128").
Reclassifications
Certain amounts from prior years have been reclassified for consistency
with current year presentation. These reclassifications were not material to
the
consolidated financial statements.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - RECEIVABLES FROM AND PAYABLES TO CLIENTS:
- --------------------------------------------------
Receivables from clients include amounts arising from normal cash and
margin transactions, bank loans receivable (see Note 7), and fees receivable.
Securities owned by brokerage clients are held as collateral for margin
receivables. Such collateral is not reflected in the accompanying
consolidated financial statements. The amount receivable from clients is
shown net of an allowance for doubtful accounts of approximately $1,166,000
and $824,000 as of September 25, 1998 and September 26, 1997, respectively.
Unsecured receivables are not significant.
Payables to clients include brokerage client funds on deposit awaiting
reinvestment and bank savings accounts and certificates of deposit. The
Company pays interest at varying rates on qualifying brokerage client funds
on deposit. These funds totaled $1,447,665,000 and $961,857,000 at September
25, 1998 and September 26, 1997, respectively. In addition, the Company pays
interest at varying rates on client bank deposits as described in Note 7.
NOTE 2 - TRADING AND INVESTMENT ACCOUNT SECURITIES (in thousands):
- ------------------------------------------------------------------
September 25, 1998 September 26, 1997
------------------------ ------------------------
Securities Securities
sold but sold but
Securities not yet Securities not yet
owned purchased owned purchased
---------- --------- ---------- ---------
Marketable:
Stocks and warrants $ 9,715 $ 5,000 $15,212 $23,653
Municipal obligations 77,697 55 48,716 1,689
Corporate obligations 1,913 1,197 7,681 5,206
Government obligations 10,547 24,589 22,988 24,717
Other 5,530 - 2,644 33
Non-marketable 490 - 763 -
-------- ------- ------- -------
$105,892 $30,841 $98,004 $55,298
======== ======= ======= =======
NOTE 3 - AVAILABLE FOR SALE SECURITIES (in thousands):
- ------------------------------------------------------
The amortized cost and estimated market values of securities available
for sale at September 25, 1998 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
Mortgage-backed securities:
FNMA $178,651 $124 $ (79) $178,696
FHLMC 152,510 212 (1) 152,721
GNMA 13,093 265 - 13,358
U.S. Treasury Securities 7,992 69 - 8,061
U.S. Govt. Obligations 4,994 - (17) 4,977
Corporate investments 20,527 - (71) 20,456
Other 7,731 27 (351) 7,407
-------- ---- ------ --------
$385,498 $697 $(519) $385,676
======== ==== ====== ========
The amortized cost and estimated market values of securities available
for sale at September 26, 1997 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
Mortgage-backed securities:
FNMA $142,966 $ 307 $ (99) $143,174
FHLMC 137,557 446 (5) 137,998
GNMA 14,457 - (137) 14,320
U.S. Treasury Securities 7,995 30 - 8,025
U.S. Govt. Obligations 4,992 - (8) 4,984
Corporate investments 4,003 4 (2) 4,005
Other 764 16 - 780
-------- ------ ------ --------
$312,734 $ 803 $(251) $313,286
======== ====== ====== ========
The U.S. Treasury Securities and U.S. Government Obligations mature
after one year and within five years.
NOTE 4 - LEVERAGED LEASES (in thousands):
- -----------------------------------------
The Company is the lessor in two leveraged commercial aircraft
transactions with major domestic airlines. The Company's combined equity
investments represented 21% of the aggregate purchase prices; the remaining
79% was funded by public debt issues in the form of equipment trust
certificates. The residual values of the aircrafts at the end of an average
lease term of 20 years are projected to be an average of 10% of the original
cost. The leases expire in September 2013 and June 2016, respectively.
September 25, September 26,
1998 1997
------------- -------------
Rents receivable (net of principal and
interest on the non-recourse debt) $ 21,056 $ 21,056
Unguaranteed residual values 10,719 10,719
Unearned income (8,478) (9,614)
---------- ---------
Investment in leveraged leases 23,297 22,161
Deferred taxes arising from leveraged leases (23,049) (19,259)
---------- ---------
Net investment in leveraged leases $ 248 $ 2,902
========== =========
NOTE 5 - PROPERTY AND EQUIPMENT (in thousands):
- -----------------------------------------------
September 25, September 26,
1998 1997
------------- -------------
Land $ 9,612 $ 9,612
Buildings and improvements 60,059 30,460
Furniture, fixtures, equipment
and leasehold improvements 83,904 75,374
---------- ----------
153,575 115,446
Less: accumulated depreciation
and amortization (72,203) (63,772)
---------- ----------
$ 81,372 $ 51,674
========== ==========
NOTE 6 - BORROWINGS:
- --------------------
The Company has a mortgage note payable related to the refinancing of
two existing buildings at the headquarters complex and additional financing
for a third building and adjacent parking garage completed during fiscal year
1998. The mortgage requires monthly principal and interest payments of
approximately $291,000 with a balloon payment due January 1, 2008. The
mortgage bears interest at 7.37% and is secured by land, buildings and
improvements with a net book value of $50,366,000 at September 25, 1998.
Principal maturities under this mortgage note payable for the succeeding five
years are as follows: $579,420 in 1999, $623,595 in 2000, $671,139 in 2001,
$722,307 in 2002, $777,377 in 2003 and $36,437,942 thereafter.
The Company has a $50 million committed, unsecured line of credit with a
commercial bank. Borrowings under the line bear interest at the lesser of
prime rate or Fed Funds plus .5%, or LIBOR plus .375%. The line of credit
requires that the Company maintain certain net worth levels, limits other
leases and debt and requires the Company to follow certain other sound
business practices. The Company paid $63,000, $63,000, and $64,000 in loan
commitment fees on this line during fiscal years 1998, 1997 and 1996,
respectively. There were no outstanding borrowings on this line at September
25, 1998 or September 26, 1997. The Company had a separate $50 million line
of credit under which borrowings were collateralized by customer securities
with a maximum loan to value of fifty percent at an interest rate of one
month LIBOR plus .75%. There were borrowings of $1,500,000 under this
facility at September 26, 1997. The interest rate on these borrowings ranged
from 6.1% to 6.4% during 1997.
The Company also maintains uncommitted lines of credit aggregating
$310,000,000 with commercial banks ($235,000,000 secured and $75,000,000
unsecured). Borrowings under the lines of credit bear interest, at the
Company's option, at the bank's prime rate, Fed Funds rate plus .5%, or LIBOR
plus .75%. There were no short-term borrowings outstanding under these lines
at September 25, 1998 or September 26, 1997. The interest rate on these
borrowings ranged from 5.58% to 6.84% in 1998, and 5.87% to 7.25% in 1997.
Loans on the secured, uncommitted lines of credit are collateralized by firm
or client margin securities.
NOTE 7 - BANK OPERATIONS AND DEPOSITS:
- --------------------------------------
On May 6, 1994, the Company chartered Raymond James Bank, FSB, ("RJ
Bank") in conjunction with the purchase of the deposits of certain branches
of a federal savings bank from the Resolution Trust Corporation ("RTC") for a
nominal purchase price. The Company contributed $25 million in capital to
fund RJ Bank's start-up.
A summary of client deposit accounts and weighted average interest rates
follows:
September 25, 1998 September 26, 1997
---------------------- ----------------------
(dollar amounts in thousands) (dollar amounts in thousands)
Weighted- Weighted-
Balance Average Rate Balance Average Rate
------- ------------ ------- ------------
Demand deposits:
Non-interest bearing $ 646 - $ 610 -
Interest bearing 2,229 2.19% 1,665 2.33%
Money markets 12,211 3.85% 5,383 3.94%
Savings accounts 382,767 4.53% 204,496 4.70%
Certificates of deposit 52,705 5.67% 87,731 5.68%
-------- ----- -------- -----
(4.55% - 9.00%)
$450,558 4.62% $299,885 4.95%
======== ===== ======== =====
The certificates of deposit mature as follows: $32,172,000 in 1999,
$8,381,000 in 2000, $4,135,000 in 2001, $7,005,000 in 2002 and $1,012,000 in
2003. Certificates of deposit and savings accounts in amounts of $100,000 or
more at September 25, 1998 and September 26, 1997 were approximately
$6,089,000 and $11,763,000, respectively.
A summary of RJ Bank's loan distribution is as follows:
September 25, September 26,
1998 1997
------------- -------------
(000's) (000's)
Residential mortgage loans $62,173 $18,190
Consumer loans 111 115
------- -------
62,284 18,305
Allowance for loan losses (642) (191)
Purchase premium 362 308
Deferred origination fees
and costs 22 25
------- -------
$62,026 $18,447
======= =======
Activity in the allowance for loan losses for 1998 and 1997 consists
solely of the provision for loan losses. There were no actual loan losses in
1998, 1997 or 1996.
There was no recorded investment or interest income recognized on
impaired loans during 1998, 1997 and 1996, as there were no impaired loans
during these periods.
Generally, mortgage loans are secured by either first or second
mortgages on residential property, and consumer loans are secured by time
deposit accounts. As of September 25, 1998 and September 26, 1997, all of RJ
Bank's loan portfolio was secured.
RJ Bank is subject to various regulatory and capital requirements and
was in compliance with all requirements throughout the fiscal years.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), RJ Bank is subject to rules limiting brokered deposits and
related interest rates. Under these rules, banks that are deemed "well-
capitalized" may accept brokered deposits without restriction, and banks
deemed "adequately capitalized" may do so with a waiver from the FDIC. An
"undercapitalized" bank is not eligible for a waiver and may not accept
brokered deposits. As of September 30, 1998, the most recent notification
from the Office of Thrift Supervision categorized RJ Bank as "well
capitalized" under the regulatory framework for prompt corrective action.
At September 25, 1998 and September 26, 1997, RJ Bank exceeded the
tangible capital, core capital, core/leverage capital, Tier I/risk-based
capital and total risk-based capital levels mandated by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 and FDICIA. At
September 25, 1998 and September 26, 1997, RJ Bank's Tier I capital to
average assets ratio was 8.2% and 9.3%, respectively.
NOTE 8 - FEDERAL AND STATE INCOME TAXES (in thousands):
- -------------------------------------------------------
The provision (benefit) for income taxes consists of:
Year Ended
-----------------------------------------
September 25, September 26, September 27,
1998 1997 1996
------------- ------------- -------------
Current provision:
Federal $ 56,151 $ 55,864 $ 35,473
State 9,774 9,655 6,730
-------- -------- ---------
65,925 65,519 42,203
-------- -------- ---------
Deferred provision (benefit):
Federal (7,120) (3,306) 383
State (1,273) (613) (39)
--------- -------- ---------
(8,393) (3,919) 344
--------- --------- ---------
$ 57,532 $ 61,600 $ 42,547
========= ========= =========
The Company's effective tax rate on pre-tax income differs from the
statutory federal income tax rate due to the following:
Year Ended
----------------------------------------
September 25, September 26, September 27,
1998 1997 1996
------------- ------------- -------------
Provision calculated at
statutory rates $ 52,637 $ 56,230 $ 38,034
State income taxes, net
of federal benefit 5,526 5,877 4,349
Other (631) (507) 164
--------- --------- ---------
$ 57,532 $ 61,600 $ 42,547
========= ========= =========
The major deferred tax asset (liability) items, as computed under FAS
109, are as follows:
September 25, September 26,
1998 1997
------------- -------------
Deferred tax assets:
Deferred compensation $ 35,216 $ 26,653
Accrued expenses 17,376 14,833
Other 13,063 7,489
--------- ---------
Total deferred tax assets 65,655 48,975
--------- ---------
Deferred tax liabilities:
Aircraft leases (23,049) (19,259)
Other, net (9,765) (5,360)
--------- ---------
Total deferred tax liabilities (32,814) (24,619)
--------- ---------
Net deferred tax assets $ 32,841 $ 24,356
========= =========
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
- ---------------------------------------
Long-term lease agreements expire at various times through 2003. Minimum
annual rentals under such agreements for the succeeding five fiscal years are
approximately: $10,714,000 in 1999, $9,699,000 in 2000, $9,026,000 in 2001,
$8,199,000 in 2002 and $5,135,000 in 2003. Rental expense incurred under all
leases, including equipment under short-term agreements, aggregated
$11,085,000, $8,802,000, and $7,589,000 in 1998, 1997 and 1996, respectively.
The Company has committed to lend to, or guarantee other debt for,
Raymond James Tax Credit Funds, Inc. ("RJ Tax Credit") up to $15 million upon
request. Any borrowings bear interest at broker call plus 1% per annum. RJ
Tax Credit is charged 1% for amounts guaranteed. The borrowings are secured
by properties under development. At September 25, 1998 balances of
$5,267,137 were loaned to RJ Tax Credit and $2,419,956 were guaranteed. At
September 26, 1997, balances of $4,530,000 were loaned to RJ Tax Credit. The
commitment expired in November 1998 at which time any outstanding balances
were due and payable. On November 19, 1998, the Board of Directors renewed
the commitment and increased the amount to $25 million expiring in November
1999.
As part of an effort to increase brand awareness, the Company has
entered into a stadium naming rights contract. The contract has a thirteen-
year term with a five-year renewal option. The cost for the initial year is
$2,150,000 with an annual escalator of 4% in subsequent years.
In the normal course of business, the Company enters into underwriting
commitments. Transactions relating to such commitments that were open at
September 25, 1998 and were subsequently settled had no material effect on
the consolidated financial statements as of that date.
The Company utilizes a letter of credit and deposits with clearing
organizations to satisfy margin deposit requirements. At September 25, 1998,
and September 26, 1997 the Company had a letter of credit outstanding of
$100,000 and client margin securities valued at $62,912,000 and $54,448,000,
respectively, on deposit with a clearing organization.
In the normal course of business, the Company, as general partner, is
contingently liable for the obligations of various limited partnerships
engaged primarily in securities investments and real estate activities. In
the opinion of the Company, such liabilities, if any, for the obligations of
the partnerships willnot in the aggregate have a material adverse effect on
the Company's consolidated financial position.
As a result of the extensive regulation of the securities industry, the
Company's broker-dealer subsidiaries are subject to regular reviews and
inspections by regulatory authorities and self-regulatory organizations which
can result in imposition of sanctions for regulatory violations, ranging from
non-monetary censure to fines and, in serious cases, temporary or permanent
suspension from business. In addition, from time to time regulatory agencies
and self-regulatory organizations institute investigations into industry
practices which can result in the imposition of such sanctions. Current
proceedings in which the Company is one of the named defendants include the
Securities and Exchange Commission ("SEC") investigation of certain trading
practices in the over-the-counter securities market during 1994 and 1995, and
the SEC, the Internal Revenue Service, and the National Association of
Securities Dealers, Inc. review of investment banking practices in connection
with advance refunding transactions for municipalities.
The Company is also a defendant or co-defendant in various lawsuits
incidental to its securities business. The Company is contesting the
allegations of the complaints 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
consolidated financial position or results of operations of the Company.
NOTE 10 - 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. At September 25, 1998, pursuant to prior authorizations
from the Board of Directors, 1,207,900 shares were available to be
repurchased. At their November 19, 1998 meeting the Company's Board of
Directors increased the number of shares authorized for repurchase to
2,500,000.
In February 1998 and 1997, the Company's Board of Directors declared a 3-
for-2 stock split in the form of a dividend. The additional shares were
distributed on April 2, 1998 and April 3, 1997, respectively, to shareholders
of record on March 10, 1998 and March 7, 1997, respectively. All references
(unless otherwise noted) in the consolidated financial statements and
accompanying notes to amounts per share and to the number of common shares
have been restated to give retroactive effect to the stock dividend.
The Company sold equity put options in September 1998 that entitle the
holder, at the expiration date, to sell 161,000 shares of common stock to the
Company at an exercise price of $17.87 per share. The $335,000 in premiums
has been accounted for as additional paid-in capital. At September 25, 1998,
these put options, with an aggregate exercise price of $2,877,000 and an
expiration date of March 15, 1999, were outstanding. In the event the
options are exercised, the Company may elect to pay the holder in cash the
difference between the exercise price and the market price of the Company's
shares, in lieu of repurchasing the stock. The Company sold additional
options for 239,000 shares in October 1998 which expire April 7, 1999 at an
exercise price of $18.31 per share.
NOTE 11 - EMPLOYEE BENEFIT PLANS:
- ---------------------------------
The Company's profit sharing plan and employee stock ownership plan
provide certain death, disability or retirement benefits for all employees
who meet certain service requirements. Such benefits become fully vested
after seven years of qualified service. The Company also offers a plan
pursuant to section 401(k) of the Internal Revenue Code, which provides for
the Company to match 100% of the first $500 and 50% of the next $500 of
compensation deferred by each participant annually. The Company's deferred
management bonus plan is a non-qualified plan that provides retirement
benefits for employees who meet certain length of service and compensation
requirements. Contributions to these plans are made in amounts approved
annually by the Board of Directors. Compensation expense includes aggregate
contributions to these plans of $17,299,000, $15,462,000 and $12,527,000,
for 1998, 1997 and 1996, respectively.
Stock Compensation Plans
At September 25, 1998 the Company has six stock-based compensation
plans, which are described below. In accordance with the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("FAS 123"),the Company applies APB Opinion 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for these plans.
If the Company had elected to recognize compensation expense based on the
fair value at the grant dates for awards under these plans consistent with
the methodology prescribed by FAS 123, the Company's net income and net
income per share would have been reduced to the pro forma amounts indicated
below:
Year Ended
-----------------------------
Sept. 25, Sept. 26, Sept. 27,
1998 1997 1996
--------- --------- ---------
Net income (in thousands) As reported $92,704 $98,915 $65,978
Pro forma $88,278 $95,936 $64,902
Net income per share - basic As reported $ 1.92 $ 2.09 $ 1.41
Pro forma $ 1.83 $ 2.02 $ 1.39
Net income per share - diluted As reported $ 1.86 $ 2.04 $ 1.39
Pro forma $ 1.77 $ 1.98 $ 1.37
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over
the vesting period and additional options may be granted in future years.
For disclosure purposes, the fair value of each fixed option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for stock option grants
in 1998, 1997 and 1996, respectively: dividend yields of 1.1% for all three
years; expected volatility of 44.1%, 32.2% and 31.5%, risk-free interest
rates of 5.85%, 6.28%, and 5.89% and expected lives of 5.32, 5.99,and 4.89
years.
Fixed Stock Option Plans
The Company has five fixed stock option plans. Under the 1982 Incentive
Stock Option Plan, the Company was able to grant options to its employees for
up to 4,275,281 shares of common stock. Under the 1992 Incentive Stock
Option Plan, the Company may grant options to its management personnel for up
to 4,612,500 shares of common stock. The 1992 Plan was established to
replace, on substantially the same terms and conditions, the 1982 Plan.
Options are granted to key administrative employees and registered
representatives of Raymond James & Associates, Inc. who achieve certain gross
commission levels. Options are exercisable in the 36th to 72nd months
following the date of grant and only in the event that the grantee is an
employee of the Company at that time.
Under one of the Company's non-qualified stock option plans, the Company
may grant up to 2,278,125 shares of common stock to independent contractor
registered representatives. Options are exercisable five years after grant
date provided that the representative is still associated with the Company.
Under the Company's second non-qualified stock option plan, the Company may
grant up to 379,688 shares of common stock to the Company's outside
directors. Options vest over a five-year period from grant date provided that
the director is still serving on the Board of the Company. Under the
Company's third non-qualified stock option plan, the Company may grant up to
1,125,000 shares of common stock to key management personnel. Option terms
are specified in individual agreements and expire on a date no later than the
tenth anniversary of the grant date. Under all plans, the exercise price of
each
option equals the market price of the Company's stock on the date of grant
and an option's maximum term is 10 years.
A summary of the status of the Company's five fixed stock option plans
as of September 25, 1998, September 26, 1997 and September 27, 1996, and
changes during the years ending on those dates is presented below:
1998 1997 1996
----------------- ----------------- -----------------
Shares Weighted Shares Weighted Shares Weighted
(000's) Average (000's) Average (000's) Average
Exercise Exercise Exercise
Price Price Price
----------------------------------------------------------
Outstanding at
beginning of year 2,539,220 $ 9.37 2,366,094 $17.24 2,085,393 $13.35
Granted 831,340 23.15 779,876 28.23 766,575 22.05
Canceled (84,516) 12.32 (191,130) 16.14 (52,713) 14.76
Exercised (547,999) 6.66 (415,620) 9.92 (433,161) 7.19
---------- ---------- ---------- ------
Outstanding at
yearend 2,738,045 $14.00 2,539,220 $22.59 2,366,094 $17.24
========== ========== ==========
Options exercisable
at yearend 215,878 360,691 714,812
Weighted-average
fair value of
options granted
during the year $10.26 $ 9.62 $ 8.87
The following table summarizes information about fixed stock options
outstanding at September 25, 1998:
Options Outstanding Options Exercisable
-------------------------------------------------------------
Range of Number Weighted- Weighted- Number Weighted-
Exercise Outstan Average Average Exercis Average
Prices ding Remaining Exercise able Exercise
at Contractual Price at Price
9/25/98 Life 9/25/98
- ------------------------------------------------------------------------------
$ 0.00-3.16 0 0.0 $ 0.00 0 $ 0.00
$ 3.16-6.33 129,558 1.8 $ 6.15 35,368 $ 6.11
$ 6.33-9.49 429,096 1.5 $ 7.68 178,035 $ 7.60
$ 9.49-12.65 1,259,814 3.3 $11.07 1,350 $ 9.67
$12.65-15.81 95,625 4.3 $13.39 0 $ 0.00
$15.81-18.98 16,875 6.0 $17.34 0 $ 0.00
$18.98-22.14 7,500 5.1 $19.31 0 $ 0.00
$22.14-25.30 673,377 4.4 $22.47 1,125 $22.17
$25.30-28.46 101,250 5.1 $26.35 0 $ 0.00
$28.46-31.63 24,950 4.9 $31.49 0 $ 0.00
--------- --- ------ ------- ------
2,738,045 3.3 $14.00 215,878 $ 7.45
========= === ====== ======= ======
Employee Stock Purchase Plan
Under the 1994 Employee Stock Purchase Plan, the Company is authorized
to issue up to 1,125,000 shares of common stock to its full-time employees,
nearly all of whom are eligible to participate. Under the terms of the Plan,
employees can choose each year to have up to 20% of their annual compensation
specified to purchase the Company's common stock. Share purchases in any
calendar year are limited to the lesser of 1,000 shares or shares with a
market value of $25,000. The purchase price of the stock is 85% of the market
price on the day prior to the purchase date. Under the Plan, the Company sold
314,114, 268,607, and 238,944 shares to employees in fiscal years 1998, 1997,
and 1996, respectively. The compensation cost which would have been
recognized for the fair value of the employees' purchase rights was
calculated as the value of the 15% discount from market value. At the
November 19, 1998 meeting, the Board of Directors voted in favor of, subject
to
shareholder approval, the adoption of the 1998 Employee Stock Purchase Plan
which is intended to replace, on substantially the same terms, the 1994 Plan
and authorizes the issuance of 1,500,000 shares of common stock.
Employee Investment Fund
Certain key employees of the Company participate in a limited
partnership arrangement in which the Company makes a non-recourse loan to
these employees for two thirds of the purchase price per unit of the Raymond
James Employee Investment Fund I, L.P. The loan plus interest is intended to
be paid back from the earnings of the fund. The fund is invested in the
merchant banking activities of the Company and other venture capital limited
partnerships.
NOTE 12 - NET CAPITAL REQUIREMENTS:
- -----------------------------------
The broker-dealer subsidiaries of the Company are subject to the
requirements of the Uniform Net Capital Rule (Rule 15c3-1) under the
Securities Exchange Act of 1934 and the rules of the securities exchanges of
which Raymond James & Associates, Inc. ("RJA") is a member, whose
requirements are substantially the same. This Rule requires that aggregate
indebtedness, as defined, 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 (see Note 13). The New York Stock
Exchange, Inc. 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. Net capital positions of the Company's broker-dealer subsidiaries
were as follows:
September 25, September 26,
1998 1997
------------- -------------
Raymond James & Associates, Inc.: (dollar amounts in thousands)
- -------------------------------------
(alternative method elected)
Net capital as a percent of aggregate
debit items 17% 18%
Net capital $149,284 $130,466
Required net capital 17,862 14,665
-------- --------
Excess net capital $131,422 $115,801
======== ========
Investment Management & Research, Inc.:
- ---------------------------------------
Ratio of aggregate indebtedness to net
capital 0.84 1.04
Net capital $ 11,728 $7,907
Required net capital 659 548
-------- ------
Excess net capital $ 11,069 $7,359
======== ======
Robert Thomas Securities, Inc.:
- -------------------------------
Ratio of aggregate indebtedness to net
capital 5.00 4.10
Net capital $ 2,219 $2,693
Required net capital 740 737
-------- ------
Excess net capital $ 1,479 $1,956
======== ======
NOTE 13 - RESERVE REQUIREMENTS:
- -------------------------------
Rule 15c3-3 of the Securities Exchange Act of 1934 specifies certain
conditions under which brokers and dealers carrying client accounts are
required to maintain cash or qualified securities in a special reserve
account for the exclusive benefit of clients. Amounts to be maintained, if
required, are computed in accordance with a formula defined in the Rule. At
September 25, 1998, Raymond James & Associates, Inc. had $946,724,000 in
special reserve accounts which consisted of $946,723,000 of securities
purchased under agreements to resell and $1,000 in cash, as compared to a
reserve requirement of $925,396,000 at that date. At September 26, 1997,
this subsidiary had $692,429,000 in special reserve accounts which consisted
of $692,054,000 of U.S. Treasury Securities purchased under agreements to
resell and $375,000 in cash, as compared to a reserve requirement of
$608,298,000 at that date. At September 25, 1998, such repurchase agreements
were on an overnight basis with Deutsche Bank AG, BT Alex Brown, Inc., First
Union Capital Markets Corp., and ABN Amro, Inc. At September 26, 1997, such
repurchase agreements were on an overnight basis with Deutsche Bank, BT
Securities Corporation, First Union Capital Markets Corp., and Morgan Stanley
and Company. The Company monitors the market value of the underlying
securities as compared to the related receivable, including accrued interest,
and requires additional collateral where deemed appropriate.
Investment Management & Research, Inc. and Robert Thomas Securities,
Inc. are exempt from the provisions of Rule 15c3-3, since they clear all
transactions with and for clients on a fully disclosed basis with Raymond
James & Associates, Inc.
NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
- ------------------------------------------------------------
In the normal course of business, the Company purchases and sells
securities as either principal or agent on behalf of its clients. If either
the client or a counterparty fails to perform, the Company may be required to
discharge the obligations of the nonperforming party. In such circumstances,
the Company may sustain a loss if the market value of the security or futures
contract is different from the contract value of the transaction.
The Company also acts as an intermediary between broker-dealers and
other financial institutions whereby the Company borrows securities from one
broker-dealer and then lends them to another. Securities borrowed and
securities loaned are carried at the amounts of cash collateral advanced and
received in connection with the transactions. The Company measures the
market value of the securities borrowed and loaned against the cash
collateral on a daily basis. The market value of securities borrowed and
securities loaned was $824,726,000 and $796,504,000 respectively, at
September 25, 1998 and $1,032,342,000 and $998,698,000, respectively, at
September 26, 1997. Additional cash is obtained as necessary to ensure such
transactions are adequately collateralized. If another party to the
transaction fails to perform as agreed (such as failure to deliver a security
or failure to pay for a security), the Company may incur a loss if the market
value of the security is different from the contract amount of the
transaction.
The Company has also loaned, to brokers and dealers, securities owned by
clients and others for which it has received cash or other collateral. If a
borrowing institution or broker-dealer does not return a security, the
Company may be obligated to purchase the security in order to return it to
the owner. In such circumstances, the Company may incur a loss equal to the
amount by which the market value of the security on the date of
nonperformance exceeds the value of the loan from the institution or the
collateral from the broker or dealer.
The Company has sold securities that it does not currently own and will,
therefore, be obligated to purchase such securities at a future date. The
Company has recorded $30,841,000 and $55,298,000 at September 25, 1998 and
September 26, 1997, respectively, which represents the market value of the
related securities at such dates. The Company is subject to loss if the
market price of those securities not covered by a hedged position increases
subsequent to fiscal year end. The Company utilizes short government
obligations and equity securities to hedge long proprietary inventory
positions. At September 25, 1998, the Company had $24,245,000 in short
government obligations and $571,000 in short equity securities which
represented hedge positions. At September 26, 1997, the Company had
$21,123,000 in short government obligations and $1,925,000 in short equity
securities which represented hedge positions.
The Company enters into security transactions involving forward
settlement. The Company has recorded transactions with a contract value of
$311,252,000 and $196,156,000 and a market value of $315,104,000 and
$195,063,000 as of September 25, 1998 and September 26, 1997, respectively.
Transactions involving future settlement give rise to market risk, which
represents the potential loss that can be caused by a change in the market
value of a particular financial instrument. The Company's exposure to market
risk is determined by a number of factors, including the size, composition
and diversification of positions held, the absolute and relative levels of
interest rates, and market volatility.
The majority of the Company's transactions and, consequently, the
concentration of its credit exposure is with clients, broker-dealers and
other financial institutions in the United States. These activities
primarily involve collateralized arrangements and may result in credit
exposure in the event that the counterparty fails to meet its contractual
obligations. The Company's exposure to credit risk can be directly impacted
by volatile securities markets which may impair the ability of counterparties
to satisfy their contractual obligations. The Company seeks to control its
credit risk through a variety of reporting and control procedures, including
establishing credit limits based upon a review of the counterparties'
financial condition and credit ratings. The Company monitors collateral
levels on a daily basis for compliance with regulatory and internal
guidelines and requests changes in collateral levels as appropriate.
NOTE 15 - SEGMENT ANALYSIS:
- ---------------------------
The Company's reportable segments are: retail distribution, institutional
distribution, investment banking, asset management and other. The retail
distribution segment includes the 1,052 retail branches of the Company's
three broker-dealer subsidiaries located throughout the U.S. These branches
provide securities brokerage services including the sale of equities, mutual
funds, fixed income products, and insurance to their retail clients. The
institutional distribution segment includes fourteen institutional sales
offices in the U.S. and six in Europe providing securities brokerage services
emphasizing the sale of equities and fixed income products to institutions.
The investment banking segment includes management and participation in
underwritings (exclusive of sales credits, which are included in the
distribution segments), mergers and acquisitions, public finance, trading,
research and market making. The asset management segment includes investment
portfolio management services of Eagle Asset Management, Inc., Awad Asset
Management and RJA's Asset Management Services division and mutual fund
management by Heritage Asset Management, Inc. In the various programs
offered by these entities the clients' funds are professionally managed
either in individual accounts or in funds. RJ Bank and the trust companies,
the results of operations of international joint ventures, stock loan/stock
borrow and earnings on firm capital are included in the segment entitled
"other."
The financial results of the Company's segments are the same as those
described in the "Summary of Significant Accounting Policies". Segment data
includes charges allocating corporate overhead to each segment. Intersegment
revenues and charges are eliminated between segments. The Company evaluates
the performance of its segments and allocates resources to them based on
return on investment.
The Company has not disclosed asset information by segment as the
information is not produced internally. All long-lived assets are located in
the U.S.
The Company's business is predominantly in the U.S., with only 3% of
revenues and 2% of net income coming from international operations.
Information concerning operations in these segments of business is as
follows:
1998 1997 1996
---------- ---------- ----------
Revenue: (amounts in thousands)
Retail distribution $ 704,598 $ 572,807 $ 462,488
Institutional distribution 146,590 121,411 92,881
Investment banking 57,180 64,192 45,053
Asset management 86,221 61,602 55,413
Other 88,318 76,949 65,917
---------- ---------- ----------
$1,082,907 $ 896,961 $ 721,752
Gain on sale of Liberty * - 30,646 -
---------- ---------- ----------
Total $1,082,907 $ 927,607 $ 721,752
========== ========== ==========
Pre-tax income:
Retail distribution $ 79,062 $ 71,088 $ 61,289
Institutional distribution 15,747 13,892 9,961
Investment banking 25,405 28,217 17,523
Asset management 22,002 14,935 17,284
Other 8,020 1,737 2,468
---------- ---------- ----------
150,236 129,869 108,525
Gain on sale of Liberty * - 30,646 -
---------- ---------- ----------
Total $ 150,236 $ 160,515 $ 108,525
========== ========== ==========
* see Note 16
NOTE 16 - RELATED PARTIES:
- --------------------------
On October 27, 1994, the Company and the then President and Chief
Investment Officer of its Eagle Asset Management, Inc. ("Eagle") subsidiary,
Herbert E. Ehlers ("Ehlers"), entered into a Separation Agreement by which
Ehlers (a director of the Company) and certain other Eagle personnel became
employees of a new firm, Liberty Investment Management, Inc. ("Liberty"),
effective December 31, 1994. As of January 1, 1995, Liberty assumed the
responsibility for providing portfolio management services to institutional
growth equity accounts totaling $4.3 billion formerly managed by Eagle.
In accordance with Ehlers' employment agreement, Eagle was to receive
50% of the revenues from these accounts through December 31, 1999, while
bearing none of the expenses. In addition, the Company was granted an option
to purchase 20% of Liberty in the year 2000 at a predetermined price. For the
years ended September 26, 1997 and September 27, 1996, Eagle recognized
$2,569,000 and $9,813,000, respectively, in fees from Liberty, which are
included in investment advisory fees in the consolidated statement of income.
On January 2, 1997, Liberty sold substantially all of its assets to
Goldman Sachs Asset Management, Inc. Accordingly, the Company received a lump
sum settlement of $30.6 million for its remaining three years' interest in
Liberty's revenue stream and the Company's option to purchase 20% of Liberty
at a future date.
NOTE 17 - SUBSEQUENT EVENT:
- ---------------------------
Subsequent to yearend, the Company announced its intention to merge its
two wholly-owned independent contractor subsidiaries, into one entity,
Raymond James Financial Services, Inc. ("RJFS"). The two companies will
initially operate independently as divisions of RJFS. The merger is expected
to be effective in the first calendar quarter of 1999 and will be accounted
for at book value in a manner similar to a pooling of interests.
EXHIBIT 11
- ----------
RAYMOND JAMES FINANCIAL, INC.
-----------------------------
COMPUTATION OF EARNINGS PER SHARE
---------------------------------
(in thousands, except per share amounts)
Year Ended
-----------------------------------------
September 25, September 26, September 27,
1998 1997 1996
------------- ------------- -------------
Net income $92,704 $98,915(3) $65,978
======= ======= =======
Weighted - average common
shares outstanding during the
period (1) 48,160 47,383 46,781
Additional shares assuming
exercise of stock options
and warrants (1)(2) 1,791 1,004 526
------- ------- -------
Weighted - average diluted common
shares (1) 49,951 48,387 47,307
======= ======= =======
Net income per share - basic (1) $ 1.92 $ 2.09 $ 1.41
======= ======= =======
Net income per share - diluted (1) $ 1.86 $ 2.04 $ 1.39
======= ======= =======
(1) Gives effect to the 3-for-2 common stock splits paid on April 2, 1998
and April 3, 1997.
(2) 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.
(3) Amount includes the gain on the sale of Liberty Investment Management,
Inc. Excluding this gain net income was $80,126,000, and basic and diluted
net income per share were $1.69 and $1.66, respectively. See Note 16 of the
Notes to Consolidated Financial Statements for details.
EXHIBIT 21
----------
RAYMOND JAMES FINANCIAL, INC.
-----------------------------
LIST OF SUBSIDIARIES
--------------------
The following listing includes the registrant's subsidiaries, all of
which are included in the consolidated financial statements:
State of
Name of Company Incorporation Subsidiary of
- --------------- ------------- -------------
Raymond James & Associates, Inc. ("RJA") Florida Raymond James
Financial, Inc.
("RJF")
Awad Asset Management, Inc. Florida RJF
Eagle Asset Management, Inc. Florida RJF
Gateway Assignor Corp., Inc. Florida RJF
Geovest Florida RJF
Heritage Asset Management, Inc. Florida RJF
Investment Management & Research, Inc. Florida RJF
Planning Corporation of America ("PCA") Florida RJA
PCAF, Inc. Florida PCA
Raymond James Bank, FSB Florida RJF
Raymond James Capital, Inc. Delaware RJF
Raymond James Credit Corporation Delaware RJF
RJEIF, Inc. Delaware RJF
Raymond James International Holdings, Inc.("RJIH")Delaware RJF
Raymond James Partners, Inc. Florida RJF
Raymond James Trust Company Florida RJF
RJC Partners, Inc. Delaware RJF
RJ Communication, Inc. Florida RJF
RJ Tax Credit Funds, Inc. Florida RJF
RJ Equities, Inc. Florida RJF
RJ Equities-2, Inc. Florida RJF
RJ Government Securities, Inc. Florida RJF
RJ Health Properties, Inc. Florida RJF
RJ Leasing, Inc. Florida RJF
RJ Leasing-2, Inc. Florida RJF
RJ Medical Investors, Inc. Florida RJF
RJ Mortgage Acceptance Corporation Delaware RJF
RJ Partners, Inc. Florida RJF
RJ Properties, Inc. ("RJP") Florida RJF
RJ Realty, Inc. Florida RJF
RJ Specialist, Inc. Florida RJF
RJA Municipal ABS, Inc. Delaware RJF
Robert Thomas Securities, Inc. Florida RJF
Sound Trust Company Washington RJF
Value Partners, Inc. Florida RJF
Heritage International, Ltd. Mauritius RJIH
Raymond James & Associates, Ltd. Bermuda RJIH
Raymond James Dublin, Ltd. Ireland RJIH
Raymond James Financial International, Ltd. United Kingdom RJIH