FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark one) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended December 24, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition from to period Commission file number 1-9109 RAYMOND JAMES FINANCIAL, INC. (Exact name of registrant as specified in its charter) Florida No. 59-1517485 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 880 Carillon Parkway, St. Petersburg, Florida 33716 (Address of principal executive offices) (Zip Code) (727) 573-3800 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the close of the latest practicable date. 47,849,070 shares of Common Stock as of February 2, 1999 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Form 10-Q for the Quarter Ended December 24, 1998 INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Statement of Financial Condition as of December 24, 1998 (unaudited) and September 25, 1998 2 Consolidated Statement of Operations (unaudited) for the three period ended December 24, 1998 and December 26, 1997 3 Consolidated Statement of Cash Flows (unaudited) for the three months ended December 24, 1998 and December 26, 1997 4 Notes to Consolidated Financial Statements (unaudited) 5 Item 2. Management's Financial Discussion and Analysis 7 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 11: Computation of Earnings Per Share 10 Exhibit 27: Financial Data Schedule - EDGAR version only (filed electronically) (b) Reports on Form 8-K: None All other items required in Part II have been previously filed or are not applicable for the quarter ended December 24, 1998. RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (in thousands, except share amounts) December 24, September 25, 1998 1998 (Unaudited) ASSETS Cash and cash equivalents $ 338,086 $ 296,817 Assets segregated pursuant to Federal Regulations: Cash and cash equivalents 4 1 Securities purchased under agreements to resell 1,170,837 946,723 Securities owned: Trading and investment account securities 179,080 105,892 Available for sale securities 372,243 385,676 Receivables: Clients, net 848,618 893,839 Stock borrowed 1,205,933 852,744 Brokers, dealers and clearing organizations 30,373 112,838 Other 50,800 62,722 Investment in leveraged leases 23,491 23,297 Property and equipment, net 82,868 81,372 Deferred income taxes, net 32,864 32,841 Deposits with clearing organizations 21,664 21,206 Prepaid expenses and other assets 50,280 36,769 ----------- ---------- $4,407,141 $3,852,737 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Loans payable $ 64,623 $ 44,767 Payables: Clients 2,261,275 2,126,699 Stock loaned 1,168,526 828,102 Brokers, dealers and clearing organizations 52,858 43,227 Trade and other 162,617 99,690 Trading account securities sold but not yet purchased 35,944 30,841 Accrued compensation and commissions 121,504 158,539 Income taxes payable 17,838 10,974 ----------- ---------- 3,885,185 3,342,839 Commitments and contingencies - - Shareholders' equity: Preferred stock; $.10 par value; authorized 10,000,000 shares; issued and outstanding -0- shares - - Common stock; $.01 par value; authorized 100,000,000 shares; issued 48,997,995 shares 490 490 Additional paid-in capital 58,199 57,777 Unrealized gain (loss) on securities available for sale, net of deferred taxes (221) 114 Retained earnings 473,208 459,099 ----------- --------- 531,676 517,480 Less: 787,384 and 730,118 common shares in treasury, at cost (9,720) (7,582) ----------- ---------- 521,956 509,898 ----------- ---------- $4,407,141 $3,852,737 =========== ========== See Notes to Consolidated Financial Statements. RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (in thousands, except per share amounts) Three Months Ended December 24, December 26, 1998 1997 Revenues: Securities commissions and fees $164,259 $143,054 Investment banking 11,530 31,271 Investment advisory fees 20,478 16,415 Interest 49,176 46,190 Correspondent clearing 1,068 1,119 Net trading profits 6,046 1,874 Financial service fees 8,297 8,313 Other 3,653 4,068 --------- -------- Total revenues 264,507 252,304 ========= ======== Expenses: Employee compensation and benefits 162,556 152,486 Communications and information processing 10,761 9,785 Occupancy and equipment 9,858 7,518 Clearing and floor brokerage 2,760 3,030 Interest 31,841 29,419 Business development 9,128 6,579 Other 9,266 6,601 --------- -------- Total expenses 236,170 215,418 --------- -------- Income before provision for income taxes 28,337 36,886 Provision for income taxes 10,858 14,141 --------- -------- Net income $ 17,479 $ 22,745 ========= ======== Net income per share-basic* $ .36 $ .48 Net income per share-diluted* $ .36 $ .46 Cash dividends declared per common share* $ .07 $ .06 Weighted-average common shares outstanding-basic* 48,119 47,748 Weighted-average common and common 49,115 49,003 equivalent shares outstanding-diluted* * Gives effect to the 3-for-2 stock split paid to shareholders in April 1998. See Notes to Consolidated Financial Statements. RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (in thousands) Three Months Ended December 24, December 26, 1998 1997 Cash flows from operating activities: Net income $ 17,479 $ 22,745 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,860 3,596 (Increase) decrease in assets: Available for sale investments 13,433 1,183 Deposits with clearing organizations (458) 13 Receivables: Clients, net 45,221 (87,613) Stock borrowed (353,189) (13,926) Brokers, dealers and clearing organizations 82,465 (52,002) Other 11,922 (6,463) Trading account securities, net (68,085) (59,796) Deferred income taxes (23) (3,386) Prepaid expenses and other assets (13,705) (6,964) Increase (decrease) in liabilities: Payables: Clients 134,576 126,252 Stock loaned 340,424 25,336 Brokers, dealers and clearing organizations 9,631 9,244 Trade and other 62,927 4,315 Accrued compensation (37,035) (27,839) Income taxes payable 6,864 2,062 --------- --------- Total adjustments 239,828 (85,988) --------- -------- Net cash provided by operating activities 257,307 (63,243) Cash flows from investing activities: Additions to property and equipment, net (6,356) (16,036) --------- --------- Cash flows from financing activities: Borrowings from banks and financial institutions 20,000 20,000 Repayments on loans (144) (14,215) Exercise of stock options and employee stock purchases 2,212 1,710 Purchase of treasury stock (4,430) Sale of stock options 502 Cash dividends on common stock (3,370) (2,869) Unrealized (loss) gain on securities available for sale, net (335) 31 -------- ---------- Net cash provided by financing activities 14,435 4,657 ----------- ----------- Net increase in cash and cash equivalents 265,386 (74,622) Cash and cash equivalents at beginning of period 1,243,541 888,780 ----------- ----------- Cash and cash equivalents at end of period $1,508,927 $ 814,158 =========== =========== Supplemental disclosures of cash flow information: Cash paid for interest $ 29,932 $ 29,410 Cash paid for taxes $ 10,447 $ 15,465 See Notes to Consolidated Financial Statements. RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) December 24, 1998 Basis of Consolidation The consolidated financial statements include the accounts of Raymond James Financial, Inc. and its consolidated subsidiaries (the "Company"). All material intercompany balances and transactions have been eliminated in consolidation. These statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments made are of a normal, recurring nature. The nature of the Company's business is such that the results of any interim period are not necessarily indicative of results for a full year. Commitments and Contingencies The Company has committed to lend to, or guarantee other debt for, Raymond James Tax Credit Funds, Inc. ("RJTCF") up to $25 million upon request. RJTCF, a wholly-owned subsidiary of the Company, is a sponsor of limited partnerships qualifying for low income housing tax credits. The borrowings are secured by properties under development. The commitment expires in November 1999, at which time any outstanding balances will be due and payable. At December 24, 1998, there were loans of $4,783,000 and guarantees of $2,420,000 outstanding. The Company is a defendant or co-defendant in various lawsuits incidental to its securities business. The Company is contesting the allegations in these cases and believes that there are meritorious defenses in each of these lawsuits. In view of the number and diversity of claims against the Company, the number of jurisdictions in which litigation is pending and the inherent difficulty of predicting the outcome of litigation and other claims, the Company cannot state with certainty what the eventual outcome of pending litigation or other claims will be. In the opinion of management, based on discussions with counsel, the outcome of these matters will not result in a material adverse effect on the financial position or results of operations. Capital Transactions The Company's Board of Directors has, from time to time, adopted resolutions authorizing the Company to repurchase its common stock for the funding of its incentive stock option and stock purchase plans and other corporate purposes. As of December 24, 1998, management has Board authorization to purchase up to 2,500,000 shares. At their meeting on November 19, 1998, the Board of Directors of the Company declared a quarterly cash dividend of $.07 per share, an increase of $.01 per post-split share over the prior year. Net Capital Requirements The broker-dealer subsidiaries of the Company are subject to the requirements of Rule 15c3-under the Securities Exchange Act of 1934. This rule requires that aggregate indebtedness, as defined, shall not exceed fifteen times net capital, as defined. Rule 15c3-1 also provides for an "alternative net capital requirement" which, if elected, requires that net capital be equal to the greater of $250,000 or two percent of aggregate debit items computed in applying the formula for determination of reserve requirements. The New York Stock Exchange may require a member organization to reduce its business if its net capital is less than four percent of aggregate debit items and may prohibit a member firm from expanding its business and declaring cash dividends if its net capital is less than five percent of aggregate debit items. The net capital positions of the Company's broker-dealer subsidiaries at December 24, 1998 were as follows (dollar amounts in thousands): Raymond James & Associates, Inc.: (alternative method elected) Net capital as a percent of aggregate debit items 17.00% Net capital $147,695 Required net capital $17,333 Investment Management & Research, Inc.: Ratio of aggregate indebtedness to net capital .59 Net capital $14,325 Required net capital $559 Robert Thomas Securities, Inc.: Ratio of aggregate indebtedness to net capital 1.68 Net capital $6,126 Required net capital $688 MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS (Any statements containing forward looking information should be read in conjunction with Management's Discussion and Analysis of Results of Operations and Financial Condition in the Company's Annual Report on Form 10-K for the year ended September 25, 1998). Results of Operations - Three months ended December 24, 1998 compared with three months ended December 26, 1997. Following this past summer's sell-off, the equity markets staged a remarkable comeback rally during the December 1998 quarter, aided by three cuts by the Federal Reserve in short-term interest rates. With the exception of new issue activity, which has been extremely sector-oriented and selective in light of the recent market volatility, the Company's major lines of business regained significant momentum during the quarter. Nonetheless, a 5% increase in revenues, to $264.5 million, coupled with 10% expense growth, led to a 23% decline in earnings from the prior year. In the preparation of fiscal 1999 budgets, the company has made expense control a top priority. Securities commission revenues increased 15%, as transaction volume remained at relatively high levels, particularly in equities. There were 3,339 Financial Advisors at the end of the quarter, a 10% increase over the prior year. Investment banking showed a dramatic 63% decline as new issue activity has not recovered following the steep market decline of the previous quarter. The Company managed only 2 offerings during the quarter as compared to 23 in the prior year quarter. Merger and acquisition revenues were relatively flat. Investment advisory fees increased 25% over the same quarter in the prior year, a direct correlation to the increase in assets under management. This increase is the result of both asset appreciation and net retail sales. December 24, December 26, % Increase 1998 1997 (Decrease) Assets Under Management (000's): Eagle Asset Management, Inc. $ 5,489,741 $4,137,186 33% Heritage Family of Mutual Funds 3,939,815 3,310,468 19% Investment Advisory Services 2,089,231 1,425,051 47% Awad Asset Management 681,591 817,721 (16%) Carillon Asset Management 0 62,868 (100%) Total Financial Assets Under ------------ ---------- Management $12,200,378 $9,753,294 25% ============ ========== For the first time in 18 quarters, net interest income failed to set a quarterly record. This was the combined result of a decline in margin balances, lower spreads on client cash deposits, and a lower rate earned on fixed income inventories and excess corporate cash. Trading and investment profits includes approximately $4.8 million in profits for the Company's own investment account. Although the Company has not invested frequently, or recently, in equity positions, it did acquire several positions, primarily in the securities industry, during the market downturn at the beginning of the quarter and realized significant profits on these positions. Employee compensation increased 7% over the same quarter in the prior year, the combined result of a 23% increase in administrative compensation, a decline in incentive compensation related to declining net income and the 12% increase in commission expense. The increase in administrative compensation reflects the overall growth in firm expenses supporting current activity levels and anticipated future growth. Other expenses which have grown to support growth are data communication and information processing (up 10%) and occupancy and equipment expenses (up 31%). Occupancy and equipment includes the costs related to the third headquarters building at the home office complex completed in June 1998. Both expense categories include expenses related to new computer and office equipment. Business development expenses increased due to the stadium naming rights expense, travel and entertainment expenditures, and the first portion of the expenses related to the reorganization of the Company's independent contractor firms into Raymond James Financial Services, Inc. The increase in other expense includes expenses related to some retail client settlements and other legal expenses and accruals. Financial Condition The Company's total assets have increased 14% since fiscal year end, reaching a record $4.4 billion. The rise was due to increases in matched-book stock loan program balances and increased customer cash balances. Customer cash balances are reflected as a customer payable, and the corresponding assets are included in assets segregated pursuant to Federal Regulations. Loans payable at December 24, 1998 includes $20 million related to short- term borrowings under existing lines of credit in order to accommodate customer settlement activity. These loans were repaid in full on December 28, 1998. Liquidity and Capital Resources Net cash provided by operating activities for the three months was $257,307,000. The primary source of this increase was the aforementioned increased customer cash balances, which does not give rise to cash available for use in normal operations due to regulatory segregation requirements. Investing and financing activities provided a net additional $8,079,000 over the last three months. Sources included the short-term borrowing to accommodate customer settlement activity, employee stock purchases, and exercises of stock options. The primary uses were purchases of treasury stock, the payment of cash dividends, and purchases of property and equipment. The parent company has an unsecured $50 million line for general corporate purposes. In addition, Raymond James & Associates, Inc. has uncommitted lines of credit aggregating $310 million. The Company's broker-dealer subsidiaries are subject to requirements of the Securities and Exchange Commission relating to liquidity and capital standards (see Notes to Consolidated Financial Statements). Year 2000 The widespread use of computer programs that rely on two-digit date programs to perform computations and decision-making functions may cause computer systems to malfunction in the year 2000 and lead to significant business delays and disruptions in the U.S. and internationally. The Company has revised all critical information technology (IT) internal computer code that it has identified as requiring modification for Year 2000 compliance, and will begin full integration testing of the revised code during the first quarter of fiscal 1999. All of the Company's securities transactions are processed on software provided by Securities Industry Software (SIS), a subsidiary of Automatic Data Processing, Inc., and the Company is closely monitoring the progress of SIS in revising its software. Based on information received to date, the Company believes that SIS will complete revision and testing of its software on a timely basis. The Company is also monitoring information received from third-party vendors regarding their progress in modification of other software used by the Company, as well as the progress of other industry suppliers, in addressing this issue. With respect to non-IT systems, primarily those located at its headquarters campus and those provided by its telecommunications and satellite service providers, the Company has completed the inventory of all systems and has begun the process of confirming the compliance status of its vendors. Most of these vendors are major national or international companies which have been addressing the Year 2000 issue for some time. The Company expects to complete this process of third-party review by August of 1999. With the exception of those discussed below, all of the Company's subsidiaries are substantially dependent upon the Company's Year 2000 compliance program. Raymond James Bank, Raymond James Trust Company and Heritage Asset Management, Inc. have received revised computer software from the third-party vendors on whom they are dependent and have begun the testing process, which they anticipate will be completed by June of 1999. Eagle Asset Management, Inc. has completed assessment and inventory of its critical IT requirements and is presently installing a new portfolio management system which has been designed to be Year 2000 compliant. Installation is expected to be completed by April of 1999 and system testing completed by July of 1999. The Company will begin the process of developing contingency plans during the second fiscal quarter. The securities industry is scheduled to begin industry-wide testing for Year 2000 compliance during the spring of 1999 and the Company anticipates that it will be ready to participate in that testing program as it has completed virtually all of its internal programming. To date, the Company's costs in making system modifications have not been material and the Company does not believe that remaining costs will have a material impact on the Company's operations in fiscal 1999. The impact of this problem on the securities industry will be material, however, since virtually every aspect of the sale of securities and the processing of transactions will be affected. Due to the enormous task facing the securities industry, and the interdependent nature of securities transactions, the Company may be adversely affected by this problem in the Year 2000 depending on whether it and the entities with whom it does business address this issue successfully. Effects of Inflation The Company's assets are primarily liquid in nature and are not significantly affected by inflation. Management believes that the changes in replacement cost of property and equipment would not materially affect operating results. However, the rate of inflation affects the Company's expenses, including employee compensation, communications and occupancy, which may not be readily recoverable through charges for services provided by the Company. RAYMOND JAMES FINANCIAL, INC. COMPUTATION OF EARNINGS PER SHARE (in thousands, except per share amounts) Three Months Ended December 24, December 26, 1998 1997 Net income $17,479 $22,745 -------- --------- Weighted-average common shares outstanding during the period (2) 48,119 47,748 Additional shares assuming exercise of stock options and warrants (1)(2) 996 1,255 ---------- --------- Weighted-average diluted common shares (2) 49,115 49,003 ========== ========= Net income per share-basic (2) $ .36 $ .48 Net income per share-diluted(2) $ .36 $ .46 (1) Represents the number of shares of common stock issuable on the exercise of dilutive employee stock options less the number of shares of common stock which could have been purchased with the proceeds from the exercise of such options. These purchases were assumed to have been made at the average market price of the common stock during the period, or that part of the period for which the option was outstanding. (2) Gives effect to the 3-for-2 stock split paid to shareholders April 2, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RAYMOND JAMES FINANCIAL, INC. (Registrant) Date: February 3, 1999 /s/ Thomas A. James Thomas A. James Chairman and Chief Executive Officer /s/ Jeffrey P. Julien Jeffrey P. Julien Vice President - Finance and Chief Financial Officer