Raymond James Financial - 10-Q quarterly report FY

Commission file number   1-9109      

RAYMOND JAMES FINANCIAL, INC.
(Exact name of registrant as specified in its charter)

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.

48,556,693 shares of Common Stock and 190,847 exchangeable shares as of February 6, 2002.

The exchangeable shares were issued on January 2, 2001 in connection with the acquisition of Goepel McDermid Inc. They are exchangeable into shares of common stock on a one-for-one basis and entitle holders to payments equivalent to cash dividends paid on shares of common stock.

     In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"), and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and that certain intangible assets acquired in a business combination shall be recognized as assets apart from goodwill. SFAS 142 requires goodwill to be tested for impairment at least annually, as well as under certain circumstances, and written down when impaired, rather than being amortized as previous standards required. Furthermore, SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carri ed at cost less accumulated amortization. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however the Company has elected to early-adopt the standard as of the beginning of fiscal 2002. As a result, the Company ceased all goodwill amortization and did not recognize $1,163,000 of goodwill amortization expense that would have been recognized in the first quarter of fiscal 2002 under the previous accounting standard.

     The following table presents the impact of SFAS 142 on net income and net income per share had the standard been in effect for the first quarter of fiscal 2001 (in thousands):

     SFAS 142 requires the completion of a transitional impairment test within six months of adoption, with any impairments treated as a cumulative effect of a change in accounting principle as of the date of adoption. The Company will complete the transitional impairment test by the end of the second quarter of fiscal 2002. The Company will then be required to perform goodwill impairment tests on at least an annual basis. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

     As of December 28, 2001 and September 28, 2001, total purchased intangible assets, other than goodwill, consisted only of a noncompete agreement with a gross carrying amount of $3 million arising from the acquisition of Goepel McDermid. The noncompete agreement is being amortized over a two year period and will be fully amortized at the end of the first quarter of fiscal 2003, resulting in an expense of $375,000 per quarter until that time.

     In July 2001, the FASB issued SFAS No. 143 - Accounting for Asset Retirement Obligations. Statement 143 relates to the accounting for the obligations associated with the retirement of long-lived assets. In August 2001, the FASB issued SFAS No. 144 - Accounting for Impairment or Disposal of Long-lived Assets. Statement 144 establishes methods of accounting and reporting for the impairment of long-lived assets other than goodwill and intangible assets not being amortized. The Company is currently reviewing these statements and the impact of their adoption on its financial position, results of operations and cash flows. The Company will implement Statement 143 and 144 beginning in the first quarter of its fiscal year ending September 26, 2003.

Commitments and Contingencies

     The Company has committed to lend to, or guarantee other debt for, Raymond James Tax Credit Funds, Inc. ("RJ Tax Credit") up to $60 million upon request. Any borrowings bear interest at broker call plus 1% per annum. The borrowings are secured by properties under development. In addition, RJ Tax Credit is charged 1% for amounts guaranteed. At December 28, 2001, balances of $8,288,939 were loaned to RJ Tax Credit and there were no guarantees outstanding. The commitment expires in November 2002, at which time any outstanding balances will be due and payable.

     RJBank has outstanding at any time a significant number of commitments to extend credit. These arrangements are subject to strict credit control assessments and each customer's creditworthiness is evaluated on a case-by-case basis. At December 28, 2001, RJBank had standby letters of credit of $3,848,483, consumer lines of credit of $7,576,123 and commercial lines of credit of $18,569,819 outstanding. In addition, RJBank had commitments to fund loans at fixed and variable rates of $8,787,613 and $28,421,876, respectively, at December 28, 2001.

     As part of an effort to increase brand awareness, the Company entered into a stadium naming rights contract in July 1998. The contract has a thirteen-year term with a five-year renewal option and a 4% annual escalator. Expenses of $604,614 and $581,360 were recognized in the first quarter of fiscal 2002 and 2001, respectively.

     In the normal course of business, the Company enters into underwriting commitments. Transactions relating to such commitments that were open at December 28, 2001 and were subsequently settled had no material effect on the consolidated financial statements as of that date.

     The Company utilizes client marginable securities to satisfy deposits with clearing organizations. At December 28, 2001 and December 29, 2000, the Company had client margin securities valued at $71,209,000 and $80,296,000, respectively, on deposit with a clearing organization.

     The Company has guaranteed lines of credit for their various foreign joint ventures as follows: three lines of credit totaling $12.5 million in Turkey, two lines of credit not to exceed $11 million in Argentina, and a $325,000 letter of credit in India. At December 28, 201 there were no balances outstanding on these lines of credit. In addition, the Company has issued letters of guarantee with respect to the clearance by its joint venture affiliates of potential securities transactions to 14 counterparties in Turkey and 4 in Argentina totaling $32.5 million in Turkey and $8 million in Argentina.

Capital Transactions

     The Company's Board of Directors has, from time to time, adopted resolutions authorizing the Company to repurchase its common stock for general corporate purposes. At December 28, 2001, pursuant to prior authorizations from the Board of Directors, 1,680,723 shares were available to be repurchased at the discretion of management.

Acquisition of Goepel McDermid Inc.

     Effective January 1, 2001, the Company purchased 100% of Goepel McDermid Inc., a Canadian broker-dealer, for $78 million plus the establishment of CDN $17.5 million in deferred compensation. The $78 million consisted of $48 million in cash and one million shares exchangeable for RJF common stock. The exchangeable shares have dividend rights equivalent to those of common shares.

     Effective January 23, 2001 Goepel McDermid Inc. changed its name to Raymond James Ltd. For consolidated financial statement purposes the acquisition was accounted for as a purchase and, accordingly, Raymond James Ltd.'s results are included in the consolidated financial statements since the date of acquisition. The aggregate purchase price has been allocated to the assets based on their estimated fair value, with the remainder of the purchase price (approximately $35 million) recorded as goodwill.

     The unaudited pro forma results of operations as though Goepel McDermid Inc. had been acquired as of the beginning of fiscal 2000 are as follows:

The other US broker-dealer subsidiary was in compliance at December 28, 2001 and December 29, 2000.

The Canadian broker-dealer subsidiary of the Company is subject to the Investment Dealers Association of Canada's capital requirements and was in compliance at December 28, 2001.

Earnings Per Share

(in 000's, expect per share amounts)

Comprehensive Income

     Total comprehensive income for the three months ended December 28, 2001 and

     December 29, 2000 is as follows (in thousands):

     The Company has only limited involvement with derivative financial instruments. Certain derivative financial instruments are used to manage well-defined interest rate risk at RJBank and others are used to hedge fixed income inventories. On October 1, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as subsequently amended by SFAS 137 and SFAS 138, which establishes accounting and reporting standards for derivatives and hedging activities. This statement establishes standards for designating a derivative as a hedge. Derivatives in a broker-dealer and derivatives that do not meet the criteria for designation as a hedge are accounted for as trading account assets.

     To manage interest rate exposures, RJBank uses interest rate swaps. Interest rate swaps are agreements to exchange interest rate payment streams based on a notional principal amount. RJBank specifically designates interest rate swaps as hedges during the initial fixed rate period of adjustable rate loan pools and recognizes interest differentials as adjustments to net interest income in the period they occur.

     All derivative instruments are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, RJBank designates the derivative as a hedge of the variability of cash flows to be paid related to a recognized liability ("cash flow" hedge). RJBank formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to specific liabilities on the balance sheet. RJBank also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a h ighly effective hedge, RJBank discontinues hedge accounting prospectively. When hedge accounting is discontinued, RJBank continues to carry the derivative at its fair value on the balance sheet and recognizes any changes in its fair value in earnings.

     To the extent of the effectiveness of a hedge, changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge are recorded in other comprehensive income, net of tax. For all hedge relationships, ineffectiveness resulting from differences between the changes in cash flows of the hedged item and changes in fair value of the derivative are recognized in the results of operations as other income or other expense.

     The Company uses interest rate swaps to hedge certain fixed income inventory positions against interest rate movements. The inventory positions and the swaps are marked to market with the gain or loss recorded in income for the period. In addition to these transactions, the Company has entered into swaps with some of its institutional customers. The Company's management performs evaluations of its potential interest rate risk and is of the opinion that the exposure to interest rate risk is not material to its financial position.

     The Company's reportable segments are retail distribution, institutional distribution, investment banking, asset management and other. Segment data include charges allocating corporate overhead to each segment. Intersegment revenues and charges are eliminated between segments. The Company has not disclosed asset information by segment as the information is not produced.

     Information concerning operations in these segments of business is as follows:

     The Company has operations in the US, Canada, Europe and several consolidated joint ventures overseas including: India, France, Turkey, and Argentina.

(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 28, 2001).

Results of Operations - Three months ended December 28, 2001 compared with three
                                        months ended December 29, 2000.

     Quarterly revenues of $364,136,000 declined 13.5% from the prior year quarter's $421,023,000. Net income of $18,098,000, or $.37 per diluted share, was a 44% decrease from the $32,181,000, or $.67 per share, in the prior year quarter. Results for the current quarter include the Company's Canadian subsidiary Raymond James Ltd. ("RJ Ltd."), which was acquired as of January 1, 2001 and had revenues and expenses of $19 million for the quarter, breaking even before the amortization of retention pools established in the purchase.

     Commission revenues of $238.6 million reflect a 3% decrease from the prior year quarter; excluding the $12 million in RJ Ltd. they would show an 8% decline. This decline is reflective of the effect of the recent poor market conditions and their negative impact on retail investors' behavior. Although the equity market rallied in the December quarter, retail investors have been understandably cautious in their approach to the market. The number of retail Financial Advisors at the end of December was 4,699, including 218 in RJ Ltd., representing a 12% increase from the prior year quarter.

     Although investment banking revenues increased 84% from the comparable quarter last year, including $2.6 million from RJ Ltd, the equity capital markets operation continues to operate well below capacity. Underwriting activity did increase during the quarter with the Company managing or co-managing 9 domestic new issues vs. 2 in the prior year quarter, as well as 2 Canadian deals in the December quarter. The increase in revenues was predominantly due to sales credits from the increased commissions on underwritings. The Company also realized fees on two military housing financing transactions during the quarter.

     Investment Advisory fees are down 17% from the prior year quarter as many billings are based on beginning of quarter balances. The balances at September 28, 2001 were down 10% from September 29, 2000, when assets under management reached an all time high of $17.6 billion.

     Net interest income of $20.3 million represented another decline in net interest, 36% below the comparable prior year quarter and 8% below the immediately preceding quarter. This decline of $11 million represented almost 60% of the decline in pre-tax profits from the prior year quarter. Customer margin balances, a significant source of interest income for the Company, are relatively flat with the prior quarter, but they are down 25% from the prior year quarter. At the same time, customer cash balances are up slightly over both the prior quarter and prior year quarter, resulting in an increase in the Company's regulatorily segregated cash balances. The interest rate earned on these assets is significantly lower than on margin balances, resulting in lower interests spreads and lower net interest earnings on the largest portion of the Company's interest bearing assets.

     Financial service fees reflect a 26% increase over the prior year quarter, the result of an increased number of IRA accounts, a change to fee based (vs. commission) employee trades, increased mutual fund distribution fees and $500,000 at RJ Ltd. Offsetting these increases, was a slight decline in transaction fees on RJA's retail wrap fee commission equivalent accounts, as retail investors are not trading as actively as in prior quarters due to the current uncertain market conditions.

     Compensation expense is flat with the prior quarter and has decreased 1% since the prior year quarter. Excluding the $12 million in compensation expense related to RJ Ltd., compensation expense has declined 5% since the prior year quarter. The decline in compensation correlates with lower commission revenues. The number of employees (net of RJ Ltd.) is the same as in prior year quarter, down 125 from the prior quarter and down 235 from the Company's high in March 2001. Each department has been tasked with a thorough review of both their structures and compensation agreements as part of the Company's overall efforts toward expense control.

     Each of the other expense categories, aside from interest expense, were impacted by the addition of the RJ Ltd. expenses. Net of RJ Ltd., communication and information processing increased 9% over the prior year quarter, reflecting growth in the support structure and back office operations, as a response to the record volume in fiscal 2000. Other expense includes an addition of approximately $4 million to legal reserves in the quarter ended December 28, 2001 due to net changes in outstanding claims.

Financial Condition

     The Company's total assets have increased 4% since fiscal year end. This increase is entirely attributable to the acquisition of RJ Ltd., net of some minor shifts in the Company's balance sheet.

     The Company's credit risks remain consistent with those disclosed in the Company's annual report on Form 10-K dated September 28, 2001. The Company's balance sheet includes approximately $1.5 billion in receivables from clients. These receivables consist predominantly of client margin loans and bank loans. The Company monitors exposure to industry sectors and individual securities and performs analysis on a regular basis in connection with its margin lending activities. The Company adjusts its margin requirements if it believes its risk exposure is not appropriate based on market conditions. RJ Bank offers a variety of loan products; including mortgage, commercial real estate, and consumer loans, which are collateralized and corporate loans for which, the borrower is carefully evaluated and monitored.

     In addition to the $38 million mortgage on the corporate headquarters complex, loans payable at December 28, 2001 include $50 million at the parent company, $60 million in advances from the Federal Home Loan Bank to RJBank, $15 million in short-term financing within RJA, $2 million in short-term financing within the Canadian broker-dealer subsidiary and $1.3 million to fund customer borrowing in a finance subsidiary. In addition, RJF has a $125 million line of credit. Raymond James & Associates, Inc. has uncommitted bank lines of credit aggregating $355 million with commercial banks and RJ Ltd. has a CDN $40 million line of credit.

Liquidity and Capital Resources

     Net cash used in operating activities during the current quarter was $80 million. Cash was predominantly provided by increased stock borrow balances being less than increased stock loan balances, and increased broker-dealer payables exceeding increased broker-dealer receivables. Cash was predominantly used by an increase in segregated cash and cash equivalents as client payables increased and client receivables decreased.

     Investing activities required $27 million during the quarter. Additions to fixed assets consumed nearly $3 million, predominantly for the purchase of computers, office furniture and equipment, while net purchases of available for sale securities consumed nearly $25 million.

     Financing activities provided $4 million, the result of net borrowings exceeding repayments and the payment of cash dividends netting with the exercise of stock options and employee stock purchases.

     The Company's broker-dealer subsidiaries are subject to requirements of the SEC and the Investment Dealers Association of Canada relating to liquidity and capital standards (see Notes to Consolidated Financial Statements).

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 are adequately insured and therefore 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.

Item 3. Quantitative and Qualitative Disclosure of Market Risk

     Information about market risks for the three months ended December 28, 2001 does not differ materially from that discussed under Item 7a of the Company's Annual Report on Form 10-K for the year ended September 28, 2001. Additional information is discussed under Derivative Financial Instruments in the notes to the consolidated financial

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.