Raymond james Financial, Inc. 2006 10-K
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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|
For
the
fiscal year ended September
30, 2006
OR
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the
transition period from to
Commission
file number 1-9109
RAYMOND
JAMES FINANCIAL, INC.
(Exact
name of registrant as specified in its charter)
Florida
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No.
59-1517485
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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880
Carillon Parkway, St. Petersburg, Florida
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33716
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code
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(727)
567-1000
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Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
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Name
of each exchange on which registered
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Common
Stock, $.01 Par Value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
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None
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(Title
of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes x
No
o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes o
No
x
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
o
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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No
x
The
aggregate market value of common stock held by non-affiliates of the registrant
as of March 31, 2006 was $2,731,191,559.
The
number of shares outstanding of the registrant’s common stock as of December 5,
2006 was 117,034,717.
DOCUMENTS
INCORPORATED BY REFERENCE
|
Portions
of the definitive Proxy Statement to be delivered to shareholders
in
connection with the Annual Meeting of Shareholders to be held February
15,
2007 are incorporated by reference into Part
III.
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RAYMOND
JAMES FINANCIAL, INC.
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Page
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Item
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Item
2
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Item
3
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Item
4
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PART
II
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Item
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Item
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Item
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Item
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Item
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Item
9
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Item
9A
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Item
9B
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84
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PART
III
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Item
10
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84
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Item
11
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84
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Item
12
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Item
13
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Item
14
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PART
IV
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Item
15
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85
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87
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PART
I
Raymond
James Financial, Inc. (“RJF”) is a holding company headquartered in Florida
whose subsidiaries are engaged in various financial services businesses
predominantly in the United States of America (“U.S.”) and Canada. Its principal
subsidiaries include Raymond James & Associates, Inc. (“RJA”), Raymond James
Financial Services, Inc. (“RJFS”), Raymond James Ltd. ("RJ Ltd."), Eagle Asset
Management, Inc. (“Eagle”), Heritage Asset Management, Inc. (“Heritage”) and
Raymond James Bank, FSB (“RJBank”). All of these subsidiaries are wholly owned
by RJF. RJF and its subsidiaries are hereinafter collectively referred to as
the
“Company”.
PRINCIPAL
SUBSIDIARIES
RJF's
principal subsidiary, RJA, is the largest full service brokerage and investment
firm headquartered in the state of Florida and one of the larger retail
brokerage firms in North America. RJA is a self-clearing broker-dealer engaged
in most aspects of securities distribution, trading, investment banking and
asset management. RJA also offers financial planning services for individuals
and provides clearing services for RJFS, other affiliated entities and several
unaffiliated broker-dealers. RJA is a member of the New York Stock Exchange
(“NYSE”), American Stock Exchange, and most regional exchanges in the U.S. It is
also a member of the National Association of Securities Dealers (“NASD”) and
Securities Investors Protection Corporation (“SIPC”).
RJFS
is
an independent contractor broker-dealer subsidiary, and one of the largest
independent contractor brokerage firms in the U.S. Financial Advisors affiliated
with RJFS may offer their clients all products and services offered by RJA.
RJFS
also has four institutional sales offices in Europe. RJFS is a member of the
NASD and SIPC, but not of any exchange, as it clears all of its business on
a
fully disclosed basis through RJA.
RJ
Ltd.
is the Company's Canadian broker-dealer subsidiary which engages in both retail
and institutional distribution and investment banking. RJ Ltd. is a member
of
the Toronto Stock Exchange and the Investment Dealers Association of Canada
("IDA"). Its U.S. broker-dealer subsidiary is a member of the NASD.
Eagle
is
a registered investment advisor serving as the discretionary manager for
individual and institutional equity and fixed income portfolios.
Heritage
acts as the manager of the Company's internally sponsored Heritage Family of
Mutual Funds.
RJBank
provides traditional banking products and services to the clients of the
Company's broker-dealer subsidiaries and to the general public.
BUSINESS
SEGMENTS
The
Company's business has seven segments: Private Client Group; Capital Markets;
Asset Management; RJBank; Emerging Markets; Stock Loan/Borrow and certain
investments combined in the "Other" segment. Financial information concerning
RJF for each of the fiscal years ended September 30, 2006, September 30, 2005
and September 24, 2004 is included in the consolidated financial statements
and
notes thereto. Such information is hereby incorporated by
reference.
PRIVATE
CLIENT GROUP
The
Company provides securities transaction and financial planning services to
approximately 1.5 million client accounts through the branch office systems
of
RJA, RJFS, RJ Ltd., and Raymond James Investment Services Limited (“RJIS"), an
independent contractor subsidiary in the United Kingdom. The Company's Financial
Advisors offer a broad range of investments and services, including both third
party and proprietary products, and a range of financial planning services.
In
most cases, the Company charges commissions for sales of investment products
to
its Private Client Group clients based on an established commission schedule.
Varying discounts may be given, generally based upon the client's level of
business, the trade size, service level provided, and other relevant factors.
An
increasing number of clients are electing asset-based fee alternatives instead
of the traditional commission structure; in fiscal year 2006 asset-based fees
from such accounts represented 31% of the Private Client Group's commission
and
fees.
The
majority of the Company’s U.S. Financial Advisors are also licensed to sell
insurance and annuity products through its general insurance agency, Planning
Corporation of America (“PCA”), a wholly owned subsidiary of RJA. 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, life insurance, disability insurance
and long-term care coverage.
The
Company's Financial Advisors offer a number of professionally managed load
mutual funds, as well as a selection of no-load funds. RJA maintains
dealer-sales agreements with most major distributors of mutual fund shares
sold
through broker-dealers, including funds managed by Heritage. Commissions on
such
sales generally range from 0% to 5.75% of the dollar value of the transaction.
The majority of mutual fund purchases include a front-end sales charge
or occur at net asset value (“NAV”) in fee-based accounts. In addition,
there is typically an annual charge in the form of a fund expense.
No
single
client accounts for a material percentage of this segment's total
business.
Private
Client Group Securities Commission and Fees
For
the Fiscal Years Ended:
|
|
|
|
|
|
|
|
Sept.
30,
|
%
of
|
Sept.
30,
|
%
of
|
Sept.
24,
|
%
of
|
|
2006
|
Total
|
2005
|
Total
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2004
|
Total
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|
($
in 000's)
|
|
|
|
|
|
|
|
Listed
equity
|
$
188,031
|
15%
|
$
178,148
|
16%
|
$
154,374
|
15%
|
OTC
equities
|
55,706
|
5%
|
55,946
|
5%
|
68,223
|
7%
|
Fixed
income *
|
37,911
|
3%
|
41,596
|
3%
|
49,075
|
5%
|
Mutual
funds
|
294,586
|
23%
|
257,026
|
23%
|
228,001
|
22%
|
Fee
based accounts
|
390,691
|
31%
|
307,684
|
27%
|
251,967
|
25%
|
Insurance
and annuity products
|
228,888
|
18%
|
222,657
|
20%
|
212,747
|
21%
|
New
issue sales credits
|
66,938
|
5%
|
69,234
|
6%
|
51,614
|
5%
|
Total
Private Client Group
commissions
and fees
|
$1,262,751
|
100%
|
$1,132,291
|
100%
|
$1,016,001
|
100%
|
*
Fixed
income products include municipal, corporate, government agency and
mortgage-backed bonds, preferred stocks, certificates of deposit, and unit
investment trusts.
Raymond
James & Associates
RJA
employs 1,028 Financial Advisors in 170 retail branch offices concentrated
in
the Southern, Midwest and Mid-Atlantic regions of the United States. RJA's
Financial Advisors work in a traditional branch setting supported by local
management and administrative staffs. The number of Financial Advisors per
office ranges from one to 32. RJA Financial Advisors are employees and their
compensation includes not only commission payments but also participation in
the
firm’s benefit plans, including Profit Sharing and ESOP programs. All
investment program products are available to RJA Financial Advisors.
Between 75 and 100 new Financial Advisors are trained each year at the Robert
A.
James National Training Center in St. Petersburg, Florida.
Raymond
James Financial Services
RJFS
supports 3,255 independent contractor Financial Advisors in providing products
and services to their Private Client Group clients in 1,426 offices and 539
satellite offices throughout all 50 states. The
number of Financial Advisors in RJFS offices ranges from one to 13. Independent
contractors are responsible for all of their direct costs and, accordingly,
are
paid a larger percentage of commissions and fees. They are permitted to conduct
other businesses unrelated to their RJFS activities such as offering fixed
insurance products, independent registered investment advisory services, and
accounting and tax services, among others.
Through
its Financial Institutions Division (“FID”), RJFS offers securities to customers
of financial institutions such as banks, thrifts and credit unions. FID consists
of 503 Financial Advisors in 210 locations. RJFS also provides custodial,
trading and other support services to unaffiliated independent investment
advisors through its Investment Advisor Division (“IAD”). IAD’s 62 registered
investment advisory firms are able to conduct daily business online with RJFS.
Services provided include trading, access to their clients’ account information,
and the services of the Asset Management segment.
Raymond
James Ltd.
RJ
Ltd.
is a self-clearing broker-dealer with its own operations and information
processing personnel. RJ Ltd. has 60 private client branches with 195 employee
Financial Advisors and 117 independent Financial Advisors, all located in
Canada.
Raymond
James Investment Services Limited
The
Company is a 75% shareholder of RJIS. This
entity
operates an independent contractor network in the United Kingdom, and currently
has 36 branch locations and 71 Financial Advisors.
RJA
- Operations
RJA's
operations 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 certain regulatory and
legal requirements and general office administration for most of the Company's
securities brokerage operations. At September 30, 2006, RJA employed 721 persons
in its operations areas who provide services primarily to the Private Client
Group, but also support the Company's other segments.
The
Company's businesses are supported by, and are dependent upon, an extensive
system of electronic data processing. These computer systems are largely
developed and maintained by the 726 employees in the Company’s information
technology department, most of whom are located in St. Petersburg.
The
Company's operations were not adversely affected by the series of hurricanes
that Florida experienced during 2005. However, the Company continues to enhance
certain aspects of its business continuity plan to deal with the possible impact
of future hurricanes or other events by expanding its operational and processing
capabilities in Michigan.
The
Company has developed a business continuity plan that is designed to permit
continued operation of critical business functions in the event of disruptions
to the St. Petersburg facility; all mission critical business departments have
developed operational plans for such disruptions, and the Company has a staff
which devotes their full time to monitoring and facilitating those plans. In
that connection, the Company maintains computer capacity
to support mission critical functions at its Michigan location, and conducts
some of its daily operational activities from that site. Systems have been
designed so that the Company can transfer all mission critical processing
activities to Michigan, and personnel have been identified who are assigned
responsibility for this role, including some personnel who will be required
to
temporarily relocate to Michigan to carry out these activities if necessary.
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 is based on
current interest rates and on the size of the loan balance in the client's
account.
Typically,
broker-dealers utilize bank borrowings and equity capital as the primary sources
of funds to finance clients' margin account borrowings. RJA's primary source
of
funds to finance clients' margin account balances has been cash balances in
brokerage clients' accounts (Client Interest Program), which are funds awaiting
investment. In addition, pursuant to written agreements with clients,
broker-dealers are permitted by the Securities and Exchange Commission (“SEC”)
and NYSE rules to lend client securities in margin accounts to other financial
institutions. 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; to the extent not
so
used, such funds are required to be deposited in a special segregated 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.
CAPITAL
MARKETS
Capital
Markets
activities primarily consist of equity and fixed income products and services.
No
single
client accounts for a material percentage of this segment's total business.
Institutional
Sales
Institutional
sales commissions account for a significant portion of this segment's revenue,
which is fueled by a combination of general market activity and the Capital
Markets group’s ability to identify attractive investment opportunities and
promote those opportunities. The Company's institutional clients are serviced
by
the RJA and RJ Ltd. Institutional Equity Departments, the RJA Fixed Income
Department, the European offices of RJFS, and Raymond James Financial
International Ltd, an institutional UK broker-dealer located in London. In
providing securities brokerage services to its institutional clients, the
Company charges its commissions on equity transactions based on trade size
and
the amount of business conducted annually with each institution. Fixed income
commissions are based on trade size and the characteristics of the specific
security involved.
|
Capital
Markets
Commissions
For
the Fiscal Years
Ended:
|
|
Sept.
30,
|
%
of
|
Sept.
30,
|
%
of
|
Sept.
24,
|
%
of
|
|
2006
|
Total
|
2005
|
Total
|
2004
|
Total
|
|
($
in 000's)
|
|
|
|
|
|
|
|
Equity
|
$
217,840
|
84%
|
$
193,001
|
74%
|
$
174,464
|
69%
|
Fixed
Income
|
41,830
|
16%
|
66,431
|
26%
|
77,102
|
31%
|
|
|
|
|
|
|
|
Total
commissions
|
$
259,670
|
100%
|
$
259,432
|
100%
|
$
251,566
|
100%
|
The
109
domestic and overseas professionals in RJA's Institutional Equity Sales and
Sales Trading Departments maintain relationships with over 1,310 institutional
clients, principally in North America and Europe. In addition to the Company's
headquarters in St. Petersburg, FL, RJA has institutional equity sales offices
in New York City, Boston, Chicago, Los Angeles, London and Geneva. RJ Ltd.
has
29 institutional equity sales and trading professionals servicing predominantly
Canadian institutional investors from offices in Montreal, Toronto and
Vancouver. RJFS has institutional equity sales offices in Brussels, Dusseldorf,
Luxembourg and Paris. European offices also provide services to high net worth
clients.
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 tax-exempt
securities in both the primary and secondary markets to facilitate its
institutional sales activities. In addition to St. Petersburg, the Fixed Income
Department maintains institutional sales and trading offices in New York City,
Chicago and 17 other cities throughout the U.S. To assist institutional clients,
the Fixed Income Research Group provides portfolio strategy analysis and
municipal bond research.
Equity
Research Department
The
47
domestic senior analysts in RJA's research department support the Company's
institutional and retail sales efforts and publish research on approximately
670
companies. This research primarily focuses on U.S. companies in specific
industries including Technology, Telecommunications, Consumer, Financial
Services, Business Services, Healthcare, Real Estate, Energy and Industrial
Growth. Proprietary industry studies and company-specific research reports
are
made available to both institutional and individual clients. RJ Ltd. has
an
additional 19 analysts who publish research on approximately 207 companies
primarily focused in the Energy, Energy Services, Mining, Forest Products,
Biotechnology, Technology, Consumer and Industrial Products, REIT and Income
Trust sectors.
Equity
Trading
Trading
equity 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. RJA
makes
markets in approximately 330 common stocks in the OTC market. Similar to the
equity research department, this operation serves to support both the Company's
institutional and Private Client Group sales efforts.
Equity
Investment Banking
The
60
professionals of RJA's Investment Banking Group, located in St. Petersburg
with
additional offices in Atlanta, New York City, Nashville, Chicago, Princeton,
Palo Alto, Dallas, and Houston, are involved in a variety of activities
including public and private equity financing for corporate clients, and merger
and acquisition advisory services. RJ Ltd.'s Investment Banking Group consists
of 21 professionals located in Calgary, Toronto and Vancouver providing equity
financing and financial advisory services to corporate clients. The Company's
investment banking activities focus on the same industries as those followed
by
the Equity Research department.
Syndicate
Department
The
Syndicate Department coordinates the marketing, distribution, pricing and
stabilization of RJA's
lead and
co-managed equity underwritings. In addition to RJA's managed and co-managed
offerings, this department coordinates the firm's syndicate and selling group
activities in transactions managed by other investment banking firms.
Fixed
Income Trading
RJA
trades both taxable and tax-exempt fixed income products. The 28 taxable and
22
tax-exempt RJA fixed income traders purchase and sell corporate (including
high
yield), municipal, government, government agency, and mortgage-backed bonds,
asset backed securities, preferred stock and certificates of deposit from/to
clients of the Company or other dealers who may be purchasing or selling
securities for their own account or acting as an agent for their clients. RJA
enters into future commitments such as forward contracts and “to be announced”
securities (e.g. securities having a stated coupon and original term to
maturity, although the issuer and/or the specific pool of mortgage loans is
not
known at the time of the transaction). In addition, a subsidiary of RJF
participates in the interest rate swaps market as a principal, both for
economically hedging RJA fixed income inventory and in transactions with
customers.
Fixed
Income Investment Banking
Fixed
income investment banking includes debt underwriting and public finance
activities. The 56 professionals in the RJA Public Finance division operate
out
of 8 offices (located in St. Petersburg, Birmingham, New York City, Chicago,
Atlanta, Nashville, Helena (Montana) and San Antonio). The Company acts as
a
financial advisor or underwriter to various municipal agencies or political
subdivisions, housing developers and non-profit health care institutions.
RJA
acts
as an underwriter or selling group member for corporate bonds, mortgage-backed
securities, 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.
Partnership
Syndication Activities
Raymond
James Tax Credit Funds, Inc. (“RJTCF”) is the general partner or managing member
in a number of limited partnerships and limited liability companies which invest
in multi-family real estate entities that qualify for tax credits under Section
42 of the Internal Revenue Code. RJTCF has been an active participant in
the tax credit program since its inception in 1986, and currently focuses on
tax
credit funds for institutional investors that invest in a portfolio of tax
credit eligible multi-family apartments. The investors’ expected return on
investment from these funds are primarily derived from tax credits and tax
losses that investors can use to reduce their federal tax liability. During
fiscal 2006, RJTCF invested over $276.8 million for large institutional
investors in 78 real estate transactions for properties located throughout
the
U.S. From inception, RJTCF has raised over $1.3 billion in equity and has
sponsored 43 tax credit funds, with investments in 1,068 tax credit apartment
properties in 42 states.
ASSET
MANAGEMENT
The
Company's asset management segment includes proprietary asset management
operations, internally sponsored mutual funds, several small proprietary hedge
funds, non-affiliated private account portfolio management alternatives, and
other fee based programs. No
single
client accounts for a material percentage of this segment's total
business.
Eagle
Asset Management, Inc.
Eagle
is
a registered investment advisor with approximately $12.5 billion under
management at September 30, 2006, including approximately $1.8 billion for
the
Heritage Family of Mutual Funds. Eagle offers a variety of equity and fixed
income objectives managed by six portfolio management teams. Eagle's clients
include individuals, pension and profit sharing plans, foundations, endowments,
variable annuities and mutual fund portfolios. These accounts are managed on
a
discretionary basis in accordance with the investment objective(s) specified
by
the client. Eagle manages approximately $6.9 billion for institutional clients,
including funds managed as a subadvisor to variable annuity accounts and mutual
funds (including Heritage), and approximately $5.6 billion for private client
accounts.
Eagle's
investment management fee for discretionary accounts generally ranges from
.20%
to 1.0% of asset balances per year depending upon the size and investment
objective(s)
of the
account.
Heritage
Asset Management, Inc.
Heritage
serves as investment advisor to the Heritage Family of Mutual Funds and certain
short-term fixed income accounts. Heritage also serves as transfer agent for
all
of the funds and as fund accountant for all Heritage funds except the
International Equity Fund. Heritage internally manages the largest of its
portfolios, the Heritage Cash Trust-Money Market Fund, which has $5.1 billion
in
assets. Portfolio management services for the Diversified Growth Fund, Core
Equity Fund and the Mid-Cap Stock Fund are subadvised by Eagle. Portfolio
management for the Small Cap Stock Fund is subadvised by both Eagle and the
Company's Awad Asset Management subsidiary (“Awad”). Unaffiliated advisors are
utilized for the Municipal Money Market Fund, Capital Appreciation Trust, High
Yield Bond Fund, Growth and Income Fund, and the International Equity
Fund.
Heritage
also serves as an advisor to RJBank to make recommendations and monitor the
Bank's liquid assets, investments in mortgages and mortgage related
securities.
Total
assets under management at September 30, 2006 were $9.3 billion, of which
approximately $6.3 billion were money market funds.
Heritage
Fund Distributors, Inc.
Heritage
Fund Distributors is a registered broker-dealer engaged in the distribution
of
the Heritage Family of Mutual Funds.
Awad
Asset Management, Inc.
Awad
is a
registered investment advisor that primarily manages small cap equity
portfolios. At September 30, 2006 Awad had approximately $1 billion under
management, including approximately $193 million of the Heritage Small Cap
Stock
Fund. Awad's clients include individuals, pension and profit sharing plans,
variable annuities, foundations, endowments, and mutual fund portfolios.
Accounts are managed on a discretionary basis in accordance with the investment
objective(s) specified by the client. Management fees generally range from
.27%
to 1.0% of asset balances annually depending upon the size and investment
objective(s) of the account.
Asset
Management Services
RJA's
Asset Management Services (“AMS”) Department manages several investment advisory
programs. The primary advisory services offered are the Raymond James Consulting
Services program, which offers a variety of both affiliated and non-affiliated
advisors, and the Eagle High Net Worth program. Both programs maintain an
approved list of investment managers, provide asset allocation model portfolios,
establish custodial facilities, monitor performance of client accounts, provide
clients with accounting and other administrative services, and assist investment
managers with certain trading management activities. AMS earns fees generally
ranging from 0.40% to 0.85% of asset balances per annum, a portion of which
is
paid to the investment managers who direct the investment of the clients'
accounts. In addition, AMS also offers the Freedom program, where an investment
committee within AMS manages portfolios of mutual funds on a discretionary
basis. At September 30, 2006, these three programs had approximately $13.0
billion in assets under management, including approximately $2.0 billion managed
by Heritage, Eagle and Awad.
Additional
advisory programs offered through AMS are Passport, Ambassador, Opportunity,
and
the Managed Investment Program. For these accounts, advisory services are
provided by the Financial Advisors with AMS providing quarterly performance
reporting and other accounting and administrative services. Fees are based
on
the individual account size and are also dependent on the type of securities
in
the accounts. As of September 30, 2006, these programs had approximately $18.4
billion in assets.
In
addition to the foregoing programs, AMS also administers fee-based programs
for
clients who have contracted for portfolio management services from nonaffiliated
investment advisors that are not part of the Raymond James Consulting Services
program.
RJFS
offers an advisory fee based program similar to Passport called IMPAC. As of
September 30, 2006, IMPAC had $7.9 billion in assets serviced by RJFS Financial
Advisors.
Raymond
James Trust Company
Raymond
James Trust Company West
Raymond
James Trust Company and Raymond James Trust Company West provide personal trust
services primarily to existing clients of the broker-dealer subsidiaries.
Portfolio management of trust assets is often subcontracted to the asset
management operations of the Company. These two subsidiaries had a combined
total of approximately $1.3 billion in client assets at September 30, 2006,
including $54 million in the donor-advised charity known as the Raymond James
Charitable Endowment Fund.
Proprietary
Private Equity Funds
The
Company has sponsored two private equity funds to date: Raymond James Capital
Partners, L.P., a merchant banking limited partnership; and Ballast Point
Ventures, L.P., a venture capital limited partnership (the “Funds”). The
Company, through wholly owned subsidiaries, earns management fees for services
provided to the Funds and participates in profits or losses through both general
and limited partnership interests.
RAYMOND
JAMES BANK, FSB
RJBank
is
a federally chartered savings bank, regulated by the Office of Thrift
Supervision, which provides residential, consumer and commercial loans, as
well
as FDIC-insured deposit accounts, to clients of the Company's broker-dealer
subsidiaries and to the general public. RJBank also purchases residential whole
loan packages and is active in bank participations and corporate loan
syndications. RJBank generates revenue principally through the interest income
earned on the transactions noted above, offset by the interest expense it incurs
on client deposits and on its borrowings.
RJBank
operates from a single branch location adjacent to the Company’s headquarters
complex in St. Petersburg, Florida. Access to RJBank's products and services
is
available nationwide through the offices of its affiliated broker-dealer firms
as well as through convenient telephonic and electronic banking services. As
of
September 30, 2006, RJBank had total assets of $3.1 billion, with 90% of the
bank's $2.8 billion in deposits consisting of cash balances swept from the
investment accounts of RJA and RJFS clients. These balances are held in the
FDIC
insured Raymond James Bank Deposit Program administered by RJA. Other than
the
foregoing, no single client accounts for a material percentage of the segment's
total business.
EMERGING
MARKETS
Raymond
James International Holdings, Inc. (“RJIH”) currently has interests in joint
ventures in Argentina, India, Turkey, and Uruguay. These joint ventures operate
in securities brokerage, investment banking and asset management. In addition,
RJIH owns Raymond James Global Securities, Inc. (“RJGS”), a broker-dealer which
clears business predominantly for Latin American entities. RJGS is incorporated
in the British Virgin Islands and utilizes the correspondent clearing services
of RJA. No
single
client accounts for a material percentage of this segment's total
business.
STOCK
LOAN/BORROW
This
activity involves the borrowing and lending of securities from and to other
broker-dealers, financial institutions and other counterparties, generally
as an
intermediary. The borrower of the securities puts up a cash deposit, commonly
102% of the market value of the securities, on which interest is earned.
Accordingly, the lender receives cash and pays interest. These cash deposits
are
adjusted daily to reflect changes in current market value. The net revenues
of
this operation are the interest spreads generated. No
single
client accounts for a material percentage of this segment's total
business.
OTHER
This
segment includes various investment and corporate activities of Raymond James
Financial, Inc.
COMPETITION
The
Company is engaged in intensely competitive businesses. The Company competes
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. The Company also competes with a number of firms offering on-line
financial services and discount brokerage services, usually with lower levels
of
service, to individual clients. The Company competes principally on the basis
of
quality of its associates, service, product selection, location and reputation
in local markets.
In
the
financial services industry, there is significant competition for qualified
associates. The Company's ability to compete effectively in its businesses
is
substantially dependent on its continuing ability to attract, retain, and
motivate qualified associates, including successful Financial Advisors,
investment bankers, trading professionals, portfolio managers and other
revenue-producing or specialized personnel.
REGULATION
The
following discussion sets forth some of the material elements of the regulatory
framework applicable to the financial services industry and provides some
specific information relevant to the Company. The regulatory framework is
intended primarily for the protection of customers and the securities markets,
depositors and the Federal Deposit Insurance Fund and not for the protection
of
creditors or shareholders. Under certain circumstances, these rules may limit
the ability of the Company to make capital withdrawals from its broker-dealer
subsidiaries.
To
the
extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the particular
statutory and regulatory provisions. A change in applicable statutes,
regulations or regulatory policy may have a material effect on the Company’s
business.
Broker-dealers
are subject to regulations that cover all aspects of the securities business,
including:
· |
uses
and safekeeping of clients' funds and
securities
|
· |
capital
structure and financial soundness
|
· |
the
conduct of directors, officers and
employees
|
The
financial services industry in the U.S. is subject to extensive regulation
under
federal and state laws. The SEC is the federal agency charged with
administration of the federal securities laws. Financial services firms are
also
subject to regulation by state securities commissions in those states in which
they conduct business. RJA and RJFS are currently registered as broker-dealers
in all 50 states. In addition, financial services firms are subject to
regulation by various foreign governments, securities exchanges, central banks
and regulatory bodies, particularly in those countries where they have
established offices. Various Company affiliates have offices in France, the
United Kingdom, Germany, Switzerland, Belgium, Luxemburg, Turkey, Argentina,
India, British Virgin Islands, Canada and Uruguay.
Much
of
the regulation of broker-dealers in the U.S. and Canada, however, has been
delegated to self-regulatory organizations ("SROs"), principally the NASD,
the
NYSE and other securities exchanges. These SROs adopt and amend rules (which
are
subject to approval by the SEC) for governing the industry and conduct periodic
examinations of member broker-dealers.
The
SEC,
SROs and state securities commissions may conduct administrative proceedings
that can result in censure, fine, suspension or expulsion of a broker-dealer,
its officers or employees. Such administrative proceedings, whether or not
resulting in adverse findings, can require substantial expenditures and can
have
an adverse impact on the reputation of a broker-dealer.
The
Company's U.S. broker-dealer subsidiaries are required by federal law to belong
to SIPC. When the SIPC fund falls below a certain amount, members are required
to pay annual assessments of up to 1% of adjusted gross revenues. As a result
of
adequate fund levels, each of the Company's domestic broker-dealer subsidiaries
was required to pay only the minimum annual assessment of $150
in
fiscal 2006. The SIPC fund provides protection for securities held in customer
accounts up to $500,000 per customer, with a limitation of $100,000 on claims
for cash balances. In December 2003, RJA joined with other major U.S. securities
brokerage firms to form Customer Asset Protection Company (“CAPCO”), a licensed
Vermont insurance company, to provide excess SIPC coverage. CAPCO provides
account protection for the total net equity of client accounts of participating
firms with no aggregate limit. CAPCO has received a financial strength rating
of
A+ from Standard and Poor’s. These coverages do not protect against market
fluctuations.
The
financial services industry in Canada is subject to comprehensive regulation
under both federal and provincial laws. Securities commissions have been
established in 13 provinces and territorial jurisdictions and are charged with
the administration of securities laws. RJ Ltd. is currently registered in all
Canadian jurisdictions. Securities dealers in Canada are also subject to
regulation by SROs which are responsible for the enforcement of and conformity
with securities legislation for their members and have been granted the powers
to prescribe their own rules of conduct and financial requirements of members.
RJ Ltd. is regulated by the securities commissions in the jurisdictions of
registration as well as by the SROs, the IDA and Market Regulation Services
Inc.
RJ
Ltd.
is required by the IDA to belong to the Canadian Investors Protection Fund
("CIPF"), whose primary role is investor protection. The CIPF may charge member
firms assessments based on revenues and risk premiums based on capital
deficiencies. The CIPF provides protection for securities and cash held in
client accounts up to CDN$1,000,000 per client with separate coverage of
CDN$1,000,000 for certain types of accounts. This coverage does not protect
against market fluctuations.
See
Note
19 of the Notes to Consolidated Financial Statements for further information
on
SEC and IDA regulations pertaining to broker-dealer regulatory minimum net
capital requirements.
The
Company's investment advisory operations, including the Company-sponsored mutual
funds, are also subject to extensive regulation. The Company's U.S. asset
managers are registered as investment advisors with the SEC and are also
required to make notice filings in certain states. Virtually all aspects of
the
asset management business are subject to various federal and state laws and
regulations. These laws and regulations are primarily intended to benefit the
asset management clients and generally grant supervisory agencies and bodies
broad administrative powers, including the power to limit or restrict an
investment advisor from conducting its asset management business in the event
that it fails to comply with such laws and regulations. Possible sanctions
that
may be imposed for a failure include the suspension of individual employees,
limitations on the asset managers engaging in the asset management business
for
specified periods of time, the revocation of registrations, and other censures
and fines. A regulatory proceeding, regardless of whether it results in a
sanction, can require substantial expenditures and can have an adverse effect
on
the reputation of an asset manager.
RJBank
is
subject to various regulatory capital requirements established by the federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on RJBank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, RJBank must meet specific capital
guidelines that involve quantitative measures of RJBank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. RJBank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and
other factors. Quantitative measures established by regulation to ensure capital
adequacy require RJBank to maintain minimum amounts and ratios of Total and
Tier
I capital to risk-weighted assets (as defined in the regulations). See Note
19
of the Notes to the Consolidated Financial Statements for further information
and capital analysis.
The
Company's two state-chartered trust companies are subject to regulation by
the
states in which they are chartered. These regulations focus on, among other
things, the soundness of internal controls in place at the trust
companies.
As
a
public company, the Company is subject to corporate governance requirements
established by SEC and NYSE, as well as federal and state law. Under the
Sarbanes-Oxley Act, the Company is required to meet certain requirements
regarding business dealings with members of the Board of Directors, the
structure of its Audit Committee, and ethical standards for its senior financial
officers, among other things. Under SEC and NYSE rules, the Company is required
to comply with other standards of corporate governance, including having a
majority of independent directors serve on its Board of Directors, and the
establishment of independent audit, compensation and corporate governance
committees.
Under
Section 404 of the Sarbanes-Oxley Act, the Company is required to complete
an
assessment of its internal controls over financial reporting and to obtain
reports from its independent auditors regarding their opinion of management's
assessment of internal controls and their independent opinion regarding the
Company's internal control over financial reporting. This requirement imposes
additional costs on the Company, reflecting internal staff and management time,
as well as additional audit fees and fees for outside service providers and
consultants since the Act went into effect.
OTHER
INFORMATION MADE AVAILABLE BY THE COMPANY
The
Company's internet address is www.raymondjames.com.
The
Company makes available, free of charge, through links to the U.S. Securities
and Exchange Commission website, the Company’s annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and the Company’s proxy statements. Investors
can find this information under “About Our Company - Financial Results and SEC
Filings”. These reports are available through the Company’s website as soon as
reasonably practicable after the Company electronically files such material
with, or furnishes it to, the SEC.
Additionally,
the Company makes available on its website under “About Our Company - Inside
Raymond James - Corporate Governance”, a number of its corporate governance
documents. These include; the Corporate Governance Principles, the charters
of
the Audit Committee and the Corporate Governance, Nominating and Compensation
Committee of the Board of Directors, the Senior Financial Officers’
Code of Ethics and the Codes of Ethics for Employees and the Board of Directors.
Printed copies of these documents will be furnished to any shareholder who
requests them. The information on the Company's websites are not incorporated
by
reference into this report.
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, are discussed in Item 1A, “Risk Factors”
in this report. The Company does not undertake any obligation to publicly update
or revise any forward-looking statements.
Economic
and Political Developments and Their Impact on Securities Markets Could
Adversely Affect the Company’s Business
The
Company is engaged in various financial services businesses. As such, the
Company is directly affected by general economic and political conditions,
changes in the rate of inflation and the related impact on securities markets,
fluctuations in interest and currency rates, investor confidence, and changes
in
volume and price levels of the securities markets. Severe market fluctuations
or
weak economic conditions could reduce the Company’s trading volume and net
revenues and adversely affect its profitability.
The
Company Faces Intense Competition
The
Company is engaged in intensely competitive businesses. See the section entitled
“Competition” of Item 1 of this report for additional information about the
Company’s competitors. Competitive pressures experienced by the Company could
have an adverse affect on its business, results of operations, financial
condition and liquidity.
Regulatory
and Legal Developments Could Adversely Affect the Company’s
Business
The
securities industry is subject to extensive regulation and broker-dealers are
subject to regulations covering all aspects of the securities business. See
the
section entitled “Regulation” of Item 1 of this report for additional
information regarding the Company’s regulatory environment and Item 3, “Legal
Proceedings”, for a discussion of the Company’s legal matters. The Company could
be subject to civil liability, criminal liability, or sanctions, including
revocation of its subsidiaries’ registrations as investment advisors or
broker-dealers, revocation of the licenses of its Financial Advisors, censures,
fines, or a temporary suspension or permanent bar from conducting business,
if
it violates such laws or regulations. Any such liability or sanction could
have
a material adverse effect on the Company’s financial condition, results of
operations, and business prospects. In addition, the regulatory environment
in
which the Company operates frequently changes and has seen significant increased
regulation in recent years. The Company may be adversely affected as a result
of
new or revised legislation or regulations, changes in federal, state or foreign
tax laws, or by changes in the interpretation or enforcement of existing laws
and regulations.
The
Company’s Business Is Highly Dependent on Technology
The
Company’s businesses rely extensively on electronic data processing and
communications systems, and its continued success will depend upon its ability
to successfully maintain and upgrade the capability of those systems and retain
skilled information technology employees. Failure of those systems, which could
result from events beyond the Company’s control, could result in financial
losses, liability to clients and damage to the Company’s reputation.
The
Company’s Operations Could Be Adversely Affected By Serious
Weather Conditions
The
Company’s principal operations are located in St. Petersburg, Florida. During
2004 and 2005, there was a significant increase in hurricane activity on the
Gulf Coast which has directly affected other parts of Florida. While the Company
has a business continuity plan that permits significant operations to be
conducted from its Southfield, Michigan location (see Item 1, “Business” in this
report), the Company’s operations could be adversely affected by hurricanes or
other serious weather conditions that could affect processing of transactions
and communications.
In
addition, as a result of high levels of storm induced damage during these years
in Florida and along the Gulf Coast, insurance coverage for wind and flood
damage has become harder to obtain and substantially more expensive. As a
consequence, the Company has been forced to pay more for the limited coverage
it
obtained and self-insure against these risks to a greater degree than in the
past.
The
Company’s Business is Dependent on Fees Generated from the Distribution of
Financial Products
A
large
portion of the Company’s revenues are derived from fees generated from the
distribution of financial products such as mutual funds and variable annuities.
Changes in the structure or amount of the fees paid by the sponsors of these
products could directly affect the Company’s revenues and profits.
Other
Risks
See
Item
7A, “Quantitative and Qualitative Disclosures About Market Risk” in this report
regarding the Company’s exposure to, and approaches to managing, market risk,
interest rate risk, equity price risk, credit risk, operational risk and
regulatory and legal risk.
Not
applicable.
The
Company's headquarters is located on approximately 55 acres within the Carillon
office park in St. Petersburg, Florida. The headquarters complex currently
includes four main towers which encompass a total of 884,000 square feet of
office space, the Raymond James Bank building, which is a 26,000-square-foot
two-story building, and two five-story parking garages. At this location, the
Company has the ability to add approximately 490,000 square feet of new office
space. Raymond James also has 30,000 square feet of leased space near Carillon.
The Company’s facilities are used to some extent for current operations of all
segments. The Company relocated its Detroit, Michigan operations to a newly
renovated 84,000 square foot building on 14 acres in Southfield, Michigan.
The
Company owns that real estate as well as a 45,000 square foot building in
Detroit that previously housed those operations. The Company intends to sell
the
Detroit building.
The
Company leases offices in various locations throughout the U.S. and in certain
foreign countries. With the exception of a Company-owned RJA branch office
building in Crystal River, FL, RJA branches are leased with various expiration
dates through 2014. RJ Ltd. leases premises for main offices in Vancouver,
Calgary, and Toronto and for branch offices throughout Canada. These leases
have
various expiration dates through 2013. RJ Ltd. does not own any land or
buildings. See Note 13 to Consolidated Financial Statements for further
information regarding the Company's leases.
Leases
for branch offices of RJFS, the independent contractors of RJ Ltd. and RJIS
are
the responsibility of the respective independent contractor Financial
Advisors.
The
Company is a defendant or co-defendant in various lawsuits and arbitrations
incidental to its securities business. Like others in the retail
securities industry, the Company experienced a significant increase in the
number of claims seeking recovery due to portfolio losses in the early 2000's.
During the past year, the number of claims has declined to more historic levels.
As
previously reported, RJF and RJFS were defendants in a series of lawsuits and
arbitrations relating to an alleged mortgage lending program known as the
"Premiere 72" program, that was administered by a company owned in part by
two
individuals who were registered as Financial Advisors with RJFS in Houston.
In
July 2005, RJFS paid approximately $24 million in a settlement with
approximately 380 claimants in this litigation, representing approximately
two-thirds of the outstanding claims. RJFS has settled with an additional 150
claimants for a lump sum of $18 million. These settlements effectively
extinguish the Company’s liability with the exception of one remaining lawsuit
in federal court involving one claimant family group.
On
September 27, 2005, the State of Utah filed a petition for Order of Censure,
Suspension of License and Imposition of Fine against RJFS related to the alleged
failure to supervise a former Financial Advisor. The Utah Securities Division
asked the Division Director to enter an order censuring the Company, suspending
its license in Utah for 30 days, ordering a fine of $100,000 and requiring
the
engagement of an independent consultant to review its supervisory structure
and
procedures. In September 2006, RJFS agreed without admitting or denying the
State’s findings, to a fine of $100,000.
Raymond
James Yatyrym Menkul Kyymetler A. S., (“RJY”), the Company’s Turkish affiliate,
was assessed for the year 2001 approximately US$6.8 million by the Turkish
tax
authorities. The authorities applied a significantly different methodology
than
in the prior year’s audit. RJY is vigorously contesting most aspects of this
assessment and has filed an appeal with the Turkish tax court. Audits of 2002
through 2004 are anticipated and their outcome is unknown in light of the change
in methodology and the pending litigation. The Company has made provision in
its
consolidated financial statements for its estimate of the reasonable potential
exposure for this matter. As of September 30, 2006, RJY had total capital of
approximately US$6.4 million, of which the Company owns approximately
73%.
The
Company is contesting the allegations in this and other cases and believes
that
there are meritorious defenses in each of these lawsuits and arbitrations.
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 the Company's management, based on current
available information, review with outside legal counsel, and consideration
of
amounts provided for in the accompanying consolidated financial statements
with
respect to these matters, ultimate resolution of these matters will not have
a
material adverse impact on the Company's financial position or results of
operations. However, resolution of one or more of these matters may have a
material effect on the results of operations in any future period, depending
upon the ultimate resolution of those matters and upon the level of income
for
such period.
None.
PART
II
PURCHASES
OF
EQUITY SECURITIES
The
Company's common stock is traded on the NYSE under the symbol “RJF”. At December
5, 2006 there were approximately 14,000 holders of the Company's common
stock.
The
following table sets forth for the periods indicated the high and low trades
for
the common stock (as adjusted for the three-for-two stock split in March
2006).
|
2006
|
2005
|
|
High
|
Low
|
High
|
Low
|
First
Quarter
|
$
25.72
|
$
20.25
|
$
20.91
|
$
15.57
|
Second
Quarter
|
31.45
|
24.47
|
22.79
|
19.27
|
Third
Quarter
|
31.66
|
26.34
|
20.85
|
17.25
|
Fourth
Quarter
|
30.57
|
26.45
|
21.46
|
18.33
|
See
Quarterly Financial Information in Item 8 for the amount of the quarterly
dividends paid.
The
Company expects to continue paying cash dividends. However, the payment and
rate
of dividends on the Company's common stock is subject to several factors
including operating results, financial requirements of the Company, and 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, NYSE, NASD and the IDA; and RJBank, which may be
subject to restrictions by federal banking agencies. Such restrictions have
never become applicable with respect to the Company's dividend payments. (See
Note 19 of the Notes to Consolidated Financial Statements for more information
on the capital restrictions placed on RJBank and the Company's broker-dealer
subsidiaries).
See
Note
15 of the Notes to Consolidated Financial Statements for information regarding
repurchased shares of the Company's common stock.
|
Year
Ended
|
|
Sept.
30,
|
|
Sept.
30,
|
|
Sept.
24,
|
Sept.
26,
|
Sept.
27,
|
|
2006
|
|
2005
|
|
2004
|
2003
|
2002
|
|
(in
000’s, except per share data)
|
Operating
Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
revenues
|
$
2,632,757
|
|
$2,156,997
|
|
$1,829,776
|
$1,497,571
|
$1,517,423
|
Net
revenues
|
$
2,336,087
|
|
$2,039,208
|
|
$1,781,259
|
$1,451,960
|
$1,441,088
|
Net
income
|
$
214,342
|
|
$
151,046
|
|
$
127,575
|
$
86,317
|
$
79,303
|
Net
income per
|
|
|
|
|
|
|
|
Share
- basic: *
|
$
1.90
|
|
$
1.37
|
|
$
1.16
|
$
.79
|
$
.72
|
Net
income per
|
|
|
|
|
|
|
|
Share
- diluted: *
|
$
1.85
|
|
$
1.33
|
|
$
1.14
|
$
.78
|
$
.71
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
|
|
|
common
shares
|
|
|
|
|
|
|
|
outstanding
- basic: *
|
112,614
|
|
110,217
|
|
110,093
|
109,236
|
109,517
|
Weighted
average
common and common
|
|
|
|
|
|
|
|
equivalent
shares
|
|
|
|
|
|
|
|
outstanding
- diluted: *
|
115,738
|
|
113,048
|
|
111,603
|
110,624
|
111,666
|
|
|
|
|
|
|
|
|
Cash
dividends declared
|
|
|
|
|
|
|
|
per
share *
|
$
.32
|
|
$
.21
|
|
$
.17
|
$
.16
|
$
.16
|
|
|
|
|
|
|
|
|
Financial
Condition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$11,516,650
|
|
$8,369,256
|
|
$7,621,846
|
$6,911,638
|
$6,040,303
|
Long-term
debt
|
$
286,712
|
**
|
$
280,784
|
**
|
$
174,223
|
$
167,013
|
$
147,153
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
$
1,463,869
|
|
$1,241,823
|
|
$1,065,213
|
$
924,735
|
$
839,636
|
Shares
outstanding *
|
114,064
|
***
|
113,394
|
|
110,769
|
109,148
|
109,517
|
|
|
|
|
|
|
|
|
Equity
per share
|
|
|
|
|
|
|
|
at
end of period*
|
$
12.83
|
|
$
10.95
|
|
$
9.62
|
$
8.47
|
$
7.67
|
|
* |
Gives
effect to the three-for-two stock splits paid on March 22, 2006 and
March
24, 2004. |
|
**
|
Includes
loans payable related to investments by variable interest entities
in real
estate partnerships, which are non-recourse to the
Company.
|
|
***
|
Excludes
non-vested shares.
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
The
following Management’s Discussion and Analysis is intended to help the reader
understand the results of operations and the financial condition of the Company.
Management’s Discussion and Analysis is provided as a supplement to, and should
be read in conjunction with, the Company’s consolidated financial statements and
accompanying notes to the consolidated financial statements.
The
Company’s results continue to be highly correlated to the direction of the U.S.
equity markets and are subject to volatility due to changes in interest rates,
valuation of financial instruments, economic and political trends and industry
competition. An environment favorable to the Company’s results is characterized
by a stable political environment, low inflation, low unemployment,
upward-trending financial markets, and strong corporate profitability, all
of
which have a positive influence on investor confidence. During fiscal 2006,
long
term inflation expectations remained low and the Federal Reserve continued
its
measured short-term interest rate increases with six 25 basis point rate
increases during the first nine months of the year. The Dow Jones Industrial
Average, S&P 500 and NASDAQ indices rose 11%, 9% and 5%, respectively,
during the fiscal year.
Results
of Operations - Total Company
The
Company currently operates through the following seven business segments:
Private
Client Group; Capital Markets; Asset Management; RJBank; Emerging Markets;
Stock
Loan/Borrow and various corporate investments and expenses combined in the
"Other" segment.
The
following table presents consolidated and segment financial information for
the
Company for the years indicated:
|
Year
Ended
|
|
September
30,
|
|
September
30,
|
|
September
24,
|
|
2006
|
|
2005
|
|
2004
|
|
(in
000's)
|
Total
Company
|
|
|
|
|
|
Revenues
|
$
2,632,757
|
|
$
2,156,997
|
|
$
1,829,776
|
Pretax
earnings
|
342,066
|
|
247,971
|
|
204,121
|
|
|
|
|
|
|
Private
Client Group
|
|
|
|
|
|
Revenues
|
1,679,813
|
|
1,397,578
|
|
1,202,368
|
Pretax
earnings
|
168,519
|
|
102,245
|
|
107,122
|
|
|
|
|
|
|
Capital
Markets
|
|
|
|
|
|
Revenues
|
487,419
|
|
455,151
|
|
400,787
|
Pretax
earnings
|
78,221
|
|
77,333
|
|
57,910
|
|
|
|
|
|
|
Asset
Management
|
|
|
|
|
|
Revenues
|
200,124
|
|
171,916
|
|
148,160
|
Pretax
earnings
|
48,095
|
|
40,841
|
|
27,875
|
|
|
|
|
|
|
RJBank
|
|
|
|
|
|
Revenues
|
114,692
|
|
45,448
|
|
28,104
|
Pretax
earnings
|
16,003
|
|
14,204
|
|
8,824
|
|
|
|
|
|
|
Emerging
Markets
|
|
|
|
|
|
Revenues
|
55,263
|
|
38,768
|
|
27,675
|
Pretax
earnings
|
2,857
|
|
5,927
|
|
4,304
|
|
|
|
|
|
|
Stock
Loan/Stock Borrow
|
|
|
|
|
|
Revenues
|
59,947
|
|
31,876
|
|
16,372
|
Pretax
earnings
|
8,001
|
|
5,962
|
|
2,135
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Revenues
|
35,499
|
|
16,260
|
|
6,310
|
Pretax
earnings (loss)
|
20,370
|
|
1,459
|
|
(4,049)
|
Year
ended September 30, 2006 Compared with the Year ended September 30, 2005 -
Total
Company
The
Company had record annual revenues and earnings for the third consecutive year,
with net revenues surpassing $2.3 billion. Non-interest expenses rose by 12%,
contrasted to a 15% increase in net revenues. Net income exceeded $200 million
for the first time in the Company's history, up 42% from the prior year. Driven
by a 36% increase in net interest earnings (see table below) combined with
solid
increases in investment advisory fees (14%) and securities commissions and
fees
(10%), a modest (6%) increase in investment banking revenues and an increase
in
financial service fees (35%), all of the Company’s four major segments had
higher revenues and pretax income than in the prior year.
Total
firm net revenues increased 15%, while pretax profits after consideration of
minority interest were up 38% over the prior year.
Year
ended September 30, 2005 Compared with the Year ended September 24, 2004 -
Total
Company
The
Company had record results for its fiscal year ended September 30, 2005, with
both total and net revenues surpassing $2 billion. Net income of over $150
million was up 18% from the prior year. Driven by robust increases in investment
banking revenues (41%) and net interest earnings (48% - see table below)
combined with solid increases in investment advisory fees (17%) and securities
commissions and fees (10%), all three of the Company’s largest segments had
significantly higher revenues than in the prior year. Capital Markets and Asset
Management had even more impressive increases in pretax profits (34% and 47%,
respectively). Private Client Group earnings were negatively impacted by legal
expenses and settlements.
Total
firm net revenues increased 14%, while pretax profits after consideration
of minority interest were up 21% over the prior year.
Net
Interest Analysis
|
Year
Ended
|
|
September
30, 2006
|
|
September
30, 2005
|
|
September
24, 2004
|
|
($
in 000's)
|
Interest
Revenue
|
|
|
|
|
|
Margin
balances:
|
|
|
|
|
|
Average
balance
|
$
1,327,121
|
|
$
1,218,486
|
|
$
1,006,007
|
Average
rate
|
7.4%
|
|
5.6%
|
|
4.0%
|
Interest
revenue - margin balances
|
98,417
|
|
68,125
|
|
39,750
|
|
|
|
|
|
|
Assets
segregated pursuant to federal regulations:
|
|
|
|
|
|
Average
balance
|
2,983,853
|
|
2,390,174
|
|
2,288,593
|
Average
rate
|
4.8%
|
|
2.8%
|
|
1.1%
|
Interest
revenue - segregated assets
|
141,741
|
|
65,847
|
|
24,832
|
|
|
|
|
|
|
Raymond
James Bank, FSB interest revenue:
|
|
|
|
|
|
Average
earning assets
|
1,980,547
|
|
1,063,973
|
|
882,123
|
Average
rate
|
5.8%
|
|
4.2%
|
|
3.1%
|
Interest
revenue - Raymond James Bank, FSB
|
114,065
|
|
45,017
|
|
27,318
|
|
|
|
|
|
|
Stock
borrowed interest revenue
|
59,947
|
|
31,876
|
|
16,372
|
|
|
|
|
|
|
Interest
revenue- variable interest entities
|
1,008
|
|
822
|
|
-
|
Other
interest revenue
|
54,803
|
|
33,875
|
|
26,492
|
|
|
|
|
|
|
Total
interest revenue
|
$
469,981
|
|
$
245,562
|
|
$
134,764
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
Client
interest program:
|
|
|
|
|
|
Average
balance
|
$
3,793,570
|
|
$
3,228,443
|
|
$
2,715,667
|
Average
rate
|
3.8%
|
|
1.8%
|
|
0.4%
|
Interest
expense - client interest program
|
143,428
|
|
58,486
|
|
11,659
|
|
|
|
|
|
|
Raymond
James Bank, FSB interest expense:
|
|
|
|
|
|
Average
interest bearing liabilities
|
1,801,747
|
|
971,013
|
|
811,268
|
Average
rate
|
4.1%
|
|
2.3%
|
|
1.2%
|
Interest
expense - Raymond James Bank, FSB
|
73,529
|
|
22,020
|
|
9,863
|
|
|
|
|
|
|
Stock
loaned interest expense
|
47,593
|
|
22,873
|
|
12,405
|
|
|
|
|
|
|
Interest
expense- variable interest entities
|
8,368
|
|
3,934
|
|
-
|
Other
interest expense
|
23,752
|
|
10,476
|
|
14,590
|
|
|
|
|
|
|
Total
interest expense
|
$
296,670
|
|
$
117,789
|
|
$
48,517
|
|
|
|
|
|
|
Net
interest income
|
$
173,311
|
|
$
127,773
|
|
$
86,247
|
Over
half
of the increase in pretax income was made up of the increase in net interest,
39% of which was generated by RJBank. This increase was a result of the
substantial increase in customer deposits and corresponding loan balances at
RJBank resulting from the Company’s inception of a new cash sweep option for
certain brokerage clients. The remainder of the increase in interest earnings
was primarily related to increased cash balances in customer accounts at the
broker-dealers, on which the Company earns a spread, and increased interest
earnings on corporate cash balances.
Results
of Operations - Private Client Group
The
following table presents consolidated financial information for the Private
Client Group segment for the years indicated:
|
Year
Ended
|
|
September
30,
|
|
%
Incr.
|
|
September
30,
|
|
%
Incr.
|
|
September
24,
|
|
2006
|
|
(Decr.)
|
|
2005
|
|
(Decr.)
|
|
2004
|
|
($
in 000's)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Securities
commissions and fees
|
$
1,262,751
|
|
12%
|
|
$
1,132,291
|
|
11%
|
|
$
1,016,001
|
Interest
|
248,709
|
|
77%
|
|
140,807
|
|
97%
|
|
71,484
|
Financial
service fees
|
93,421
|
|
40%
|
|
66,774
|
|
12%
|
|
59,606
|
Other
|
74,932
|
|
30%
|
|
57,706
|
|
4%
|
|
55,277
|
Total
revenue
|
1,679,813
|
|
20%
|
|
1,397,578
|
|
16%
|
|
1,202,368
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
139,593
|
|
130%
|
|
60,796
|
|
368%
|
|
12,996
|
Net
revenues
|
1,540,220
|
|
15%
|
|
1,336,782
|
|
12%
|
|
1,189,372
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expenses:
|
|
|
|
|
|
|
|
|
|
Sales
commissions
|
940,567
|
|
14%
|
|
825,889
|
|
12%
|
|
735,194
|
Admin
& incentive comp and benefit costs
|
233,684
|
|
13%
|
|
207,368
|
|
11%
|
|
187,469
|
Communications
and information processing
|
53,064
|
|
8%
|
|
49,183
|
|
25%
|
|
39,387
|
Occupancy
and equipment
|
51,101
|
|
11%
|
|
46,114
|
|
-
|
|
46,197
|
Business
development
|
50,555
|
|
21%
|
|
41,719
|
|
11%
|
|
37,602
|
Clearance
and other
|
42,836
|
|
(34%)
|
|
65,166
|
|
75%
|
|
37,158
|
Total
non-interest expenses
|
1,371,807
|
|
11%
|
|
1,235,439
|
|
14%
|
|
1,083,007
|
Income
before taxes and minority interest
|
168,413
|
|
65%
|
|
101,343
|
|
(5%)
|
|
106,365
|
Minority
interest
|
(106)
|
|
|
|
(902)
|
|
|
|
(757)
|
Pretax
earnings
|
$
168,519
|
|
65%
|
|
$
102,245
|
|
(5%)
|
|
$
107,122
|
Margin
on net revenue
|
10.9%
|
|
|
|
7.6%
|
|
|
|
9.0%
|
Year
ended September 30, 2006 Compared with the Year ended September 30, 2005 -
Private Client Group
The
Private Client Group's (“PCG”) results include a $130 million increase in
commission and fee revenues. While commission and fee revenues increased in
the
PCG segment of all three broker-dealers, the increases were far more significant
in RJA and RJ Ltd. where there has been an increase in the number of Financial
Advisors due to successful recruiting. RJA added a net 65 employee Financial
Advisors and increased the average production from $379,000 in fiscal 2005
to
$404,000 in fiscal 2006. In addition, average assets under management per RJA
Financial Advisor has increased to an all time high of $58 million from $50
million at September 2005. RJA has successfully focused on recruiting
high-producing Financial Advisors and continued to benefit from industry
consolidation. RJA commissions and fees increased 23%. RJ Ltd. added 20 employee
Financial Advisors and 13 independent contractor Financial Advisors. RJ Ltd.
commissions and fees increased 27%. The modest 5.7% increase in RJFS commissions
and fees is primarily attributable to a $65.7 million, or 15.6%, increase in
fee
based business and mutual fund trails.
PCG
net
interest earnings increased 36% over the prior fiscal year, a combined result
of
increased client margin balances (up 9%) and increased customer cash balances,
on which a spread is earned. Net interest represented 65% of the segment's
pretax earnings, down from 78% in fiscal 2005.
Financial
Service Fees in the PCG segment increased $26.6 million, or 40% over the prior
year. The increase included a one-time adjustment of approximately $10 million
related to a change from cash to accrual accounting for IRA fees. The increase
in other revenue of $17.2 million is predominantly made up of increased mutual
fund networking fees and the newly introduced educational and marketing support
fee from mutual fund companies.
Commission
expenses increased 2% more than commission revenue, the result of an increased
number of independent contractors (who receive higher payouts) in RJ Ltd, the
advances associated with recruiting at RJA and higher payout levels to more
productive Financial Advisors. Admin and incentive compensation increased due
to
the increase in the segment’s profits and an increased number of support staff
related to the growing number of Financial Advisors in RJA and increased
compliance staff in RJFS. Business development expenses increased as it includes
advertising costs and increased travel and other expenses related to recruiting.
Other expenses declined as prior years' expense included historically high
legal
costs and settlements related to the 2000 - 2002 market decline.
PCG
margins increased by more than 3% over the prior year, reaching 10.9%. The
prior
year was negatively impacted by the historically high legal costs and
settlements, and the expense of the early stages of independent contractor
business in the UK and at RJ Ltd.
Year
ended September 30, 2005 Compared with the Year ended September 24, 2004 -
Private Client Group
The
Private Client Group's results reflect an 11% increase in commission and fee
revenue. Due to the continued process of upgrading the Company’s Financial
Advisor population, which encompassed the termination of lower producers, the
net increase in the number of Financial Advisors was only 2%. The Company’s
branding campaign, which has increased the visibility of the firm name, and
the
promotion of the AdvisorChoice platform for Financial Advisors has helped to
increase Financial Advisor interest in the Company. In particular, the employee
firm (RJA) had strong recruiting results in the latter half of the year as
the
Company benefited from industry consolidation. Most of the increase in
commission and fee revenue is attributable to the increased average production
of Financial Advisors and was close to the Company's goal of a 10% increase
per
year. Further productivity gains may be expected, provided the market conditions
remain favorable, as newly recruited Financial Advisors complete the transition
of their accounts and existing Financial Advisors grow their
businesses.
While
average margin balances increased 21% for the fiscal year, interest revenues
within PCG increased 97% as a result of rising short-term interest rates, which
also led to higher than normal spreads. Accordingly, PCG net interest earnings
increased 37%, and represented nearly 78% of this segment's
earnings.
Commission
expense grew ratably with commission and fee revenue. Increased administrative
compensation costs include cost of living raises, a 6% increase in employee
headcount and increased incentive compensation and benefit plan accruals related
to increased corporate profitability. Communications and Information Processing
expense increased as the Company continues its efforts to provide state of
the
art technology to its Financial Advisors. Business Development expense includes
the marketing expenditures to promote the AdvisorChoice platform to prospective
Financial Advisors and the Company's branding efforts - including a new
television ad and increased air time. These efforts, combined with the stadium
naming rights for the Tampa Bay Buccaneers football stadium, have increased
the
Company’s name recognition nationwide. Business Development expense also
includes increased travel expenses related to recruiting efforts and increased
attendance at sales and education conferences. Other expense continues to be
dominated by legal expenses and settlements.
PCG
margins, which were 7.6% in fiscal 2005, were negatively impacted by the losses
in the early stage, independent contractor joint venture in the UK, relatively
low margins in the private client group in RJ Ltd. (as they grow their
independent contractor division) and historically high legal costs and
settlements, which has had an estimated 1.5% to 2% impact on PCG margins in
each
of the past two years.
Results
of Operations - Capital Markets
The
following table presents consolidated financial information for the Capital
Markets segment for the years indicated:
|
Year
Ended
|
|
September
30,
|
|
%
Incr.
|
|
September
30,
|
|
%
Incr.
|
|
September
24,
|
|
2006
|
|
(Decr.)
|
|
2005
|
|
(Decr.)
|
|
2004
|
|
($
in 000's)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Institutional
sales commissions:
|
|
|
|
|
|
|
|
|
|
Equity
|
$
217,840
|
|
13%
|
|
$
193,001
|
|
11%
|
|
$
174,464
|
Fixed
income
|
41,830
|
|
(37%)
|
|
66,431
|
|
(14%)
|
|
77,102
|
Underwriting
fees
|
84,303
|
|
8%
|
|
77,900
|
|
47%
|
|
53,142
|
Mergers
& acquisitions fees
|
44,693
|
|
5%
|
|
42,576
|
|
94%
|
|
21,928
|
Private
placement fees
|
2,334
|
|
(56%)
|
|
5,338
|
|
(46%)
|
|
9,958
|
Trading
profits
|
21,876
|
|
15%
|
|
19,089
|
|
(7%)
|
|
20,579
|
Raymond
James Tax Credit Funds
|
31,710
|
|
19%
|
|
26,630
|
|
30%
|
|
20,513
|
Interest
|
36,311
|
|
74%
|
|
20,847
|
|
45%
|
|
14,329
|
Other
|
6,522
|
|
95%
|
|
3,339
|
|
(62%)
|
|
8,772
|
Total
revenue
|
487,419
|
|
7%
|
|
455,151
|
|
14%
|
|
400,787
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
46,126
|
|
133%
|
|
19,838
|
|
72%
|
|
11,543
|
Net
Revenues
|
441,293
|
|
1%
|
|
435,313
|
|
12%
|
|
389,244
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expenses
|
|
|
|
|
|
|
|
|
|
Sales
commissions
|
96,649
|
|
(3%)
|
|
99,223
|
|
10%
|
|
90,184
|
Admin
& incentive comp and benefit costs
|
200,453
|
|
2%
|
|
197,170
|
|
11%
|
|
177,168
|
Communications
and information processing
|
27,084
|
|
13%
|
|
24,071
|
|
3%
|
|
23,447
|
Occupancy
and equipment
|
12,073
|
|
(4%)
|
|
12,563
|
|
3%
|
|
12,252
|
Business
development
|
22,177
|
|
17%
|
|
18,995
|
|
6%
|
|
17,957
|
Clearance
and other
|
19,907
|
|
38%
|
|
14,395
|
|
39%
|
|
10,345
|
Total
non-interest expense
|
378,343
|
|
3%
|
|
366,417
|
|
11%
|
|
331,353
|
Income
before taxes and minority interest
|
62,950
|
|
(9%)
|
|
68,896
|
|
19%
|
|
57,891
|
Minority
interest
|
(15,271)
|
|
|
|
(8,437)
|
|
|
|
(19)
|
Pretax
earnings
|
$
78,221
|
|
1%
|
|
$
77,333
|
|
34%
|
|
$
57,910
|
Year
ended September 30, 2006 Compared with the Year ended September 30, 2005 -
Capital Markets
The
Capital Markets segment’s revenues and pretax profits increased just slightly
from the prior year’s record results. Commission revenues in the segment were
flat, as the 37% decline in fixed income commissions were offset by the 13%
increase in institutional equity commissions, the latter continuing to be fueled
by an active new issue market. RJA equity market conditions remained strong,
allowing RJA to complete 97 managed or co-managed domestic underwritings, just
one short of the record 98 underwritings completed in fiscal 2005. RJ Ltd.
completed a record 29 managed or co-managed underwritings, up nine from fiscal
2005. Merger and acquisition fees increased modestly from the prior year's
record level, offsetting the decline in private placement fees. Equity Capital
Market's most active strategic business units in fiscal 2006 were Energy,
Technology, Financial Services and Real Estate.
The
$16
million increase in interest income, predominantly on RJA's fixed income
inventories, was offset by an equal increase in interest expense to finance
these inventories. Higher interest income and expenses were primarily the result
of higher interest rates.
RJTCF's
revenues were up 19%, to $31.7 million, as RJTCF invested over $276.8 million
for institutional investors in 78 real estate transactions compared to $250
million in 93 deals in fiscal 2005.
Non-interest
expense increased 3% over the prior year, with the most significant increase
in
other expense. This increase was due to increases within the RJTCF variable
interest entities, of which 99% is eliminated through minority
interest.
Year
ended September 30, 2005 Compared with the Year ended September 30, 2004 -
Capital Markets
Institutional
commissions were relatively flat, with equity commissions up 11% and fixed
income commissions down 14%, as trends established in the prior year continued.
Although the number of managed/co-managed corporate underwritings was nearly
flat, underwriting fees were up 47% as a result of an increased average deal
size and a greater number of lead managed deals. Merger and acquisition fees
nearly doubled from fiscal 2004. Equity Capital Markets has nine strategic
business units; Real Estate, Energy and Healthcare were the strongest performers
during fiscal 2005. These record investment banking results contribute
significantly to the firm's profits, as incremental revenues produce a high
margin.
RJTCF
revenues were up 30% and contributed $5 million to the segment's pretax profits.
RJTCF syndicates funds that invest in real estate partnerships that qualify
for
federal and state low income housing tax credits. During fiscal 2005, RJTCF
invested over $250 million for institutional investors in 93 real estate
transactions compared to $206 million in 80 deals in fiscal 2004.
Interest
expense, the expense associated with
carrying
the fixed income trading inventory, was up due to increased interest rates.
Non-interest expense was up 11% - with 83% of that increase related to
compensation. The remaining expenses were relatively flat.
Results
of Operations - Asset Management
The
following table presents consolidated financial information for the Asset
Management segment for the years indicated:
|
Year
Ended
|
|
September
30,
|
|
%
Incr.
|
|
September
30,
|
|
%
Incr.
|
|
September
24,
|
|
2006
|
|
(Decr.)
|
|
2005
|
|
(Decr.)
|
|
2004
|
|
($
in 000's)
|
Revenues
|
|
|
|
|
|
|
|
|
|
Investment
advisory fees
|
$
170,680
|
|
13%
|
|
$
151,001
|
|
17%
|
|
$
128,696
|
Other
|
29,444
|
|
41%
|
|
20,915
|
|
7%
|
|
19,464
|
Total
revenue
|
200,124
|
|
16%
|
|
171,916
|
|
16%
|
|
148,160
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Admin
& incentive comp and benefit costs
|
69,648
|
|
15%
|
|
60,318
|
|
10%
|
|
54,776
|
Communications
and information processing
|
16,598
|
|
12%
|
|
14,803
|
|
4%
|
|
14,284
|
Occupancy
and equipment
|
4,319
|
|
4%
|
|
4,170
|
|
19%
|
|
3,502
|
Business
development
|
8,530
|
|
16%
|
|
7,331
|
|
33%
|
|
5,493
|
Other
|
50,629
|
|
16%
|
|
43,730
|
|
5%
|
|
41,575
|
Total
expenses
|
149,724
|
|
15%
|
|
130,352
|
|
9%
|
|
119,630
|
Income
before taxes and minority interest
|
50,400
|
|
21%
|
|
41,564
|
|
46%
|
|
28,530
|
Minority
interest
|
2,305
|
|
|
|
723
|
|
|
|
655
|
Pretax
earnings
|
$
48,095
|
|
18%
|
|
$
40,841
|
|
47%
|
|
$
27,875
|
The
following table presents assets under management at the dates
indicated:
|
Sept.
30,
|
|
%
Incr.
|
|
Sept.
30,
|
|
%
Incr.
|
|
Sept.
24,
|
|
2006
|
|
(Decr.)
|
|
2005
|
|
(Decr.)
|
|
2004
|
Assets
Under Management:
|
($
in 000's)
|
|
|
|
|
|
|
|
|
|
|
Eagle
Asset Mgmt., Inc.
|
|
|
|
|
|
|
|
|
|
Retail
|
$
5,600,806
|
|
19%
|
|
$
4,719,275
|
|
25%
|
|
$
3,761,898
|
Institutional
|
6,862,611
|
|
1%
|
|
6,823,906
|
|
34%
|
|
5,080,713
|
Total
Eagle
|
12,463,417
|
|
8%
|
|
11,543,181
|
|
31%
|
|
8,842,611
|
|
|
|
|
|
|
|
|
|
|
Heritage
Family of Mutual Funds
|
|
|
|
|
|
|
|
|
|
Money
Market
|
6,306,508
|
|
4%
|
|
6,058,612
|
|
0%
|
|
6,071,532
|
Other
|
3,004,816
|
|
19%
|
|
2,534,975
|
|
28%
|
|
1,983,580
|
Total
Heritage
|
9,311,324
|
|
8%
|
|
8,593,587
|
|
7%
|
|
8,055,112
|
|
|
|
|
|
|
|
|
|
|
Raymond
James Consulting Services
|
7,915,168
|
|
20%
|
|
6,573,448
|
|
37%
|
|
4,810,935
|
Awad
Asset Management
|
996,353
|
|
(18%)
|
|
1,222,199
|
|
(9%)
|
|
1,349,040
|
Freedom
Accounts
|
5,122,733
|
|
105%
|
|
2,496,772
|
|
153%
|
|
988,010
|
|
|
|
|
|
|
|
|
|
|
Total
Assets Under Management
|
35,808,995
|
|
18%
|
|
30,429,187
|
|
27%
|
|
24,045,708
|
Less:
Assets Managed for Affiliated Entities
|
(3,991,281)
|
|
36%
|
|
(2,936,804)
|
|
70%
|
|
(1,728,788)
|
|
|
|
|
|
|
|
|
|
|
Third
Party Assets Under Management
|
$31,817,714
|
|
16%
|
|
$27,492,383
|
|
23%
|
|
$22,316,920
|
Year
ended September 30, 2006 Compared with the Year ended September 30, 2005 -
Asset
Management
Investment
Advisory fees increased over $19 million, or 13%, on a nearly 16% increase
in
assets under management. Increases in assets under management were positively
impacted by the recruiting of RJA Financial Advisors. New Financial Advisors
brought significant assets into the Company's asset management programs,
particularly Eagle and Raymond James Consulting Services ("RJCS"). New managed
assets brought in by RJA Financial Advisors totaled $3.9 billion for fiscal
2006, a 70% increase over $2.3 billion added in fiscal 2005. Eagle's total
retail assets increased 19% over the prior year. Of Eagle's retail asset total,
35% were introduced by Financial Advisors outside the Raymond James system.
Account cancellations exceeded sales in Eagle's institutional accounts due
to
the loss of a few significant accounts and the closing of the Institutional
Growth division in September. RJCS offers 40 independent investment advisors
to
the Company's clients. Assets managed within the program increased 20% over
the
prior year. The Company's managed mutual fund product (Freedom) continued to
experience significant growth (105%) as this concept continues to be embraced
by
clients and Financial Advisors. Heritage Asset Management's non-money market
funds increased 19% with 65% of the sales through broker-dealers outside of
the
Raymond James family. Heritage money market accounts increased 4% despite the
movement of just under $1 billion to the RJBank sweep option during the
year.
Expenses
in this segment increased $19 million (15%) with $9 million of that increase
in
compensation. The Compensation increase included increased salary expense,
costs
associated with closing Eagle's institutional growth division, and increased
incentive compensation related to the 18% increase in pretax profits. The other
notable increase in expense was a $7 million (16%) increase in other expense
consisting predominantly of the fees paid to outside money managers in
RJCS.
Year
ended September 30, 2005 Compared with the Year ended September 24, 2004 -
Asset
Management
Investment
advisory fees increased roughly 17%. Due to the billing schedules this increase
does not correlate directly to the increase in average assets under management.
Approximately one-half of the Company’s assets under management are billed based
on beginning-of-quarter balances and slightly less than one-third are billed
based on average daily balances. The remaining assets under management are
predominantly billed based on end-of-quarter balances. The overall growth of
managed equity programs was the aggregate result of strong net sales and market
appreciation. Eagle Asset Management has several portfolio managers with strong
performance records and the firm has been successful in winning a growing number
of institutional accounts. Accordingly, assets managed for institutional
accounts increased 34% over the prior year. Several of the same portfolio
managers also manage portfolios for the Heritage Asset Management family of
mutual funds. Assets in these funds, excluding the money market funds,
increased
28% over
the prior year.
In
addition to Eagle portfolio managers, the asset management division of RJA
offers 30 independent investment advisors to the Company's clients through
its
RJCS program. Assets managed within this program have increased 37% over the
prior year. The Company has also seen significant growth (153%) in its managed
mutual fund product (Freedom) as this concept is extremely popular with
Financial Advisors and clients.
Expense
growth in this segment was a modest 9%, primarily reflecting increased personnel
costs related to profit-based incentive compensation and increased business
development expenses related to increased travel and proposal costs. Other
expense is predominantly fees paid to outside money managers. With the capacity
to increase assets under management significantly in certain disciplines without
significant additional costs, there is a higher degree of leverage in this
segment and management has a positive outlook on its prospects, provided market
conditions do not deteriorate and performance results remain strong.
Results
of Operations - RJBank
The
following table presents consolidated financial information for RJBank for
the
years indicated:
|
For
the Years Ended
|
|
September
30,
|
|
%
Incr.
|
|
September
30,
|
|
%
Incr.
|
|
September
24,
|
|
2006
|
|
(Decr.)
|
|
2005
|
|
(Decr.)
|
|
2004
|
|
($
in 000's)
|
Interest
income and expense
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
114,065
|
|
153%
|
|
$
45,017
|
|
65%
|
|
$
27,318
|
Interest
expense
|
73,529
|
|
234%
|
|
22,020
|
|
123%
|
|
9,863
|
Net
interest income
|
40,536
|
|
76%
|
|
22,997
|
|
32%
|
|
17,455
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
627
|
|
45%
|
|
431
|
|
(45%)
|
|
786
|
Net
revenues
|
41,163
|
|
76%
|
|
23,428
|
|
28%
|
|
18,241
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense
|
|
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
6,135
|
|
14%
|
|
5,388
|
|
15%
|
|
4,686
|
Communications
and information processing
|
907
|
|
14%
|
|
799
|
|
5%
|
|
758
|
Occupancy
and equipment
|
629
|
|
32%
|
|
478
|
|
38%
|
|
347
|
Provision
for loan loss
|
13,760
|
|
891%
|
|
1,388
|
|
(20%)
|
|
1,732
|
Other
|
3,729
|
|
218%
|
|
1,171
|
|
(38%)
|
|
1,894
|
Total
non-interest expense
|
25,160
|
|
173%
|
|
9,224
|
|
(2%)
|
|
9,417
|
Pretax
earnings
|
$
16,003
|
|
13%
|
|
$
14,204
|
|
61%
|
|
$
8,824
|
Year
ended September 30, 2006 Compared with the Year ended September 30, 2005 -
RJBank
Assets
at
RJBank grew a substantial $ 1.8 billion during the year. The increase was driven
by a $1.7 billion increase in deposits, $1.3 billion of which were redirected
from the Company’s Heritage Cash Trust or customer brokerage accounts,
representing the introduction of a new sweep program for certain brokerage
accounts. This alternative offers clients a money market equivalent interest
rate and FDIC insurance. The Company intends to expand this offering over the
next several years, transferring an additional $2 to $4 billion. During the
year, RJBank deployed $1.3 billion of the increased deposits into loans.
Purchased residential loan pools increased $700 million and corporate loans
increased $600 million. This growth, combined with increased rates, generated
an
increase in net interest income of nearly $18 million. Pretax income increased
only $1.8 million, due to the $13.8 million provision for loan loss associated
with the increase in loans outstanding. During periods of growth when new loans
are originated or purchased, an allowance for loan losses is established for
potential losses inherent in those new loans. Accordingly, a robust period
of
growth generally results in charges to earnings in that period, while the
benefits of higher interest earnings are realized in later periods.
Year
ended September 30, 2005 Compared with the Year ended September 24, 2004 -
RJBank
Interest
revenue and expense increased due to the combination of balance sheet growth
and
rising interest rates during the year. As a result, net interest income
increased 32% to $23 million for fiscal 2005 vs. $17.5 million in fiscal 2004.
The increase in loans receivable was predominantly in purchased residential
mortgage loan pools, and therefore did not require significant increases in
costs, with total non-interest expense actually declining 2%. This decrease
is
primarily the net impact of a decline in the provision for loan losses. The
provision for loan losses is associated with the net increase in loans
outstanding and the mix of such loans.
RJBank
has become, and is expected to grow into, a more significant segment within
the
Company during the next several years. RJF contributed an additional $80 million
in equity capital to RJBank in fiscal 2005 allowing RJBank to begin to grow
its
asset base in preparation for offering an improved deposit alternative for
certain brokerage accounts. The Company currently offers customers the option
of
sweeping their cash awaiting investment to the Heritage Cash Trust (the money
market fund managed by Heritage Asset Management) or leaving the cash in the
broker-dealer - in the Client Interest Program. The clients will receive an
equivalent money market interest rate in the bank account and their accounts
will have FDIC insurance.
Results
of Operations - Emerging Markets
|
For
the Years Ended
|
|
September
30,
|
|
%
Incr.
|
|
September
30,
|
|
%
Incr.
|
|
September
24,
|
|
2006
|
|
(Decr.)
|
|
2005
|
|
(Decr.)
|
|
2004
|
|
($
in 000's)
|
Revenues
|
|
|
|
|
|
|
|
|
|
Securities
commissions and fees
|
$
38,370
|
|
31%
|
|
$
29,309
|
|
39%
|
|
$
21,146
|
Investment
advisory fees
|
1,919
|
|
(34%)
|
|
2,890
|
|
45%
|
|
1,991
|
Interest
income
|
3,647
|
|
90%
|
|
1,919
|
|
83%
|
|
1,048
|
Trading
profits
|
3,720
|
|
18%
|
|
3,141
|
|
105%
|
|
1,530
|
Other
|
7,607
|
|
404%
|
|
1,509
|
|
(23%)
|
|
1,960
|
Total
revenues
|
55,263
|
|
43%
|
|
38,768
|
|
40%
|
|
27,675
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
1,467
|
|
195%
|
|
497
|
|
26%
|
|
396
|
Net
revenues
|
53,796
|
|
41%
|
|
38,271
|
|
40%
|
|
27,279
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense
|
|
|
|
|
|
|
|
|
|
Compensation
expense
|
29,185
|
|
48%
|
|
19,758
|
|
25%
|
|
15,798
|
Other
expense
|
19,867
|
|
93%
|
|
10,294
|
|
96%
|
|
5,248
|
Total
non-interest expense
|
49,052
|
|
63%
|
|
30,052
|
|
43%
|
|
21,046
|
Minority
interest
|
1,887
|
|
|
|
2,292
|
|
|
|
1,929
|
Pretax
earnings
|
$
2,857
|
|
(52%)
|
|
$
5,927
|
|
38%
|
|
$
4,304
|
Year
ended September 30, 2006 Compared with the Year ended September 30, 2005 -
Emerging Markets
This
segment consists of the results of the Company’s joint ventures in India,
Argentina, Uruguay and Turkey. Securities commissions increased $9 million
or
31% over the prior year. The vast majority of this increase was in the Company’s
joint venture in Turkey.
Other
income includes investment banking revenues of $2.7 million, primarily from
a
single large Latin American underwriting fee. Investment Advisory fees declined
as the Company generated $1 million less in asset management fees in India.
The
Company is negotiating the sale of its interest to its joint venture partners
in
India.
The
$20
million increase in expense is made up predominantly of a $10 million increase
in compensation related to increased revenues and increased other expense
related to the accrual of an estimated tax liability in Turkey.
Year
ended September 30, 2005 Compared with the Year ended September 24, 2004 -
Emerging Markets
This
segment consists of the results of the Company’s joint ventures in India,
Argentina, Turkey and Uruguay. Commission revenues increased by $6.5 million
in
Turkey, while the related compensation expense increased $3.7
million.
Results
of Operations - Stock Loan/Borrow
|
For
the Years Ended
|
|
September
30,
|
|
%
Incr.
|
|
September
30,
|
|
%
Incr.
|
|
September
24,
|
|
2006
|
|
(Decr.)
|
|
2005
|
|
(Decr.)
|
|
2004
|
|
($
in 000's)
|
Interest
income and expense
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
59,947
|
|
88%
|
|
$
31,876
|
|
95%
|
|
$
16,372
|
Interest
expense
|
47,593
|
|
108%
|
|
22,873
|
|
84%
|
|
12,405
|
Net
interest income
|
12,354
|
|
37%
|
|
9,003
|
|
127%
|
|
3,967
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
4,353
|
|
43%
|
|
3,041
|
|
66%
|
|
1,832
|
Pretax
earnings
|
$
8,001
|
|
34%
|
|
$
5,962
|
|
179%
|
|
$
2,135
|
Year
ended September 30, 2006 Compared with the Year ended September 30, 2005 -
Stock
Loan/Borrow
The
Company’s stock borrow balances averaged $1,018,460 during fiscal year 2006 vs.
$1,129,560 in fiscal 2005. As the Company’s stock loan business is predominantly
a matched book business, stock loan balances were similar. Average spreads
increased from 0.9% in fiscal 2005 to 2.0% in 2006 largely due to rising
interest rates, resulting in a 37% increase in net interest income and a 34%
increase in pre- tax profits.
Year
ended September 30, 2005 Compared with the Year ended September 24, 2004 -
Stock
Loan/Borrow
The
Company’s stock borrow balances averaged $1,129,560 during fiscal year 2005 vs.
$1,291,636 in fiscal 2004. As the Company’s stock loan business is predominantly
a matched book business, stock loan balances were similar. Average spreads
increased from .4% in fiscal 2004 to .9% in 2005 largely due to rising interest
rates, resulting in a 127% increase in net interest income. The business is
well
leveraged, resulting in a 179% increase in pre- tax profits.
Results
of Operations - Other
The
following table presents consolidated financial information for the Other
segment for the years indicated:
|
For
the Years Ended
|
|
September
30,
|
|
%
Incr.
|
|
September
30,
|
|
%
Incr.
|
|
September
24,
|
|
2006
|
|
(Decr.)
|
|
2005
|
|
(Decr.)
|
|
2004
|
|
($
in 000's)
|
Revenues
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
4,266
|
|
(8%)
|
|
$
4,638
|
|
13%
|
|
$
4,088
|
Other
|
31,233
|
|
169%
|
|
11,622
|
|
423%
|
|
2,222
|
Total
revenues
|
35,499
|
|
118%
|
|
16,260
|
|
158%
|
|
6,310
|
|
|
|
|
|
|
|
|
|
|
Other
expense
|
15,129
|
|
2%
|
|
14,801
|
|
43%
|
|
10,359
|
Pretax
earnings (loss)
|
$
20,370
|
|
1,296%
|
|
$
1,459
|
|
136%
|
|
$
(4,049)
|
Year
ended September 30, 2006 Compared with the Year ended September 30, 2005 -
Other
Revenue
in the Other segment includes the $16.1 million pretax gain from the sale of
the
Company's NYSE and Montreal Exchange seats, the $9.3 million in gains recognized
from the Company's interests in various private equity partnerships and
approximately $3 million from other corporate investments.
Year
ended September 30, 2005 Compared with the Year ended September 24, 2004 -
Other
The
interest revenue in this segment represents the earnings on the portion of
the
Company’s capital that is invested in interest-bearing instruments. The segment
also includes the investment results from the private equity investments made
at
the corporate level, including 30 partnerships managed independently of Raymond
James and two managed by Raymond James subsidiaries. Expenses are predominately
executive incentive compensation expense, which increased due to improved
corporate earnings.
Statement
of Financial Condition Analysis
The
Company’s statement of financial condition consists primarily of cash and cash
equivalents (a large portion of which are segregated for the benefit of
customers), receivables and payables. The statement of financial condition
is
primarily liquid in nature, providing the Company with flexibility in financing
its business. Total assets of $11.5 billion at September 30, 2006 were up
approximately 38% over September 30, 2005. Most of this increase is due to
the
significant increases in brokerage client cash deposits, leading to a similar
increase in segregated cash balances on the asset side, and growth of RJBank,
with the increased loan balances being largely funded by deposits. RJBank
loan balances increased significantly as the Company continued to introduce
an
additional cash sweep offering to brokerage customers. The Company initiated
the
first phase of this option in July 2006 and plans to continue to expand the
offering for the next few years, which will result in continued growth in RJBank
balances. The other significant increase in assets was in securities purchased
under agreements to resell. The
broker-dealer gross assets and liabilities, including trading inventory, stock
loan/stock borrow, receivables and payables from/to brokers, dealers and
clearing organizations and clients fluctuate with the Company's business levels
and overall market conditions.
Liquidity
and Capital Resources
Cash
used
in operating activities during fiscal 2006 was approximately $38.9 million,
primarily attributable to the increase in segregated assets (directly correlated
to the increase in brokerage client deposits), an increase in securities
inventory levels, an increase in receivables from broker-dealers and clearing
organizations, an increase in receivables from clients, and a decrease in
payables due broker-dealers and clearing organizations. This was offset by
an
increase in payables due clients, an increase in payables associated with the
Company’s stock loan/borrowed business, and an increase in securities sold under
agreements to repurchase.
Investing
activities used $2.0 billion in cash, which is primarily due to loans originated
and purchased by RJBank, the purchases of available for sales securities, and
purchases by RJBank of securities under agreements to resell. This was offset
by
RJBank’s loan repayments and the maturation of available for sale
securities.
Financing
activities provided $1.8 billion, the result of an increase in deposits at
RJBank and cash provided from the exercise of stock options and employee stock
purchases. This was partially offset by the repayments of borrowings, purchases
of treasury stock and the payment of cash dividends.
At
September 30, 2006 and September 30, 2005 the Company had loans payable of
approximately $141.6 million and $146 million, respectively. The balance at
September 30, 2006 is comprised primarily of a $67.5 million loan for its
home-office complex, a $1.1 million mortgage loan for the office of a foreign
joint venture, $60 million in Federal Home Loan Bank advances (RJBank), and
various short-term borrowings totaling approximately $13 million.
In
addition, the Company and its subsidiaries have the following lines of credit:
RJF has a committed $200 million line of credit, RJA has uncommitted bank lines
of credit aggregating $485.1 million with commercial banks, Raymond James Credit
Corporation has a line of credit for $25 million, and RJ Ltd. has a CDN$40
million uncommitted line of credit. At September 30, 2006, the Company had
approximately $13 million in outstanding loans under these lines of credit.
Additionally, RJBank had $781 million in credit available from the FHLB
at
September 30, 2006. The Company’s committed $200 million line of credit is
subject to a 0.125% per annum facility fee.
As
of
September 30, 2006, the Company's liabilities are comprised primarily of client
payables of $4.6 billion at the broker-dealer subsidiaries and deposits of
$2.8
billion at RJBank, as well as deposits held on stock loaned transactions of
$1.2
billion. The Company primarily acts as an intermediary in stock borrowed/loan
transactions. As a result, the liability associated with the stock loan
transactions is related to the $1.1 billion receivable comprised of the
Company's cash deposits for stock borrowed transactions. To meet its obligations
to clients, the Company has approximately $3.8 billion in cash and assets
segregated pursuant to federal regulations. The Company also has client
brokerage receivables of $1.5 billion.
The
Company will continue its implementation of a new cash sweep option to its
clients through RJBank. This new cash sweep option will require substantial
capital to be contributed to RJBank to meet regulatory requirements, and
therefore may require the Company to infuse an estimated $200 to $300 million
over the next several years for this purpose.
The
Company has committed a total of $42.6 million, in amounts ranging from $200,000
to $2.0 million, to 40 different independent venture capital or private equity
partnerships. As of September 30, 2006, the Company had invested $29.4 million
of that amount and has received $24.8 million in distributions. Additionally,
the Company is the general partner in two internally sponsored private equity
limited partnerships to which it has committed $14 million. Of that amount,
the
Company had invested $11.7 million and has received $5.5 million in
distributions as of September 30, 2006.
Management
has been authorized by the Board of Directors to repurchase its common stock
at
their discretion for general corporate purposes. There is no formal stock
repurchase plan at this time. In May 2004 the Board authorized the repurchase
of
up to $75 million of shares. As of September 30, 2006 the unused portion of
this
authorization was $67.6 million.
The
Company has committed to lend to or guarantee obligations of its wholly owned
subsidiary, RJ Tax Credit Funds, Inc. (“RJTCF”), of up to $90 million upon
request, subject to certain limitations as well as annual review and renewal.
RJTCF borrows in order to invest in partnerships which purchase and develop
properties qualifying for tax credits. These
investments in project partnerships are then sold to various tax credit funds,
which have third party investors, and for which RJTCF serves as the managing
member or general partner. RJTCF typically sells these investments within 90
days of their acquisition, and the proceeds from the sales are used to repay
RJTCF’s borrowings. Additionally, RJTCF may make short-term loans or advances to
project partnerships on behalf of the tax credit funds in which it serves as
managing member or general partner. At September 30, 2006, cash funded to invest
in either loans to or investments in project partnerships was $28.6 million.
In
addition, at September 30, 2006, RJTCF is committed to additional future
fundings of $7.6 million related to project partnerships that have not yet
been
sold to various tax credit funds.
The
Company believes its existing assets, which are highly liquid in nature,
together with funds generated from operations should provide adequate funds
for
continuing operations.
The
Company is the lessor in two leveraged commercial aircraft transactions with
two
major domestic airlines (Delta and Continental). The Company's ability to
realize its expected return is dependent upon the airlines' ability to fulfill
their lease obligations. In the event that the airlines default on their lease
commitments and the Trustee for the debt holders is unable to re-lease or sell
the planes with adequate terms, the Company would suffer a loss of some or
all
of its investment. Delta Airlines filed for bankruptcy protection on September
14, 2005. Accordingly, the Company recorded a $6.5 million pretax charge in
2005
to fully reserve the balance of its investment in the leveraged lease of an
aircraft to Delta. The Company also had taken a $4 million pretax charge in
2004
to partially reserve for this investment. No amount of these charges represents
a cash expenditure; however, in the likely event of a material modification
to
the lease or foreclosure of the aircraft by the debt holders in fiscal 2007,
certain tax payments of up to approximately $8.1 million could be accelerated.
The expected tax payments are currently reflected on the statement of financial
condition as a deferred tax liability and are not expected to result in a
further charge to earnings. The Company also has a leveraged lease outstanding
with Continental valued at $10.9 million as of Sept. 30, 2006. Although
Continental remains current on its lease payments to the Company, the inability
of Continental to make its lease payments, or the termination or modification
of
the lease through a bankruptcy proceeding, could result in the write-down of
the
Company's investment and the acceleration of certain income tax payments. The
Company is monitoring this lessee for specific events or circumstances that
would increase the likelihood of a default on Continental’s obligations under
this lease given the difficult economic environment for the airline industry.
The
Company’s Turkish affiliate was assessed for the year 2001 approximately US$6.8
million by the Turkish tax authorities. This affiliate is vigorously contesting
most aspects of this assessment and has filed an appeal with the Turkish tax
court. Audits of 2002 through 2004 are anticipated and their outcome is unknown
in light of the change in methodology from the prior year’s audit and the
pending litigation. As of September 30, 2006, this affiliate had total capital
of approximately US$6.4 million, of which the Company owns approximately
73%.
The
Company's broker-dealer subsidiaries are subject to requirements of the SEC
and
the IDA relating to liquidity and capital standards. The domestic 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. RJA,
a
member firm of the NYSE, is also subject to the rules of the NYSE, whose
requirements are substantially the same. Rule 15c3-1 requires that aggregate
indebtedness, as defined, not to exceed 15 times net capital, as defined. Rule
15c3-1 also provides for an “alternative net capital requirement”, which RJA,
RJFS, and HFD have elected. It requires that minimum net capital, as defined,
be
equal to the greater of $250,000 or two percent of Aggregate Debit Items arising
from client transactions. The NYSE may require a member firm 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.
RJA, RJFS, and HFD had excess net capital as of September 30, 2006.
RJ
Ltd.
is subject to the Minimum Capital Rule (By-Law No. 17 of the IDA) and the Early
Warning System (By-Law No. 30 of the IDA). The Minimum Capital Rule requires
that every member shall have and maintain at all times Risk Adjusted Capital
greater than zero calculated in accordance with Form 1 (Joint Regulatory
Financial Questionnaire and Report) and with such requirements as the Board
of
Directors of the IDA may from time to time prescribe. Insufficient Risk Adjusted
Capital may result in suspension from membership in the stock exchanges or
the
IDA. The Early Warning System is designed to provide advance warning that a
member firm is encountering financial difficulties. This system imposes certain
sanctions on members who are designated in Early Warning Level 1 or Level 2
according to its capital, profitability, liquidity position, frequency of
designation or at the discretion of the IDA. Restrictions on business activities
and capital transactions, early filing requirements, and mandated corrective
measures are sanctions that may be imposed as part of the Early Warning System.
RJ Ltd. was not in Early Warning Level 1 or Level 2 during fiscal 2006 or 2005.
RJBank
is
subject to various regulatory and capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions
by
regulators. Under capital adequacy guidelines and the regulatory framework
for
prompt corrective action, RJBank must meet specific capital guidelines that
involve quantitative measures of RJBank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
RJBank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. Quantitative measures established by regulation to ensure capital
adequacy require RJBank to maintain minimum amounts and ratios of Total and
Tier
I Capital (as defined in the regulations) to risk-weighted assets (as defined).
Management believes, as of September 30, 2006, that the Bank meets all capital
adequacy requirements to which it is subject.
Critical
Accounting Policies
The
Company’s financial statements and accompanying notes are prepared in accordance
with accounting principles generally accepted in the U.S. The following is
a
summary of the Company’s critical accounting policies. For a full description of
these and other accounting policies, see Note 1 of the Notes to the Consolidated
Financial Statements. The Company believes that of its significant accounting
policies, those described below involve a high degree of judgment and
complexity. These critical accounting policies require estimates and assumptions
that affect the amounts of assets, liabilities, revenues and expenses reported
in the consolidated financial statements. Due to their nature, estimates involve
judgments based upon available information. Actual results or amounts could
differ from estimates and the difference could have a material impact on the
consolidated financial statements. Therefore, understanding these policies
is
important in understanding the reported results of operations and the financial
position of the Company.
Valuation
of Securities and Other Assets
“Trading
securities” and “Available for sale securities” are reflected in the
Consolidated Statement of Financial Condition at fair value or amounts that
approximate fair value. In accordance with SFAS 115, “Accounting for Certain
Investments in Debt and Equity Securities”, unrealized gains and losses related
to these financial instruments are reflected in net earnings
or other
comprehensive income, depending on the underlying purpose of the instrument.
The
following table presents the Company’s trading and available for sale securities
segregated into cash (i.e., non-derivative) trading instruments, derivative
contracts, and available for sale securities:
|
September
30,
2006
|
|
Financial
Instruments
Owned
at
Fair Value
|
|
Financial
Instruments
Sold
but
not yet Purchased
at
Fair Value
|
|
(in
000’s)
|
|
|
|
|
Cash
trading instruments
|
$
464,867
|
|
$
85,700
|
Derivative
contracts
|
20,904
|
|
8,309
|
Available
for sale securities
|
280,580
|
|
-
|
Total
|
$
766,351
|
|
$
94,009
|
Cash
Trading Instruments, Available for Sale Securities and Derivative
Contracts
When
available, the Company uses prices from independent sources such as listed
market prices, or broker or dealer price quotations to derive the fair value
of
the instruments. For investments in illiquid, privately held or other securities
that do not have readily determinable fair values, the Company uses estimated
fair values as determined by management. Fair
market value of OTC derivative contracts is estimated by using pricing models,
based on the contractual terms and conditions, current market levels of interest
rates and volatilities, and other factors. The
following table presents the carrying value of cash trading instruments,
available for sale securities, and derivative contracts for which fair value
is
measured based on quoted prices or other independent sources versus those for
which fair value is determined by management:
|
September
30,
2006
|
|
Financial
Instruments
Owned at Fair Value
|
|
Financial
Instruments
Sold
but
not yet Purchased at Fair Value
|
|
(in
000’s)
|
Fair
value based on quoted prices and independent sources
|
$
745,314
|
|
$
85,700
|
Fair
value determined by Management
|
21,037
|
|
8,309
|
Total
|
$
766,351
|
|
$
94,009
|
Investment
in Leveraged Leases
The
Company is the lessor in two leveraged commercial aircraft transactions with
two
major domestic airlines (Delta and Continental). The Company's ability to
realize its expected return is dependent upon the airlines' ability to fulfill
their lease obligations. In the event that the airlines default on their lease
commitments and the Trustee for the debt holders is unable to re-lease or sell
the planes with adequate terms, the Company would suffer a loss of some or
all
of its investment. Delta Airlines filed for bankruptcy protection on September
14, 2005. Accordingly, the Company recorded a $6.5 million pretax charge in
2005
to fully reserve the balance of its investment in the leveraged lease of an
aircraft to Delta. The Company also had taken a $4 million pretax charge in
2004
to partially reserve for this investment. No amount of these charges represents
a cash expenditure; however, in the likely event of a material modification
to
the lease or foreclosure of the aircraft by the debt holders in fiscal 2007,
certain tax payments of up to approximately $8.1 million could be accelerated.
The expected tax payments are currently reflected on the statement of financial
condition as a deferred tax liability and are not expected to result in a
further charge to earnings.
The
Company also has a leveraged lease outstanding with Continental valued at $10.9
million as of Sept. 30, 2006. The Company's equity investment represented 20%
of
the aggregate purchase price; the remaining 80% was funded by public debt issued
in the form of equipment trust certificates. The residual value of the aircraft
at the end of the lease term of approximately 17 years is projected to be 15%
of
the original cost. This lease expires in May 2014.
Although
Continental remains current on its lease payments to the Company, the inability
of Continental to make its lease payments, or the termination or modification
of
the lease through a bankruptcy proceeding, could result in the write-down of
the
Company's investment and the acceleration of certain income tax payments. The
Company is monitoring this lessee for specific events or circumstances that
would increase the likelihood of a default on Continental’s obligations under
this lease given the difficult economic environment for the airline industry.
Goodwill
Goodwill
is related to the acquisitions of Roney & Co. (now part of RJA) and Goepel
McDermid, Inc. (now called Raymond James Ltd.). This goodwill, totaling $63
million, was allocated to the reporting units within the Private Client
Group
and
Capital Markets segments pursuant to SFAS No. 142, “Goodwill and Other
Intangible Assets”. Goodwill represents the excess cost of a business
acquisition over the fair value of the net assets acquired. In accordance with
SFAS No. 142, indefinite-life intangible assets and goodwill are not amortized.
Rather they are subject to impairment testing on an annual basis, or more often
if events or circumstances indicate there may be impairment. This test involves
assigning tangible assets and liabilities, identified intangible assets and
goodwill to reporting units and comparing the fair value of each reporting
unit
to its carrying amount. If the fair value is less than the carrying amount,
a
further test is required to measure the amount of the impairment.
When
available, the Company uses recent, comparable transactions to estimate the
fair
value of the respective reporting units. The Company calculates an estimated
fair value based on multiples of revenues, earnings, and book value of
comparable transactions. However, when such comparable transactions are not
available or have become outdated, the Company uses discounted cash flow
scenarios to estimate the fair value of the reporting units. As of September
30,
2006, goodwill had been allocated to the Private Client Group of RJA, and both
the Private Client Group and Capital Markets segments of RJ Ltd. As of the
most
recent impairment test, the Company determined that the carrying value of the
goodwill for each reporting unit had not been impaired. However, changes in
current circumstances or business conditions could result in an impairment
of
goodwill. As required, the Company will continue to perform impairment testing
on an annual basis or when an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying amount.
Reserves
The
Company recognizes liabilities for contingencies when there is an exposure
that,
when fully analyzed, indicates it is both probable that a liability has been
incurred and the amount of loss can be reasonably estimated. When a range of
probable loss can be estimated, the Company accrues the most likely amount;
if
not determinable, the Company accrues at least the minimum of the range of
probable loss.
The
Company records reserves related to legal proceedings in "other payables".
Such
reserves are established and maintained in accordance with SFAS No. 5,
"Accounting for Contingencies", and Financial Interpretation No. 14. The
determination of these reserve amounts requires significant judgment on the
part
of management. Management considers many factors including, but not limited
to:
the amount of the claim; the amount of the loss in the client's account; the
basis and validity of the claim; the possibility of wrongdoing on the part
of an
employee of the Company; previous results in similar cases; and legal precedents
and case law. Each legal proceeding is reviewed with counsel in each accounting
period and the reserve is adjusted as deemed appropriate by management. Lastly,
each case is reviewed to determine if it is probable that insurance coverage
will apply, in which case the reserve is reduced accordingly. Any change in
the
reserve amount is recorded in the consolidated financial statements and is
recognized as a charge/credit to earnings in that period.
The
Company also records reserves or allowances for doubtful accounts related to
client receivables and loans. Client receivables at the broker-dealers are
generally collateralized by securities owned by the brokerage clients.
Therefore, when a receivable is considered to be impaired, the amount of the
impairment is generally measured based on the fair value of the securities
acting as collateral, which is measured based on current prices from independent
sources such as listed market prices or broker-dealer price quotations.
Client
loans at RJBank are generally collateralized by real estate or other property.
RJBank provides for both an allowance for losses in accordance
with
SFAS No. 5, “Accounting for Contingencies”, and a reserve for individually
impaired loans in accordance with SFAS No. 114, “Accounting by a Creditor for
Impairment of a Loan”. The calculation of the SFAS No. 5 allowance is subjective
as management segregates the loan portfolio into different homogeneous classes
and assigns each class an allowance percentage based on the perceived risk
associated with that class of loans. During the fiscal year, RJBank re-evaluated
and implemented changes to the loan loss reserve methodology in conjunction
with
a revision to the corporate loan grading process. The new loan grading process
was revised and expanded to provide more specific and detailed risk measurement
across the corporate loan portfolio. The factors taken into consideration when
assigning the reserve percentage to each reserve category include estimates
of
borrower default probabilities and collateral values; trends in delinquencies;
volume and terms; changes in geographic distribution, lending policies, local,
regional, and national economic conditions; concentrations of credit risk and
past loss history. In addition, the Company provides for potential losses
inherent in RJBank’s unfunded lending commitments using the criteria above,
further adjusted for an estimated probability of funding. For individual loans
identified as impaired, RJBank measures impairment based on the present value
of
expected future cash flows discounted at the loan's effective interest rate,
the
loan's observable market price, or the fair value of the collateral if the
loan
is collateral dependent. At September 30, 2006, the amortized cost of all RJBank
loans was $2.3 billion and an allowance for loan losses of $18.7 million was
recorded against that balance. The total allowance for loan losses, including
$4
million in reserves for off-balance sheet exposures maintained in Other
Liabilities, is equal to 1% of the amortized cost of the loan portfolio.
The
Company also makes loans or pays advances to Financial Advisors, primarily
for
recruiting and retention purposes. The Company provides for an allowance for
doubtful accounts based on an evaluation of the Company’s ability to collect
such receivables. The Company’s ongoing evaluation includes the review of
specific accounts of Financial Advisors no longer associated with the Company
and the Company’s historical collection experience. At September 30, 2006 the
receivable from Financial Advisors was $89.8 million, which is net of an
allowance of $3.3 million for estimated uncollectibility.
Income
Taxes
SFAS
No.
109, “Accounting for Income Taxes”, establishes financial accounting and
reporting standards for the effect of income taxes. The objectives of accounting
for income taxes are to recognize the amount of taxes payable or refundable
for
the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in the Company’s financial
statements or tax returns. Judgment is required in assessing the future tax
consequences of events that have been recognized in the Company’s financial
statements or tax returns. Variations in the actual outcome of these future
tax
consequences could materially impact the Company’s financial position, results
of operations, or cash flows.
Effects
of recently issued accounting standards, not yet
adopted
In
May
2005, the FASB issued Statement No. 154, “Accounting Changes and Error
Corrections” (SFAS 154), which replaces APB No. 20, “Accounting Changes” and
FASB Statement No. 3, “Reporting Changes in Interim Financial Statements”. The
Statement changes the accounting for, and reporting of, a change in accounting
principle. Statement 154 requires retrospective application to prior period’s
financial statements of voluntary changes in accounting principle and changes
required by new accounting standards when the standard does not include specific
transition provisions, unless it is impracticable to do so. Statement 154 is
effective for accounting changes and corrections of errors beginning in the
Company’s fiscal year 2007. The Company is currently evaluating the impact on
its financial reporting process of the adoption of SFAS 154.
In
June
2005, the FASB ratified the consensus reached by the Emerging Issues Task Force
(“EITF”) in Issue 04-5, “Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar Entity When
the
Limited Partners Have Certain Rights” on the guidance on how general partners in
a limited partnership should determine whether they control a limited
partnership. This consensus is effective for general partners of all new limited
partnerships formed, and for existing limited partnerships for which the
partnership agreements are modified, subsequent to the date of the ratification
of this consensus (June 29, 2005). The guidance in this issue is effective
for
general partners in all other limited partnerships no later than the beginning
of the Company’s fiscal year 2007. The Company adopted this EITF for
partnerships created or modified after June 29, 2005, the impact of which was
not material to its consolidated financial statements. The Company anticipates
consolidating two additional partnerships, which were created prior to June
29,
2005, during the first quarter of fiscal year 2007. As of September 30, 2006,
these partnerships had assets of approximately $44.3 million.
In
February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments." SFAS No. 155 is an amendment of SFAS No. 133 and SFAS
No. 140. SFAS No. 155 permits companies to elect, on an instrument by instrument
basis, to apply a fair value remeasurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation.
SFAS No. 155 is effective for all financial instruments acquired or issued
after
the beginning of an entity's first fiscal year that begins after September
15,
2006. The Company does not expect SFAS No. 155 to have a material impact on
the
consolidated financial statements of the Company.
In
March
2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
Assets." SFAS No. 156 amends SFAS No. 140. SFAS No. 156 requires that all
separately recognized servicing assets and servicing liabilities be initially
measured at fair value. For subsequent measurements, SFAS No. 156 permits
companies to choose between using an amortization method or a fair value
measurement method for reporting purposes. SFAS No. 156 is effective as of
the
beginning of a company's first fiscal year that begins after September 15,
2006.
The Company does not expect SFAS No. 156 to have a material impact on the
consolidated financial statements of the Company.
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48), which clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with SFAS
No. 109, “Accounting for Income Taxes.” FIN 48 establishes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
This interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company is currently evaluating the impact the adoption of this
interpretation will have on its consolidated financial statements.
In
July
2006, the FASB issued Staff Position No. FAS 13-2, “Accounting for a Change or
Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated
by a Leveraged Lease Transaction (“FSP FAS 13-2”). This FASB Staff Position
addresses how a change in the timing of cash flows relating to income taxes
generated by a leveraged lease transaction affects the accounting by a lessor
for that lease. FSP FAS 13-2 is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact the adoption
of this staff position will have on its consolidated financial
statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in the Current Year Financial Statements” (“SAB 108”). SAB 108
addresses how the effects of prior year uncorrected misstatements should be
considered when quantifying misstatements in current year financial statements.
SAB 108 requires an entity to quantify misstatements using a balance sheet
and
income statement approach and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors. The guidance is effective for annual financial statements
covering the first fiscal year ending after November 15, 2006. The Company
is
currently evaluating the impact this guidance will have on its financial
reporting process.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair-value measurements required under other accounting pronouncements
but
does not change existing guidance as to whether or not an instrument is carried
at fair value. SFAS No. 157 is effective as of the beginning of a company's
first fiscal year that begins after November 17, 2007. The Company does not
expect SFAS No. 157 to have a material impact on the consolidated financial
statements of the Company.
Off
Balance Sheet Arrangements
Information
concerning the Company's off balance sheet arrangements are included in Note
20
of the Notes to the Consolidated Financial Statements. Such information is
hereby incorporated by reference.
Contractual
Obligations
The
Company has contractual obligations to make future payments in connection with
its short and long-term debt, non-cancelable
lease
agreements, partnership investments, commitments to extend credit, and a naming
rights agreement (see Note 13 to the Consolidated Financial Statements for
further information on the Company's commitments). The following table sets
forth these contractual obligations by fiscal year (in 000's):
|
Total
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
Long-term
debt
|
$128,598
|
$2,746
|
$7,911
|
$3,086
|
$8,272
|
$43,469
|
$63,114
|
Variable
interest entities’ loans payable(1)
|
193,647
|
32,787
|
13,158
|
17,984
|
17,529
|
22,394
|
89,795
|
Short-term
debt
|
13,040
|
13,040
|
-
|
-
|
-
|
-
|
-
|
Operating
leases
|
101,766
|
26,013
|
21,858
|
16,860
|
14,378
|
8,938
|
13,719
|
Investments
- private equity partnerships(2)
|
20,100
|
20,100
|
-
|
-
|
-
|
-
|
-
|
Certificates
of deposit
|
255,360
|
125,622
|
50,427
|
36,306
|
24,885
|
18,120
|
-
|
Commitments
to extend credit - RJBank(3)
|
1,112,293
|
1,112,293
|
-
|
-
|
-
|
-
|
-
|
Commitments
to real estate partnerships(4)
|
7,600
|
7,600
|
-
|
-
|
-
|
-
|
-
|
CSS
commitment
|
425
|
425
|
|
|
|
|
|
Naming
rights for Raymond James Stadium
|
33,120
|
3,031
|
3,152
|
3,278
|
3,409
|
3,545
|
16,705
|
Total
|
$1,865,949
|
$1,343,657
|
$96,506
|
$77,514
|
$68,473
|
$96,466
|
$183,333
|
|
|
|
|
|
|
|
|
|
(1)
|
Loans
which are non-recourse to the Company. See Notes 6 and 10 in the
Notes to
the Consolidated Financial Statements for additional
information.
|
|
(2)
|
The
Company has committed a total of $42.6 million, in amounts ranging
from
$200,000 to $2.0 million, to 40 different independent venture capital
or
private equity partnerships. As of September 30, 2006, the Company
had
invested $29.4 million of that amount and has received $24.8 million
in
distributions. Additionally, the Company is the general partner in
two
internally sponsored private equity limited partnerships to which
it has
committed $14 million. Of that amount, the Company had invested $11.7
million and has received $5.5 million in distributions as of September
30,
2006. Although the combined remaining balance of $20.1 million has
been
included in fiscal year 2007 above, the contributions to the partnerships
may occur after that time and are dependent upon the timing of the
capital
calls by the general partners.
|
|
(3)
|
Because
many commitments expire without being funded in whole or part, the
contract amounts are not estimates of future cash
flows.
|
|
(4) |
RJTCF is committed to additional future fundings
related
to real estate partnerships. |
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.
RISK
MANAGEMENT
Risks
are
an inherent part of the Company's business and activities. Management of these
risks is critical to the Company's fiscal soundness and profitability. Risk
management at the Company is a multi-faceted process that requires
communication, judgment and knowledge of financial products and markets. The
Company's senior management takes an active role in the risk management process
and requires specific administrative and business functions to assist in the
identification, assessment, monitoring and control of various risks. The
principal risks involved in the Company's business activities are market,
credit, operational, and regulatory and legal.
Market
Risk
Market
risk is the risk of loss to the Company resulting from changes in interest
rates
and equity prices. The Company has exposure to market risk primarily through
its
broker-dealer and banking operations. The Company's broker-dealer subsidiaries,
primarily RJA, trade tax exempt and taxable debt obligations and act as an
active market maker in approximately 330 over-the-counter equity securities.
In
connection with these activities, the Company maintains inventories in order
to
ensure availability of securities and to facilitate client transactions.
Additionally, the Company, primarily within its Canadian broker-dealer
subsidiary, invests for its own proprietary equity investment
account.
The
following table represents the fair value of trading inventories associated
with
the Company's broker-dealer client facilitation, market-making activities and
proprietary trading activities.
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
Securities
|
|
|
|
Securities
|
|
|
|
Sold
but
|
|
|
|
Sold
but
|
|
Trading
|
|
Not
yet
|
|
Trading
|
|
Not
yet
|
|
Securities
|
|
Purchased
|
|
Securities
|
|
Purchased
|
|
(in
000's)
|
|
|
Marketable:
|
|
|
|
|
|
|
|
Municipal
|
$
192,028
|
|
$
5
|
|
$
177,984
|
|
$
17
|
Corporate
|
134,431
|
|
968
|
|
27,830
|
|
2,285
|
Government
|
37,793
|
|
31,636
|
|
42,009
|
|
99,465
|
Agency
|
68,380
|
|
34,023
|
|
60,445
|
|
84
|
Total
debt securities
|
432,632
|
|
66,632
|
|
308,268
|
|
101,851
|
|
|
|
|
|
|
|
|
Derivative
contracts
|
20,904
|
|
8,309
|
|
12,795
|
|
2,488
|
Equity
securities
|
29,532
|
|
19,068
|
|
32,237
|
|
30,256
|
Other
securities
|
2,703
|
|
-
|
|
6,379
|
|
-
|
Total
|
$485,771
|
|
$94,009
|
|
$359,679
|
|
$134,595
|
Changes
in value of the Company's trading inventory may result from fluctuations in
interest rates, credit ratings of the issuer, equity prices and the correlation
among these factors. The Company manages its trading inventory by product type
and has established trading divisions that have responsibility for each product
type. The Company's primary method of controlling risk in its trading inventory
is through the establishment and monitoring of limits on the dollar amount
of
securities positions that can be entered into and other risk-based limits;
limits are established both for categories of securities (e.g., OTC equities,
high yield securities, municipal bonds) and for individual traders. As of
September 30, 2006 the absolute fixed income and equity inventory limits were
$1,905,000,000 and $80,705,000, respectively. The Company's trading activities
were well within these limits at September 30, 2006. Position limits in trading
inventory accounts are monitored on a daily basis. Consolidated position and
exposure reports are prepared and distributed to senior management. Limit
violations are carefully monitored. Management also monitors inventory levels
and trading results, as well as inventory aging, pricing, concentration and
securities ratings. For derivatives, primarily interest rate swaps, the Company
monitors exposure in its derivatives subsidiary daily based on established
limits with respect to a number of factors, including interest rate risk,
spread, ratio and basis risk and volatility. These exposures are monitored
both
on a total portfolio basis and separately for selected maturity periods.
Interest
Rate Risk
The
Company is exposed to interest rate risk as a result of maintaining trading
inventories of fixed income instruments and actively manages this risk using
hedging techniques that involve swaps, futures, and U.S. Treasury obligations.
The Company monitors, on a daily basis, the Value-at-Risk (“VaR”) in its
institutional Fixed Income trading portfolios (cash instruments and interest
rate derivatives). VaR is an appropriate statistical technique for estimating
the potential loss in trading portfolios due to typical adverse market movements
over a specified time horizon with a suitable confidence level.
To
calculate VaR, the Company uses historical simulation. This approach assumes
that historical changes in market conditions are representative of future
changes. The simulation is based upon daily market data for the previous twelve
months. VaR is reported at a 99% confidence level, based on a one-day time
horizon. This means that the Company could expect to incur losses greater than
those predicted by the VaR estimates only once in every 100 trading days, or
about 2.5 times a year. During the fiscal year ended September 30 2006, the
reported daily loss in the institutional Fixed Income trading portfolio twice
exceeded the predicted VaR. This is consistent with the model and its
business-as-usual assumptions.
However,
trading losses on a single day could exceed the reported VaR by significant
amounts in unusually volatile markets and might accumulate over a longer time
horizon, such as a number of consecutive trading days. Accordingly, management
employs additional interest rate risk controls including position limits, a
daily review of trading results, review of the status of aged inventory,
independent controls on pricing, monitoring of concentration risk, and by issuer
ratings.
The
following tables set forth the high, low, and daily average VaR for the
Company's overall institutional portfolio during the twelve months ended
September 30, 2006, with the corresponding dollar value of the Company's
portfolio.
|
Twelve
months ended September 30, 2006
|
|
VaR
at
|
($
in 000's)
|
High
|
Low
|
|
Daily Average
|
|
September
30, 2006
|
|
September
30, 2005
|
Daily
VaR
|
$1,251
|
$312
|
|
$729
|
|
$483
|
|
$532
|
Related
Portfolio Value (net)*
|
$303,377
|
$177,669
|
|
$308,379
|
|
$312,917
|
|
$169,978
|
VaR
as a percent
of
Portfolio Value
|
0.41%
|
0.18%
|
|
0.24%
|
|
0.15%
|
|
0.31%
|
* Portfolio
value achieved on the day of the VAR calculation.
The
modeling of the risk characteristics of trading positions involves a number
of
assumptions and approximations. While management believes that its assumptions
and approximations are reasonable, there is no uniform industry methodology
for
estimating VaR, and different assumptions or approximations could produce
materially different VaR estimates. As a result, VaR statistics are more
reliable when used as indicators of risk levels and trends within a firm than
as
a basis for inferring differences in risk-taking across firms.
Additional
information is discussed under Derivative Financial Instruments in Note 11
of
the Notes to the Consolidated Financial Statements.
RJBank
maintains an earning asset portfolio that is comprised of mortgage, corporate
and consumer loans, as well as mortgage-backed securities, securities purchased
under resale agreements, and other investments. Those earning assets are funded
in part by its obligations to clients, including demand deposits, money market
accounts, savings accounts, and certificates of deposit; and FHLB advances.
Based on the current earning asset portfolio of RJBank, market risk for RJBank
is limited primarily to interest rate risk. RJBank analyzes interest rate risk
based on forecasted net interest income, which is the net amount of interest
received and interest paid, and the net portfolio valuation, both in a range
of
interest rate scenarios. The following table represents the carrying value
of
RJBank's assets and liabilities that are subject to market risk. This table
does
not include financial instruments with limited market risk exposure due to
offsetting asset and liability positions, short holding periods or short periods
of time until the interest rate resets.
RJBank
Financial Instruments with Market Risk (as described above, in
000's):
|
|
|
|
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
Mortgage-backed
securities
|
|
$
151,437
|
|
$
6,716
|
Municipal
obligations
|
|
-
|
|
5
|
Loans
receivable, net
|
|
1,282,504
|
|
648,649
|
Total
assets with market risk
|
|
$
1,433,941
|
|
$
655,370
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$
255,360
|
|
$
220,660
|
Federal
Home Loan Bank advances
|
|
60,000
|
|
70,000
|
Interest
rate swaps
|
|
-
|
|
72
|
Total
liabilities with market risk
|
|
$
315,360
|
|
$
290,732
|
As
noted
above, RJBank reviews interest rate risk based on net interest income and impact
on RJBank's equity. One of the core objectives of RJBank's Asset/Liability
Management Committee is to manage the sensitivity of net interest income to
changes in market interest rates. The Asset/Liability Management Committee
uses
several measures to monitor and limit RJBank's interest rate risk including
scenario analysis, interest repricing gap analysis and limits, and net portfolio
value limits. Model-based scenario analysis is used to monitor and report the
interest rate risk positions, and analyze alternative strategies.
Net
interest income is the net amount of interest received less interest paid.
This
involves large volumes of contracts and transactions, and numerous different
products. Simulation models and estimation techniques are used to assess the
sensitivity of the net interest income stream to movements in interest rates.
Assumptions about consumer behavior play an important role in these
calculations; this is particularly relevant for loans such as mortgages where
the client has the right, but not the obligation, to repay before the scheduled
maturity. On the liability side, the re-pricing characteristics of deposits
are
based on estimates since the rates are not coupled to a specified market
rate.
The
sensitivity of net interest income to interest rate conditions is estimated
for
a variety of scenarios. Assuming an immediate and lasting shift of 100 basis
points in the term structure of interest rates, RJBank's sensitivity analysis
indicates that an upward movement would decrease RJBank's net interest income
by
13.82% in the first year after the rate jump, whereas a downward shift of the
same magnitude would increase RJBank's net interest income by 9.20%. These
sensitivity figures are based on positions as of September 30, 2006, and are
subject to certain simplifying assumptions, including that management takes
no
corrective action.
Equity
Price Risk
The
Company is exposed to equity price risk as a consequence of making markets
in
equity securities and the investment activities of RJA and RJ Ltd. The U.S.
broker-dealer activities are client-driven, with the objective of meeting
clients' needs while earning a trading profit to compensate for the risk
associated with carrying inventory. The Company attempts to reduce the risk
of
loss inherent in its inventory of equity securities by monitoring those security
positions constantly throughout each day and establishing position limits.
The
Company's Canadian broker-dealer has a proprietary trading business with 27
traders. The average aggregate inventory held for proprietary trading during
the
year ended September 30, 2006 was CDN$7,111,436.
Credit
Risk
The
Company is engaged in various trading and brokerage activities whose
counterparties primarily include broker-dealers, banks and other financial
institutions. The Company is exposed to risk that counterparties may not fulfill
their obligations. The risk of default depends on the creditworthiness of the
counterparty and/or the issuer of the instrument. The Company manages this
risk
by imposing and monitoring individual and aggregate position limits within
each
business segment for each counterparty, conducting regular credit reviews of
financial counterparties, reviewing security and loan concentrations, holding
and marking to market collateral on certain transactions and conducting business
through clearing organizations, which guarantee performance.
The
Company's client activities involve the execution, settlement, and financing
of
various transactions on behalf of its clients. Client activities are transacted
on either a cash or margin basis. Credit exposure associated with the Company's
Private Client Group consists primarily of customer margin accounts, which
are
monitored daily and are collateralized. When clients execute a purchase the
Company is at some risk that the client will renege on the trade. If this
occurs, the Company may have to liquidate the position at a loss. However,
for
most of the private client group purchase transactions, clients have available
funds in the account before the trade is executed. 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.
In
addition, RJBank offers a variety of loan products including residential
mortgage, commercial real estate, and consumer loans, which are collateralized,
and corporate loans for which the borrower is carefully evaluated and monitored.
RJBank's policy is to require customers to provide such collateral prior to
the
disbursement of approved loans. The amount of collateral obtained, if it is
deemed necessary by RJBank upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, residential real estate, and income-producing
commercial properties. When using derivative financial instruments to hedge
exposures to changes in interest rates, RJBank exposes itself to credit risk
with those counterparties also. RJBank minimizes the credit or repayment risk
of
derivative instruments by entering into transactions only with high-quality
counterparties whose credit rating is investment grade.
As
of
September 30, 2006, RJBank has entered into a $460 million reverse repurchase
agreement with a single counterparty. Although RJBank is exposed to risk that
this counterparty may not fulfill its contractual obligation, the risk of
default is minimal due to the creditworthiness of the counterparty, collateral
received and the short duration of this agreement.
The
Company is subject to concentration risk if it holds large positions, extends
large loans to, or has large commitments with a single counterparty, borrower,
or group of similar counterparties or borrowers (e.g. in the same industry).
Securities purchased under agreements to resell consist entirely of securities
issued by the U.S. government or its agencies. Receivables from and payables
to
clients and stock borrow and lending activities are conducted with a large
number of clients and counterparties and potential concentration is carefully
monitored. Inventory and investment positions taken and commitments made,
including underwritings, may involve exposure to individual issuers and
businesses. The Company seeks to limit this risk through careful review of
the
underlying business and the use of limits established by senior management,
taking into consideration factors including the financial strength of the
counterparty, the size of the position or commitment, the expected duration
of
the position or commitment and other positions or commitments
outstanding.
The
Company is the lessor in two leveraged commercial aircraft transactions with
two
major domestic airlines (Delta and Continental). The Company's ability to
realize its expected return is dependent upon the airlines' ability to fulfill
their lease obligations. In the event that the airlines default on their lease
commitments and the Trustee for the debt holders is unable to re-lease or sell
the planes with adequate terms, the Company would suffer a loss of some or
all
of its investment. Delta Airlines filed for bankruptcy protection on September
14, 2005. Accordingly, the Company recorded a $6.5 million pretax charge in
2005
to fully reserve the balance of its investment in the leveraged lease of an
aircraft to Delta. The Company also had taken a $4 million pretax charge in
2004
to partially reserve for this investment. Although Continental remains current
on its lease payments to the Company, the Company is monitoring this lessee
for
specific events or circumstances that would increase the likelihood of a default
on Continental’s obligations under this lease given the difficult economic
environment for the airline industry.
Operational
Risk
Operational
risk generally refers to the risk of loss resulting from the Company's
operations, including, but not limited to, business disruptions, improper or
unauthorized execution and processing of transactions, deficiencies in the
Company's technology or financial operating systems and inadequacies or breaches
in the Company's control processes. The Company operates different businesses
in
diverse markets and is reliant on the ability of its employees and systems
to
process a large number of transactions. These risks are less direct than credit
and market risk, but managing them is critical, particularly in a rapidly
changing environment with increasing transaction volumes. In the event of a
breakdown or improper operation of systems or improper action by employees,
the
Company could suffer financial loss, regulatory sanctions and damage to its
reputation. In order to mitigate and control operational risk, the Company
has
developed and continues to enhance specific policies and procedures that are
designed to identify and manage operational risk at appropriate levels
throughout the organization and within such departments as Accounting,
Operations, Information Technology, Legal, Compliance and Internal Audit. These
control mechanisms attempt to ensure that operational policies and procedures
are being followed and that the Company's various businesses are operating
within established corporate policies and limits. Business continuity plans
exist for critical systems, and redundancies are built into the systems as
deemed appropriate.
A
Compliance and Standards Committee comprised of senior executives meets monthly
to consider policy issues. The Committee reviews material customer complaints
and litigation, as well as issues in operating departments, for the purpose
of
identifying issues that present risk exposure to customers or to the Company.
The Committee adopts policies to deal with these issues, which are then
disseminated throughout the Company.
The
Company has established a Quality of Markets Committee that meets regularly
to
monitor the best execution activities of the trading departments within the
Company as they relate to customer orders. This Committee is comprised of
representatives from the OTC Trading, Listed Trading, Options, Compliance and
Legal Departments and is under the direction of a senior officer of the Company.
This Committee reviews reports from OTC Trading, Listed Trading and Options
departments and recommends action for improvement when necessary.
Regulatory
and Legal Risk
Legal
risk includes the risk of Private Client Group customer claims, the possibility
of sizable adverse legal judgments and non-compliance with applicable legal
and
regulatory requirements. The Company is generally subject to extensive
regulation in the different jurisdictions in which it conducts business.
Regulatory oversight of the securities industry has become increasingly
demanding over the past several years and the Company, as well as others in
the
industry, has been directly affected by this increased regulatory
scrutiny.
The
Company has comprehensive procedures addressing issues such as regulatory
capital requirements, sales and trading practices, use of and safekeeping of
customer funds, extension of credit, collection activities, money-laundering
and
record keeping. The
Company and
its
subsidiaries have designated Anti-money Laundering Compliance Officers who
monitor compliance with regulations adopted under the U.S.A. Patriot Act.
The
Company acts as an underwriter or selling group member in both equity and fixed
income product offerings. Particularly when acting as lead or co-lead manager,
the Company has financial and legal exposure. To manage this exposure,
a
committee of senior executives review proposed underwriting commitments to
assess the quality of the offering and the adequacy of due diligence
investigation.
The
Company's major business units have compliance departments that are responsible
for regularly reviewing and revising compliance and supervisory procedures
to
conform to changes in applicable regulations.
During
the past year, the number of claims has continued to decline to more historic
levels. While these claims may not be the result of any wrongdoing, the Company
does, at a minimum, incur costs associated with investigating and defending
against such claims. See further discussion on the Company's reserve policy
under "Critical Accounting Policies"; see also "Legal Proceedings" and
"Regulation".
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Shareholders
Raymond
James Financial, Inc.:
We
have
audited the accompanying consolidated statements of financial condition of
Raymond James Financial, Inc. and subsidiaries as of September 30, 2006 and
2005, and the related consolidated statements of operations and comprehensive
income, changes
in shareholders’ equity,
and cash
flows for each of the years in the three-year period ended September 30, 2006.
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Raymond James Financial,
Inc. and subsidiaries as of September 30, 2006 and 2005, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 2006, in conformity with U.S. generally accepted
accounting principles.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Raymond James Financial,
Inc.’s internal control over financial reporting as of September 30, 2006, based
on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO),
and our
report dated December 14, 2006 expressed an unqualified opinion on management’s
assessment of, and the effective operation of, internal control over financial
reporting.
KPMG
LLP
Tampa,
Florida
December
14,
2006
Certified
Public Accountants
RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
|
September
30,
|
September
30,
|
|
2006
|
2005
|
|
(in
thousands)
|
Assets:
|
|
|
Cash
and cash equivalents
|
$
641,691
|
$
881,133
|
Assets
segregated pursuant to federal regulations
|
3,189,900
|
2,351,805
|
Securities
purchased under agreements to resell
|
776,863
|
117,616
|
Securities
owned:
|
|
|
Trading
securities, at fair value
|
485,771
|
359,679
|
Available
for sale securities, at fair value
|
280,580
|
187,549
|
Other
investments
|
66,726
|
-
|
Receivables:
|
|
|
Brokerage
clients, net
|
1,504,607
|
1,426,096
|
Stock
borrowed
|
1,068,102
|
1,079,849
|
Bank
loans, net
|
2,262,832
|
1,000,281
|
Brokers-dealers
and clearing organizations
|
210,443
|
110,760
|
Other
|
290,294
|
241,527
|
Investments
in real estate partnerships- held by variable interest
entities
|
227,963
|
138,228
|
Property
and equipment, net
|
142,780
|
137,555
|
Deferred
income taxes, net
|
94,957
|
88,860
|
Deposits
with clearing organizations
|
30,780
|
31,286
|
Goodwill
|
62,575
|
62,575
|
Investment
in leveraged leases, net
|
10,882
|
11,808
|
Prepaid
expenses and other assets
|
168,904
|
142,649
|
|
|
|
|
$11,516,650
|
$8,369,256
|
|
|
|
Liabilities
and Shareholders' Equity:
|
|
|
Loans
payable
|
$
141,638
|
$
146,462
|
Loans
payable related to investments by variable interest entities in real
estate partnerships
|
193,647
|
144,780
|
Payables:
|
|
|
Brokerage
clients
|
4,552,227
|
3,767,535
|
Stock
loaned
|
1,235,104
|
1,115,595
|
Bank
deposits
|
2,806,880
|
1,076,020
|
Brokers-dealers
and clearing organizations
|
79,646
|
146,269
|
Trade
and other
|
138,091
|
140,360
|
Trading
securities sold but not yet purchased, at fair value
|
94,009
|
134,595
|
Securities
sold under agreements to repurchase
|
301,110
|
33,681
|
Accrued
compensation, commissions and benefits
|
321,224
|
299,657
|
Income
taxes payable
|
34,294
|
31,448
|
|
|
|
|
9,897,870
|
7,036,402
|
|
|
|
Minority
Interests
|
154,911
|
91,031
|
|
|
|
Shareholders'
equity*
|
|
|
Preferred
stock; $.10 par value; authorized
|
|
|
10,000,000
shares; issued and outstanding -0- shares
|
-
|
-
|
Common
Stock; $.01 par value; authorized
|
|
|
180,000,000
shares; issued 117,655,883 at
|
|
|
Sept.
30, 2006 and 114,850,634 at Sept. 30, 2005
|
1,150
|
765
|
Shares
exchangeable into common stock; 362,197
|
|
|
at
Sept. 30, 2006 and 427,988 at Sept. 30, 2005
|
4,649
|
5,493
|
Additional
paid-in capital
|
205,198
|
165,074
|
Retained
earnings
|
1,258,446
|
1,082,063
|
Accumulated
other comprehensive income
|
12,095
|
9,632
|
|
1,481,538
|
1,263,027
|
Less:
1,270,015 and 1,884,422 common shares
|
|
|
in
treasury, at cost
|
17,669
|
21,204
|
|
1,463,869
|
1,241,823
|
|
|
|
|
$11,516,650
|
$8,369,256
|
|
|
|
*
All share amounts have been adjusted for the March 22, 2006 3-for-2
stock
split.
|
See
accompanying Notes to Consolidated Financial
Statements.
|
RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in
thousands, except per share amounts)
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
24,
|
|
2006
|
2005
|
2004
|
|
|
|
|
Revenues:
|
|
|
|
Securities
commissions and fees
|
$
1,561,504
|
$
1,421,908
|
$
1,290,344
|
Investment
banking
|
158,598
|
150,166
|
106,350
|
Investment
advisory fees
|
179,366
|
157,428
|
134,447
|
Interest
|
469,981
|
245,562
|
134,764
|
Net
trading profits
|
27,156
|
24,612
|
23,565
|
Financial
service fees
|
115,990
|
86,014
|
80,431
|
Other
|
120,162
|
71,307
|
59,875
|
|
|
|
|
Total
revenues
|
2,632,757
|
2,156,997
|
1,829,776
|
|
|
|
|
Interest
expense
|
296,670
|
117,789
|
48,517
|
Net
revenues
|
2,336,087
|
2,039,208
|
1,781,259
|
|
|
|
|
Non-Interest
Expenses:
|
|
|
|
Compensation,
commissions and benefits
|
1,601,037
|
1,429,104
|
1,273,420
|
Communications
and information processing
|
103,576
|
91,881
|
82,186
|
Occupancy
and equipment costs
|
72,593
|
66,948
|
61,339
|
Clearance
and floor brokerage
|
28,329
|
24,063
|
20,773
|
Business
development
|
78,579
|
67,802
|
59,963
|
Other
|
118,066
|
113,957
|
77,347
|
Total
non-interest expenses
|
2,002,180
|
1,793,755
|
1,575,028
|
|
|
|
|
Minority
Interest
|
(8,159)
|
(2,518)
|
2,110
|
|
|
|
|
Income
before provision for income taxes
|
342,066
|
247,971
|
204,121
|
|
|
|
|
Provision
for income taxes
|
127,724
|
96,925
|
76,546
|
|
|
|
|
Net
income
|
$
214,342
|
$
151,046
|
$
127,575
|
|
|
|
|
Net
income per share-basic
|
$
1.90
|
$
1.37
|
$
1.16
|
Net
income per share-diluted
|
$
1.85
|
$
1.33
|
$
1.14
|
Weighted
average common shares
|
|
|
|
outstanding-basic*
|
112,614
|
110,217
|
110,093
|
Weighted
average common and common
|
|
|
|
equivalent
shares outstanding-diluted*
|
115,738
|
113,048
|
111,603
|
|
|
|
|
Cash
dividend per common share*
|
$
0.32
|
$
0.21
|
$
0.17
|
|
|
|
|
Net
income
|
$
214,342
|
$
151,046
|
$
127,575
|
Other
Comprehensive Income:
|
|
|
|
Net
unrealized gain (loss) on available
|
|
|
|
for
sale securities, net of tax
|
217
|
79
|
(112)
|
Net
unrealized gain on interest
|
|
|
|
rate
swaps accounted for as cash flow
hedges,
net of tax
|
44
|
882
|
2,184
|
Net
change in currency translations
|
2,202
|
4,796
|
1,199
|
Total
comprehensive income
|
$
216,805
|
$
156,803
|
$
130,846
|
|
|
|
|
*
All
share amounts have been adjusted for the March 22, 2006 3-for-2 stock
split.
See
accompanying Notes to Consolidated Financial Statements.
RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in
thousands, except per share amounts)
|
Common
Stock
|
|
Shares
Exchangeable into Common Stock
|
Additional
|
|
Accumulated
Other
|
Treasury
Stock
|
Total
|
|
|
|
|
|
|
Paid-in
|
Retained
|
Comprehensive
|
Common
|
|
Shareholders'
|
|
Shares
|
Amount
|
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
|
Shares
|
Amount
|
Equity
|
Balances
at September 26, 2003
|
49,691
|
$
497
|
|
219
|
$
6,450
|
$
101,298
|
$
850,656
|
$
604
|
(1,401)
|
$
(34,770)
|
$
924,735
|
Net
income fiscal 2004
|
|
|
|
|
|
|
127,575
|
|
|
|
127,575
|
Cash
dividends - common stock ($.17 per share)*
|
|
|
|
|
|
|
(20,664)
|
|
|
|
(20,664)
|
Purchase
of treasury shares
|
|
|
|
|
|
|
|
|
(84)
|
(1,955)
|
(1,955)
|
3-for-2
stock split
|
25,002
|
250
|
|
102
|
|
|
(250)
|
|
(593)
|
|
|
Employee
stock purchases
|
274
|
3
|
|
|
|
8,348
|
|
|
|
|
8,351
|
Exchangeable
shares
|
36
|
-
|
|
(36)
|
(957)
|
957
|
|
|
|
|
|
Exercise
of stock options
|
319
|
3
|
|
|
|
5,247
|
|
|
106
|
2,271
|
7,521
|
Grant
of restricted shares
|
|
|
|
|
|
2,432
|
|
|
211
|
4,824
|
7,256
|
Stock
option expense
|
|
|
|
|
|
9,123
|
|
|
|
|
9,123
|
Net
unrealized loss on available for sale securities, net of
tax
|
|
|
|
|
|
|
|
(112)
|
|
|
(112)
|
Net
unrealized gain on interest rate swaps accounted for as cash flow
hedges
|
|
|
|
|
|
|
|
2,184
|
|
|
2,184
|
Net
change in currency translations
|
|
|
|
|
|
|
|
1,199
|
|
|
1,199
|
Balances
at September 24, 2004
|
75,322
|
$
753
|
|
285
|
$
5,493
|
$
127,405
|
$957,317
|
$
3,875
|
(1,761)
|
$
(29,630)
|
$1,065,213
|
Net
income fiscal 2005
|
|
|
|
|
|
|
151,046
|
|
|
|
151,046
|
Cash
dividends - common stock ($.21 per share)*
|
|
|
|
|
|
|
(26,300)
|
|
|
|
(26,300)
|
Purchase
of treasury shares
|
|
|
|
|
|
62
|
|
|
(6)
|
(177)
|
(115)
|
Employee
stock purchases
|
329
|
3
|
|
|
|
9,622
|
|
|
|
|
9,625
|
Exercise
of stock options
|
916
|
9
|
|
|
|
13,961
|
|
|
54
|
913
|
14,883
|
Grant
of restricted shares
|
|
|
|
|
|
5,678
|
|
|
457
|
7,690
|
13,368
|
Stock
option expense
|
|
|
|
|
|
8,346
|
|
|
|
|
8,346
|
Net
unrealized gain on available for sale securities, net of
tax
|
|
|
|
|
|
|
|
79
|
|
|
79
|
Net
unrealized gain on interest rate swaps accounted for as cash flow
hedges
|
|
|
|
|
|
|
|
882
|
|
|
882
|
Net
change in currency translations
|
|
|
|
|
|
|
|
4,796
|
|
|
4,796
|
Balances
at September 30, 2005
|
76,567
|
$
765
|
|
285
|
$
5,493
|
$
165,074
|
$1,082,063
|
$
9,632
|
(1,256)
|
$
(21,204)
|
$1,241,823
|
Net
income fiscal 2006
|
|
|
|
|
|
|
214,342
|
|
|
|
214,342
|
Cash
dividends - common stock ($.32 per share)
|
|
|
|
|
|
|
(37,570)
|
|
|
|
(37,570)
|
Purchase
of treasury shares
|
|
|
|
|
|
|
|
|
(126)
|
(5,580)
|
(5,580)
|
3-for2
stock split
|
38,945
|
389
|
|
129
|
|
|
(389)
|
|
(426)
|
|
|
Employee
stock purchases
|
321
|
3
|
|
|
|
10,710
|
|
|
|
|
10,713
|
Exchangeable
shares
|
52
|
|
|
(52)
|
(844)
|
844
|
|
|
|
|
|
Exercise
of stock options
|
987
|
10
|
|
|
|
19,721
|
|
|
290
|
4,761
|
24,492
|
Grant
of restricted shares
|
784
|
8
|
|
|
|
|
|
|
248
|
4,354
|
4,362
|
Restricted
stock expense
|
|
|
|
|
|
11,308
|
|
|
|
|
11,308
|
Stock
option expense
|
|
|
|
|
|
13,773
|
|
|
|
|
13,773
|
Restricted
stock units
|
|
|
|
|
|
1,584
|
|
|
|
|
1,584
|
APIC
reclass related to unvested restricted stock grants
|
|
(25)
|
|
|
|
(17,816)
|
|
|
|
|
(17,841)
|
Net
unrealized gain on available for sale securities, net of
tax
|
|
|
|
|
|
|
|
217
|
|
|
217
|
Net
unrealized gain on interest rate swaps accounted for as cash flow
hedges
|
|
|
|
|
|
|
|
44
|
|
|
44
|
Net
change in currency translations
|
|
|
|
|
|
|
|
2,202
|
|
|
2,202
|
Balances
at September 30, 2006
|
117,656
|
$
1,150
|
|
362
|
$
4,649
|
$
205,198
|
$1,258,446
|
$
12,095
|
(1,270)
|
$
(17,669)
|
$1,463,869
|
*
Adjusted to reflect 3-for-2 stock split paid on March 22, 2006.
See
accompanying Notes to Consolidated Financial Statements.
RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
(continued
on next page)
|
Year
ended
|
|
September
30,
|
September
30,
|
September
24,
|
|
2006
|
2005
|
2004
|
Cash
Flows from operating activities:
|
|
|
|
Net
Income
|
$
214,342
|
$
151,046
|
$
127,575
|
Adjustments
to reconcile net income to net
cash (used in) provided by operating activities:
|
|
|
|
Depreciation
and amortization
|
19,173
|
17,781
|
16,827
|
Excess
tax benefits from stock-based payment arrangements
|
(1,646)
|
-
|
-
|
Deferred
income taxes
|
(6,097)
|
(15,301)
|
(5,094)
|
Unrealized
gains, premium and discount amortization on
available for sale securities and other
securities
|
196
|
(794)
|
(1,603)
|
Ineffectiveness
of interest rate swaps accounted for as cash
flow hedges
|
-
|
208
|
(392)
|
Impairment
on leveraged lease investments
|
-
|
6,534
|
4,000
|
Loss
(gain) on sale of property and equipment
|
143
|
(106)
|
1,696
|
Provision
for loan loss, legal proceedings, bad debts and other
accruals
|
28,404
|
38,416
|
23,706
|
Stock-based
compensation expense
|
29,820
|
17,031
|
17,631
|
Minority
Interest
|
(8,159)
|
(2,518)
|
2,110
|
|
|
|
|
(Increase)
decrease in operating assets:
|
|
|
|
Assets
segregated pursuant to federal regulations
|
(838,095)
|
(29,403)
|
(86,036)
|
Receivables:
|
|
|
|
Brokerage
clients, net
|
(78,980)
|
(151,938)
|
(185,124)
|
Stock
borrowed
|
11,747
|
457,030
|
(328,317)
|
Brokers-dealers
and clearing organizations
|
(99,683)
|
14,784
|
1,171
|
Other
|
(39,084)
|
(47,526)
|
(35,572)
|
Securities
purchased under agreements to resell, net
of securities sold under agreements to repurchase
|
68,182
|
(48,270)
|
(11,825)
|
Trading
securities, net
|
(166,678)
|
(6,694)
|
(104,857)
|
Prepaid
expenses and other assets
|
(32,170)
|
(31,864)
|
(31,785)
|
|
|
|
|
Increase
(decrease) in operating liabilities:
|
|
|
|
Payables:
|
|
|
|
Brokerage
clients
|
784,692
|
418,858
|
144,582
|
Stock
loaned
|
119,509
|
(481,522)
|
369,966
|
Brokers-dealers
and clearing organizations
|
(66,623)
|
72,011
|
(80,499)
|
Trade
and other
|
(572)
|
(10,743)
|
(1,209)
|
Accrued
compensation, commissions and benefits
|
20,016
|
43,595
|
57,045
|
Income
taxes payable
|
2,681
|
(697)
|
6,128
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
(38,882)
|
409,918
|
(99,876)
|
See
accompanying Notes to Consolidated Financial Statements
RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
(continued)
|
Year
ended
|
|
September
30,
|
September
30,
|
September
24,
|
|
2006
|
2005
|
2004
|
|
|
|
|
Cash
Flows from investing activities:
|
|
|
|
Additions
to property and equipment, net
|
(27,280)
|
(30,154)
|
(22,028)
|
Loan
originations and purchases
|
(2,317,719)
|
(692,857)
|
(335,544)
|
Loan
repayments
|
1,044,015
|
379,298
|
208,810
|
Purchases
of other investments
|
(66,726)
|
-
|
-
|
Investments
in real estate partnerships-held by variable interest
entities
|
(89,735)
|
(75,967)
|
(22,569)
|
Loans
to investor members of variable interest entities related to investments
in real estate partnerships
|
(42,715)
|
(46,286)
|
-
|
Repayments
of loans by investor members of variable interest entities related
to
investments in real estate partnerships
|
10,898
|
-
|
-
|
Securities
purchased under agreements to resell
|
(460,000)
|
-
|
-
|
Sale
of available for sale securities
|
252
|
9,250
|
-
|
Purchases
of available for sale securities
|
(1,180,414)
|
(60,536)
|
(66,011)
|
Available
for sale securities maturations and repayments
|
1,087,624
|
71,671
|
98,730
|
|
|
|
|
Net
cash used in investing activities
|
(2,041,800)
|
(445,581)
|
(138,612)
|
|
|
|
|
Cash
Flows from financing activities:
|
|
|
|
Proceeds
from borrowed funds, net
|
8,464
|
16,542
|
80,198
|
Repayments
of mortgage and borrowings, net
|
(13,288)
|
(6,473)
|
(111,014)
|
Proceeds
from borrowed funds related to investments by variable interest entities
in real estate partnerships
|
54,249
|
74,921
|
44,250
|
Repayments
of borrowed funds related to investments by variable interest entities
in
real estate partnerships
|
(5,382)
|
(3,665)
|
-
|
Proceeds
from capital contributed to variable interest entities related to
investments in real estate partnerships
|
83,215
|
32,051
|
3,991
|
Minority
Interest
|
(11,176)
|
(4,210)
|
4,724
|
Exercise
of stock options and employee stock purchases
|
33,120
|
23,066
|
14,620
|
Increase
(decrease) in bank deposits
|
1,730,860
|
302,984
|
(6,479)
|
Purchase
of treasury stock
|
(5,100)
|
(115)
|
(1,955)
|
Cash
dividends on common stock
|
(37,570)
|
(26,300)
|
(20,664)
|
Excess
tax benefits from stock-based payment arrangements
|
1,646
|
-
|
-
|
|
|
|
|
Net
cash provided by financing activities
|
1,839,038
|
408,801
|
7,671
|
|
|
|
|
Currency
adjustment:
|
|
|
|
Effect
of exchange rate changes on cash
|
2,202
|
4,796
|
5,392
|
Net
(decrease) increase in cash and cash equivalents
|
(239,442)
|
377,934
|
(225,425)
|
Cash
resulting from consolidation of variable interest entities related
to
investments in real estate partnerships
|
-
|
20,851
|
-
|
Cash
and cash equivalents at beginning of year
|
881,133
|
482,348
|
707,773
|
|
|
|
|
Cash
and cash equivalents at end of year
|
$
641,691
|
$
881,133
|
$
482,348
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
Cash
paid for interest
|
$
294,215
|
$
116,553
|
$
48,229
|
Cash
paid for taxes
|
$
129,480
|
$
113,476
|
$
75,511
|
See
accompanying Notes to Consolidated Financial Statements
RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description
of Business
Raymond
James Financial, Inc. (“RJF”) is a holding company whose subsidiaries are
engaged in various financial services businesses, including the underwriting,
distribution, trading and brokerage of equity and debt securities and the sale
of mutual funds and other investment products. In addition, some of these
subsidiaries provide investment management services for retail and institutional
clients and banking and trust services. The accounting and reporting policies
of
Raymond James Financial, Inc. and its subsidiaries (the “Company”) conform to
accounting principles generally accepted in the United States of America
(“U.S.”), the more significant of which are summarized below:
Basis
of Presentation
The
consolidated financial statements include the accounts of RJF and its
consolidated subsidiaries that are generally controlled through a majority
voting interest. All material consolidated subsidiaries are 100% owned by the
Company. In accordance with Financial Accounting Standards Board (“FASB”)
Interpretation (“FIN”) No. 46R, “Consolidation of Variable Interest Entities”
(“FIN 46R”), the Company also consolidates any variable interest entities
(“VIEs”) of which it is the primary beneficiary, as defined. Additional
information is provided in Note 6 below.
When
the Company does not have a controlling interest in an entity, but exerts
significant influence over the entity, the Company applies the equity method
of
accounting. All material intercompany balances and transactions have been
eliminated in consolidation.
Management
Estimates and Assumptions
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the U.S. 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 and
could
have a material impact on the consolidated financial statements.
Reporting
Period
Through
fiscal 2005, the Company's fiscal year ended on the last Friday in September
of
each year. Three
of
the Company's wholly owned subsidiaries, Raymond James Bank (“RJBank”), Raymond
James Limited (“RJ Ltd.”) and Raymond James Tax Credit Funds, Inc. (“RJ Tax
Credit”),
have
fiscal years that end on the last day of September. Certain other entities
also
have fiscal periods that do not coincide with the Company's fiscal period.
Any
individually material transactions are reviewed and recorded in the appropriate
fiscal year.
On
December 1, 2005 the Company’s Board of Directors approved a change in the
Company’s fiscal year from the last Friday in September of each year to
September 30 of each year. This also changes the ending date of the Company’s
fiscal quarters from the last Friday in each quarter to the last day of each
quarter.
Recognition
of Revenues
Securities
transactions and related commission revenues and expenses are recorded on a
trade date basis.
Investment
banking revenues are recorded at the time a transaction is completed and the
related income is reasonably determinable. Investment banking revenues include
management fees and underwriting fees, net of reimbursable expenses, earned
in
connection with the distribution of the underwritten securities, merger and
acquisition fees, private placement fees and limited partnership
distributions.
The
Company earns investment advisory fees based on the value of clients' portfolios
managed by its investment advisor subsidiaries. These fees are recorded ratably
over the period earned.
Financial
service fees include per account fees such as IRA fees, transaction fees on
fee
based accounts, service fees and distributions fees received from mutual
funds.
Under
clearing agreements, the Company clears trades for unaffiliated correspondent
brokers and retains a portion of commissions as a fee for its services.
Correspondent clearing revenues are recorded net of commissions remitted and
included in other revenue. Total commissions generated by correspondents were
$29,985,000, $28,957,000, and $24,289,000 and commissions remitted totaled
$25,049,000, $24,435,000, and $19,719,000 for the years ended September 30,
2006, September 30, 2005, and September 24, 2004, respectively.
Cash
and Cash Equivalents
Cash
equivalents are highly liquid investments with original maturities of 90 days
or
less, other than those used for trading purposes.
Assets
Segregated Pursuant to Federal Regulations
In
accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, Raymond
James & Associates (“RJA”), as a broker-dealer carrying client accounts, is
subject to requirements related to maintaining cash or qualified securities
in a
segregated reserve account for the exclusive benefit of its clients. Segregated
assets at September 30, 2006 and September 30, 2005 consist of cash and cash
equivalents.
Repurchase
Agreements
The
Company purchases short-term securities under agreements to resell (“reverse
repurchase agreements”). Additionally, the Company sells securities under
agreements to repurchase (“repurchase agreements”). Both reverse repurchase and
repurchase agreements are accounted for as collateralized financings and are
carried at contractual amounts plus accrued interest. Other than RJBank’s policy
described below, it is the Company's policy to obtain possession of collateral
with a market value equal to or in excess of the principal amount loaned under
the reverse repurchase agreements. To ensure that the market value of the
underlying collateral remains sufficient, the collateral is valued daily, and
the Company may require counterparties to deposit additional collateral (or
may
return collateral to counterparties) when appropriate.
RJBank’s
reverse repurchase agreements are accounted for as collateralized investing
transactions and are recorded at the amounts at which the securities were
acquired plus accrued interest. Securities obtained under the resale agreements
have a market value equal to or exceeding the principal amount of the resale
agreements. The securities are held by third party custodians and are segregated
under written agreements that recognize RJBank’s interest in the securities. The
securities purchased are primarily mortgage-backed securities or collateralized
mortgage obligations (“CMOs”) issued by U.S. agencies. The market value of
securities purchased is monitored and collateral is obtained from or returned
to
the counterparty when appropriate. These reverse repurchase agreements generally
mature on the next business day. RJBank has the right to sell, transfer or
pledge the securities purchased under agreements to resell.
Securities
Owned
Trading
securities are comprised primarily of the financial instruments held by the
Company's broker-dealer subsidiaries. These instruments are recorded at fair
value with unrealized gains and losses reflected in current period earnings.
Fair values are generally based on prices from independent sources, such as
listed market prices or broker or dealer price quotations. For
investments in illiquid and privately held securities that do not have readily
determinable fair values through quoted market prices, the determination of
fair
value is based upon consideration of available information, including types
of
securities, current financial information, restrictions on dispositions, market
values of underlying securities and quotations for similar
instruments.
Available
for sale securities are comprised primarily of CMOs and mortgage related debt.
Debt and equity securities classified as available for sale are reported at
fair
value with unrealized gains or losses, net of deferred taxes, reported in
shareholders' equity as a component of accumulated other comprehensive income.
Fair values of the debt securities are estimated based on bid quotations
received from securities dealers or, if quoted market prices are not available,
then the fair value is estimated using quoted market prices for similar
securities, pricing models, or discounted cash flow analyses, using observable
market data where available. All realized gains and losses are determined on
a
specific identification basis and are included in current period earnings.
Additionally, any unrealized losses deemed to be other than temporary are
included in current period earnings and
a new
cost basis for the security is established. Many factors are considered to
determine whether an impairment is other-than-temporary, including whether
the
Company has the ability and intent to hold the investment until a market price
recovery and whether evidence indicating the cost of the investment is
recoverable outweighs evidence to the contrary. Evidence considered in this
assessment includes the reasons for the impairment, the severity and duration
of
the impairment, changes in value subsequent to year-end, and forecasted
performance of the security.
Brokerage
Client Receivables and Allowance for Doubtful Accounts
Brokerage
client receivables include receivables of the Company's asset management and
broker-dealer subsidiaries. The receivables from asset management clients are
primarily for accrued asset management service fees, while the receivables
from
broker-dealer clients are principally for amounts due on cash and margin
transactions and are generally collateralized by securities owned by the
clients. Both the receivables from the asset management and broker-dealer
clients are reported at their outstanding principal balance, adjusted for any
allowance for doubtful accounts. When a broker-dealer receivable is considered
to be impaired, the amount of the impairment is generally measured based on
the
fair value of the securities acting as collateral, which is measured based
on
current prices from independent sources such as listed market prices or
broker-dealer price quotations. Securities owned by customers, including those
that collateralize margin or other similar transactions, are not reflected
in
the Consolidated Statement of Financial Condition.
The
Company also makes loans or pays advances to Financial Advisors, primarily
for
recruiting and retention purposes. The Company provides for an allowance for
doubtful accounts based on an evaluation of the Company’s ability to collect
such receivables. The Company’s ongoing evaluation includes the review of
specific accounts of Financial Advisors no longer associated with the Company
and the Company’s historical collection experience.
Securities
Borrowed and Securities Loaned
Securities
borrowed and securities loaned transactions are reported as collateralized
financings and recorded at the amount of collateral advanced or received.
Securities borrowed transactions generally require the Company to deposit cash
with the lender. With respect to securities loaned, the Company generally
receives collateral in the form of cash in an amount in excess of the market
value of securities loaned. The Company monitors the market value of securities
borrowed and loaned on a daily basis, with additional collateral obtained or
refunded, as necessary.
Bank
Client Loans and Allowances for Losses
Bank
loans are primarily comprised of loans originated or purchased by RJBank and
include commercial and residential mortgage loans, as well as non-real estate
commercial and consumer loans. The Company records these loans at amortized
cost, adjusted for an allowance for loan loss. Included in amortized cost are
any deferred fees or loan origination costs plus the unamortized premiums or
discounts on purchased loans.
Loan
origination fees, net of related costs, are capitalized and recognized in
interest income using the interest or straight-line method, or proportionate
to
the amount of principal payments, over the contractual life of the loans.
Client
loans at RJBank are generally collateralized by real estate or other property.
RJBank provides for both an allowance for losses in accordance
with
Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for
Contingencies”, and a reserve for individually impaired loans in accordance with
SFAS No. 114, “Accounting by a Creditor for Impairment of a Loan”. The
calculation of the SFAS No. 5 allowance is subjective as management segregates
the loan portfolio into different homogeneous classes and assigns each class
an
allowance percentage based on the perceived risk associated with that class
of
loans. During
the fiscal year, RJBank re-evaluated and implemented changes to the loan loss
reserve methodology in conjunction with a revision to the corporate loan grading
process. Because of continued and planned growth, the loan grading process
was
revised and expanded to provide more specific and detailed risk measurement
across the corporate loan portfolio. The
factors taken into consideration when assigning
the
reserve percentage to each reserve category include estimates of borrower
default probabilities and collateral values; trends in delinquencies; volume
and
terms; changes in geographic distribution, lending policies, local, regional,
and national economic conditions; concentrations of credit risk and past loss
history. In addition, the Company provides for potential losses inherent in
RJBank’s unfunded lending commitments using the criteria above, further adjusted
for an estimated probability of funding. For individual loans identified as
impaired, RJBank measures impairment based on the present value of expected
future cash flows discounted at the loan's effective interest rate, the loan's
observable market price, or the fair value of the collateral if the loan is
collateralized. At September 30, 2006, the amortized cost of all RJBank loans
was $2.3 billion and an allowance for loan losses of $18.7 million was recorded
against that balance. The total allowance for loan losses, including $4 million
in reserves for off-balance sheet exposures maintained in Other Liabilities,
approximates 1% of the amortized cost of the loan portfolio.
Once
RJBank has identified a loan as impaired, the accrual of interest on the loan
is
discontinued when either principal or interest becomes 90 days past due or
when
the full timely collection of interest or principal becomes uncertain. When
a
loan is placed on nonaccrual status, the accrued and unpaid interest receivable
is written off and accretion of the net deferred loan origination fees ceases.
The loan is accounted for on the cash or cost recovery method thereafter until
qualifying for return to accrual status.
Investments
in Real Estate Partnerships- Held by Variable Interest
Entities
A
wholly
owned subsidiary of the Company is the managing member or general partner in
several separate tax credit housing funds. Additional information is presented
in Note 6 below. These funds invest in limited partnerships which purchase
and
develop affordable housing properties qualifying for federal and state tax
credits. As of September 30, 2006 and September 30, 2005, the investments
related to these limited partnerships totaled approximately $228.0 million
and
$138.2 million, respectively, on the Company’s Consolidated Statement of
Financial Condition.
Property
and Equipment
Property,
equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Depreciation of assets is primarily provided
for
using the straight-line method over the estimated useful lives of the assets,
which range from three to seven years for software, two to five for furniture
and equipment and 10 to 31 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.
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 property and equipment are reflected in income in
the
period realized.
Goodwill
Intangible
assets consist predominantly of goodwill related to the acquisitions of Roney
& Co. (now part of RJA) and Goepel McDermid, Inc. (now called Raymond James
Ltd). This goodwill, totaling $63 million, was allocated to the reporting units
within the Private Client Group
and
Capital Markets segments pursuant to SFAS No. 142, “Goodwill and Other
Intangible Assets”. Goodwill represents the excess cost of a business
acquisition over the fair value of the net assets acquired. In accordance with
SFAS No. 142, indefinite-life intangible assets and goodwill are not amortized.
Rather they are subject to impairment testing on an annual basis, or more often
if events or circumstances indicate there may be impairment. This test involves
assigning tangible assets and liabilities, identified intangible assets and
goodwill to reporting units and comparing the fair value of each reporting
unit
to its carrying amount. If the fair value is less than the carrying amount,
a
further test is required to measure the amount of the impairment.
When
available, the Company uses recent, comparable transactions to estimate the
fair
value of the respective reporting units. The Company calculates an estimated
fair value based on multiples of revenues, earnings, and book value of
comparable transactions. However, when such comparable transactions are not
available or have become outdated, the Company uses discounted cash flow
scenarios to estimate the fair value of the reporting units. As of September
30,
2006, goodwill had been allocated to the Private Client Group of RJA, and both
the Private Client Group and Capital Markets segments of RJ Ltd. As of the
most
recent impairment test, the Company determined that the carrying value of the
goodwill for each reporting unit had not been impaired. However, changes in
current circumstances or business conditions could result in an impairment
of
goodwill. As required, the Company will continue to perform impairment testing
on an annual basis or when an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying amount.
Exchange
Memberships
Exchange
memberships are carried at cost or, if an “other than temporary” impairment in
value has occurred, at a value that reflects management's estimate of the
impairment. The Company’s membership interests, which are included in prepaid
expenses and other assets at a cost of $1,009,000 and $2,820,000 at September
30, 2006, and September 30, 2005, respectively, had an aggregate market value
of
$2,565,000 and $10,743,000 at September 30, 2006 and September 30, 2005,
respectively. The market value of the exchange memberships is determined based
on the last reported sale.
Legal
Reserves
The
Company recognizes liabilities for contingencies when there is an exposure
that,
when fully analyzed, indicates it is both probable that a liability has been
incurred and the amount of loss can be reasonably estimated. When a range of
probable loss can be estimated, the Company accrues the most likely amount;
if
not determinable, the Company accrues at least the minimum of the range of
probable loss.
The
Company records reserves related to legal proceedings in "other payables".
Such
reserves are established and maintained in accordance with SFAS No. 5,
"Accounting for Contingencies", and FIN No. 14. The determination of these
reserve amounts requires significant judgment on the part of management.
Management considers many factors including, but not limited to: the amount
of
the claim; the amount of the loss in the client's account; the basis and
validity of the claim; the possibility of wrongdoing on the part of an employee
of the Company; previous results in similar cases; and legal precedents and
case
law. Each legal proceeding is reviewed with counsel in each accounting period
and the reserve is adjusted as deemed appropriate by management. Lastly, each
case is reviewed to determine if it is probable that insurance coverage will
apply, in which case the reserve is reduced accordingly. Any change in the
reserve amount is recorded in the consolidated financial statements and is
recognized as a charge/credit to earnings in that period.
Stock
Compensation
At
September 30, 2006, the Company had multiple stock-based employee compensation
plans, which are described more fully in Note 17 below. In addition, the Company
has a stock option plan for its independent contractor Financial Advisors,
which
is described more fully in Note 18 below. Effective October 1, 2005, the Company
adopted the provisions of SFAS No. 123R. Given that the Company had adopted
the
fair value recognition provisions as of September 28, 2002, using the modified
prospective method of adoption within the provisions of SFAS No. 148 “Accounting
for Stock-Based Compensation - Transition and Disclosure”, the adoption of SFAS
No. 123R did not have a material impact on the Company’s accounting for employee
stock-based compensation. The Company accounts for stock options granted to
its
independent contractor Financial Advisors following the provisions of Emerging
Issues Task Force (“EITF”) Issue No. 96-18 “Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.” As a result, these options are revalued at each
reporting date for purposes of measuring compensation expense associated with
these options. Compensation expense is recognized for all stock-based
compensation with future service requirements over the relevant vesting
periods.
Derivative
Financial Instruments
The
Company makes limited use of derivative financial instruments in certain of
its
businesses. Certain derivative financial instruments have been used to manage
specifically identified interest rate risk at RJBank, while others are used
in
the conduct of the Company’s fixed income business. The Company accounts for
derivative financial instruments and hedging activities in accordance with
SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
subsequently amended by SFAS No. 137, "Accounting for Derivative Instruments
and
Hedging Activities - Deferral of the Effective Date of FASB Statements No.
133",
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities", and SFAS No. 149, "Amendments of Statement 133 on Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivatives and hedging activities. These statements establish
standards for designating a derivative as a hedge. Derivatives in a
broker-dealer or those that do not meet the criteria for designation as a hedge
are accounted for as trading account assets and liabilities, and recorded at
fair value in the statement of financial condition with the realized and
unrealized gains or losses recorded in the consolidated statement of operations
for that period.
Under
FIN
39, “Offsetting of Amounts Related to Certain Contracts”, the Company elects to
net-by-counterparty the fair value of interest rate swap contracts entered
into
by the Fixed Income Trading group. Certain contracts contain a legally
enforceable master netting arrangement and therefore, the fair value of those
swap contracts are netted by counterparty in the consolidated statement of
financial condition.
The
Company uses interest rate swaps as well as future contracts as part of its
fixed income business. In addition, the Company enters into interest rate swaps
which are, in turn, substantially economically hedged with counterparties.
These
positions are marked to market with the gain or loss and the related interest
recorded in Net Trading Profits within the statement of operations for the
period. Any collateral exchanged as part of the swap agreement is recorded
in
Broker Receivables and Payables in the consolidated statement of financial
condition for the period.
To
manage
interest rate exposures, RJBank has used interest rate swaps. Interest rate
swaps are agreements to exchange interest rate payment streams based on a
notional principal amount. RJBank specifically designated interest rate swaps
as
hedges of the variability in interest rates on the deposit base utilized to
fund
the purchase of loan pools that initially carry a fixed rate, and recognized
interest differentials as adjustments to net interest income in the period
they
occurred.
All
derivative instruments are recognized on the statement of financial condition
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 statement of financial
condition. 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.
Changes
in the fair value of a derivative that is highly effective and that is
designated and qualifies as a cash flow hedge are recorded in other
comprehensive income to the extent effective, until earnings are affected by
the
variability in cash flows of the designated hedged item. Any ineffectiveness
resulting from the cash flow hedge is recorded in RJBank's non-interest income
or expense at the end of each hedging period.
RJBank
discontinues hedge accounting prospectively when it is determined that the
derivative is no longer effective in offsetting changes in the cash flows of
the
hedged item, the derivative expires or is sold, terminated or exercised, or
the
derivative is no longer designated as a hedging instrument, because management
determines that the designation of the derivative as a hedging instrument is
no
longer appropriate.
When
hedge accounting is discontinued, RJBank continues to carry the derivative
at
its fair value in the statement of financial condition, and recognizes any
changes in its fair value in earnings.
Foreign
Currency Translation
The
Company consolidates its foreign subsidiaries and joint ventures. The statement
of financial condition of the subsidiaries and joint ventures are translated
at
exchange rates as of the period end. The statements of operations are translated
at an average exchange rate for the period. The gains or losses resulting from
translating foreign currency financial statements into U.S. dollars are included
in shareholders' equity as a component of accumulated other comprehensive
income.
Income
Taxes
The
Company utilizes the asset and liability approach defined in SFAS No. 109,
“Accounting for Income Taxes”, which 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.
Earnings
per Share
Basic
EPS
is calculated by dividing earnings available to common stockholders by the
weighted-average number of common shares outstanding. Diluted EPS is similar
to
basic EPS, but adjusts for the effect of the potential issuance of common
shares by application of the treasury stock method.
Reclassifications
Certain
amounts from prior years have been reclassified to conform to the current
year
presentation. The effect of these reclassifications on the Company’s previously
reported annual consolidated financial statements was not material. These
reclassifications had no effect on net income.
Revision
to 2005 and 2004 Consolidated Statements of Cash Flows
Certain
amounts in the Company’s 2005 and 2004 Consolidated Statements of Cash Flows
have been reclassified between operating, investing and financing activities
to
comply with SFAS No. 95, “Statement of Cash Flows” (see Note 23 of the Notes to
Consolidated Financial Statements). The effect of these reclassifications
on the
Company’s previously reported annual consolidated financial statements was not
material. These
reclassifications had no effect on net income.
NOTE
2 - TRADING SECURITIES AND TRADING SECURITIES SOLD BUT NOT YET
PURCHASED:
|
September
30, 2006
|
September
30, 2005
|
|
|
Securities
|
|
Securities
|
|
|
Sold
but
|
|
Sold
but
|
|
Trading
|
Not
yet
|
Trading
|
Not
yet
|
|
Securities
|
Purchased
|
Securities
|
Purchased
|
|
(in
000's)
|
Marketable:
|
|
|
|
|
Equities
|
$
29,532
|
$
19,068
|
$
32,237
|
$
30,256
|
Municipal
obligations
|
192,028
|
5
|
177,984
|
17
|
Corporate
obligations
|
134,431
|
968
|
27,830
|
2,285
|
Government
obligations
|
37,793
|
31,636
|
42,009
|
99,465
|
Agencies
|
68,380
|
34,023
|
60,445
|
84
|
Derivative
Contracts
|
20,904
|
8,309
|
12,795
|
2,488
|
Other
|
2,684
|
-
|
2,019
|
-
|
Non-marketable
|
19
|
-
|
4,360
|
-
|
|
$485,771
|
$94,009
|
$359,679
|
$134,595
|
Corporate
obligations and agencies included mortgage-backed securities of $77.1 million
and $79.8 million at September 30, 2006 and September 30, 2005, respectively,
are included in the table above. Mortgage-backed securities sold but not yet
purchased of $34.0 million and $84,000 at September 30, 2006 and September
30,
2005, respectively, are included in agencies in the table above. Net unrealized
gains (losses) related to open trading positions at September 30, 2006,
September 30, 2005, and September 24, 2004 were $4,387,000, $(1,257,000), and
$7,025,000, respectively.
NOTE
3 - AVAILABLE FOR SALE SECURITIES:
Available
for sale securities are comprised primarily of CMOs, mortgage related debt,
and
certain equity securities of the Company's non-broker-dealer subsidiaries,
principally RJBank. There were proceeds
of $252,000 from the sale of securities available for sale for the year ended
September 30, 2006. There were proceeds of $9,250,000 for the year ended
September 30, 2005 and no proceeds for the year ended September 24, 2004.
The
amortized cost and estimated market values of securities available for sale
at
September 30, 2006 are as follows:
|
|
Gross
|
Gross
|
Estimated
|
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|
Cost
|
Gains
|
Losses
|
Value
|
|
(in
000's)
|
|
|
|
|
|
|
|
|
|
|
Agency
collateralized mortgage obligations
|
$
140,888
|
$
461
|
$
(27)
|
$
141,322
|
Non-agency
collateralized mortgage obligations
|
137,753
|
330
|
(156)
|
137,927
|
Other
|
1,306
|
26
|
(1)
|
1,331
|
|
$
279,947
|
$
817
|
$
(184)
|
$
280,580
|
The
amortized cost and estimated market values of securities available for sale
at
September 30, 2005 are as follows:
|
|
Gross
|
Gross
|
Estimated
|
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|
Cost
|
Gains
|
Losses
|
Value
|
|
(in
000's)
|
|
|
|
|
|
|
|
|
|
|
Agency
collateralized mortgage obligations
|
$
180,410
|
$
420
|
$
(34)
|
$180,796
|
Non-agency
collateralized mortgage obligations
|
5,166
|
-
|
(171)
|
4,995
|
Other
|
1,688
|
70
|
-
|
1,758
|
|
$
187,264
|
$
490
|
$(205)
|
$187,549
|
The
amortized cost and estimated market value of securities available for sale
at
September 30, 2006, by contractual maturity are shown below. Since RJBank’s
available for sale securities are backed by mortgages, actual maturities will
differ from contractual maturities because borrowers may have the right to
call
or prepay obligations with or without prepayment penalties.
|
|
Estimated
|
|
Amortized
|
Market
|
|
Cost
|
Value
|
|
(in
000’s)
|
|
|
|
One
year or less
|
$
1,237
|
$
1,238
|
One
to five years
|
1,098
|
1,100
|
Five
to 10 years
|
-
|
-
|
After
10 years
|
277,612
|
278,242
|
|
$
279,947
|
$
280,580
|
|
|
|
The
following table shows RJBank’s investments’ gross unrealized losses and fair
value, aggregated by investment category and length of time the individual
securities have been in a continuous unrealized loss position, at September
30,
2006 (in 000’s).
|
|
Less
than 12 months
|
|
12
months or more
|
|
Total
|
|
|
Estimated
|
|
|
|
Estimated
|
|
|
|
Estimated
|
|
|
|
|
fair
|
|
Unrealized
|
|
fair
|
|
Unrealized
|
|
fair
|
|
Unrealized
|
|
|
value
|
|
losses
|
|
value
|
|
losses
|
|
value
|
|
losses
|
Agency
collateralized
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage
obligations
|
|
$
20,357
|
|
$
(9)
|
|
$
19,052
|
|
$
(18)
|
|
$
39,409
|
|
$
(27)
|
Non-agency
collateralized
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage
obligations
|
|
6,199
|
|
(10)
|
|
4,186
|
|
(146)
|
|
10,385
|
|
(156)
|
Total
temporarily impaired
securities
|
|
$
26,556
|
|
$
(19)
|
|
$
23,238
|
|
$
(164)
|
|
$
49,794
|
|
$
(183)
|
The
reference point for determining when securities are in a loss position is fiscal
year-end. As such, it is possible that a security had a fair value that exceeded
its amortized cost on other days during the past twelve-month period. The
unrealized losses at September 30, 2006, were primarily caused by interest
rate
changes. The Federal National Mortgage Association or Federal Home Loan Mortgage
Corporation guarantees the contractual cash flows of the agency collateralized
mortgage obligation securities, and the non-agency collateralized mortgage
obligations are rated AAA. It is expected that the securities would not be
settled at a price less than the amortized cost of the investment. Because
the
decline in fair value is attributable to changes in interest rates and not
credit quality, and because the Company has the ability and intent to hold
these
investments until a fair value recovery or maturity, these investments are
not
considered "other-than-temporarily" impaired.
NOTE
4 - RECEIVABLES FROM AND PAYABLES TO BROKERAGE CLIENTS:
Receivables
from Brokerage Clients
Receivables
from brokerage clients include amounts arising from normal cash and margin
transactions and fees receivable. Margin receivables are collateralized by
securities owned by brokerage clients. Such collateral is not reflected in
the
accompanying consolidated financial statements. The amount receivable from
clients at September 30, 2006 and September 30, 2005 is as follows:
|
September
30,
2006
|
September
30,
2005
|
|
(in
000's)
|
|
|
|
Brokerage
client receivables
|
$
1,505,126
|
$
1,426,890
|
Allowance
for doubtful accounts
|
(519)
|
(794)
|
Brokerage
client receivables, net
|
$
1,504,607
|
$
1,426,096
|
|
|
|
Payables
to Brokerage Clients
Payables
to brokerage clients include brokerage client funds on deposits awaiting
reinvestment. The following table presents a summary of such payables at
September 30, 2006 and September 30, 2005:
|
September
30,
2006
|
September
30,
2005
|
|
($
in 000's)
|
|
|
|
Brokerage
client payables:
|
|
|
Interest
bearing
|
$
4,140,197
|
$
3,301,599
|
Non-interest
bearing
|
412,030
|
465,936
|
Total
brokerage client payables
|
$
4,552,227
|
$
3,767,535
|
Interest
expense on brokerage client payables for the years ended September 30, 2006,
September 30, 2005, and September 24, 2004 was $143,428,000, $58,486,000, and
$11,659,000, respectively.
NOTE
5 - BANK LOANS, NET:
Bank
client receivables are primarily comprised of loans originated or purchased
by
RJBank and include commercial and residential mortgage loans, as well as
consumer loans. These receivables are collateralized
by first or second mortgages on residential property, real property, or the
general assets of the borrower. The
following table provides a summary of RJBank's loans receivable at September
30,
2006 and September 30, 2005:
|
September
30,
|
September
30,
|
|
2006
|
2005
|
|
(in
000's)
|
|
|
|
Residential
mortgage loans
|
$
1,322,911
|
$
689,129
|
Commercial
loans
|
960,977
|
313,191
|
Consumer
loans
|
1,917
|
3,866
|
|
2,285,805
|
1,006,186
|
|
|
|
Allowance
for loan losses
|
(18,694)
|
(7,593)
|
Net
(unearned income) deferred expenses
|
(4,279)
|
1,688
|
|
|
|
|
$
2,262,832
|
$
1,000,281
|
At
September 30, 2006 and September 30, 2005, $60,000,000 and $70,000,000 in
Federal Home Loan Bank (“FHLB”) advances, respectively, were secured by a
blanket lien on RJBank's residential mortgage loan portfolio.
RJBank's
gain from the sale of originated loans held for sale were $413,000, $421,000,
and $258,000 for the years ended September 30, 2006, September 30, 2005, and
September 24, 2004, respectively.
Certain
officers, directors, and affiliates, and their related interests were indebted
to RJBank for $294,000 and $297,000 at September 30, 2006 and September 30,
2005, respectively.
Changes
in the allowance for loan losses and reserve for unfunded lending commitments
at
RJBank for the years ended September 30, 2006, September 30, 2005, and September
24, 2004 are as follows:
|
September
30,
|
September
30,
|
September
24,
|
|
2006
|
2005
|
2004
|
|
(in
000's)
|
Balance,
beginning of year
|
$
9,030
|
$
7,642
|
$
5,910
|
Provision
charged to operations
|
13,760
|
1,388
|
1,732
|
Charge-offs
|
(61)
|
-
|
-
|
Recoveries
|
9
|
-
|
-
|
Balance,
end of year
|
$
22,738
|
$
9,030
|
$
7,642
|
The
total
allowance for loan losses includes both the reserve for funded loans shown
net
of Bank Loans Receivable on the statement of financial condition, and the
reserve for unfunded lending commitments included in Trade and Other
Payables.
The
investment in loans on nonaccrual status at September 30, 2006 was $2.1 million.
At September 30, 2005, loans on nonaccrual status were immaterial to the
consolidated financial statements.
The
investment and the average balance of impaired loans at September 30, 2006,
September 30, 2005, and September 24, 2004 along with the related interest
income recognized on these loans, were immaterial to the consolidated financial
statements.
NOTE
6 - VARIABLE INTEREST ENTITIES (“VIEs”):
Under
the
provisions of FIN 46R the Company has determined that Raymond James Employee
Investment Funds I and II (the “EIF Funds”), Comprehensive Software Systems,
Inc. (“CSS”), certain entities in which Raymond James Tax Credit Funds, Inc.
(“RJTCF”) owns variable interests, various partnerships involving real estate,
and a trust fund established for employee retention purposes are VIEs. Of these,
the Company has determined that the EIF Funds, certain tax credit fund
partnerships/LLCs, and the trust fund should be consolidated in the financial
statements.
The
following table summarizes the balance sheets of the variable interest entities
consolidated by the Company:
|
September
30,
|
September
30,
|
|
2006
|
2005
|
|
(in
000's)
|
Assets:
|
|
|
Cash
and cash equivalents
|
$
17,622
|
$
23,272
|
Receivables,
other
|
88,145
|
56,357
|
Investments
in real estate partnerships - held by variable interest entities
|
227,963
|
138,228
|
Trust
fund investment in parent company common stock*
|
5,100
|
-
|
Prepaid
expenses and other assets
|
16,426
|
12,270
|
|
|
|
Total
Assets
|
$
355,256
|
$
230,127
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
Loans
payable related to investments by variable interest entities in real
estate partnerships
|
$
193,647
|
$
144,780
|
Trade
and other
|
279
|
2,338
|
Intercompany
payable
|
16,098
|
-
|
|
|
|
Total
Liabilities
|
210,024
|
147,118
|
|
|
|
Minority
Interests
|
143,217
|
81,328
|
Shareholders'
Equity
|
2,015
|
1,681
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
$
355,256
|
$
230,127
|
*
Included in common shares in treasury in the Company’s Consolidated Statement of
Financial Condition.
The
EIF
Funds are limited partnerships, for which the Company is the general partner,
that invest in the merchant banking and private equity activities of the Company
and other unaffiliated venture capital limited partnerships. The EIF Funds
were
established as compensation and retention measures for certain qualified key
employees of the Company. The Company makes non-recourse loans to these
employees for two-thirds of the purchase price per unit. The loans and
applicable interest are to be repaid based on the earnings of the EIF Funds.
The
Company is deemed to be the primary beneficiary, and accordingly, consolidates
the EIF Funds, which had combined assets of approximately $20.5 million at
September 30, 2006. None of those assets act as collateral for any obligations
of the EIF Funds. The Company's exposure to loss is limited to its contributions
and the non-recourse loans funded to the employee investors, for which their
partnership interests serve as collateral. At September 30, 2006 that exposure
is approximately $8.8 million.
CSS
was
formed by a group of broker-dealer firms, including the Company, to develop
a
back-office software system. CSS is currently funded by capital contributions
and loans from its owners. CSS had assets of $4.7 million at September 30,
2006.
As of September 30, 2006, the Company owns approximately 42% of CSS. The
Company's exposure to loss is limited to its capital contributions, amounts
loaned and committed. The Company is not the primary beneficiary of CSS and
accounts for its investment using the equity method of accounting.
RJTCF
is
a wholly owned subsidiary of RJF and is the managing member or general partner
in approximately 43 separate tax credit housing funds having one or more
investor members or limited partners. These tax credit housing funds are
organized as limited liability companies or limited partnerships for the purpose
of investing in limited partnerships which purchase and develop low income
housing properties qualifying for tax credits. As of September 30, 2006, 41
of
these tax credit housing funds are VIEs as defined by FIN 46R, and RJTCF’s
interest in these tax credit housing funds which are VIEs range from .01% to
1%.
RJTCF
has
concluded it is the primary beneficiary in approximately one quarter of these
tax credit housing funds, and accordingly, consolidates these funds, which
have
combined assets of approximately $329.6 million at September 30, 2006. None
of
those assets act as collateral for any obligations of these funds. The Company's
exposure to loss is limited to its investments in and advances to these funds.
At September 30, 2006, that exposure is approximately $15.3 million.
RJTCF
is
not the primary beneficiary of the remaining tax credit housing funds it
determined to be VIEs and accordingly the Company does not consolidate its
financial interests in these funds. The Company's exposure to loss is limited
to
its investments in and advances to those funds. At September 30, 2006, that
exposure is approximately $21.2 million.
The
two
remaining tax credit housing funds that have been determined not to be VIEs
are
wholly owned by RJTCF and are included in the Company’s consolidated financial
statements. As of September 30, 2006, only one of these funds had any material
activity. This fund typically holds interests in certain tax credit limited
partnerships for less than 90-days and has assets of approximately $4.3 million
at September 30, 2006.
As
of
September 30, 2006, the Company has a variable interest in several limited
partnerships involved in various real estate activities, in which a subsidiary
is the general partner. The Company is not the primary beneficiary of these
partnerships and accordingly the Company does not consolidate its financial
interests in these partnerships. These partnerships have assets of approximately
$25.5 million at September 30, 2006. The Company's exposure to loss is limited
to its capital contributions. The carrying value of the Company's investment
in
these partnerships is not material at September 30, 2006.
One
of
the Company’s restricted stock plans is associated with a trust fund which was
established through the Company’s wholly owned Canadian subsidiary. This trust
fund was established and funded to enable the trust fund to acquire Company
common stock in the open market to be used to settle restricted stock units
granted as a retention vehicle for certain employees of the Canadian subsidiary.
For financial statement purposes, the Company is deemed to be the primary
beneficiary in accordance with FIN 46R, and accordingly, consolidates this
trust
fund, which has assets of approximately $5.1 million at September 30, 2006.
None
of those assets are specifically pledged as collateral for any obligations
of
the trust fund. The Company's exposure to loss is limited to its contributions
to the trust fund. At September 30, 2006, that exposure is approximately $5.1
million.
NOTE
7 - LEVERAGED LEASES:
The
Company is the lessor in two leveraged commercial aircraft transactions with
two
major domestic airlines (Delta and Continental). The Company's ability to
realize its expected return is dependent upon the airlines' ability to fulfill
their lease obligations. In the event that the airlines default on their lease
commitments and the Trustee for the debt holders is unable to re-lease or sell
the planes with adequate terms, the Company would suffer a loss of some or
all
of its investment. Delta Airlines filed for bankruptcy protection on September
14, 2005. Accordingly, the Company recorded a $6.5 million pretax charge in
2005
to fully reserve the balance of its investment in the leveraged lease of an
aircraft to Delta. The Company also had taken a $4 million pretax charge in
2004
to partially reserve for this investment. No amount of these charges represents
a cash expenditure; however, in the likely event of a material modification
to
the lease or foreclosure of the aircraft by the debt holders in fiscal 2007,
certain tax payments of up to approximately $8.1 million could be accelerated.
The expected tax payments are currently reflected on the statement of financial
condition as a deferred tax liability and are not expected to result in a
further charge to earnings.
The
Company also has a leveraged lease outstanding with Continental valued at $10.9
million as of Sept. 30, 2006. The Company's equity investment represented 20%
of
the aggregate purchase price; the remaining 80% was funded by public debt issued
in the form of equipment trust certificates. The residual value of the aircraft
at the end of the lease term of approximately 17 years is projected to be 15%
of
the original cost. This lease expires in May 2014.
|
September
30,
|
September
30,
|
|
2006
|
2005
|
|
(in
000's)
|
Rents
receivable (net of principal and
|
|
|
interest
on the non-recourse debt)
|
$
8,576
|
$
9,502
|
Unguaranteed
residual values
|
8,012
|
8,012
|
Unearned
income
|
(5,706)
|
(5,706)
|
Investment
in leveraged leases
|
10,882
|
11,808
|
|
|
|
Deferred
taxes arising from leveraged leases
|
(19,796)
|
(21,349)
|
Net
investment in leveraged leases
|
$
(8,914)
|
$
(9,541)
|
Although
Continental remains current on its lease payments to the Company, the inability
of Continental to make its lease payments, or the termination or modification
of
the lease through a bankruptcy proceeding, could result in the write-down of
the
Company's investment and the acceleration of certain income tax payments. The
Company is monitoring this lessee for specific events or circumstances that
would increase the likelihood of a default on Continental’s obligations under
this lease given the difficult economic environment for the airline industry.
NOTE
8 - PROPERTY AND EQUIPMENT:
|
September
30,
|
September
30,
|
|
2006
|
2005
|
|
(in
000's)
|
|
|
|
Land
|
$
18,644
|
$
19,244
|
Construction
in process
|
4,755
|
10,175
|
Buildings,
leasehold and land improvements
|
137,117
|
123,773
|
Furniture,
fixtures, and equipment
|
155,198
|
145,774
|
|
315,714
|
298,966
|
Less: accumulated
depreciation
|
|
|
and
amortization
|
(172,934)
|
(161,411)
|
|
$
142,780
|
$
137,555
|
NOTE
9 - BANK DEPOSITS:
Bank
deposits include demand deposits, savings accounts and certificates of deposit.
The following table presents a summary of bank deposits at September 30, 2006
and September 30, 2005:
|
September
30,
|
September
30,
|
|
2006
|
2005
|
|
Balance
|
Weighted
Average Rate
|
Balance
|
Weighted
Average Rate
|
|
($
in 000's)
|
|
|
|
|
|
Bank
deposits:
|
|
|
|
|
Demand
deposits - interest bearing
|
$
6,088
|
1.95%
|
$
4,405
|
0.84%
|
Demand
deposits - non-interest bearing
|
2,538
|
-
|
4,210
|
-
|
Savings
and money market accounts
|
2,542,894
|
4.59%
|
846,745
|
2.63%
|
Certificates
of deposit (1)
|
255,360
|
4.49%
|
220,660
|
3.61%
|
Total
bank deposits
|
$2,806,880
|
4.57%
|
$1,076,020
|
2.82%
|
|
|
|
|
|
|
(1)
|
Certificates
of deposit in amounts of $100,000 or more at September 30, 2006 and
September 30, 2005 were $72,067,000 and $61,018,000,
respectively.
|
Certificates
of deposit issued have remaining maturities at September 30, 2006 and
September 30, 2005, as follows:
|
September
30,
|
September
30,
|
|
2006
|
2005
|
|
(in
000's):
|
|
|
|
One
year or less
|
$125,622
|
$120,380
|
One
to two years
|
50,427
|
25,737
|
Two
to three years
|
36,306
|
23,460
|
Three
to four years
|
24,885
|
29,434
|
Four
to five years and thereafter
|
18,120
|
21,649
|
Total
|
$255,360
|
$220,660
|
RJBank
had deposits from officers and directors of $691,000 and $625,000 at September
30, 2006 and September 30, 2005, respectively.
Interest
expense on bank client accounts is comprised of the following for the years
ended September 30, 2006, September 30, 2005 and September 24,
2004:
|
September
30,
|
September
30,
|
September
24,
|
|
2006
|
2005
|
2004
|
|
(in
000's)
|
|
|
|
|
Demand
deposits
|
$
81
|
$
24
|
$
9
|
Savings
and money market accounts
|
51,233
|
12,017
|
1,644
|
Certificates
of deposit
|
10,872
|
6,577
|
5,101
|
|
$
62,186
|
$
18,618
|
$
6,754
|
NOTE
10 - LOANS PAYABLE:
Loans
Payable
Loans
payable at September 30, 2006 and September 30, 2005 are presented
below:
|
September
30,
2006
|
September
30,
2005
|
|
(in
000's)
|
Short-term
Borrowings:
|
|
|
Borrowings
on lines of credit (1)
|
$
13,040
|
$
5,338
|
Current
portion of mortgage notes payable
|
2,746
|
2,604
|
Total
short-term borrowings
|
15,786
|
7,942
|
|
|
|
Long-term
Borrowings:
|
|
|
Mortgage
notes payable
(2)
|
65,852
|
68,520
|
Federal
Home Loan Bank advances (3)
|
60,000
|
70,000
|
Total
long-term borrowings
|
125,852
|
138,520
|
|
|
|
Total
loans payable
|
$141,638
|
$146,462
|
|
|
|
|
(1)
|
The
Company and its subsidiaries maintain one committed and several
uncommitted lines of credit denominated in U.S. dollars and one
uncommitted line of credit denominated in Canadian dollars (“CDN”). At
September 30, 2006, the aggregate domestic lines were $710 million
and CDN
$40 million, respectively, of which CDN $10.2 million was outstanding.
The
interest rates for the lines of credit are variable and are based
on the
Fed Funds rate, LIBOR, and Canadian prime rate. For the fiscal year
ended
September 30, 2006, interest rates on the lines of credit ranged
from
4.25% to 6.76%. For the fiscal year ended, September 30, 2005 interest
rates on the lines of credit ranged from 2.25% to 5.34%. In addition,
various foreign joint ventures of the Company have several lines
of
credit. At September 30, 2006 the aggregate unsecured lines of credit
were
$22.4 million, of which $3.8 million was outstanding. The interest
rates
for the lines of credit range from 17% to
20%.
|
|
(2)
|
Mortgage
notes payable is comprised of a mortgage loan for the financing of
the
Company's home office complex and a note for the financing of the
office
for a foreign joint venture. The mortgage loan bears interest at
5.7% and
is secured by land, buildings, and improvements with a net book value
of
$73.6 million at September 30, 2006. The foreign joint venture note
bears
interest at 8.25% and is secured by the
building.
|
|
(3)
|
RJBank
has $60 million in FHLB advances outstanding at September 30, 2006,
which
are comprised of long-term, fixed rate advances. The long-term, fixed
rate
advances bear interest at rates ranging from 2.37% to 5.67%. The
outstanding FHLB advances mature between May 2008 and October 2014.
These
advances are secured by a blanket lien on RJBank's residential loan
portfolio granted to FHLB at September 30, 2006. The FHLB has the
right to
convert advances totaling $50 million and $65 million at September
30,
2006 and September 30, 2005, respectively, to a floating rate at
one or
more future dates. RJBank has the right to prepay these advances
without
penalty if the FHLB exercises its
right.
|
Long-term
borrowings at September 30, 2006, based on their contractual terms, mature
as
follows (in 000's):
2008
|
$
7,911
|
2009
|
3,086
|
2010
|
8,272
|
2011
|
43,469
|
2012
and thereafter
|
63,114
|
Total
|
$125,852
|
Loans
Payable Related to Investments by Variable Interest Entities in Real Estate
Partnerships
The
borrowings of certain variable interest entities are comprised of several loans,
which are non-recourse to the Company. See Note 6 of
the
Notes to Consolidated Financial Statements
for
additional information regarding the entities deemed to be variable interest
entities under FIN 46R, which are consolidated by the Company.
Variable
interest entities’ loans payable at September 30, 2006 and September 30, 2005
are presented below:
|
September
30,
2006
|
September
30,
2005
|
|
(in
000's)
|
|
|
|
Current
portion of loans payable
|
$
32,787
|
$
2,516
|
Long-term
portion of loans payable
|
160,860
|
142,264
|
|
|
|
Total
loans payable
|
$193,647
|
$144,780
|
|
|
|
VIEs’
long-term borrowings at September 30, 2006, based on their contractual terms,
mature as follows (in 000's):
2008
|
$
13,158
|
2009
|
17,984
|
2010
|
17,529
|
2011
|
22,394
|
2012
and thereafter
|
89,795
|
Total
|
$160,860
|
NOTE
11 - DERIVATIVE FINANCIAL INSTRUMENTS:
The
Company makes limited use of derivative financial instruments in certain of
its
businesses. Certain derivative financial instruments have been used to manage
specifically identified interest rate risk at RJBank, while others are used
in
the conduct of the Company’s fixed income business.
The
Company uses interest rate swaps as well as futures contracts as part of its
fixed income business. These positions are marked to market with the gain or
loss and the related interest recorded in Net Trading Profits within the
statement of operations for the period. Any collateral exchanged as part of
the
swap agreement is recorded in Broker Receivables and Payables in the
consolidated statement of financial condition for the period. At September
30,
2006 and September 30, 2005, the Company had outstanding derivative contracts
with notional amounts of $2.3 billion and $1.9 billion, respectively, in
interest rate swaps. The notional amount of a derivative contract does not
change hands; it is simply used as a reference to calculate payments.
Accordingly, the notional amount of the Company’s derivative contracts
outstanding at September 30, 2006 significantly exceeds the possible losses
that
could arise from such transactions. The net market value of all open swap
positions at September 30, 2006 and September 30, 2005 was $13 million and
$10
million, respectively.
RJBank
uses variable-rate deposits to finance the purchase of certain loan pools that
contain debt instruments that are fixed for the first five years of their life.
The funding sources expose RJBank to variability in interest payments due to
changes in interest rates. Management believes it is prudent to limit the
variability of its interest payments. To meet this objective, management entered
into interest rate swap agreements to manage fluctuations in cash flows
resulting from interest rate risk. These swaps changed the variable-rate cash
flow exposure on the funding sources to fixed cash flows. Under the terms of
the
interest rate swaps, RJBank received variable interest rate payments and made
fixed interest rate payments, thereby creating the equivalent of fixed-rate
funding. At September 30, 2006 and 2005, RJBank was party to zero
and
$11.5 million, respectively, in notional
amount of interest rate swap agreements, and had securities and cash of zero
and
$0.9 million, respectively, pledged or held as interest-bearing collateral
for
such agreements.
Changes
in the fair value of a derivative that is effective, as defined by SFAS 133,
and
that is designated and qualifies as a cash flow hedge are recorded in other
comprehensive income until earnings are affected by the variability in cash
flows of the designated hedged item. Any ineffectiveness resulting from the
cash
flow hedge is recorded in income or expense at the end of each reporting period.
For purposes of the statement of cash flows, any ineffectiveness resulting
from
the cash flow hedge is subtracted or added back in the reconciliation of net
income to cash provided by operating activities at the end of each reporting
period. When hedge accounting is discontinued, RJBank continues to carry the
derivative at its fair value in the statement of financial condition, and
recognizes any changes in its fair value in earnings. For the years ended
September 30, 2006, September 30, 2005, and September 24, 2004, RJBank recorded
zero, ($207,767), and $391,651, respectively, in income (expense) from
ineffective cash flow hedges and transition adjustments. The net amount of
the
existing unrealized losses expected to be reclassified into pretax earnings
within the next 12 months was zero at September 30, 2006 and $100,000 at
September 30, 2005.
The
Company is exposed to credit losses in the event of nonperformance by the
counterparties to its interest rate swap agreements. The Company performs a
credit evaluation of counterparties prior to entering into swap transactions.
Currently, the Company anticipates that all counterparties will be able to
fully
satisfy their obligations under those agreements. The Company may require
collateral from counterparties to support these obligations as established
by
the credit threshold specified by the agreement and/or as a result of monitoring
the credit standing of the counterparties. The
Company is also exposed to interest rate risk related to its interest rate
swap
agreements. The
Company monitors exposure in its derivatives subsidiary daily based on
established limits with respect to a number of factors, including interest
rate
risk, spread, ratio and basis risk and volatility. These exposures are monitored
both on a total portfolio basis and separately for selected maturity periods.
NOTE
12 - INCOME TAXES:
The
provision (benefit) for income taxes consists of the following:
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
24,
|
|
2006
|
2005
|
2004
|
|
|
(in
000’s)
|
|
Current
provision:
|
|
|
|
Federal
|
$
102,665
|
$
78,783
|
$
71,004
|
State
|
16,844
|
15,483
|
13,722
|
International
|
13,379
|
8,231
|
3,381
|
|
132,888
|
102,497
|
88,107
|
Deferred
benefit:
|
|
|
|
Federal
|
(3,742)
|
(3,058)
|
(5,813)
|
State
|
(495)
|
(1,867)
|
(5,897)
|
International
|
(927)
|
(647)
|
149
|
|
(5,164)
|
(5,572)
|
(11,561)
|
|
$
127,724
|
$
96,925
|
$
76,546
|
The
Company's income tax expense differs from the amount computed by applying the
statutory federal income tax rate due to the following:
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
24,
|
|
2006
|
2005
|
2004
|
|
|
(in
000’s)
|
|
|
|
|
|
Provision
calculated at statutory rates
|
$
119,723
|
$
85,909
|
$
71,442
|
State
income taxes, net of federal benefit
|
10,627
|
8,851
|
5,085
|
Other
|
(2,626)
|
2,165
|
19
|
|
$
127,724
|
$
96,925
|
$
76,546
|
U.S.
and
international components of income before income taxes were as
follows:
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
24,
|
|
2006
|
2005
|
2004
|
|
|
(in
000’s)
|
|
|
|
|
|
U.S.
|
$
308,003
|
$
230,790
|
$
196,642
|
International
|
34,063
|
17,181
|
7,479
|
Income
before income taxes
|
$
342,066
|
$
247,971
|
$
204,121
|
The
major
deferred tax asset (liability) items, as computed under SFAS 109, are as
follows:
|
September
30,
|
|
September
30,
|
|
2006
|
|
2005
|
|
(in
000’s)
|
Deferred
tax assets:
|
|
|
|
Deferred compensation
|
$
56,584
|
|
$
49,460
|
Capital expenditures
|
7,286
|
|
8,719
|
Accrued expenses
|
40,904
|
|
39,674
|
Unrealized loss
|
1,932
|
|
252
|
Net operating loss carryforward
|
13,496
|
|
10,487
|
Other
|
-
|
|
1,617
|
Total
deferred tax assets
|
120,202
|
|
110,209
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Aircraft
leases
|
(19,796)
|
|
(21,349)
|
Other
|
(5,449)
|
|
-
|
Total
deferred tax liabilities
|
(25,245)
|
|
(21,349)
|
Net
deferred tax assets
|
$
94,957
|
|
$
88,860
|
The
Company has recorded a deferred tax asset at September 30, 2006 and September
30, 2005. The net operating loss carryforwards expire between 2008 and 2016.
No
valuation allowance as defined by SFAS 109 is required for the years then ended
as Management believes that it is more likely than not the deferred tax asset
is
realizable.
The
“American Jobs Creation Act of 2004” provides for a one-time deduction for
qualifying repatriations of foreign earnings in either fiscal year 2005 or
2006.
The 85% dividends received deduction can result in a lower tax rate if the
eligible dividends are reinvested within the limitations and requirements of
Internal Revenue Code Section 965. During fiscal year 2006, the Company
repatriated $1.9 million in extraordinary dividends and recorded a tax liability
of $102,000. To the degree that the cumulative undistributed earnings of
non-U.S. subsidiaries were permanently invested, no deferred U.S. federal income
taxes have been provided. We have provided for U.S. deferred income taxes in
the
amount of $2.9 million on undistributed earnings not considered permanently
reinvested in our non-U.S. subsidiaries.
NOTE
13 - COMMITMENTS AND CONTINGENCIES:
Long-term
lease agreements expire at various times through 2014. Minimum annual rentals
under such agreements for the succeeding five fiscal years are approximately:
$26,013,000 in 2007, $21,858,000 in 2008, $16,860,000 in 2009, $14,378,000
in
2010, $8,938,000 in 2011 and $13,719,000 thereafter. Rental expense incurred
under all leases, including equipment under short-term agreements, aggregated
$34,329,000, $31,949,000 and $31,396,000 in 2006, 2005 and 2004,
respectively.
See
Note
7 of the Notes to Consolidated Financial Statements with respect to the
Company's interest in certain commercial aircraft leveraged leases.
RJBank
has outstanding at any time a significant number of commitments to extend credit
or purchase loans. These arrangements are subject to strict credit control
assessments and each client's credit worthiness is evaluated on a case-by-case
basis. A summary of commitments to extend credit, purchase loans and letters
of
credit outstanding is as follows:
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
(in
000's)
|
|
|
|
|
|
Standby
letters of credit
|
|
$
55,193
|
|
$
15,933
|
Consumer
lines of credit
|
|
25,772
|
|
21,326
|
Commercial
lines of credit
|
|
760,253
|
|
168,804
|
Unfunded
loan commitments - variable rate
|
|
264,663
|
|
288,169
|
Unfunded
loan commitments - fixed rate
|
|
6,412
|
|
11,402
|
Because
many commitments expire without being funded in whole or part, the contract
amounts are not estimates of future cash flows.
In
the
normal course of business, RJBank issues, or participates in the issuance of,
financial standby letters of credit whereby it provides an irrevocable guarantee
of payment in the event the letter of credit is drawn down by the beneficiary.
As of September 30, 2006, $55.2 million of such letters of credit were
outstanding. Of the letters of credit outstanding, $54.6 million are
underwritten as part of a larger corporate credit relationship, and the
remaining $600,000 are fully secured by cash or securities. In the event that
a
letter of credit is drawn down, RJBank would pursue repayment from the account
party under the existing borrowing relationship, or would liquidate collateral,
or both. The proceeds from repayment or liquidation of collateral are expected
to cover the maximum potential amount of any future payments of amounts drawn
down under the existing letters of credit.
At
September 30, 2006 and September 30, 2005, no securities were pledged by RJBank
as collateral with the FHLB for advances. In lieu of pledging securities as
collateral for advances, RJBank provided the FHLB with a lien against RJBank's
portfolio of residential mortgage loans.
As
of
September 30, 2006, RJBank has entered into a $460 million reverse repurchase
agreement with a single counterparty. Although RJBank is exposed to risk that
this counterparty may not fulfill its contractual obligation, the risk of
default is minimal due to the creditworthiness of the counterparty, collateral
received and the short duration of this agreement.
As
part
of an effort to increase brand awareness, the Company entered into a stadium
naming rights contract in July 1998. The contract expires in 2016 and has a
4%
annual escalator. Expenses of $2,914,000, $2,802,000
and
$2,694,000 were recognized in the fiscal 2006, 2005 and 2004,
respectively.
In
the
normal course of business, the Company enters into underwriting commitments.
Transactions relating to such commitments that were open at September 30, 2006
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 September 30, 2006 and September 30, 2005, the Company had
client margin securities valued at $65.2 million and $93.4 million,
respectively, on deposit with a clearing organization.
The
Company has committed to lend $1.7 million to CSS in four equal
installments beginning
in April 2006, the last of which is due in December 2006. CSS
was
formed by a group of broker-dealer firms, including the Company, to develop
a
back-office software system.
The
Company has committed a total of $42.6 million, in amounts ranging from $200,000
to $2.0 million, to 40 different independent venture capital or private equity
partnerships. As of September 30, 2006, the Company had invested $29.4 million
of that amount and has received $24.8 million in distributions. Additionally,
the Company is the general partner in two internally sponsored private equity
limited partnerships to which it has committed $14 million. Of that amount,
the
Company had invested $11.7 million and has received $5.5 million in
distributions as of September 30, 2006.
The
Company is the general partner in EIF Funds. These limited partnerships invest
in the merchant banking and private equity activities of the Company and other
unaffiliated venture capital limited partnerships. The EIF Funds were
established as compensation and retention measures for certain qualified key
employees of the Company. At September 30, 2006, the Company has $4.6 million
committed to these funds.
At
September 30, 2006, the approximate market values of collateral received that
can be repledged by the Company, were:
Sources
of collateral (in 000's):
|
|
Securities
purchased under agreements to resell
|
$
313,477
|
Securities
received in securities borrowed vs. cash transactions
|
1,071,200
|
Collateral
received for margin loans
|
1,437,487
|
Total
|
$2,822,164
|
During
the year certain collateral was repledged. At September 30, 2006, the
approximate market values of this portion of collateral and financial
instruments owned that were repledged by the Company, were:
Uses
of collateral and trading securities (in 000's):
|
|
Securities
purchased under agreements to resell
|
$
313,477
|
Securities
received in securities borrowed vs. cash transactions
|
1,034,563
|
Collateral
received for margin loans
|
257,651
|
Total
|
$1,605,691
|
In
the
normal course of business, certain subsidiaries of the Company act as general
partner and may be contingently liable for activities of various limited
partnerships. These partnerships engaged primarily in real estate activities.
In
the opinion of the Company, such liabilities, if any, for the obligations of
the
partnerships will not in the aggregate have a material adverse effect on the
Company's consolidated financial position.
The
Company and its subsidiaries maintain one committed and several uncommitted
lines of credit denominated in U.S. dollars and one uncommitted line of credit
denominated in Canadian dollars. At September 30, 2006, the aggregate domestic
lines were $710 million and total Canadian lines were CDN $40 million of which
CDN $10.2 million was outstanding. The interest rates for the lines of credit
are variable and are based on the Fed Funds rate, LIBOR, and Canadian prime
rate. The Company’s committed $200 million line of credit is subject to a 0.125%
per annum facility fee. RJBank has $60 million in FHLB advances outstanding
at
September 30, 2006, which are comprised of long-term, fixed rate advances.
RJBank had $781 million in credit available from the FHLB
at
September 30, 2006.
The
Company has guaranteed lines of credit for various foreign joint ventures as
follows: four lines of credit totaling $22.5 million in Turkey and one line
of
credit totaling $3 million in Argentina. At September 30, 2006, there was an
outstanding balance of $1.1 million on the lines of credit in Turkey and none
on
the line in Argentina. The Company has also from time to time authorized
guarantees for the completion of trades with counterparties in Argentina and
Turkey. At September 30, 2006, there were no outstanding guarantees in Turkey
and Argentina.
The
Company guarantees the existing mortgage debt of RJA of approximately $67.5
million. The
Company may guarantee interest rate swap obligations of RJ Capital Services,
Inc. The Company has also committed to lend to or guarantee obligations of
RJTCF
of up to $90.0 million upon request, subject to certain limitations as well
as
annual review and renewal. RJTCF borrows in order to invest in partnerships
which purchase and develop properties qualifying for tax credits. These
investments in project partnerships are then sold to various tax credit funds,
which have third party investors, and for which RJTCF serves as the managing
member or general partner. RJTCF typically sells these investments within 90
days of their acquisition, and the proceeds from the sales are used to repay
RJTCF’s borrowings. Additionally, RJTCF may make short-term loans or advances to
project partnerships on behalf of the tax credit funds in which it serves as
managing member or general partner. At September 30, 2006, cash funded to invest
in either loans or investments in project partnerships was $28.6 million. In
addition, at September 30, 2006, RJTCF is committed to additional future
fundings of $7.6 million related to project partnerships that have not yet
been
sold to various tax credit funds.
NOTE
14 - LEGAL AND REGULATORY PROCEEDINGS:
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
the 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 also
result in the imposition of such sanctions.
The
Company is a defendant or co-defendant in various lawsuits and arbitrations
incidental to its securities business. Like others in the retail
securities industry, the Company experienced a significant increase in the
number of claims seeking recovery due to portfolio losses in the early 2000's.
During the past year, the number of claims has declined to more historic levels.
As
previously reported, RJF and Raymond
James Financial Services, Inc. (“RJFS”)
were
defendants in a series of lawsuits and arbitrations relating to an alleged
mortgage lending program known as the "Premiere 72" program, that was
administered by a company owned in part by two individuals who were registered
as Financial Advisors with RJFS in Houston. In July 2005, RJFS paid
approximately $24 million in a settlement with approximately 380 claimants
in
this litigation, representing approximately two-thirds of the outstanding
claims. RJFS has settled with an additional 150 claimants for a lump sum of
$18
million. These settlements effectively extinguish the Company’s liability with
the exception of one remaining lawsuit in federal court involving one claimant
family group.
On
September 27, 2005, the State of Utah filed a petition for Order of Censure,
Suspension of License and Imposition of Fine against RJFS related to the alleged
failure to supervise a former Financial Advisor. The Utah Securities Division
asked the Division Director to enter an order censuring the Company, suspending
its license in Utah for 30 days, ordering a fine of $100,000 and requiring
the
engagement of an independent consultant to review its supervisory structure
and
procedures. In September 2006, RJFS agreed without admitting or denying the
State’s findings, to a fine of $100,000.
Raymond
James Yatyrym Menkul Kyymetler A. S., (“RJY”), the Company’s Turkish affiliate,
was assessed for the year 2001 approximately US$6.8 million by the Turkish
tax
authorities. The authorities applied a significantly different methodology
than
in the prior year’s audit. RJY is vigorously contesting most aspects of this
assessment and has filed an appeal with the Turkish tax court. Audits of 2002
through 2004 are anticipated and their outcome is unknown in light of the change
in methodology and the pending litigation. The Company has made provision in
its
consolidated financial statements for its estimate of the reasonable potential
exposure for this matter. As of September 30, 2006, RJY had total capital of
approximately US$6.4 million, of which the Company owns approximately
73%.
The
Company is contesting the allegations in this and other cases and believes
that
there are meritorious defenses in each of these lawsuits and arbitrations.
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 the Company's management, based on current
available information, review with outside legal counsel, and consideration
of
amounts provided for in the accompanying consolidated financial statements
with
respect to these matters, ultimate resolution of these matters will not have
a
material adverse impact on the Company's financial position or results of
operations. However, resolution of one or more of these matters may have a
material effect on the results of operations in any future period, depending
upon the ultimate resolution of those matters and upon the level of income
for
such period.
NOTE
15 - CAPITAL TRANSACTIONS:
At
their
meeting on February 17, 2006, the Company’s Board of Directors declared a
3-for-2 stock split by means of a dividend. The additional shares were
distributed on March 22, 2006, to shareholders of record on March 8, 2006.
All
references in the consolidated financial statements to amounts per share and
to
the number of shares outstanding have been restated to give retroactive effect
to the stock split.
The
following table presents information on a monthly basis for purchases of the
Company’s stock for the quarter ended September 30, 2006:
|
|
Number
of
|
|
Average
|
Period
|
|
Shares
Purchased (1)
|
|
Price
Per Share
|
|
|
|
|
|
July
1, 2006 - July 31, 2006
|
|
-
|
|
-
|
August
1, 2006 - August 31, 2006
|
|
-
|
|
-
|
September
1, 2006 - September 30, 2006
|
|
2,251
|
|
$29.48
|
Total
|
|
2,251
|
|
$29.48
|
(1)
The
Company does not have a formal stock repurchase plan. Shares are repurchased
at
the discretion of management pursuant to prior authorization from the Board
of
Directors. On May 20, 2004, the Board of Directors authorized purchases of
up to
$75 million. Since that date 391,514 shares have been repurchased for a total
of
$7.4 million, leaving $67.6 million available to repurchase shares. Historically
the Company has considered such purchases when the price of its stock approaches
1.5 times book value or when employees surrender shares as payment for option
exercises. The decision to repurchase shares is subject to cash availability
and
other factors. During 2006 and 2005, 189,664 and 5,740 shares were repurchased
at an average price of $28.97 and $30.81, respectively. During the three months
ended March 31, 2006, the Company established a trust fund, through its wholly
owned Canadian subsidiary, that would enable the trust fund to acquire Company
common stock in the open market to be used to settle restricted stock units
granted as a retention vehicle for certain employees of the Canadian subsidiary.
The only purchases of shares during February were for this trust fund. With
the
exception of the shares purchased through this trust fund in March 2006, the
Company only purchased shares during the balance of the year that were
surrendered by employees as a payment for option exercises.
NOTE
16 - OTHER COMPREHENSIVE INCOME:
The
activity in other comprehensive income and related tax effects are
as
follows (in 000's):
|
|
|
|
|
|
|
|
Sept.
30,
|
|
Sept.
30,
|
|
Sept.
24,
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
Net
unrealized gain (loss) on available for sale securities, net of
tax
effect of $129 in 2006, $51 in 2005, and ($67) in
2004
|
$
217
|
|
$
79
|
|
$
(112)
|
|
|
|
|
|
|
Net
unrealized gain on interest rate swaps accounted for as cash flow
hedges,
net of tax effect of $28 in 2006, $566 in 2005, and $1,310
in 2004
|
44
|
|
882
|
|
2,184
|
|
|
|
|
|
|
Net
change in currency translations, net of tax effect of $1,312 in
2006,
$3,078 in 2005, and $719 in 2004
|
2,202
|
|
4,796
|
|
1,199
|
|
|
|
|
|
|
Other
comprehensive income
|
$
2,463
|
|
$
5,757
|
|
$
3,271
|
The
components of accumulated other comprehensive income, net of income
taxes
(in 000's):
|
|
|
|
|
|
Sept.
30,
|
|
Sept.
30,
|
|
2006
|
|
2005
|
|
|
|
|
Net
unrealized gain on securities available for sale
|
$
403
|
|
$
186
|
|
|
|
|
Net
unrealized loss on interest rate swaps accounted for as cash
flow
hedges
|
-
|
|
(44)
|
|
|
|
|
Currency
translations
|
11,692
|
|
9,490
|
|
|
|
|
Accumulated
other comprehensive income, net of income taxes
|
$
12,095
|
|
$
9,632
|
NOTE
17 - 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. The plans are noncontributory. Contributions by the
Company, if any, are determined annually by the Company’s Board of Directors on
a discretionary basis and are recognized as compensation cost throughout the
year. Benefits become fully vested after seven years of qualified service.
All
shares owned by the ESOP are included in earnings per share calculations. Cash
dividends paid to the ESOP are reflected as a reduction of retained earnings.
The number of shares of RJF common stock held by the ESOP at September 30,
2006
and 2005 was approximately 5,370,000 and 5,480,000, respectively. 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
Long Term Incentive Plan (“LTIP”) is a non-qualified deferred compensation plan
that provides benefits to employees who meet certain compensation or production
requirements. The Company has purchased and holds life insurance on the lives
of
most of those employees participating in the LTIP, to earn a competitive rate
of
return for participants and to provide a source of funds available to satisfy
its obligations under this plan. Contributions to the qualified plans and the
LTIP contribution for management are made in amounts approved annually by the
Board of Directors. Compensation expense includes aggregate contributions to
these plans of $36,912,285, $26,872,875, and $24,009,740 for fiscal years 2006,
2005, and 2004, respectively.
Stock-Based
Compensation Plans
At
September 30, 2006, the Company had multiple stock-based employee compensation
plans, which are described below. The Company issues new shares under all plans
approved by shareholders. Effective October 1, 2005, the Company adopted SFAS
No. 123R, “Share-Based Payment”. The adoption of this statement did not have a
material impact on the Company’s consolidated financial statements given that it
adopted the fair value recognition provisions of SFAS No. 123 effective
September 28, 2002 using the modified prospective application transition method
within the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation
- Transition and Disclosure”. Prior to the adoption of SFAS No. 123R, benefits
of tax deductions in excess of recognized compensation costs were reported
as
operating cash flows. SFAS No. 123R requires excess tax benefits to be reported
as a financing cash inflow rather than as a reduction of taxes paid, as part
of
operating cash flows.
Fixed
Stock Option Plans
The
Company has two qualified and two non-qualified fixed stock option plans
available for grants to employees and members of the Company’s Board of
Directors. Under the 2002 Incentive Stock Option Plan, one of the Company’s
qualified plans, the Company may grant options to its management personnel
for
up to 9,000,000 shares of common stock. The 2002 Plan was established to
replace, on substantially the same terms and conditions, the 1992 Plan. As
of
September 30, 2006, the 1992 Plan still has options outstanding. Options are
granted to key administrative employees and Financial Advisors 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, disabled
or recently retired.
As
noted
above, the Company has two non-qualified fixed stock option plans. Under the
first of those plans, the Company may grant up to 854,298 shares of common
stock
to the Company's outside directors. Options vest over a three-year period from
grant date provided that the director is still serving on the Board of the
Company. Under the Company's second non-qualified stock option plan, the Company
may grant up to 2,531,250 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 fixed stock option
plans, the exercise price of each option equals the market price of the
Company's stock on the date of grant.
The
Company’s net income for the years ended September 30, 2006, September 30, 2005,
and September 24, 2004 includes $5.6 million, $6.2 million, and $7.4 million,
respectively, of compensation costs and $281,000, $293,000, and $389,000,
respectively of income tax benefits related to the Company’s four fixed stock
option plans available for grants to employees and members of its Board of
Directors.
These
amounts may not be representative of future stock-based compensation expense
since the estimated fair value of stock options is amortized to expense straight
line over the vesting period and additional options may be granted in future
years. The fair value of each fixed option grant for these plans 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 years
ended 2006, 2005, and 2004:
|
2006
|
|
2005
|
|
2004
|
Dividend
Yield
|
1.19%
|
|
1.10%
|
|
1.10%
|
Expected
Volatility
|
29.38%
|
|
38.56%
|
|
36.27%
|
Risk-free
Interest Rate
|
4.41%
|
|
3.69%
|
|
2.89%
|
Expected
Lives
|
4.9
yrs
|
|
5.1
yrs
|
|
5.2
yrs
|
The
dividend yield assumption is based on the Company’s current declared dividend as
a percentage of the stock price. The expected volatility assumption for the
current period is based on the Company’s historical stock price and is a
weighted average combining (1) the volatility of the most recent year, (2)
the
volatility of the most recent time period equal to the expected lives
assumption, and (3) the annualized volatility of the price of the Company’s
stock since the late 1980’s. The expected volatility used by the Company in the
prior periods presented was based on the annualized volatility of the price
of
the Company’s stock since the late 1980’s. The risk-free interest rate
assumption is based on the U.S. Treasury yield curve in effect at the time
of
grant of the options. The expected lives assumption is based on the average
of
(1) the assumption that all outstanding options will be exercised at the
midpoint between their vesting date and full contractual term and (2) the
assumption that all outstanding options will be exercised at their full
contractual term.
A
summary
of option activity of the Company's four fixed stock option plans available
for
grants to employees and members of its Board of Directors for the year ended
September 30, 2006 is presented below:
|
|
|
Weighted
|
|
|
|
Weighted
|
Average
|
|
|
|
Average
|
Remaining
|
Aggregate
|
|
Options
For
|
Exercise
|
Contractual
|
Intrinsic
|
|
Shares
|
Price
($)
|
Term
(Years)
|
Value
($)
|
Outstanding
at October
1, 2005
|
5,277,204
|
$15.06
|
-
|
-
|
Granted
|
1,628,822
|
24.64
|
-
|
-
|
Exercised
|
(1,304,170)
|
14.24
|
-
|
-
|
Canceled
|
(234,733)
|
18.64
|
-
|
-
|
Expired
|
(12,800)
|
15.09
|
-
|
-
|
Outstanding
at September
30, 2006
|
5,354,323
|
$18.02
|
2.65
|
$60,106,036
|
Exercisable
at September
30, 2006
|
907,458
|
$13.99
|
0.65
|
$13,835,323
|
As
of
September 30, 2006, there was $13.2 million of total unrecognized compensation
cost related to stock options for these plans. These costs are expected to
be
recognized over a weighted average period of approximately three years. The
weighted average grant date fair value of stock options granted under these
plans during the years ended September 30, 2006, September 30, 2005 and
September 24, 2004 was $7.36 per share, $6.44 per share and $5.60 per share,
respectively. The total intrinsic value of stock options exercised for these
plans during the years ended September 30, 2006, September 30, 2005 and
September 24, 2004 was $15.3 million, $11.2 million and $5.1 million,
respectively. The total grant date fair value of stock options vested for these
plans during the years ended September 30, 2006, September 30, 2005 and
September 24, 2004 was $5.4 million, $7.0 million and $3.8 million,
respectively.
Cash
received from stock option exercises for these plans for the year ended
September 30, 2006 was $18.1 million. The actual tax benefit realized for the
tax deductions from option exercise for these stock option plans was $594,000
for the year ended September 30, 2006.
Restricted
Stock Plan
Under
the
2005 Restricted Stock Plan the Company is authorized to issue up to 2,250,000
restricted stock units or restricted shares of common stock to employees and
independent contractors. The 2005 Plan was established to replace, on
substantially the same terms and conditions, the 1999 Plan. During
the three months ended March 31, 2006, this plan was amended to allow the
issuance of restricted stock units as retention measures for certain employees
of the Company. In addition, the Company, through its wholly owned Canadian
subsidiary, established a trust fund which is associated with the 2005 Plan.
This trust fund was established and funded to enable the trust fund to acquire
Company common stock in the open market to be used to settle restricted stock
units granted as a retention vehicle for certain employees of the Canadian
subsidiary. Awards
under this plan may be granted by the Company in connection with initial
employment or under various retention plans for individuals who are responsible
for a contribution to the management, growth, and/or profitability of the
Company. These awards are forfeitable in the event of termination other than
for
death, disability or retirement. The compensation cost is recognized over the
vesting period of the awards and is calculated as the market value of the awards
on the date of grant. The following activity occurred during the year ended
September 30, 2006:
|
|
Weighted
|
|
|
Average
|
|
|
Grant
Date
|
|
Shares/Units
|
Fair
Value ($)
|
Nonvested
at October
1, 2005
|
1,022,043
|
$16.02
|
Granted
|
1,175,197
|
24.76
|
Vested
|
(285,464)
|
13.76
|
Canceled
|
(55,907)
|
19.99
|
Nonvested
at September
30, 2006
|
1,855,869
|
$21.77
|
The
Company’s net income for the year ended September 30, 2006 includes $7.5 million
of compensation costs and $2.9 million of income tax benefits related to the
Company’s Restricted Stock Plan. The Company’s net income for the years ended
September 30, 2005 and September 24, 2004 includes $3.7 million and 3.0 million,
respectively, of compensation costs and $1.4 million and $1.1 million,
respectively, of income tax benefits related to this plan.
As
of
September 30, 2006, there was $27.4 million of total unrecognized compensation
cost related to grants under the Company’s Restricted Stock Plan. These costs
are expected to be recognized over a weighted average period of approximately
3.7 years. The total fair value of shares vested under this plan during the
year
ended September 30, 2006 was $3.9 million.
Employee
Stock Purchase Plan
Under
the
2003 Employee Stock Purchase Plan, the Company is authorized to issue up to
3,375,000 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, and its expired predecessor plan, the Company
sold approximately 379,000, 493,000 and 498,000 shares to employees during
the
years ended September 30, 2006, September 30, 2005 and September 24, 2004,
respectively. The compensation cost is calculated as the value of the 15%
discount from market value and was $1.6 million, $1.4 million and $1.3 million
during the years ended September 30, 2006, September 30, 2005 and September
24,
2004, respectively.
Stock
Bonus Plan
The
Company's 1999 Stock Bonus Plan authorizes the Company to issue up to 2,250,000
restricted shares to officers and certain other employees in lieu of cash for
10% to 20% of annual bonus amounts in excess of $250,000. The determination
of
the number of shares to be granted may encompass a discount from market value
at
the discretion of the Compensation Committee of the Board of Directors. Under
the plan the shares are generally restricted for a three year period, during
which time the shares are forfeitable in the event of voluntary termination.
The
compensation cost is recognized over the three-year vesting period based on
the
market value of the shares on the date of grant. The following activity occurred
during the year ended September 30, 2006:
|
|
Weighted
|
|
|
Average
|
|
|
Grant
Date
|
|
Shares
|
Fair
Value ($)
|
Nonvested
at October
1, 2005
|
862,026
|
$17.39
|
Granted
|
413,154
|
25.18
|
Vested
|
(266,043)
|
13.93
|
Canceled
|
(19,191)
|
21.36
|
Nonvested
at September
30, 2006
|
989,946
|
$21.49
|
The
Company’s net income for the year ended September 30, 2006 includes $5.4 million
of compensation costs and $2.0 million of income tax benefits related to the
Company’s Stock Bonus Plan. The Company’s net income for the years ended
September 30, 2005 and September 24, 2004 includes $3.5 million and $2.7
million, respectively, of compensation costs and $1.3 million and $1.0 million,
respectively, of income tax benefits related to this plan.
As
of
September 30, 2006, there was $9.3 million of total unrecognized compensation
cost related to grants under the Company’s Stock Bonus Plan. These costs are
expected to be recognized over a weighted average period of approximately 1.4
years. The total fair value of shares vested under this plan during the fiscal
year ended September 30, 2006 was $3.7 million.
Employee
Investment Funds
Certain
key employees of the Company participate in the Raymond James Employee
Investment Funds I and II, which are limited partnerships that invest in the
merchant banking and venture capital activities of the Company and other
unaffiliated venture capital limited partnerships. The Company makes
non-recourse loans to these employees for two thirds of the purchase price
per
unit. The loans and applicable interest are to be repaid based solely on the
distributions from the funds.
NOTE
18 - NON-EMPLOYEE STOCK-BASED COMPENSATION:
Under
one
of its non-qualified fixed stock option plans, the Company may grant stock
options to its independent contractor Financial Advisors. The Company may grant
up to 5,126,000 shares of common stock to independent contractor Financial
Advisors under this plan. Options are exercisable five years after grant date
provided that the Financial Advisors are still associated with the Company.
Under this fixed stock option plan, the exercise price of each option equals
the
market price of the Company's stock on the date of grant.
Prior
to
fiscal 2006, the Company valued stock options awarded to its independent
contractor Financial Advisors at fair value on the date of grant and amortized
these options over their expected service period in accordance with SFAS No.
123. However, after further analysis on the application of SFAS No. 123R, the
SEC guidance contained in Staff Accounting Bulletin (“SAB”) No. 107, and
Emerging Issues Task Force (“EITF”) No. 96-18, “Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services”, to these non-employee awards, the
Company concluded that absent a specific performance commitment, these grants
are to be measured at their vesting date fair value and their fair value
estimated at reporting dates prior to that time. The compensation expense
recognized each period should be based on the most recent estimated value.
The
Company’s prior recording of compensation expenses for these grants were an
estimate based on grant date fair value. The current year includes the effect
of
the change for the current year. The effect on prior years was not material.
Further, in accordance with EITF 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” the
Company classifies these non-employee awards as liabilities at fair value upon
vesting, with changes in fair value reported in earnings until these awards
are
exercised or forfeited.
The
Company’s net income for the years ended September 30, 2006, September 30, 2005,
and September 24, 2004 includes $9.7 million, $2.1 million, and $1.9 million,
respectively, of compensation costs and $3.7 million, $804,000, and $725,000,
respectively net of income tax benefits related to option grants to its
independent contractor Financial Advisors.
The
fair
value of each fixed option grant awarded to an independent contractor Financial
Advisor is estimated on the date of grant and periodically revalued using the
Black-Scholes option pricing model with the following weighted average
assumptions used for fiscal years ended 2006, 2005, and 2004:
|
2006
|
|
2005
|
|
2004
|
Dividend
Yield
|
1.11%
|
|
1.10%
|
|
1.10%
|
Expected
Volatility
|
30.89%
|
|
38.20%
|
|
42.55%
|
Risk-free
Interest Rate
|
4.62%
|
|
3.37%
|
|
2.21%
|
Expected
Lives
|
2.76
yrs
|
|
2.56
yrs
|
|
2.82
yrs
|
The
dividend yield assumption is based on the Company’s current declared dividend as
a percentage of the stock price. The expected volatility assumption for the
current period is based on the Company’s historical stock price and is a
weighted average combining (1) the volatility of the most recent year, (2)
the
volatility of the most recent time period equal to the expected lives
assumption, and (3) the annualized volatility of the price of the Company’s
stock since the late 1980’s. The expected volatility used by the Company in the
prior periods presented was based on the annualized volatility of the price
of
the Company’s stock since the late 1980’s. The risk-free interest rate
assumption is based on the U.S. Treasury yield curve in effect at each point
in
time the options are valued. The expected lives assumption is based on the
difference between the option’s vesting date plus 90 days (the average exercise
period) and the date of the current reporting period.
A
summary
of option activity of the Company's fixed stock option plan under which awards
are granted to its independent contractor Financial Advisors for the year ended
September 30, 2006 is presented below:
|
|
|
Weighted
|
|
|
|
Weighted
|
Average
|
|
|
|
Average
|
Remaining
|
Aggregate
|
|
Options
For
|
Exercise
|
Contractual
|
Intrinsic
|
|
Shares
|
Price
($)
|
Term
(Years)
|
Value
($)
|
Outstanding
at October
1, 2005
|
1,772,967
|
$14.69
|
-
|
-
|
Granted
|
427,538
|
21.40
|
-
|
-
|
Exercised
|
(441,552)
|
13.41
|
-
|
-
|
Canceled
|
(69,403)
|
16.67
|
-
|
-
|
Expired
|
(2,225)
|
16.88
|
-
|
-
|
Outstanding
at September
30, 2006
|
1,687,325
|
$16.64
|
3.04
|
$21,262,456
|
Exercisable
at September
30, 2006
|
112,775
|
$15.49
|
0.25
|
$1,550,578
|
As
of
September 30, 2006, there was $8.1 million of total unrecognized compensation
cost related to unvested stock options granted to its independent contractor
Financial Advisors based on estimated fair value at that date. These costs
are
expected to be recognized over a weighted average period of approximately three
years. The weighted average grant date fair value of stock options granted
under
this plan during the years ended September 30, 2006, September 30, 2005 and
September 24, 2004 was $11.87 per share, $9.51 per share and $5.72 per share,
respectively. The total intrinsic value of stock options exercised for this
plan
during the years ended September 30, 2006, September 30, 2005 and September
24,
2004 was $5.6 million, $2.7 million and $1.1 million, respectively. The total
estimated fair value of stock options vested for this plan during the years
ended September 30, 2006, September 30, 2005 and September 24, 2004 was $4.1
million, $3.5 million and $1.1 million, respectively.
Cash
received from stock option exercises for this plan for the year ended September
30, 2006 was $5.9 million. The actual tax benefit realized for the tax
deductions from option exercise of awards to its independent contractor
Financial Advisors was $2.1 million for the year ended September 30, 2006.
NOTE
19 - REGULATIONS AND CAPITAL REQUIREMENTS:
Certain
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. RJA, a member firm of the New York Stock Exchange (“NYSE”), is also
subject to the rules of the NYSE, whose requirements are substantially the
same.
Rule 15c3-1 requires that aggregate indebtedness, as defined, not to exceed
fifteen times net capital, as defined. Rule 15c3-1 also provides for an
“alternative net capital requirement”, which RJA, RJFS and Heritage Fund
Distributors, Inc. (“HFD”) have elected. It requires that minimum net capital,
as defined, be equal to the greater of $250,000 or two percent of Aggregate
Debit Items arising from client transactions. The NYSE may require a member
firm
to reduce its business if its net capital is less than four percent of Aggregate
Debit Items and may prohibit a member firm from expanding its business and
declaring cash dividends if its net capital is less than five percent of
Aggregate Debit Items. The net capital position of RJA at September 30, 2006
and
September 30, 2005 was as follows:
|
September
30,
|
|
September
30,
|
|
2006
|
|
2005
|
Raymond
James & Associates, Inc.:
|
($
in 000's)
|
(alternative
method elected)
|
|
|
|
Net
capital as a percent of Aggregate Debit
Items
|
27.58%
|
|
27.8%
|
Net
capital
|
$
369,443
|
|
$
372,615
|
Less:
required net capital
|
(26,793)
|
|
(26,804)
|
Excess
net capital
|
$
342,650
|
|
$
345,811
|
At
September 30, 2006 and September 30, 2005, RJFS had no Aggregate Debit Items
and
therefore the minimum net capital of $250,000 was applicable. The net capital
position of RJFS at September 30, 2006 and September 30, 2005 was as
follows:
|
September
30,
|
|
September
30,
|
|
2006
|
|
2005
|
Raymond
James Financial Services, Inc.:
|
(in
000's)
|
(alternative
method elected)
|
|
|
|
Net
capital
|
$
41,200
|
|
$
41,851
|
Less:
required net capital
|
(250)
|
|
(250)
|
Excess
net capital
|
$
40,950
|
|
$
41,601
|
At
September 30, 2006, HFD had no Aggregate Debit Items and therefore the minimum
net capital of $250,000 was applicable. The net capital position of HFD at
September 30, 2006 was as follows:
|
September
30,
|
|
2006
|
Heritage
Fund Distributors, Inc.
|
(in
000’s)
|
(alternative
method elected)
|
|
Net
capital
|
$
1,669
|
Less:
required net capital
|
(250)
|
Excess
net capital
|
$
1,419
|
RJ
Ltd.
is subject to the Minimum Capital Rule (By-Law No. 17 of the Investment Dealers
Association ("IDA")) and the Early Warning System (By-Law No. 30 of the IDA).
The Minimum Capital Rule requires that every member shall have and maintain
at
all times Risk Adjusted Capital greater than zero calculated in accordance
with
Form 1 (Joint Regulatory Financial Questionnaire and Report) and with such
requirements as the Board of Directors of the IDA may from time to time
prescribe. Insufficient Risk Adjusted Capital may result in suspension from
membership in the stock exchanges or the IDA.
The
Early
Warning System is designed to provide advance warning that a member firm is
encountering financial difficulties. This system imposes certain sanctions
on
members who are designated in Early Warning Level 1 or Level 2 according to
their capital, profitability, liquidity position, frequency of designation
or at
the discretion of the IDA. Restrictions on business activities and capital
transactions, early filing requirements, and mandated corrective measures are
sanctions that may be imposed as part of the Early Warning System. RJ Ltd.
was
not in Early Warning Level 1 or Level 2 at September 30, 2006 or September
30,
2005.
The
Risk
Adjusted Capital of RJ Ltd. was CDN $42,841,000 and CDN $25,482,000 September
30, 2006 and September 30, 2005, respectively.
RJBank
is
subject to various regulatory and capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions
by
regulators. Under capital adequacy guidelines and the regulatory framework
for
prompt corrective action, RJBank must meet specific capital guidelines that
involve quantitative measures of RJBank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
RJBank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require RJBank
to
maintain minimum amounts and ratios (set forth in the table below) of total
and
Tier I Capital (as defined in the regulations) to risk-weighted assets (as
defined). Management believes that, as of September 30, 2006 RJBank meets all
capital adequacy requirements to which it is subject.
As
of
September 30, 2006, the most recent notification from the Office of Thrift
Supervision categorized RJBank as “well capitalized” under the regulatory
framework for prompt corrective action. To be categorized as “well capitalized”,
RJBank must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table below. There are no conditions
or
events since that notification that management believes have changed RJBank's
capitalization.
|
|
|
To
be well capitalized
|
|
|
Requirement
for capital
|
under
prompt
|
|
|
adequacy
|
corrective
action
|
|
Actual
|
purposes
|
provisions
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
($
in 000's)
|
As
of September 30, 2006:
|
|
|
|
|
|
|
Total
capital (to risk-weighted assets)
|
$
219,339
|
12.0%
|
$146,716
|
8.0%
|
$183,396
|
10.0%
|
Tier I
capital (to risk-weighted assets)
|
196,415
|
10.7%
|
73,358
|
4.0%
|
110,037
|
6.0%
|
Tier I
capital (to average assets)
|
196,415
|
6.4%
|
122,975
|
4.0%
|
153,719
|
5.0%
|
|
|
|
|
|
|
|
As
of September 30, 2005:
|
|
|
|
|
|
|
Total
capital (to risk-weighted assets)
|
$
173,466
|
24.9%
|
$55,685
|
8.0%
|
$69,606
|
10.0%
|
Tier I
capital (to risk-weighted assets)
|
165,873
|
23.8%
|
27,842
|
4.0%
|
41,764
|
6.0%
|
Tier I
capital (to average assets)
|
165,873
|
12.6%
|
52,628
|
4.0%
|
65,785
|
5.0%
|
NOTE
20 - 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
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 $1,034,563,000 and
$1,197,215,000, respectively, at September 30, 2006 and $1,049,897,000 and
$1,081,328,000, respectively, at September 30, 2005. The contract value of
securities borrowed and securities loaned was $1,068,102,000 and $1,235,104,000,
respectively, at September 30, 2006 and $1,079,849,000 and $1,115,595,000,
respectively, at September 30, 2005. Additional cash is obtained as necessary
to
ensure such transactions are adequately collateralized. If another party to
the
transaction fails to perform as agreed (for example 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-dealers and other financial institutions,
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 collateral received from the financial
institution or 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 $94 million and $135 million at September 30, 2006 and September 30,
2005, 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
economically hedge long proprietary inventory positions. At September 30, 2006,
the Company had $31,636,000 in short government obligations, $34,023,000 in
short agency securities and $19,068,000 in short equity securities, which
represented hedge positions. At September 30, 2005, the Company had $99,549,000
in short government obligations and $30,256,000 in short equity securities
which
represented hedge positions.
The
Company enters into security transactions involving forward settlement. The
Company has recorded transactions with contract values of $2,304,629,000 and
$1,623,208,000 and market values of $2,297,824,000 and $1,612,514,000 as of
September 30, 2006 and September 30, 2005, 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 duration, 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 U.S. 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.
The
following table presents the computation of basic and diluted earnings per
share
(in 000’s, except per share amounts):
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
24,
|
|
2006
|
2005
|
2004
|
|
|
|
|
Net
income
|
$ 214,342
|
$ 151,046
|
$ 127,575
|
|
|
|
|
Weighted
average common shares outstanding during the period*
|
112,614
|
110,217
|
110,093
|
|
|
|
|
Dilutive
effect of stock options and awards (1)*
|
3,124
|
2,831
|
1,510
|
|
|
|
|
Weighted
average diluted common shares (1)*
|
115,738
|
113,048
|
111,603
|
|
|
|
|
Net
income per share - basic*
|
$
1.90
|
$
1.37
|
$
1.16
|
|
|
|
|
Net
income per share - diluted (1)*
|
$
1.85
|
$
1.33
|
$
1.14
|
|
|
|
|
Securities
excluded from weighted average common shares because their effect
would be
antidilutive*
|
0
|
108
|
1,620
|
* |
Gives effect
to the three-for-two stock split paid on March 22,
2006. |
(1) |
Diluted
earnings per share is computed on the basis of the weighted average
number
of shares of common stock plus the effect of dilutive potential common
shares outstanding during the period using the treasury stock method.
Dilutive potential common shares include stock options, units and
awards.
|
NOTE
22 - SEGMENT ANALYSIS:
SFAS
No.
131, “Disclosures about Segments of an Enterprise and Related Information”,
establishes standards for reporting information about operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by
the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance.
The
Company currently operates through the following seven business segments:
Private
Client Group; Capital Markets; Asset Management; RJBank; Emerging Markets;
Stock
Loan/Borrow and various corporate investments combined in the "Other" segment.
The
business segments are based upon factors such as the services provided and
the
distribution channels served and are consistent with how the Company assesses
performance and determines how to allocate resources throughout the Company
and
its subsidiaries. The financial results of the Company's segments are presented
using the same policies as those described in Note 1, “Summary of Significant
Accounting Policies”. Segment data includes charges allocating corporate
overhead and benefits to each segment. Intersegment revenues, charges,
receivables and payables are eliminated between segments upon consolidation.
The
Private Client Group segment includes the retail branches of the Company's
broker-dealer subsidiaries located throughout the U.S., Canada and the United
Kingdom. These branches provide securities brokerage services including the
sale
of equities, mutual funds, fixed income products and insurance products to
their
individual clients. The segment includes net interest earnings on client margin
loans and cash balances. Additionally, this segment includes the correspondent
clearing services that the Company provides to other broker-dealer firms.
The
Capital Markets segment includes institutional sales and trading in the U.S.,
Canada and Europe. It provides securities brokerage, trading, and research
services to institutions with an emphasis on the sale of U.S. and Canadian
equities and fixed income products. This segment also includes the Company's
management of and participation in underwritings, merger and acquisition
services, public finance activities, and the operations of Raymond James Tax
Credit Funds.
The
Asset
Management segment includes investment portfolio management services of Eagle
Asset Management, Inc., Awad Asset Management, Inc., and Raymond James
Consulting Services (RJA’s asset management services division), mutual fund
management by Heritage Asset Management, Inc., private equity management by
Raymond James Capital, Inc. and RJ Ventures, LLC, and trust services of Raymond
James Trust Company and Raymond James Trust Company West. In addition to the
asset management services noted above, this segment also offers fee-based
programs to clients who have contracted for portfolio management services from
outside money managers.
RJBank
is
a separate segment, which provides consumer, residential, and commercial loans,
as well as FDIC-insured deposit accounts to clients of the Company's
broker-dealer subsidiaries and to the general public.
The
Emerging Markets segment includes various joint ventures in Argentina, India,
Turkey, and Uruguay. These joint ventures operate in securities brokerage,
investment banking and asset management.
The Stock Loan/Borrow segment involves the borrowing and lending of securities
from and to other broker-dealers, financial institutions and other
counterparties, generally as an intermediary.
The
Other
segment includes various investment and corporate activities of the
Company.
In
fiscal
year 2005, the Company adopted EITF No. 04-10, “Determining Whether to Aggregate
Operating Segments that do not meet the Quantitative Thresholds”. As a result of
the adoption of this EITF, three segments were segregated from the previously
reported Other segment: Emerging Markets, Stock Loan/Borrow, and Other.
Reclassifications have been made in the segment disclosure for fiscal year
2004
to conform to this presentation.
Information
concerning operations in these segments of business is as follows (in 000's):
|
Year
ended
|
|
September
30,
|
September
30,
|
September
24,
|
|
2006
|
2005
|
2004
|
|
(000's)
|
Revenues:
|
|
|
|
Private
Client Group
|
$
1,679,813
|
$
1,397,578
|
$
1,202,368
|
Capital
Markets
|
487,419
|
455,151
|
400,787
|
Asset
Management
|
200,124
|
171,916
|
148,160
|
RJBank
|
114,692
|
45,448
|
28,104
|
Emerging
Markets
|
55,263
|
38,768
|
27,675
|
Stock
Loan/Borrow
|
59,947
|
31,876
|
16,372
|
Other
|
35,499
|
16,260
|
6,310
|
Total
|
$
2,632,757
|
$
2,156,997
|
$
1,829,776
|
|
|
|
|
Income
Before Provision for Income Taxes:
|
Private
Client Group
|
$
168,519
|
$
102,245
|
$
107,122
|
Capital
Markets
|
78,221
|
77,333
|
57,910
|
Asset
Management
|
48,095
|
40,841
|
27,875
|
RJBank
|
16,003
|
14,204
|
8,824
|
Emerging
Markets
|
2,857
|
5,927
|
4,304
|
Stock
Loan/Borrow
|
8,001
|
5,962
|
2,135
|
Other
|
20,370
|
1,459
|
(4,049)
|
Pre-
Tax Income
|
$
342,066
|
$
247,971
|
$
204,121
|
The
following table presents the Company's total assets on a segment
basis:
|
|
|
|
September
30,
|
September
30,
|
|
2006
|
2005
|
|
(000's)
|
Total
Assets:
|
|
|
Private
Client Group *
|
$
5,370,018
|
$
4,538,535
|
Capital
Markets **
|
1,369,479
|
1,032,815
|
Asset
Management
|
76,684
|
74,418
|
RJBank
|
3,120,840
|
1,327,675
|
Emerging
Markets
|
58,950
|
91,550
|
Stock
Loan/Borrow
|
1,250,857
|
1,147,314
|
Other
|
269,822
|
156,949
|
Total
|
$
11,516,650
|
$
8,369,256
|
|
*
|
Includes
$46 million of goodwill allocated pursuant to SFAS No. 142, "Goodwill
and
Other Intangible Assets".
|
|
**
|
Includes
$17 million of goodwill allocated pursuant to SFAS No.
142.
|
The
Company has operations in the U.S., Canada, Europe and joint ventures in India,
Turkey, Argentina
and Uruguay.
Substantially all long-lived assets are located in the U.S. The following table
represents revenue by country for the years indicated (in 000’s).
|
Year
ended
|
|
September
30,
|
September
30,
|
September
24,
|
|
2006
|
2005
|
2004
|
|
(000's)
|
Revenues:
|
|
|
|
United
States
|
$
2,309,697
|
$
1,912,577
|
$
1,651,474
|
Canada
|
222,365
|
162,525
|
115,880
|
Europe
|
52,489
|
46,432
|
39,890
|
Other
|
48,206
|
35,463
|
22,532
|
Total
|
$
2,632,757
|
$
2,156,997
|
$
1,829,776
|
The
Company has $10.4 million invested in emerging market joint ventures, which
carry greater risk than amounts invested in developed markets.
NOTE
23 - REVISION TO 2005 AND 2004 CONSOLIDATED STATEMENTS OF CASH
FLOWS:
Certain
amounts in the Company’s 2005 and 2004 Consolidated Statements of Cash Flows
related to variable interest entities have been reclassified between operating,
investing and financing activities to comply with SFAS No. 95, “Statement of
Cash Flows”.
The
Company’s previous presentation was to classify the cash flows from debt
financing activities of the variable interest entities related to investments
in
real estate partnerships which it consolidates (see Note 6 of the Notes to
Consolidated Financial Statements for further information) as financing
activities. The cash flows pertaining to the remaining activities of these
variable interest entities, including equity contributions to these entities
by
unrelated investor members, were classified as operating activities. However,
upon further review of the application of SFAS No. 95 to the activities of
these
variable interest entities, the Company deemed the following cash flow
reclassifications were appropriate (see table below).
For
the
year ended September 30, 2005, $75.9 million of cash previously classified
as
used in operating activities was reclassified to investing activities to reflect
the cash flow used for investments in real estate partnerships held by variable
interest entities. Approximately $46.3 million of cash used in financing
activities was reclassified to investing activities to reflect the cash flow
used for loans made to unrelated investor members in real estate related
variable interest entities. Minority interest of $32.1 million related to the
capital contributed by outside investors to variable interest entities in real
estate partnerships was reclassified from operating activities to financing
activities. Cash acquired of $20.8 million related to the Company’s initial
consolidation of variable interest entities related to investments in real
estate partnerships was also reclassified from operating activities to a
separate line item. In addition, non-cash assets of $43.2 million and non-cash
loans payable of $19.7 million were added upon the initial consolidation of
these variable interest entities.
For
the
year ended September 24, 2004, $22.6 million of cash previously classified
as
used in operating activities was reclassified to investing activities to reflect
the cash flow used for investments in real estate partnerships held by variable
interest entities. Minority interest of $4.0 million related to the capital
contributed by outside investors to variable interest entities in real estate
partnerships was reclassified from operating activities to financing activities.
The
Company also reclassified certain amounts related to repurchase agreements
used
for trading purposes from cash and cash equivalents to securities purchased
under agreements to resell on its 2005 and 2004 Consolidated Statements of
Financial Condition and related cash flow activity on its 2005 and 2004
Consolidated Statements of Cash Flows (see table below).
A
summary
of the effects of the reclassifications are as follows (in 000’s):
|
For
the Years Ended
|
|
September
30, 2005
|
|
September
24, 2004
|
|
|
|
|
Net
cash provided by (used in) operating activities as previously
reported
|
$
434,050
|
|
$
(94,113)
|
Reclassification
related to increase in securities purchased under agreements to
resell
|
(71,141)
|
|
(19,617)
|
Reclassification
related to minority interest
|
4,210
|
|
(4,724)
|
Reclassifications
related to variable interest entities
|
42,799
|
|
18,578
|
Net
cash provided by (used in) operating activities as
adjusted
|
$
409,918
|
|
$
(99,876)
|
|
|
|
|
Net
cash used in investing activities as previously reported
|
$
(323,328)
|
|
$
(116,043)
|
Reclassifications
related to variable interest entities
|
(122,253)
|
|
(22,569)
|
Net
cash used in investing activities as adjusted
|
$
(445,581)
|
|
$
(138,612)
|
|
|
|
|
Net
cash provided by (used in) financing activities as previously
reported
|
$
354,408
|
|
$
(1,044)
|
Reclassification
related to minority interest
|
(4,210)
|
|
4,724
|
Reclassifications
related to variable interest entities
|
58,603
|
|
3,991
|
Net
cash provided by financing activities as adjusted
|
$
408,801
|
|
$
7,671
|
The
effect of these reclassifications on the Company’s previously reported annual
consolidated financial statements was not material. These
reclassifications had no effect on net income.
*****
QUARTERLY
FINANCIAL INFORMATION
(unaudited)
2006
|
1st
Qtr.
|
2nd
Qtr.
|
3rd
Qtr.
|
|
4th
Qtr.
|
|
(In
000's, except per share data)
|
|
|
|
|
|
|
Revenues
|
$
575,347
|
$
656,818
|
$
711,357
|
|
$
689,235
|
Net
Revenues
|
526,536
|
592,802
|
629,668
|
|
587,081
|
Non-Interest
expenses
|
455,716
|
501,538
|
535,339
|
|
509,587
|
Income
before income taxes
|
71,335
|
95,310
|
96,502
|
|
78,919
|
Net
income
|
45,109
|
61,531
|
56,774
|
|
50,928
|
Net
income per share - basic(1)
|
.41
|
.54
|
.50
|
|
.45
|
Net
income per share - diluted(1)
|
.40
|
.53
|
.48
|
|
.44
|
Dividends
declared per share(1)
|
.08
|
.08
|
.08
|
|
.08
|
2005
|
1st
Qtr.
|
2nd
Qtr.
|
3rd
Qtr.
|
|
4th
Qtr.
|
|
(In
000's, except per share data)
|
|
|
|
|
|
|
Revenues
|
$
524,377
|
$
512,327
|
$
526,362
|
|
$
593,931
|
Net
Revenues
|
498,985
|
483,118
|
493,544
|
|
563,561
|
Non-Interest
expenses
|
432,591
|
428,609
|
437,859
|
(2)
|
494,696
|
Income
before income taxes
|
64,805
|
58,129
|
51,476
|
|
73,561
|
Net
income
|
39,243
|
34,697
|
32,382
|
|
44,724
|
Net
income per share - basic(1)
(3)
|
.35
|
.31
|
.29
|
|
.40
|
Net
income per share - diluted(1)
|
.35
|
.30
|
.29
|
|
.39
|
Dividends
declared per share(1)
(3)
|
.05
|
.05
|
.05
|
|
.05
|
|
(1)
|
Adjusted
for three-for-two stock split paid on March 22,
2006.
|
|
(2)
|
Due
to a reclassification of minority interest this amount is not the
previously reported amount for the
quarter.
|
|
(3) |
Due
to rounding the quarterly results do not add to the total for the
year. |
None.
Disclosure
controls are procedures designed to ensure that information required to be
disclosed in the Company's reports filed
under
the Exchange Act, such as this report, is recorded, processed, summarized,
and
reported within the time periods specified in the SEC's rules and forms.
Disclosure controls are also designed to ensure that such information is
accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable, not
absolute, assurance of achieving the desired control objectives, as the
Company's are designed to do, and management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
Under
the
supervision and with the participation of the Company’s management, including
the Chief Executive Officer and Chief Financial Officer, the Company has
evaluated the effectiveness of its disclosure controls and procedures pursuant
to Exchange Act Rule 13a-15(b) as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that these disclosure controls and procedures
are effective. There were no changes in the Company’s internal control over
financial reporting during the year ended September 30, 2006 that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
REPORT
OF
MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. Internal control
over
financial reporting is a process to provide reasonable assurance regarding
the
reliability of the Company’s financial reporting for external purposes in
accordance with accounting principles generally accepted in the United States.
Internal control over financial reporting includes maintaining records that
in
reasonable detail accurately and fairly reflect the Company’s transactions;
providing reasonable assurance that transactions are recorded as necessary
for
preparation of its financial statements; providing reasonable assurance that
receipts and expenditures of Company assets are made in accordance with
management authorization; and providing reasonable assurance that unauthorized
acquisition, use or disposition of Company assets that could have a material
effect on the Company’s financial statements would be prevented or detected on a
timely basis. Because of its inherent limitations, internal control over
financial reporting is not intended to provide absolute assurance that a
misstatement of the Company’s financial statements would be prevented or
detected.
Management
conducted an evaluation of the effectiveness of the Company’s internal control
over financial reporting based on the framework in Internal
Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this evaluation, management concluded that the Company’s
internal control over financial reporting was effective as of September 30,
2006. KPMG LLP has audited this assessment of the Company’s internal control
over financial reporting; their report, which expresses unqualified opinions
on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting as of September 30, 2006, is included
below.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Shareholders
Raymond
James Financial, Inc.:
We
have
audited management's assessment, included in the accompanying Report of
Management on Internal Control Over Financial Reporting,
that
Raymond James Financial, Inc. maintained effective internal control over
financial reporting as of September 30, 2006, based on criteria established
in
Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Raymond
James Financial, Inc.’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company’s internal control over financial reporting based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management's assessment that Raymond James Financial, Inc. maintained
effective internal control over financial reporting as of September 30, 2006,
is
fairly stated, in all material respects, based on criteria established in
Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Also,
in
our opinion, Raymond James Financial, Inc. maintained, in all material respects,
effective internal control over financial reporting as of September 30, 2006,
based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated statements of financial
condition of Raymond James Financial, Inc. and subsidiaries as of September
30,
2006 and 2005, and the related consolidated statements of operations and
comprehensive income, changes in shareholders’ equity, and cash flows for each
of the years in the three-year period ended September 30, 2006, and our report
dated December 14, 2006 expressed
an unqualified opinion on those consolidated financial statements.
KPMG
LLP
Tampa,
Florida
December
14, 2006
Certified
Public Accountants
None.
PART
III
Executive
officers of the registrant (including its significant subsidiaries) who are
not
Directors of the registrant are as follows:
Jennifer
C. Ackart
|
42
|
Controller
and Chief Accounting Officer
|
|
|
|
Richard
G. Averitt, III
|
61
|
Chairman
and CEO - Raymond James Financial Services, Inc.
|
|
|
|
George
Catanese
|
47
|
Senior
Vice President and Chief Risk Officer
|
|
|
|
Tim
Eitel
|
57
|
Chief
Information Officer - Raymond James & Associates
|
|
|
|
Jeffrey
P. Julien
|
50
|
Senior
Vice President - Finance and Chief Financial Officer, Director and/or
officer of several RJF subsidiaries
|
|
|
|
Paul
L. Matecki
|
51
|
General
Counsel, Director of Compliance - RJF
|
|
|
|
Richard
K. Riess
|
57
|
Executive
Vice President - RJF,
|
|
|
CEO
and Director of both Eagle and Heritage
|
|
|
|
Van
C. Sayler
|
51
|
Senior
Vice President - Fixed Income, Raymond James &
Associates
|
|
|
|
Thomas
R. Tremaine
|
50
|
Executive
Vice President - Operations and Administration, Raymond James &
Associates
|
|
|
|
Jeffrey
E. Trocin
|
47
|
Executive
Vice President - Equity Capital Markets, Raymond James &
Associates
|
|
|
|
Dennis
W. Zank
|
52
|
President
- Raymond James & Associates
|
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 2007 Annual Meeting of Shareholders. Such proxy statement will be filed
with the SEC prior to January 11, 2007.
The
information required by Items 11, 12, 13 and 14 is incorporated herein by
reference to the registrant's definitive proxy statement for the 2007 Annual
Meeting of Shareholders. Such proxy statement will be filed with the SEC prior
to January 11, 2007.
PART
IV
(a) |
Financial
Statements and Schedules
|
The
financial statements are set forth under Item 8 of this Annual Report on Form
10-K. Financial statement schedules have been omitted since they are either
not
required, not applicable, or the information is otherwise included.
(b) Exhibit
Listing
Exhibit
Number
|
|
Description
|
|
3(i).1
|
|
Amended
and restated Articles of Incorporation of Raymond James Financial,
Inc. as
filed with the Secretary of State Florida on March 21, 2001, incorporated
by reference to Exhibit 3.1 as filed with Form 10-K on December 21,
2001.
|
|
|
|
|
|
3(i).2
|
|
Articles
of Amendment to Articles of Incorporation of Raymond James Financial,
Inc., incorporated by reference to Exhibit 3 as filed with Form 10-Q
on
May 4, 2005.
|
|
|
|
|
|
3(ii).1
|
|
Amended
and Restated By-Laws of Raymond James Financial, Inc. reflecting
amendments adopted by the Board of Directors on May 25, 2006, incorporated
by reference to Exhibit 3(ii) as filed with Form 10-Q on August 9,
2006.
|
|
|
|
|
|
10.1*
|
|
Raymond
James Financial, Inc. 2002 Incentive Stock Option Plan effective
February
14, 2002, incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-8, No. 333-98537, filed August 22,
2002.
|
|
|
|
|
|
10.2*
|
|
Raymond
James Financial, Inc. Restricted Stock Plan and Stock Bonus Plan
effective
October 1, 1999, incorporated by reference to Exhibits 4.1 and 4.2,
respectively to Registration Statement on Form S-8, No. 333-74716,
filed
December 7, 2001.
|
|
|
|
|
|
10.3
|
|
Arrangement
Agreement between Goepel McDermid Inc. as seller, and Raymond James
Holdings (Canada), Inc. incorporated by reference to Exhibit 10 to
Registration Statement on Form S-3, No. 333-51840, filed on December
14,
2000.
|
|
|
|
|
|
10.4
|
|
Mortgage
Agreement for $75 million dated as of December 13, 2002 incorporated
by
reference to Exhibit No. 10 as filed with Form 10-K on December 23,
2002.
|
|
|
|
|
|
10.5*
|
|
Raymond
James Financial, Inc.'s Stock Option Plan for Key Management Personnel
effective November 21, 1996, incorporated by reference to Exhibit
4.1 to
Registration Statement on Form S-8, No. 333-103277, filed February
18,
2003.
|
|
|
|
|
|
10.6*
|
|
Raymond
James Financial, Inc. 2003 Employee Stock Purchase Plan incorporated
by
reference to Exhibit 4.1 to Registration Statement on Form S-8, No.
333-103280, filed February 18, 2003.
|
|
|
|
|
10.7
|
Form
of Indemnification Agreement with Directors, incorporated by reference
to
Exhibit 10.18 as filed with Form 10-K on December 8, 2004.
|
|
|
|
|
10.8.1*
|
The
2005 Raymond James Financial, Inc. Restricted Stock Plan effective
February 17, 2005, incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-8, No. 333-125214, filed May 25,
2005.
|
|
|
|
|
10.8.2*
|
First
Amendment to 2005 Raymond James Financial, Inc. Restricted Stock
Plan as
filed with Form 8-K on February 21, 2006.
|
|
|
|
|
10.9.1
|
Amended
and Restated Revolving Credit Agreement for $200 million dated as
of
October 13, 2005, incorporated by reference to Exhibit 10.9 as filed
with
Form 10-K on December 14, 2005.
|
|
|
|
|
10.9.2
|
|
|
|
|
|
10.10*
|
Raymond
James Financial, Inc. Amended Stock Option Plan for Outside Directors,
incorporated by reference to Exhibit 10 as filed with Form 10-Q on
February 9, 2006.
|
|
|
|
|
10.11*
|
|
|
|
|
|
11
|
Computation
of Earnings per Share is set forth in Note 21 of the Notes to the
Consolidated Financial Statements in this Form 10-K.
|
|
|
|
|
14
|
Code
of Ethics for Senior Financial Officers, incorporated by reference
to
Exhibit 10.18 as filed with Form 10-K on December 8, 2004.
|
|
|
|
|
21
|
|
|
|
|
|
23
|
|
|
|
|
|
31
|
|
|
|
|
|
32
|
|
|
|
|
|
99(i).1
|
|
|
|
|
|
99(i).2
|
|
|
* Indicates
a management contract or compensatory plan or arrangement.
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 14th
day of
December, 2006.
|
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
14, 2006
|
Thomas
A. James
|
|
Executive
Officer, Director
|
|
|
|
|
|
/s/
CHET B. HELCK
|
|
President
and Chief Operating Officer, Director
|
December
14, 2006
|
Chet
B. Helck
|
|
|
|
|
|
|
|
/s/
FRANCIS S. GODBOLD
|
|
Vice
Chairman and Director
|
December
14, 2006
|
Francis
S. Godbold
|
|
|
|
|
|
|
|
/s/
JEFFREY P. JULIEN
|
|
Senior
Vice President - Finance
|
December
14, 2006
|
Jeffrey
P. Julien
|
|
and
Chief Financial Officer
|
|
|
|
|
|
/s/
JENNIFER C. ACKART
|
|
Controller
and Chief Accounting Officer
|
December
14, 2006
|
Jennifer
C. Ackart
|
|
|
|
|
|
|
|
/s/
ANGELA M. BIEVER
|
|
Director
|
December
14, 2006
|
Angela
M. Biever
|
|
|
|
|
|
|
|
/s/
H. WILLIAM HABERMEYER
|
|
Director
|
December
14, 2006
|
H.
William Habermeyer
|
|
|
|
|
|
|
|
/s/
PAUL W. MARSHALL
|
|
Director
|
December
14, 2006
|
Paul
W. Marshall
|
|
|
|
|
|
|
|
/s/
PAUL C. REILLY
|
|
Director
|
December
14, 2006
|
Paul
C. Reilly
|
|
|
|
|
|
|
|
/s/
KENNETH A. SHIELDS
|
|
Director
|
December
14, 2006
|
Kenneth
A. Shields
|
|
|
|
|
|
|
|
/s/
HARDWICK SIMMONS
|
|
Director
|
December
14, 2006
|
Hardwick
Simmons
|
|
|
|
|
|
|
|