SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JANUARY 31, 2000
COMMISSION FILE NO. 1-9015
MORGAN KEEGAN, INC.
(Exact name of Registrant as specified in its charter)
Tennessee 62-1153850
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Fifty Front Street
Memphis, Tennessee 38103
(Address of principal (Zip Code)
executive offices)
901-524-4100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
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 for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for at least the past 90 days. Yes X No .
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practical date.
Class Outstanding at January 31, 2000
Common Stock $.625 par value 29,054,868
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements
of Financial Condition. . . . . . . . January 31, 2000 and July 31, 1999
Consolidated Statements
of Income . . . . . . . . . . . . . . Three months and six months ended
January 31, 2000 and 1999
Consolidated Statements
of Cash Flows . . . . . . . . . . . . Six months ended
January 31, 2000 and 1999
Notes to Consolidated
Financial Statements. . . . . . . . . January 31, 2000
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Part II. Other Information
Item 1. Legal proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Part I. FINANCIAL INFORMATION
Item 1.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries
January 31 July 31
2000 1999
(unaudited)
(in thousands)
ASSETS
Cash $ 23,812 $ 16,102
Securities segregated for regulatory
purposes, at market 256,500 246,000
Deposits with clearing organizations
and others 11,682 9,792
Receivable from brokers and dealers and
clearing organizations 73,395 12,781
Receivable from customers 661,101 557,678
Securities purchased under agreements
to resell 325,915 184,852
Securities owned, at market 490,165 480,662
Memberships in exchanges, at cost
(market value-$6,138,000 at 1-31-00;
$6,456,000 at 7-31-99) 2,428 2,428
Furniture, equipment and leasehold
improvements, at cost (less allowances for
depreciation and amortization $27,809,000
at 1-31-00; $27,402,000 at 7-31-99) 26,222 26,167
Other assets 65,907 61,903
$1,937,127 $1,598,365
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 254,500 $ 115,100
Commercial paper 32,926 65,111
Payable to brokers and dealers and
clearing organizations 66,045 7,959
Payable to customers 891,336 733,725
Customer drafts payable 18,813 16,076
Securities sold under agreements to
repurchase 165,220 239,019
Securities sold, not yet purchased,
at market 178,644 58,755
Other liabilities 86,162 83,558
1,693,646 1,319,303
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares; 29,054,868
shares issued and outstanding
at 1-31-00; 31,859,258 at 7-31-99 17,612 19,911
Retained earnings 225,869 259,151
243,481 279,062
$1,937,127 $1,598,365
[FN]
See accompanying notes.
</FN>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Three Months Ended Six Months Ended
January 31 January 31
(in thousands, except per share amounts)
2000 1999 2000 1999
REVENUES
Commissions $ 39,854 $ 30,050 $ 67,133 $ 56,960
Principal transactions 37,683 37,958 68,306 71,369
Investment banking 12,166 11,065 24,050 21,029
Interest 24,295 18,948 46,639 37,098
Investment management fees 8,689 6,235 16,593 11,478
Other 3,682 2,910 6,683 5,649
TOTAL 126,369 107,166 229,404 203,583
EXPENSES
Compensation 63,923 55,553 117,048 104,930
Floor brokerage and
clearance 1,626 1,434 3,396 3,109
Communications 5,914 5,359 12,472 10,788
Travel and promotional 3,616 2,640 7,566 6,261
Occupancy and equipment
costs 6,282 5,375 12,144 10,485
Interest 17,289 11,491 32,493 22,283
Taxes, other than income
taxes 4,123 3,768 6,390 5,753
Other operating expense 3,100 2,308 5,534 4,690
105,873 87,928 197,043 168,299
INCOME BEFORE INCOME TAXES 20,496 19,238 32,361 35,284
INCOME TAX EXPENSE 7,700 7,500 12,100 13,800
NET INCOME $ 12,796 $ 11,738 $ 20,261 $ 21,484
NET INCOME PER SHARE:
Basic $ 0.44 $ 0.36 $ 0.68 $ 0.66
Diluted $ 0.44 $ 0.36 $ 0.68 $ 0.66
DIVIDENDS PER SHARE $ 0.08 $ 0.07 $ 0.16 $ 0.14
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 28,929 32,353 29,709 32,527
Diluted 28,978 32,464 29,764 32,636
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Six Months Ended
January 31
2000 1999
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 20,261 $ 21,484
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 5,421 4,849
Deferred income taxes (600) 600
Amortization of gain on sale of building
and related assets (690) (690)
Amortization of restricted stock 2,400 2,100
26,792 28,343
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations (60,614) (5,007)
Deposits with clearing organizations and others (1,890) 28
Receivable from customers (103,423) (27,295)
Securities segregated for regulatory purposes (10,500) (35,300)
Securities owned (9,503) (130,177)
Other assets (3,404) (6,656)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations 58,086 35,882
Payable to customers 157,611 75,875
Customer drafts payable 2,737 2,884
Securities sold, not yet purchased 119,889 (67,391)
Other liabilities 5,294 (12,568)
154,283 (169,725)
Cash provided by (used for)
operating activities 181,075 (141,382)
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper (32,185) 19,041
Issuance of Common Stock 5,361 4,761
Retirement of Common Stock (60,896) (12,308)
Dividends paid (4,707) (4,528)
Short-term borrowings 139,400 72,500
Securities purchased under agreements to resell (141,063) 52,199
Securities sold under agreements to repurchase (73,799) 9,027
Cash (used for) provided by financing activities (167,889) 140,692
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (5,476) (4,957)
Cash used for investing activities (5,476) (4,957)
Increase (decrease) in Cash 7,710 (5,647)
Cash at Beginning of Period 16,102 22,172
Cash at End of Period $ 23,812 $ 16,525
[FN]
Income tax payments were approximately $4,470,000 and $12,172,000
for the six month periods ending January 31, 2000, and 1999,
respectively. Interest payments were approximately $29,462,000
and $22,883,000 for the same periods, respectively.
See accompanying notes.
</FN>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
January 31, 2000
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts
of Morgan Keegan, Inc. and its subsidiaries (collectively
referred to as the Registrant). The accompanying unaudited
consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required
by generally accepted accounting principles for
complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation
have been included. Operating results for the three
months and six months ended January 31, 2000, are not
necessarily indicative of the results that may be
expected for the year ending July 31, 2000. For further
information, refer to the financial statements and notes
thereto included in the Registrant's annual report on
Form 10-K for the year ended July 31, 1999.
NOTE B - NET CAPITAL REQUIREMENT
As a registered broker/dealer and member of the New York
Stock Exchange, the registrant's brokerage subsidiary,
Morgan Keegan & Company, Inc. (M.K. & Co.) is subject
to the Securities and Exchange Commission's (SEC) uniform
net capital rule. The broker/dealer subsidiary has elected
to operate under the alternative method of the rule,
which prohibits a broker/dealer from engaging in any
securities transactions when its net capital is less than
2% of its aggregate debit balances, as defined,
arising from customer transactions. The SEC may also
require a member firm to reduce its business and
restrict withdrawal of subordinated capital if its net
capital is less than 4% of aggregate debit balances,
and may prohibit a member firm from expanding its business
and declaring cash dividends if its net capital is less
than 5% of aggregate debit balances. At January 31, 2000,
M.K. & Co. had net capital of $104,385,078 which was 15%
of its aggregate debit balances and $90,886,043 in
excess of the 2% net capital requirement.
NOTE C - INCOME TAXES
The principal reason for the difference between the
Registrant's effective tax rate and the federal statutory
rate is the non-taxable interest earned on municipal bonds.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
NOTE D - NET INCOME PER SHARE
The following table sets forth the computation of basic
and diluted earnings per share:
Three Months Ended Six Months Ended
January 31 January 31
2000 1999 2000 1999
Numerator
Net Income $12,795,965 $11,738,103 $20,261,235 $21,484,341
Denominator
Denominator for basic
earnings per share -
weighted average shares 28,929,278 32,352,961 29,709,254 32,527,308
Effect of dilutive
securities - stock
options 48,740 110,662 54,685 108,596
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversations 28,978,018 32,463,623 29,763,939 32,635,904
Basic earnings per share $ 0.44 $ 0.36 $ 0.68 $ 0.66
Diluted earnings per
share $ 0.44 $ 0.36 $ 0.68 $ 0.66
NOTE E - OTHER ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued in June
1998 its new standard on derivatives - Statement No.
133, "Accounting for Derivative Instruments and
Hedging Activities" (Statement 133). The new
Statement resolves the inconsistencies that existed
with respect to derivatives accounting, and dramatically
changes the way many derivatives transactions and hedged
items are reported. The Statement is effective for
years beginning after June 15, 2000. The Registrant has
not yet determined the effect, if any, Statement 133
will have on the earnings and financial condition
of the Registrant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
NOTE F - Business Segment Information
The Registrant provides financial services through five
business segments: Investment Advisory; Private Client;
Equity Capital Markets; Fixed Income Capital Markets;
and Other. Segment results include all direct revenues
and expenses of the operating units in each segment
and allocations of indirect expenses based on specific
methodologies.
Investment Advisory provides investment advisory
services to Company-sponsored mutual funds and
asset management for institutional and individual clients.
Private Client distributes a wide range of financial
products through its branch distribution network,
including equity and fixed income securities,
proprietary and non-affiliated mutual funds and annuities.
Net interest income for customers' margin loan and credit
account balances is included in this segment.
Equity Capital Markets consists of the Registrant's
equity institutional sales and trading, syndicate,
and corporate finance activities. Sales credits
associated with underwritten offerings are reported in
the Private Client segment when sold through retail
distribution channels and in the Equity Capital Markets
segment when sold through institutional distribution channels.
Fixed Income Capital markets consists of the Registrant's
fixed income institutional sales and trading, syndicate,
and public finance activities.
Other businesses are principally the Registrant's
Athletic Resource Management business and unallocated
corporate revenues and expenses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
NOTE F - Business Segment Information (continued)
Business segment financial results for the periods ending
January 31, 2000 and 1999 are as follows:
Three Months Ended Six Months Ended
January 31 January 31
2000 1999 2000 1999
Revenues:
Private Client $ 64,202 $ 52,798 $111,622 $ 93,738
Fixed Income Capital Markets 39,073 36,703 72,964 74,576
Equity Capital Markets 12,626 9,854 25,198 20,579
Investment Advisory 8,061 6,274 15,978 11,718
Other 2,407 1,537 3,642 2,972
Total $126,369 $107,166 $229,404 $203,583
Income before income taxes:
Private Client $ 10,901 $ 11,155 $ 16,055 $ 18,373
Fixed Income Capital Markets 3,930 4,910 8,579 11,441
Equity Capital Markets 3,621 1,887 4,884 3,309
Investment Advisory 1,531 1,044 2,143 1,608
Other 531 242 700 553
Total $ 20,496 $ 19,238 $ 32,361 $ 35,284
Segment data includes charges allocated to each segment.
Intersegment revenues and charges are eliminated between
segments. The Registrant evaluates the performance of
its segments and allocates resources to them based on
return on investment.
The Registrant has not disclosed asset information
by segment as the information is not produced internally.
All long-lived assets are located in the U.S.
The Registrant's business is predominantly in the U.S.,
with less than 1% of revenues and net income from
international operations.
Part I. FINANCIAL INFORMATION
Item 2.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Morgan Keegan, Inc. (The Registrant) operates a full
service regional brokerage business through its principal
subsidiary, Morgan Keegan & Company, Inc. (M.K. & Co.).
M.K. & Co. is involved in the highly competitive business
of origination, underwriting, distribution, trading and
brokerage of fixed income and equity securities and also
provides investment advisory services. While M.K.
& Co. regularly participates in the trading of some derivative
securities for its customers, this trading is not a major
portion of M.K. & Co.'s business. M.K. & Co. typically
does not underwrite high yield securities, and normally
is not involved in bridge loan financings or any
other ventures that management believes may not be
appropriate for its strategic approach. Many highly
olatile factors affect revenues, including general
market conditions, interest rates, investor sentiment and
world affairs, all of which are outside the Registrant's
control. However, certain expenses are relatively fixed.
As a result, net earnings can vary significantly from
quarter to quarter, regardless of management's efforts
to enhance revenues and control costs.
Results of Operations
The Registrant recognized record-level revenues and
net income for the quarter ended January 31, 2000.
Revenues totaled $126,369,000 for the quarter
surpassing the previous record of $120,500,000 in the
fourth quarter of fiscal 1999. The current quarter
revenues exceeded revenues for the same period of
the previous year by $19,203,000, or 18%, when
revenues totaled $107,166,000. The largest components
of this increase were in commission revenues that
increased 33% and a 39% increase in investment management
advisory fees. Margin interest income increased by 71%.
These increases are attributable to the increase in
retail activity for the quarter.
Operating expenses were $105,873,000 for the quarter
ended January 31, 2000 or 20% higher than the $87,928,000
recognized in the same period of the previous year.
The largest component of this increase was employee
compensation that increased 15% to $63,923,000.
This increase is relative to the increase noted
in revenues for the quarter.
Net income for the quarter was $12,796,000 versus
the previous quarterly record set in January 1998
when net income was $12,788,000. Net income for the
quarter ended January 31, 1999 was $11,738,000. Income
per share was $0.44 which was 22% above January 31, 1999
quarter of $0.36.
Total revenue for the six-month period ended January
31, 2000 was $229,404,000 or 13% higher than the
same period in the previous fiscal year. The most
significant increases relate to commissions on mutual
funds and annuities that increased 38% and commissions on
over-the-counter securities that increased 24%.
Interest income on customer margin balance increased
46% over the same period in the previous year.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Results of Operations (continued)
Operating expenses totaled $197,043,000 for the six
months ended January 31, 2000 compared to $168,299,000
for the six months ended January 31, 1999. The largest
component of this increase was for employee compensation
expenses which increased 12%. Interest expense
increased by 46% as interest rates have edged upward
over the last year. Several new branch offices have begun
operations during this fiscal year adding additional
operating expenses.
Net income for the six months ended January 31, 2000
was $20,261,000 compared to $21,484,000 in the same
six months of fiscal 1999. Earnings per share year-to-date
for the current year were $0.68 versus $0.66 for
the previous year, representing the benefits of the stock
buy back.
Year 2000 Processing Issue
The Year 2000 issue affects the ability of computer systems
to correctly process dates after December 31, 1999. All
work regarding this issue has been completed by the
Registrant and no operating problems related to the Year
2000 have been encountered by the Registrant or in its
interaction with vendors and customers. The aggregate
expenditures related to its Year 2000 project were
approximately $1.750 million. A significant portion of
these costs were not incremental costs to the Registrant,
but rather will represent the redeployment of
existing information technology and operations resources,
primarily to test the remediation efforts of the
Registrant's third party vendors. The Registrant
funds all Year 2000 related costs through operating
cash flows and a reallocation of the Registrant's
overall information technology spending. In accordance
with generally accepted accounting principles, Year 2000
expenditures were expensed as incurred.
Liquidity and Capital Resources
High liquidity is reflected in the Registrant's statement
of financial condition with approximately 95% of its assets
consisting of cash or assets readily convertible into
cash. Financing resources include the Registrant's
equity capital, commercial paper, short-term
borrowings, repurchase agreements and other payables.
For the six months ended January 31, 2000 cash flows
provided by operating activities were $181,075,000
primarily due to a $119,889,000 increase in
securities sold, not yet purchased.
Cash flows used for financing activities were
$167,889,000 for the six months ended January 31,
2000 compared to cash flows provided by
operating activities of $140,692,000 for the six
months ended January 31, 1999. The largest
components of this change include a $141,063,000
increase in reverse repurchase agreements and a
$73,799,000 decrease in repurchase agreements as
compared to the six-month period in fiscal 1999.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Liquidity and Capital Resources (continued)
Cash flows used for investing activities during the
six months ended January 31, 2000 were $5,476,000 compared
to $4,957,000. This investing activity is the result of
continued efforts to upgrade and maintain the
Registrant's broker/dealer subsidiary's branch network.
The Registrant continued its stock buy back program
with the shares purchased during the current fiscal year
being more than 3.6 million and the total cost being
$60,896,000. Management contemplates continuing to buy
back shares but at a slower pace over the remainder of
the fiscal year.
Forward Looking Statements
This Form 10-Q may contain or incorporate by reference
statements which may constitute "forward-looking
statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended.
Prospective investors are cautioned that any such
forward-looking statements are not guarantees for
future performance and involve risks and uncertainties,
and that actual results may differ materially from
those contemplated by such forward-looking statements.
Part I. FINANCIAL INFORMATION
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MORGAN KEEGAN, INC. and Subsidiaries
Interest Rate Sensitivity
No significant changes have occurred since July 31, 1999
in the Registrant's exposure to market risk. See
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
PART II. OTHER INFORMATION
MORGAN KEEGAN, INC. and Subsidiaries
Item 1. Legal proceedings
Morgan Keegan & Company, Inc. is subject to
various claims incidental to its securities
business. While the ultimate resolution of
pending litigation and claims cannot be
predicted with certainty, based upon the
information currently known, management is
of the opinion that it has meritorious
defenses and has instructed its counsel to
vigorously defend such lawsuits and claims,
and that liability, if any, resulting
from all litigation will have no material
adverse effect on the Registrant's
consolidated financial condition or results
of operations.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On November 23, 1999, at the Registrant's
annual meeting of its shareholders, 80% of
the 29,669,553 shares outstanding
at October 1, 1999 were represented by
proxy. A quorum was declared present for
the conduct of business and the following
proposals were voted on:
Proposal 1: Election of the directors from
the following nominees to serve the registrant
for the ensuing year:
Kenneth F. Clark, Jr. Donald Ratajczak
G. Douglas Edwards Robert M. Solmson
James E. Harwood John W. Stokes, Jr.
Allen B. Morgan, Jr. Joseph C. Weller
Harry J. Phillips, Sr. Spence L. Wilson
Results of vote: 99.7% of the votes cast were in
favor of this proposal.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
No reports were filed during the quarter on
Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
Morgan Keegan, Inc.
Registrant
BY /s/Joseph C. Weller
Joseph C. Weller
EVP, CFO, Sec.-Treas.
Date: March 13, 2000
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