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 OCTOBER 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 October 31, 2000
Common Stock $.625 par value 28,562,566
Page 1 of 15
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements
of Financial Condition. . . . . . October 31, 2000 and July 31, 2000
Consolidated Statements
of Income . . . . . . . . . . . . Three months ended
October 31, 2000 and 1999
Consolidated Statements
of Cash Flows . . . . . . . . . . Three months ended
October 31, 2000 and 1999
Notes to Consolidated
Financial Statements. . . . . . . October 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
Page 2 of 15
Part I. FINANCIAL INFORMATION
Item 1.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries
October 31 July 31
2000 2000
(unaudited)
(in thousands)
ASSETS
Cash $ 19,496 $ 19,716
Securities segregated for regulatory
purposes, at market 329,500 170,600
Deposits with clearing organizations
and others 9,878 11,846
Receivable from brokers and dealers and
clearing organizations 38,086 14,062
Receivable from customers 745,202 713,485
Securities purchased under agreements
to resell 324,482 310,935
Securities owned, at market 477,112 390,656
Memberships in exchanges, at cost
(market value-$6,188,000 at 10-31-00;
$5,780,000 at 7-31-00) 2,411 2,428
Furniture, equipment and leasehold
improvements, at cost (less allowances for
depreciation and amortization $26,810,000
at 10-31-00; $30,524,000 at 7-31-00) 27,009 26,498
Other assets 84,356 72,050
$2,057,532 $1,732,276
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 156,384 $ 100,290
Commercial paper 110,407 70,741
Payable to brokers and dealers and
clearing organizations 15,419 18,768
Payable to customers 1,003,721 829,517
Customer drafts payable 16,251 17,752
Securities sold under agreements to
repurchase 305,079 207,488
Securities sold, not yet purchased,
at market 93,528 130,851
Other liabilities 89,349 98,240
1,790,138 1,473,647
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares;
shares issued and outstanding 28,562,566
at 10-31-00; 28,549,066 at 7-31-00 17,851 17,842
Retained earnings 249,543 240,787
267,394 258,629
$2,057,532 $1,732,276
[FN]
See accompanying notes.
</FN>
Page 3 of 15
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Three Months Ended
October 31
2000 1999
(in thousands, except
per share amounts)
REVENUES
Commissions $ 35,024 $ 27,279
Principal transactions 38,942 30,623
Investment banking 12,425 11,884
Interest 28,976 22,345
Investment management fees 10,587 7,903
Other 5,546 3,001
TOTAL 131,500 103,035
EXPENSES
Compensation 65,983 53,125
Floor brokerage and clearance 1,879 1,770
Communications 7,233 6,559
Travel and promotional 3,691 3,950
Occupancy and equipment costs 6,372 5,862
Interest 21,042 15,204
Taxes, other than income taxes 2,746 2,267
Other operating expenses 6,881 2,433
115,827 91,170
INCOME BEFORE INCOME TAXES 15,673 11,865
INCOME TAX EXPENSE 5,800 4,400
NET INCOME $ 9,873 $ 7,465
NET INCOME PER SHARE:
Basic $ 0.35 $ 0.25
Diluted $ 0.34 $ 0.24
DIVIDENDS PER SHARE $ 0.09 $ 0.08
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 28,557 30,402
Diluted 28,644 30,505
[FN]
See accompanying notes.
</FN>
Page 4 of 15
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Three Months Ended
October 31
2000 1999
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 9,873 $ 7,465
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 2,720 2,699
Deferred income taxes (300) (400)
Amortization of gain on sale of building
and related assets (345) (345)
Amortization of restricted stock 1,350 1,200
13,298 10,619
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations (24,024) (11,158)
Deposits with clearing organizations and others 1,968
Receivable from customers (31,717) (64,291)
Securities segregated for regulatory purposes (158,900) 43,300
Securities owned (86,456) 63,099
Other assets (12,006) 1,843
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations (3,349) 35,455
Payable to customers 174,204 (10,532)
Customer drafts payable (1,501) (302)
Securities sold, not yet purchased (37,323) 30,238
Other liabilities (8,546) (15,092)
(187,650) 72,560
Cash (used for) provided by operating activities (174,352) 83,179
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper 39,666 (9,833)
Issuance of Common Stock 109 82
Retirement of Common Stock - (42,751)
Dividends paid (2,567) (2,399)
Short-term borrowings 56,094 55,200
Securities purchased under agreements to resell (13,547) (30,998)
Securities sold under agreements to repurchase 97,591 (46,683)
Cash provided by (used for) financing activities 177,346 (77,382)
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (3,231) (2,903)
Other 17 -
Cash used for investing activities (3,214) (2,903)
(Decrease) increase in Cash (220) 2,894
Cash at Beginning of Period 19,716 16,102
Cash at End of Period $ 19,496 $ 18,996
[FN]
Income tax payments were approximately $713,000 and $562,000 for the three
month periods ending October 31, 2000, and 1999, respectively. Interest
payments were approximately $18,211,000 and $14,953,000 for the same
periods, respectively.
See accompanying notes.
</FN>
Page 5 of 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
October 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 ended October 31, 2000, are not necessarily indicative
of the results that may be expected for the year ending July
31, 2001. 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, 2000.
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 October 31, 2000, M.K. & Co. had net
capital of $145,543,997 which was 19% of its aggregate
debit balances and $130,345,054 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.
Page 6 of 15
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
October 31
2000 1999
(in thousands, except
per share amounts)
Numerator
Net Income $ 9,873 $ 7,465
Denominator
Denominator for basic
earnings per share -
weighted average
shares 28,557 30,402
Effect of dilutive
securities - stock
options 87 103
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions 28,644 30,505
Basic earnings per share $ 0.35 $ 0.25
Diluted earnings per share $ 0.34 $ 0.24
NOTE E - OTHER ACCOUNTING PRONOUNCEMENTS
Effective August 1, 2000, the Registrant adopted Financial
Accounting Standards Board Statement No. 133, "Accounting
for Derivative and Hedging Activities", as amended by Statement
Nos. 137 and 138 (collectively, the Statements). The Statements
require derivatives to be recorded on the statement of
financial condition at fair value, with changes in fair value
recognized in income, stockholders' equity, or as adjustments
to the carrying value of assets and liabilities, depending on
the use of the derivative. The adoption of the Statements
had no material effect on the Registrant's financial statements.
The Registrant's broker/dealer subsidiary does trade in
certain derivative securities on behalf of its customers, but
generally does not act as principal in such trades.
Page 7 of 15
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.
Page 8 of 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
NOTE F - Business Segment Information (continued)
Business segment financial results for the three month periods
ending October 31, 2000 and 1999 are as follows:
October 31 October 31
2000 1999
Revenues:
Private Client $ 58,628 $ 47,420
Fixed Income Capital Markets 41,298 33,891
Equity Capital Markets 17,450 12,572
Investment Advisory 10,887 7,917
Other 3,237 1,235
Total $131,500 $103,035
Income before income taxes:
Private Client $ 6,449 $ 5,154
Fixed Income Capital Markets 5,369 4,649
Equity Capital Markets 2,712 1,263
Investment Advisory 722 612
Other 421 187
Total $ 15,673 $ 11,865
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.
Page 9 of 15
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. Many highly volatile 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's revenues increased 28% to $131,500,000
for the quarter ended October 31, 2000 versus revenues of
$103,035,000 for the same period in the prior year.
The major components of this increase included a 34%
increase in investment management fees, a 28% increase in
commissions, a 27% increase in principal transactions
and a 30% increase in interest income. The increases
represent solid business throughout the firm with
strong revenue increases in both the equity and fixed
income capital markets groups. Business was slightly
better among institutional clients than individual investors.
Operating expenses were $115,827,000 for the quarter ended
October 31, 2000 versus $91,170,000 for the same quarter
of the previous year. Employee compensation increased
24% and is relative to the increase in revenues. Interest
expense increased 38% due to increased level of inventory
carried during the quarter, but was only slightly ahead
of the 30% increase in interest income. Other operating
expenses increased $4,448,000, or 183% over the same
period in the previous year due primarily to legal expenses
including the $1,900,000 charge from legal settlements
previously reported in the Registrant's Form 10-K.
Net income for the quarter ended October 31, 2000 was
$9,873,000, or $0.35 per basic share, and was 32% higher
than the same period of the previous year when net
income was $7,465,000, or $0.25 per basic share.
Page 10 of 15
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
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 three
months ended October 31, 2000 cash flows used for operating
activities were $174,352,000 primarily due to a $158,900,000
increase in securities segregated for regulatory purposes
and an $86,456,000 increase in securities owned.
Cash flows from financing activities were $177,346,000 for
the three months ended October 31, 2000 compared to cash
flows used for financing activities of $77,382,000 for the
same period of the previous year. The largest components
of this change include a $97,591,000 increase in securities
sold under agreements to repurchase and a $56,094,000
increase in short-term borrowings.
Cash flows from investing activities during the three
months ended October 31, 2000 were $3,214,000. This
investing activity is a continuation of the Registrant's
efforts to upgrade and maintain the broker/dealer subsidiary's
branch network. The Board of Directors increased the
quarterly dividend from $0.08 per share to $0.09 per share.
Total dividends paid during the quarter were $2,567,000.
Page 11 of 15
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
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.
Page 12 of 15
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, 2000
in the Registrant's exposure to market risk. See Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Page 13 of 15
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
None
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
Page 14 of 15
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: December 13, 2000
Page 15 of 15
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