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, 2001
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, 2001
Common Stock $.625 par value 28,820,525
Page 1 of 16
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements
of Financial Condition. . . . . . January 31, 2001 and July 31, 2000
Consolidated Statements
of Income . . . . . . . . . . . . Three months and six months ended
January 31, 2001 and 2000
Consolidated Statements
of Cash Flows . . . . . . . . . . Six months ended
January 31, 2001 and 2000
Notes to Consolidated
Financial Statements. . . . . . . January 31, 2001
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 16
Part I. FINANCIAL INFORMATION
Item 1.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries
January 31 July 31
2001 2000
(unaudited)
(in thousands)
ASSETS
Cash $ 20,288 $ 19,716
Securities segregated for regulatory
purposes, at market 461,100 170,600
Deposits with clearing organizations
and others 8,971 11,846
Receivable from brokers and dealers and
clearing organizations 38,052 14,062
Receivable from customers 556,038 713,485
Securities purchased under agreements
to resell 153,898 310,935
Securities owned, at market 569,811 390,656
Memberships in exchanges, at cost
(market value-$6,297,000 at 1-31-01;
$5,780,000 at 7-31-00) 2,411 2,428
Furniture, equipment and leasehold
improvements, at cost (less allowances for
depreciation and amortization $29,646,000
at 1-31-01; $30,524,000 at 7-31-00) 27,829 26,498
Other assets 94,465 72,050
$1,932,863 $1,732,276
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 102,491 $ 100,290
Commercial paper 144,835 70,741
Payable to brokers and dealers and
clearing organizations 18,515 18,768
Payable to customers 1,068,253 829,517
Customer drafts payable 19,158 17,752
Securities sold under agreements to
repurchase 149,390 207,488
Securities sold, not yet purchased,
at market 59,278 130,851
Other liabilities 97,488 98,240
1,659,408 1,473,647
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares; 28,820,525
shares issued and outstanding
at 1-31-01; 28,549,066 at 7-31-00 17,803 17,842
Retained earnings 255,652 240,787
273,455 258,629
$1,932,863 $1,732,276
[FN]
See accompanying notes.
</FN>
Page 3 of 16
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)
2001 2000 2001 2000
REVENUES
Commissions $ 32,467 $ 39,854 $ 67,493 $ 67,133
Principal transactions 53,117 37,683 92,063 68,306
Investment banking 12,756 12,166 25,177 24,050
Interest 29,232 24,295 58,210 46,639
Investment management fees 10,125 8,689 20,711 16,593
Other 12,154 3,682 17,697 6,683
TOTAL 149,851 126,369 281,351 229,404
EXPENSES
Compensation 75,086 63,923 141,068 117,048
Floor brokerage and
clearance 1,664 1,626 3,543 3,396
Communications 7,088 5,914 14,320 12,472
Travel and promotional 4,038 3,616 7,729 7,566
Occupancy and equipment
costs 7,003 6,282 13,375 12,144
Interest 23,217 17,289 44,259 32,493
Taxes, other than income
taxes 4,968 4,123 7,715 6,390
Other operating expense 6,142 3,100 13,024 5,534
129,206 105,873 245,033 197,043
INCOME BEFORE INCOME TAXES 20,645 20,496 36,318 32,361
INCOME TAX EXPENSE 7,700 7,700 13,500 12,100
NET INCOME $ 12,945 $ 12,796 $ 22,818 $ 20,261
NET INCOME PER SHARE:
Basic $ 0.45 $ 0.44 $ 0.80 $ 0.68
Diluted $ 0.45 $ 0.44 $ 0.79 $ 0.68
DIVIDENDS PER SHARE $ 0.09 $ 0.08 $ 0.18 $ 0.16
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 28,627 28,929 28,596 29,709
Diluted 28,840 28,978 28,806 29,764
Page 4 of 16
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Six Months Ended
January 31
2001 2000
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 22,818 $ 20,261
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 5,557 5,421
Deferred income taxes (700) (600)
Amortization of gain on sale of building
and related assets (690) (690)
Amortization of restricted stock 2,700 2,400
29,685 26,792
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations (23,990) (60,614)
Deposits with clearing organizations and others 2,875 (1,890)
Receivable from customers 157,447 (103,423)
Securities segregated for regulatory purposes (290,500) (10,500)
Securities owned (179,155) (9,503)
Other assets (21,398) (3,404)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations (253) 58,086
Payable to customers 238,736 157,611
Customer drafts payable 1,406 2,737
Securities sold, not yet purchased (71,573) 119,889
Other liabilities (62) 5,294
(186,467) 154,283
Cash (used for) provided by
operating activities (156,782) 181,075
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper 74,094 (32,185)
Issuance of Common Stock 5,317 5,361
Retirement of Common Stock (11,174) (60,896)
Dividends paid (5,135) (4,707)
Short-term borrowings 2,201 139,400
Securities purchased under agreements to resell 157,037 (141,063)
Securities sold under agreements to repurchase (58,098) (73,799)
Cash provided by (used for) financing activities 164,242 (167,889)
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (6,888) (5,476)
Cash used for investing activities (6,888) (5,476)
Increase (decrease) in Cash 572 7,710
Cash at Beginning of Period 19,716 16,102
Cash at End of Period $ 20,288 $ 23,812
[FN]
Income tax payments were approximately $13,685,000 and $4,470,000
for the six month periods ending January 31, 2001, and 2000,
respectively. Interest payments were approximately
$43,982,000 and $29,462,000 for the same periods, respectively.
See accompanying notes.
</FN>
Page 5 of 16
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, 2001, 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 January
31, 2001, M.K. & Co. had net capital of $126,798,979
which was 22% of its aggregate debit balances and
$115,348,867 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 16
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
2001 2000 2001 2000
Numerator
Net Income $12,944,957 $12,795,965 $22,818,183 $20,261,235
Denominator
Denominator for basic
earnings per share -
weighted average
shares 28,627,056 28,929,278 28,596,417 29,709,254
Effect of dilutive
securities - stock
options 212,673 48,740 209,829 54,685
Denominator for
Diluted earnings
per share - adjusted
weighted average
shares and assumed
conversations 28,839,729 28,978,018 28,806,246 29,763,939
Basic earnings per
share $ 0.45 $ 0.44 $ 0.80 $ 0.68
Diluted earnings per
share $ 0.45 $ 0.44 $ 0.79 $ 0.68
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 16
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 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
NOTE F - Business Segment Information (continued)
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.
Business segment financial results for the periods ending
January 31, 2001 and 2001 are as follows:
Three Months Ended Six Months Ended
January 31 January 31
2001 2000 2001 2000
Revenues:
Private Client $ 62,070 $ 64,202 $120,698 $111,622
Fixed Income Capital
Markets 53,136 39,073 94,434 72,964
Equity Capital Markets 15,481 12,626 32,931 25,198
Investment Advisory 10,125 8,061 21,012 15,978
Other 9,039 2,407 12,276 3,642
Total $149,851 $126,369 $281,351 $229,404
Income before income taxes:
Private Client $ 10,116 $ 10,901 $ 16,565 $ 16,055
Fixed Income Capital
Markets 5,123 3,930 10,492 8,579
Equity Capital Markets 2,028 3,621 4,740 4,884
Investment Advisory 1,874 1,531 2,596 2,143
Other 1,504 513 1,925 700
Total $ 20,645 $ 20,496 $ 36,318 $ 32,361
NOTE G - Subsequent Events
On December 17, 2000, the Registrant announced the
signing of a definitive agreement under which
Regions Financial Corporation will acquire the Registrant
for $27 per share in a business combination expected
to be accounted for as a purchase. The merger is
expected to close prior to the end of the Registrant's
next fiscal quarter. Consequently, the Registrant does
not expect to file a quarterly financial statement
subsequent to the quarter ended January 31, 2001.
Page 9 of 16
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 recognized record-level revenues of
$149,851,000 for the quarter ended January 31, 2001, up
$8,043,000, or 6%, over the previous record set in the
third quarter of fiscal 2000 when revenues totaled $141,808,000.
The current quarter revenues exceeded the same period in the
previous year by $23,482,000, or 19%, when revenues were
$126,369,000. The largest components of this increase
include a 41% increase in principal transactions and a
230% increase in other income offset by a 19% decrease
in commissions. The increase in principal
transactions is the result of a significant increase
in U.S. Government underwritings and the increase in other
income is attributable to gain on a firm investment.
Operating expenses increased 22% to $129,206,000 for
the quarter compared to $105,873,000 in the same quarter
of the prior year. Employee compensation increased 18%,
interest expense increased 34% and other expenses increase
98%. The employee compensation and interest expense
increases are proportionate with the increase in
revenues. The increase in other expenses relates
primarily to the Registrant's broker/dealer subsidiary
establishing a $2 million reserve against margin
accounts.
Net income for the quarter was $12,945,000, or
$0.45 per share, compared to $12,796,000, or $0.44 per
share, in the same quarter of the prior year.
For the six months ended January 31, 2001 revenues
totaled $281,351,000 which was 22% higher than the
same six-month period of the prior year when
revenues were $229,404,000. The largest components of
this increase include a 35% increase in principal
transactions, a 25% increase in interest income and a
165% increase in other income.
Page 10 of 16
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Results of Operation (continued)
Operating expenses totaled $245,033,000 for the six
months ended January 31, 2001 compared to $197,043,000
for the six months ended January 31, 2000. The largest
components of this increase include a 21% increase
in employee compensation, a 36% increase in interest
expense and a 135% increase in other expenses. The
increase in other expenses is related to a legal
settlement incurred as disclosed in previous
filings and the addition of the bad debt reserve
established in the second quarter.
Net income for the six months ended January 31, 2001 was
$22,818,000 compared to $20,261,000 for the same six-month
period in fiscal 2000. Net income per share was $0.80 for
the current year versus $0.68 for the same period of
the previous year.
Liquidity and Capital Resources
High liquidity is reflected in the Registrant's statement
of financial condition with approximately 94% 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, 2001 cash flows used for operating
activities were $156,782,000 primarily due to a $290,500,000
increase in securities segregated for regulatory
purposes and an $179,155,000 increase in securities owned.
Cash flows provided by financing activities were $164,242,000
for the six months ended January 31, 2001 compared to cash
flows used for financing activities of $167,889,000 for the
six months ended January 31, 2000. The largest components
of this change include a $157,037,000 decrease in securities
purchased under agreements to resell and a $74,094,000 increase
in the commercial paper as compared to the six month period
in fiscal 2000.
Cash flows used for investing activities during the six
months ended January 31, 2001 were $6,888,000 compared to
$5,476,000 for the same period of fiscal 2000. This
investing activity is the result of the continued emphasis
on the upgrading and maintaining the Registrant's
broker/dealer subsidiary's branch network.
Page 11 of 16
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 16
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 16
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 21, 2000, at the Registrant's annual meeting
of its shareholders, 79.5% of the 28,855,066 shares
outstanding at October 1, 2000 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.
Stephen P. Laffey Joseph C. Weller
Allen B. Morgan, Jr. Spence L. Wilson
Harry J. Phillips, Sr.-died 1-12-01
Results of vote: 99.6% of the votes cast were in favor of
this proposal.
Proposal 2: Adoption of 2000 Equity Compensation Plan.
Results of vote: 70.1% of the votes cast were in favor of
this proposal.
Proposal 3: Adoption of 2000 Employee Stock Purchase Plan.
Results of vote: 67.2% of the votes cast were in favor of
this proposal.
Page 14 of 16
PART II. OTHER INFORMATION
MORGAN KEEGAN, INC. and Subsidiaries
Item 4. Submission of Matters to a Vote of Security Holders
(continued)
Proposal 4: Adoption of 2000 Non-Employee Director
Stock Option Plan.
Results of vote: 71.6% of the votes cast were in
favor of this proposal.
Proposal 5: Adoption of 2000 Executive Incentive
Compensation Plan.
Results of vote: 78.5% 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 10.A - Material Contracts Agreement and
Plan of Merger by and between Morgan Keegan,
Inc. and Regions Financial Corporation dated
December 17, 2000.
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
A current report on Form 8-K dated December 17,
2000 was filed under Item 5 Other Events
discussing the proposed merger with Regions
Financial Corporation.
Page 15 of 16
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 16, 2001
Page 16 of 16