[TYPE]
[TEXT] 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 April 30, 1994
Commission file number 1-9015
MORGAN KEEGAN, INC.
(Exact name of registrant as
specified in its charter)
TENNESSEE 62-1153850
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
50 North Front Street
Memphis, Tennessee 38103
(Address of principal executive offices) (Zip Code)
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 the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes 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 April 30, 1994
Common Stock, $.625 per value 14,392,237
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements
of Financial Condition............ April 30, 1994 and
July 31, 1993
Consolidated Statements
of Income........................ Three months and nine months
ended April 30, 1994 and 1993
Consolidated Statements of
Cash Flows........................Nine months ended April 30,
1994 and 1993
Notes to Consolidated
Financial Statements..............April 30, 1994
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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
-2-
PART I. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries
April 30 July 31
1994 1993
(Unaudited)
(in thousands)
ASSETS
Cash $ 13,061 $ 14,859
Securities segregated for regulatory
purposes, at market 33,401 38,801
Deposits with clearing organizations
and others 2,592 2,464
Receivable from brokers or dealers
and clearing organizations 20,736 19,624
Receivable from customers 234,485 156,633
Securities purchased under agreements
to sell 65,832 88,638
Securities owned, at market 215,877 189,682
Memberships in exchanges, at cost
(market value- $2,327,000 at 4-30-94;
$1,924,000 at 7-31-93) 678 678
Furniture, equipment and leasehold
improvements, at cost (less allowances
for depreciation and amortization -
$11,456,000 at 4-30-94; $10,619,000
at 7-31-93) 8,877 8,159
Other assets 11,805 7,546
$607,344 $527,084
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 53,100 $ 68,105
Commercial paper 11,556 12,457
Payable to brokers or dealers and
clearing organizations 16,493 17,500
Payable to customers 213,717 177,208
Customer drafts payable 10,567 7,873
Securities sold under agreements to repurchase 111,081 78,474
Securities sold, not yet purchased, at market 19,116 16,011
Other liabilities 45,637 43,121
481,267 420,749
Stockholders' equity
Common Stock, par value $.625 per share;
authorized 25,000,000 shares; 14,392,237
shares issued and outstanding at 4-30-94;
14,271,993 at 7-31-93 8,995 8,920
Additional paid-in capital 12,762 13,941
Retained earnings 104,320 83,474
126,077 106,335
$607,344 $527,084
<FN>
See accompanying notes.
-3-
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Three Months Ended Nine Months Ended
April 30 April 30
(in thousands, except per share amounts)
1994 1993 1994 1993
REVENUES
Commissions $12,418 $12,052 $36,848 $32,037
Principal transactions 18,807 27,288 70,819 76,926
Investment banking 14,865 6,740 36,144 18,462
Interest 6,731 5,241 18,500 14,415
Other 3,473 3,991 11,773 9,917
$56,294 $55,312 $174,084 $151,757
EXPENSES
Compensation 30,902 28,990 94,170 79,438
Floor brokerage
& clearance 971 1,510 2,896 4,019
Communications 3,548 3,071 10,085 8,703
Travel and promotional 1,229 1,029 4,284 2,845
Occupancy and equipment cost 1,973 2,269 6,172 6,084
Interest 4,481 2,959 10,910 8,303
Taxes, other than
income taxes 1,704 1,098 4,050 3,375
Other operating expenses 829 1,151 2,817 3,277
$45,637 $42,077 $135,384 $116,044
INCOME BEFORE INCOME TAXES 10,657 13,235 38,700 35,713
INCOME TAXES 4,000 5,150 14,800 13,650
NET INCOME $ 6,657 $ 8,085 $23,900 $22,063
NET INCOME PER SHARE $0.45 $0.57 $1.63 $1.57
DIVIDENDS PER SHARE $0.07 $0.05 $0.21 $0.14
<FN>
See accompanying notes.
-4-
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Nine Months Ended
April 30
1994 1993
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $23,900 $22,063
Non-cash items included in earnings:
Depreciation and amortization 2,481 1,705
Deferred income taxes 90 90
Amortization of restricted stock 720 576
27,191 24,434
(Increase) decrease in operating assets:
Receivable from brokers or dealers
and clearing organizations (1,112) (2,386)
Receivable from customers (77,852) (32,356)
Securities segregated for regulatory
purposes 5,400 4,600
Deposits with clearing organizations
and others ( 128) 1,980
Securities purchased under agreements
to resell 22,806 (5,314)
Securities owned (26,195) (18,335)
Other assets ( 4,349) ( 2,836)
Increase (decrease) in operating liabilities:
Payable to brokers or dealers and
clearing organizations ( 1,007) 8,793
Payable to customers 36,509 46,320
Customer drafts payable 2,694 4,361
Securities sold under agreements to
repurchase 32,607 (14,268)
Securities sold, not yet purchased 3,105 1,071
Other liabilities 2,516 52
( 5,006) (8,318)
Cash provided by operating activities 22,185 16,116
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (payments) from:
Commercial paper ( 901) 2,008
Issuance of Common Stock 6,423 1,417
Retirement of Common Stock ( 8,248) ( 394)
Dividends paid ( 3,053) (1,949)
Short-term borrowings (15,005) (12,717)
Cash used for financing activities (20,784) (11,635)
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment
and leasehold improvements ( 3,199) ( 3,113)
(Decrease) increase in cash ( 1,798) 1,368
Cash at beginning of period 14,859 11,359
Cash at end of period $13,061 $12,727
Income tax payments were $17,502,000 and $15,418,000 for the nine month
periods ended April 30, 1994 and 1993 respectively. Interest payments were
$10,827,000 and $8,272,000 for the same periods, respectively.
<FN>
See accompanying notes.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
April 30, 1994
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Morgan Keegan,
Inc. and its wholly owned subsidiaries (collectively referred to as the
Registrant). The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and 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 nine months
ended April 30, 1994 are not necessarily indicative of the results that may be
expected for the year ending July 31, 1994. 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, 1993.
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 April 30, 1994, M.K. & Co. had net capital of
$89,809,014 which was 36% of its aggregate debit balances and $84,800,397 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.
-6-
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. 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 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 third quarter revenues of $56,294,000 exceeded the prior
years third quarter of $55,312,000 by $982,000 or 1.8%. Investment banking
revenue more than doubled from $6,740,000 in the 1993 quarter to $14,865,000
in the current quarter, reflecting a strong investor appetite for equity
offerings including real estate investment trusts. The increased banking
revenues were offset by a substantial decline in fixed income commissions and
trading losses due to a market decline in March and April. Trading income for
the third quarter was $4,408,000 less than the previous year's third quarter
trading income. The Dow Jones Industrial Average has declined from January
1994 and interest rates have increased. Management anticipates a change in
volume from the record levels of the past three years as long as interest
rates continue to rise.
Operating expenses increased 8.5% for the quarter from $42,077,000 for third
quarter fiscal 1993 to $45,637,000 for third quarter fiscal 1994. Employee
compensation increased from $28,990,000 to $30,902,000 or 6.6%. The increase
is higher than the 1.8% increase in revenue, which it normally is in
proportion with, but would be in line considering the unusual decline in
trading income in excess of $4,000,000.
Interest expense increased 51.4% or $1,522,000 which was mainly attributed to
the increase in short-term rates during the quarter and the large inventory
positions held during the quarter. Floor brokerage expense declined by 35.7%
due to continuing efforts at cost cutting and management.
Net income for the quarter $6,657,000 or $.45 per share compared with
$8,085,000 or $.57 per share in the same quarter for the previous year. The
decline in fixed income commissions from the strong levels in the prior year
coupled with the trading losses in March and April resulted in the earnings
per share decline.
-7-
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Results of Operations - Fiscal Year-to-Date
Total revenues increased from $151,757,000 for fiscal 1993 to $174,084,000 for
the current year-to-date. The biggest proportion of the increase is
represented by the almost doubling of banking revenues from $18,462,000 to
$36,144,000 for the current year. Income from principal transactions declined
$6,107,000 or 7.9% with most of the decline ($5,770,000) due to the decrease
in trading income.
Operating expenses of $135,384,000 represented a 16.7% increase, or
$19,340,000 more than the previous year amount of $116,044,000. The biggest
component of the increase was compensation which increased $14,732,000 or
18.6% and corresponded to the 14.7% increase in revenues considering the
substantial decline in trading income. Interest expense increased $2,607,000
or 31.4% slightly in excess of the 28.3% increase in interest income,
primarily due to increasing interest rates during the third quarter. The
increase in travel and promotional of 50.6% is due to increased marketing
efforts and compliance seminars. The decline in clearing and floor brokerages
stems from changes in the method of execution and expense reduction in the
floor brokerage area.
Net income per share for the first nine months was $1.63 compared with $1.57
in the previous fiscal year. The 3.8% increase in profitability can be
attributed to the strong banking performance and investor activity during the
first two quarters offset by the drop in the fiscal third quarter.
Liquidity and Capital Resources
High liquidity is reflected in the Registrant's statement of financial
condition with approximately 97% of its assets consisting of cash or assets
readily convertible into cash. Financing resources include the Registrant's
equity capital, commercial paper, repurchase transactions, short-term
borrowings, and customer and broker payables. For the nine months ended April
30, 1994, cash flows from operating activities increased $22,185,000 compared
with an increase of $16,116,000 for the nine months ended April 30, 1993.
This change was primarily a result of the Registrant's brokerage subsidiary
carrying higher customer credit balances and larger balances on repurchase
transactions.
Cash flows from financing activities decreased $20,784,000 for the nine months
ended April 30, 1994 compared to a decrease of $11,635,000 for the first nine
months of fiscal 1993. A decrease in inventory reduced the need for
short-term borrowings by approximately $15,005,000.
Investing activities resulted in a $3,199,000 decrease in cash flows for the
current period compared to the $3,113,000 decrease for the same period in the
previous year. This is primarily due to management's continued commitment to
upgrade and improve the office communication network. The Registrant has no
material commitments for capital expenditures.
-8-
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
MORGAN KEEGAN, INC. and Subsidiaries
At April 30, 1994, the Registrant's broker/dealer subsidiary, which is
regulated under the SEC's uniform new capital rule, had net capital of
$89,809,014 which was $84,800,397 in excess of the 2% net capital requirement.
During the quarter, the Registrant declared and paid cash dividends of $0.07
per share on the shares outstanding.
During the quarter the Registrant repurchased 472,400 shares of Morgan Keegan,
Inc. for approximately $5,940,000 under a previously authorized stock
repurchase program of 1,000,000 shares. Total purchases under the program
through the end of the third quarter were 651,900 shares for approximately
$8,248,000. Subsequent to the end of the quarter, the directors authorized
the repurchase of an additional one million shares upon completion of the
initial one million share buy-back.
-9-
PART II OTHER INFORMATION
MORGAN KEEGAN, INC. and Subsidiaries
Item 1. Legal Proceedings
Morgan Keegan & Company, Inc. ("M.K. & Co."), is named as one of many
defendants in class action complaints pending in the United States District
Court for the Eastern District of Louisiana as part of the multi-district
litigation styled In Re Taxable Municipal Bond Securities Litigation, MDL 863
(the "MDL"). The MDL was previously described in prior Form 10-Q and Form
10-K S.E.C. filings. The MDL concerns the underwriting and sale of taxable
municipal bonds issued by several issuing authorities during 1986. All bonds
which are the subject of the amended complaints, including those issued by the
Health, Education and Housing Facility Board of the City of Memphis, Tennessee
were rated AAA by Standard and Poor's Corporation at the time of their
issuance, and maintained such rating through December, 1989. In January, 1990
and thereafter, the Standard and Poor's rating was downgraded and the market
price of the bonds had declined.
In the event the litigation is settled, management is of the opinion that such
settlement would not have a material adverse effect on M.K. & Co.'s results of
operations or on the financial statements of M.K. & Co., taken as a whole. In
the event a settlement is not achieved, management is of the opinion that it
has meritorious defenses and has advised its counsel to vigorously defend the
lawsuits.
In addition to the matters described above, M.K. & Co. is named in various
proceedings incidental to its securities business. While the ultimate
resolution of pending litigation 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 the
lawsuits.
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
1. Computation of Earnings per Share
-10-
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
Date: June 13, 1994 /S/ Joseph C. Weller
Joseph C. Weller
EVP, CFO, Sec.-Treas.
-11-
PART II OTHER INFORMATION (continued)
MORGAN KEEGAN, INC. and Subsidiaries
Item 6. Exhibit a.1.
COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Nine Months
Ended
April 30 April 30
1994 1993 1994 1993
PRIMARY
Average shares outstanding 14,674,987 14,256,852 14,620,728 14,045,317
Net effect of dilutive
stock options based on
the treasury stock
method using average
market place 26,026 54,153 45,525 50,195
TOTAL 14,701,013 14,311,005 14,666,253 14,095,512
Net Income $6,657,150 $8,085,241 $23,899,652 $22,063,258
Per share amount $0.45 $0.57 $1.63 $1.57
FULLY DILUTED
Average shares outstanding 14,674,987 14,256,852 14,620,728 14,045,317
Net effect of dilutive
stock options based
on the treasury stock
method using the
quarter end market
price, if higher than
average market price 26,026 54,153 45,525 50,195
TOTAL 14,701,013 14,311,005 14,666,253 14,095,512
Net Income $6,657,150 $8,085,241 $23,899,652 $22,063,258
Per share amount $0.45 $0.57 $1.63 $1.57