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, 1995
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 January 31, 1995
Common Stock $.625 par value 13,732,575
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements
of Financial Condition...........January 31, 1995 and July 31, 1994
Consolidated Statements of Income.......Three months and six months ended
January 31, 1995 and 1994
Consolidated Statements
of Cash Flows................Six months ended January 31, 1995and 1994
Notes to Consolidated Financial Statements..............January 31, 1995
Item 2. Management's Discussion and Analysis of Financial Conditionand
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
Signatures
PART I FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries
January 31 July 31
1995 1994
(unaudited)
ASSETS
Cash $ 11,049 $12,854
Securities segregated for regulatory purposes,
at market 132,101 35,701
Deposits with clearing organizations and others 7,305 2,591
Receivable from brokers and dealers and clearing
organizations 26,880 29,945
Receivable from customers 243,162 236,764
Securities purchased under agreements to resell 225,451 62,811
Securities owned, at market 141,173 167,568
Memberships in exchanges, at cost (market value-
$2,227,000 at 1-31-95; $2,310,000 at 7-31-94) 719 678
Furniture, equipment and leasehold improvements,
(less allowances for depreciation and
amortization $10,029,000 at 1-31-95;
$12,296,000 at 7-31-94) 11,116 9,353
Other assets 21,013 12,744
$819,969 $571,009
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 29,100 $ 16,500
Commercial paper 5,358 10,593
Payable to brokers and dealers and clearing
organizations 13,295 13,581
Payable to customers 348,002 241,141
Customer drafts payable 9,356 10,950
Securities sold under agreements to repurchase 188,726 61,849
Securities sold, not yet purchased, at market 53,925 35,985
Other liabilities 38,384 55,045
686,146 445,644
Stockholders' equity
Common Stock; par value $.625 per share:
Authorized 100,000,000 shares; 13,732,575
shares issued and outstanding at 1-31-95;
13,704,011 at 7-31-94 8,583 8,565
Additional paid-in capital 3,401 5,522
Retained earnings 121,839 111,278
133,823 125,365
$819,969 $571,009
<CN>
See accompanying notes.
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)
1995 1994 1995 1994
REVENUES
Commissions $10,775 $12,138 $20,864 $24,429
Principal transactions 21,358 25,930 42,999 52,012
Investment banking 10,829 10,122 25,236 21,280
Interest 9,349 6,337 16,903 11,769
Other 2,956 5,598 5,472 8,299
TOTAL 55,267 60,125 111,474 117,789
EXPENSES
Compensation 28,161 31,401 58,136 63,267
Floor brokerage and clearance 923 1,090 1,796 1,925
Communications 3,769 3,299 7,644 6,537
Travel and promotional 1,295 1,615 2,751 3,055
Occupancy and equipment costs 2,376 2,234 4,527 4,199
Interest 6,496 3,423 11,193 6,429
Taxes, other than income taxes 1,811 1,570 2,984 2,347
Other operating expenses 899 1,183 1,935 1,988
45,730 45,815 90,966 89,747
INCOME BEFORE INCOME
TAXES 9,537 14,310 20,508 28,042
INCOME TAX EXPENSE 3,600 5,500 7,800 10,800
NET INCOME $ 5,937 $ 8,810 $12,708 $17,242
NET INCOME PER SHARE $ 0.44 $ 0.60 $ 0.94 $ 1.18
DIVIDENDS PER SHARE $ 0.08 $ 0.07 $ 0.16 $ 0.14
[FN]
See accompanying notes.
[FN]
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Six Months Ended
January 31
1995 1994
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $12,708 $17,242
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 1,562 1,770
Deferred income taxes 90 60
Amortization of restricted stock 720 480
15,080 19,552
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations 3,065 (9,576)
Deposits with clearing organizations
and others (4,714) (128)
Receivable from customers (6,398) (60,895)
Securities segregated for regulatory purposes (96,400) (3,800)
Securities purchased under agreements to
resell (162,640) 3,840
Securities owned 26,395 (118,533)
Other assets (8,359) (3,160)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations (286) (1,157)
Payable to customers 106,861 61,447
Customer drafts payable (1,594) 2,011
Securities sold under agreements to repurchase 126,877 65,592
Securities sold, not yet purchased 17,940 22,557
Other liabilities (16,661) (5,900)
(15,914) (47,702)
Cash used for operating activities (834) (28,150)
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper (5,235) (2,627)
Issuance of Common Stock 2,196 6,423
Retirement of Common Stock (5,019) (2,307)
Dividends paid (2,147) (2,033)
Short-term borrowings 12,600 30,296
Cash provided by financing activities 2,395 29,752
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (3,325) (2,293)
Membership in exchanges (41)
Cash used for investing activities (3,366) (2,293)
Increase (decrease) in Cash (1,805) (691)
Cash at Beginning of Period 12,854 14,859
Cash at End of Period $11,049 $14,168
Income tax payments were approximately $8,934,000 and $12,181,000
for the six month period ending January 31, 1995 and 1994, respectively.
Interest payments were approximately $11,267,000 and $6,323,000 for the
same periods, respectively.
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
January 31, 1995
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 the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
includeall 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 six months ended January 31, 1995 are not
necessarily indicative of the results that may be expected for the year
ending July 31, 1995. For further information, refer to the financial
statements and notes hereto included in the Registrant's annual report on
Form 10-K for the year ended July 31, 1994.
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,
1995, M.K. & Co. had net capital of $82,987,947 which was 34% of its aggregate
debit balances and $78,086,640 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.
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
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
Revenues decreased during the second quarter $4,858,000 or 8.1%
below the second quarter of fiscal 1994. A 47.5% increase in interest
income was offset by a 17.6% decrease in principal transactions and a 11.2%
decrease in commissions. These decreases are attributable to the increase
in short-term interest rates causing uncertainty in both the fixed income
and equity markets.
Operating expenses decreased approximately $85,000 or less than
1% below the same period of the previous year. Interest expense increased
approximately $3,073,000 or 89.8% over the previous year amount.
Employee compensation for the quarter decreased approximately $3,240,000
or 10.3% and is in direct proportion with the decrease in revenues.
Net income for the quarter was approximately $5,937,000 or $.44
per share compared to $8,810,000 or $.60 for the second quarter of fiscal
1994.
Total revenues were approximately $111,474,000 for the six months
ended January, 1995 compared to $117,789,000 for the six months ended
January 1994. Increases of 18.6% in investment banking and 43.6% in
interest income were negated by decreases of 14.6% in commissions and
17.3% in principal transactions. As noted for the quarter, changes in
short-term interest rates created uncertainty in the fixed income and equity
markets.
Operating expenses increased for the first half of fiscal 1995 by
approximately $1,219,000 or 1.4% over the first half of fiscal
1994. The largest components of the increase were communications expenses
(16.9% increase) and interest expense(74.1% increase). Communications
expenses increased as a result of our continuing efforts to enhance our
branch communications network. Interest expense increased relative to
the increase in interest rates and the level of proprietary inventory
carried to meet the needs of our customers.
Year-to-date net income was $.94 per share for fiscal 1995
compared to $1.18 per share for the same period of fiscal 1994.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
MORGAN KEEGAN, INC. and Subsidiaries
Liquidity and Capital Resources
High liquidity is reflected in the Registrant's statement of
financial condition with approximately 96% of its assets consisting of cash
or assets readily convertible to cash. Financing resources include the
Registant's equity capital, commercial paper, repurchase transactions,
short-term borrowings, and customer and broker payables. For the six months
ended January 31, 1995, cash flows from operating activities decreased
$834,000 compared to a decrease of $28,150,000 for the same period of
fiscal 1994.
The biggest factor in the change from the same six month period
in the previous year was the result of the Registrant's efforts to lower
securities inventory since the changes in financial markets
during the third quarter of fiscal 1994.
Cash flow from financing activities increased by $2,395,000 for
the six months ended January 31, 1995 compared to an increase of
$29,752,000 for the six month period ended January 31, 1994. The smaller change
for 1995 resulted from less fluctuation in short-term borrowings which
remained fairly stable for the six month period.
Investing activities resulted in a $3,366,000 decrease in cash
flows for the current period compared to a $2,293,000 decrease in the
previous fiscal year. This decrease is a result of the Registrant's continued
commitment to enhance the branch communications network.
At January 31, 1995, the Registrant's broker/dealer subsidiary,
which is regulated under the SEC's uniform net capital rule, had net
capital of $82,987,947 which was $78,086,640 in excess of the 2% net capital
requirement. During the quarter, the Registrant declared and
paid cash dividends of $0.08 per share on the shares outstanding.
Also during the quarter, the Registrant continued to its
previously authorized stock repurchase program by buying 217,200 shares for
$2,759,323. The total repurchased for the year is 394,100 shares
at a cost of $5,018,343.
PART II OTHER INFORMATION
MORGAN KEEGAN, INC. and Subsidiaries
Item 1. Legal proceedings
On February 1, 1995, the Court in In Re Taxable Municipal
BondSecurities Litigation, MDL 863 ("the MDL") approved, subject
to certain conditions, the class settlement of the MDL. The MDL
and the settlement were previously described in prior Form 10-Q
and Form 10-K S.E.C. filings. Management is of the opinion that
the settlement will have no material adverse effect on the
Registrant's results of operations or on the financial statements
of the Registrant taken as a whole. In the event a final
settlement is not achieved, management is of the opinion that it
has meritorious defenses and has advised its counsel to
vigorously defend all claims arising from the MDL.
In addition to the matters described above, the Registrant 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.
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 22, 1994, at the Registrant's annual meeting of its
shareholders, 76% of the 13,533,861shares outstanding at October
31, 1994 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:
Allen B. Morgan, Jr. John W. Stokes, Jr.
William W. Deupree, Jr. Kenneth F. Clark, Jr.
Joseph C. Weller Peter S. Wilmott
Donald Ratajczak James E. Harwood, III
Results of vote: 76% of the votes cast were in favor of this
proposal.
PART II OTHER INFORMATION
MORGAN KEEGAN, INC. and Subsidiaries
Item 4. Submission of Matters to a Vote of Security Holders
(Continued)
Proposal 2: Authorization of charter amendment to increase the
authorized capital shares of the Registrant from 25,000,000 shares
to 100,000,000 shares.
Results of vote: 88% of the votes cast were in favor of this
proposal.
Proposal 3: Adoption of 1994 Restricted Stock and Stock Option
Plan to provide incentives to attract and retain officers and key
employees.
Results of vote: 94% of the votes cast were in favor of this
proposal.
Proposal 4: Amendment to 1989 Employee Stock Purchase Plan to
increase the number of shares available under the plan by an
additional 1,000,000 shares.
Results of vote: 92% 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
1. Computation of Earnings per Share
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 March 15, 1995 /s/ Joseph C. Weller
Joseph C. Weller
EVP, CFO, Sec.-Treas.
PART II OTHER INFORMATION (Continued)
MORGAN KEEGAN, INC. and Subsidiaries
Item 6. Exhibit a.1.
COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Six Months Ended
January 31 January 31
1995 1994 1995 1994
PRIMARY
Average shares outstanding 13,555,068 14,706,018 13,567,662 14,619,414
Net effect of dilutive stock
options based on the treasury
stock method using average
market price. 20,281 33,619 22,219 53,311
TOTAL 13,575,349 14,739,637 13,589,881 14,672,725
Net Income $ 5,937,390 $ 8,810,011 $12,707,952 $17,242,502
Per Share Amount $ 0.44 $ 0.60 $ 0.94 $ 1 .18
FULLY DILUTED
Average shares outstanding 13,555,068 14,706,018 13,567,662 14,619,414
Net effect of dilutive stock
options based on the
treasury stock method
using the quarter end
market price,if higher
than average market price. 20,281 33,619 22,219 53,311
TOTAL 13,575,349 14,739,637 13,589,881 14,672,725
Net Income $5,937,390 $8,810,011 $12,707,952 $17,424,502
Per Share Amount $ 0.44 $ 0.60 $ 0.94 $ 1.18