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, 1996
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 executive (Zip Code)
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 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, 1996
Common Stock $.625 par value 20,500,496
PAGE
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements
of Financial Condition. . . . . . . . April 30, 1996 and July 31, 1995
Consolidated Statements
of Income . . . . . . . . . . . . . . Three months and nine months ended
April 30, 1996 and 1995
Consolidated Statements
of Cash Flows . . . . . . . . . . . . Nine months ended
April 30, 1996 and 1995
Notes to Consolidated
Financial Statements. . . . . . . . . April 30, 1996
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
Signatures
PAGE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries
April 30 July 31
1996 1995
(unaudited)
(in thousands)
ASSETS
Cash $16,626 $ 22,287
Securities segregated for regulatory
purposes, at market 222,800 226,000
Deposits with clearing organizations
and others 7,814 7,655
Receivable from brokers and dealers and
clearing organizations 32,560 25,046
Receivable from customers 290,741 260,707
Securities purchased under agreements
to resell 88,865 91,861
Securities owned, at market 300,891 209,915
Memberships in exchanges, at cost
(market value-$3,284,000 at 4-30-96;
$2,367,000 at 7-31-95) 719 719
Furniture, equipment and leasehold
improvements, (less allowances for
depreciation and amortization $17,370,000
at 4-30-96; $12,159,000 at 7-31-95) 17,414 13,037
Other assets 30,003 25,065
$1,008,433 $882,292
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $135,400 $127,649
Commercial paper 30,956 7,468
Payable to brokers and dealers and
clearing organizations 20,419 5,387
Payable to customers 475,140 438,518
Customer drafts payable 13,335 13,774
Securities sold under agreements to
repurchase 54,092 35,360
Securities sold, not yet purchased,
at market 67,590 68,430
Other liabilities 48,431 46,249
845,363 742,835
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares;
20,500,496 shares issued and outstanding
at 4-30-96; 20,168,703 at 7-31-95 12,813 12,605
Additional paid-in capital 1,349 712
Retained earnings 148,908 126,140
163,070 139,457
$1,008,433 $882,292
See accompanying notes.
PAGE
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)
1996 1995 1996 1995
REVENUES
Commissions $18,190 $10,916 $ 49,341 $ 31,780
Principal transactions 29,417 19,870 88,203 62,868
Investment banking 13,251 5,672 37,839 30,908
Interest 13,412 10,519 36,608 27,423
Other 5,027 3,170 13,703 8,641
TOTAL 79,297 50,147 225,694 161,620
EXPENSES
Compensation 41,491 25,251 118,177 83,387
Floor brokerage and
clearance 1,189 1,026 3,364 2,822
Communications 5,003 3,961 13,614 11,605
Travel and promotional 1,520 1,292 5,366 4,043
Occupancy and equipment
costs 3,055 2,294 8,728 6,821
Interest 9,537 6,915 23,718 18,107
Taxes, other than income
taxes 2,387 1,766 5,659 4,750
Other operating expense 1,039 682 3,845 2,617
65,221 43,187 182,471 134,152
INCOME BEFORE INCOME TAXES 14,076 6,960 43,223 27,468
INCOME TAX EXPENSE 5,500 2,600 16,600 10,400
NET INCOME $ 8,576 $ 4,360 $ 26,623 $ 17,068
NET INCOME PER SHARE $ 0.41 $ 0.22 $ 1.30 $ 0.84
DIVIDENDS PER SHARE $ 0.07 $ 0.05 $ 0.19 $ 0.16
See accompanying notes.
PAGE
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Nine Months Ended
April 30
1996 1995
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $26,623 $17,068
Adjustments to reconcile net income to cash
provided by (used for) operating activities:
Depreciation and amortization 2,968 2,437
Deferred income taxes (1,140) 90
Amortization of restricted stock 1,530 1,110
29,981 20,705
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations (7,514) (16,222)
Deposits with clearing organizations
and others (159) (4,714)
Receivable from customers (30,034) (24,561)
Securities segregated for regulatory purposes 3,200 (144,699)
Securities owned (90,976) 20,168
Other assets (3,798) (7,838)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations 15,032 (2,513)
Payable to customers 36,622 129,623
Customer drafts payable (439) 3,375
Securities sold, not yet purchased (840) 23,058
Other liabilities 2,182 (20,078)
(76,724) (44,401)
Cash used in operating activities (46,743) (23,696)
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper 23,488 (3,208)
Issuance of Common Stock 2,862 2,209
Retirement of Common Stock (3,548) (9,348)
Dividends paid (3,854) (3,235)
Short-term borrowings 7,751 67,669
Securities purchased under agreements to resell 2,996 (185,214)
Securities sold under agreements to repurchase 18,732 159,899
Cash provided by financing activities 48,427 28,772
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (7,345) (4,951)
Membership in exchanges (41)
Cash used for investing activities (7,345) (4,992)
Increase (decrease) in Cash (5,661) 84
Cash at Beginning of Period 22,287 12,854
Cash at End of Period $16,626 $12,938
Income tax payments were approximately $16,246,000 and $11,818,000 for the
nine month period ending April 30, 1996 and 1995, respectively. Interest
payments were $23,886,000 and $18,085,000 for the same periods, respectively.
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
April 30, 1996
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 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, 1996 are not necessarily indicative of the
results that may be expected for the year ending July 31, 1996. 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, 1995.
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, 1996, M.K. & Co. had net capital of
$96,178,473 which was 32% of its aggregate debit balances and $90,151,567 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
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 for the Registrant increased 58% to a new quarterly record of
$79,297,000 for the quarter ended April 30, 1996 from approximately
$50,147,000 for the quarter ended April 30, 1995. This record exceeds the
previous quarterly revenue record established in the second quarter of the
current year when revenues were approximately $77,457,000. The increase in
the current quarter versus the same quarter of the previous year is
attributable to increases in principal transactions (48%),investment banking
fees (134%) and commission revenues (66%). Individual investor activity was
at record levels for the Registrant's brokerage subsidiary and throughout the
market with multiple new records set on the Dow during the quarter.
Operating expenses increased approximately 51% to $65,221,000 as compared to
$43,187,000 in the same period of the previous year. Employee compensation
expenses rose 64%, accounting for the most significant increase in expenses.
This increase is proportionate to the increase in revenues for the quarter.
Net income for the quarter was $.41 per share or approximately $8,576,000
compared to $.22 per share or approximately $4,360,000 in the same period of
the previous fiscal year.
Total revenues for the nine month period ended April 30, 1996 were
$225,694,000 compared to $161,620,000 for the same period in the previous
fiscal year. This 40% increase is composed of a 55% increase in commissions
and a 40% increase in principal transactions. Relative market conditions
appear to have stabilized in the current year enhancing bullish market
conditions for both the individual and institutional investors and allowing
the Company to take advantage of the continuing expansions of its branch
office network.
Operating expenses year-to-date increased approximately 36% to $182,471,000
from approximately $134,152,000 one year ago. Employee compensation
increased approximately 42% and interest expense increased 31%. Both of
these increases proportionate to the noted increase in revenues for the year.
PAGE
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Results of Operations (continued)
Net income for the nine months ended April 30, 1996 was approximately
$26,623,000 compared to $17,068,000 to the same period in the previous year.
On a per share basis, the current year earnings equal $1.30 versus $.84 for
the previous year.
Liquidity and Capital Resources
High liquidity is reflected in the Registrant's statement of financial
condition with approximately 95% of the 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 the other payables. For the nine month period
ended April 30, 1996, cash flows used in operating activities were
$46,743,000 compared to $23,696,000 used in the nine month period ended
April 30, 1995. The noted change in the current year is relative to the
Registrant's increase in revenues and the level of inventories carried and
customer receivables necessary to satisfy customer demands in the currently
existing bullish market conditions.
Cash flows provided by financing activities were $48,427,000 for the nine
months ended April 30, 1996 compared to $28,772,000 for the same period in
the previous period. The increase was attributed to higher levels of
borrowings (primaily the Registrant's commercial paper), necessary to finance
higher customer borrowings and inventory levels.
Investing activities resulted in a $7,345,000 use of cash flows for the
current period compared to $4,992,000 in the previous year. These investing
activities are Registrant's continued efforts to upgrade and enhance the
broker/dealer subsidiary's branch communication networks and mainframe
computers system utilized by the Registrant. Subsequent to the end of the
quarter, Morgan Properties, LLC, a wholly-owned subsidiary of the Registrant,
purchased the 23 story office building located at 50 North Front Street used
as the Registrant's headquarters in Memphis, Tennessee. The purchase price
was $20 million and was financed by a 25 year mortgage agreement.
At April 30, 1996, the Registrant's broker/dealer subsidiary, which is
regulated under the SEC's uniform net capital rule, had net capital of
$96,178,473 which was $90,151,567 in excess of the 2% net capital
requirement. During the quarter, the Registrant declared and paid dividends
of $.07 per share on the shares outstanding.
The Registrant continued the stock repurchase program begun in November,
1993. During the quarter, the Registrant repurchased 245,600 for an
aggregate price of $2,947,200. The Registrant has repurchased 297,700 shares
for an aggregate price of $3,548,050 for the nine month period ended April
30, 1996. Since the beginning of the repurchase program in 1994, the
Registrant has purchased 3,341,289 shares for $29,673,614.
PAGE
MORGAN KEEGAN, INC. and Subsidiaries
PART II OTHER INFORMATION
Item 1. Legal proceedings
The Registrant and its subsidiaries are 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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
1. Computation of Earnings per Share
PAGE
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: June 14, 1996
PAGE
PART II OTHER INFORMATION (Continued)
MORGAN KEEGAN, INC. and Subsidiaries
Item 6. Exhibit 11.
COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
Three Months Ended Nine Months Ended
April 30 April 30
1996 1995 1996 1995
PRIMARY
Average Shares outstanding 20,673,446 20,413,312 20,363,648 20,350,308
Net effect of dilutive
stock options based on
the treasury stock
method using average
market price. 120,562 72,932 131,437 46,626
TOTAL 20,794,008 20,486,244 20,495,085 20,396,934
Net Income $ 8,575,946 $ 4,360,211 $26,622,853 $17,068,163
Per Share Amount $ 0.41 $ 0.22 $ 1.30 $ 0.84
FULLY DILUTED
Average shares outstanding 20,673,446 20,413,312 20,363,648 20,350,308
Net effect of dilutive
stock options based on
the treasury stock
method using the
quarter end market
price,if higher
than average
market price. 120,562 72,932 131,437 46,626
TOTAL 20,794,008 20,486,244 20,495,085 20,396,934
Net Income $ 8,575,946 $ 4,360,211 $26,622,853 $17,068,163
Per Share Amount $ 0.41 $ 0.22 $ 1.30 $ 0.84