SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 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
Registrant's telephone number, including area code: (901) 524-4100
Title of each class Name of each exchange on which registered
Common Stock, $.625 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12 (g) of the Act
Common Stock, par value $.625 per share
(Title of Class)
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 .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by references in Part III of
this Form 10-K or any amendment to this Form 10-K.
At October 11, 1996, the Registrant had approximately 20,427,631 shares of
Common Stock outstanding. The aggregate market value of Common Stock held by
non-affiliates was approximately $324,288,642.
DOCUMENTS INCORPORATED HEREIN BY REFERENCE:
Portions of the Registrant's Annual Report to Shareholders for the year
ended July 31, 1996, which has been furnished to the Commission pursuant to
Regulation 240.14a(3) (c), are incorporated by reference into Parts I and II
of this Report on Form 10-K. Portions of the Proxy Statement to be used in
connection with the solicitation of proxies to be voted at the Registrant's
annual meeting of shareholders to be held November 22, 1996, which will be
filed with the Commission pursuant to Regulation 240.14a(6)(c) prior to
October 18, 1996, are incorporated by reference into Part III and Part IV of
this Report on Form 10-K.
PAGE
PART I
Item 1. BUSINESS
General
Morgan Keegan, Inc. (Registrant) is a holding company whose principal
subsidiary, Morgan Keegan & Company, Inc. (M.K. & Co.) is a regional
securities broker/dealer serving retail customers in the southeastern United
States and institutional clients throughout the United States and abroad.
The Registrant has very few operations and substantially all of the
Registrant's consolidated revenues are generated through the broker/dealer
subsidiary. The subsidiary is a trader, broker and underwriter of fixed
income and equity securities and provides related financial services in
support of its broker/dealer activities. Products offered by M.K. & Co.
include stocks; corporate and tax-exempt bonds; U.S. Government, agency and
guaranteed securities; tax advantaged investments; options; investment and
advisory services; a money market fund; and a regional mutual fund managed by
Morgan Asset Management, Inc., a subsidiary of the Registrant. M.K. & Co.
also produces capital raising services for corporate and government clients,
margin credit for individual customers, research, and economic and business
analysis of financial and stock market data for its customers. The
percentage (%) of total revenues derived from the various business areas is
as follows:
Year Ended July 31
1996 1995 1994
Institutional clients 24 26 31
Retail customers 45 44 41
Investment banking fees, interest and
other activities 31 30 28
Total 100 100 100
M.K. & Co. is a two seat member of the New York Stock Exchange, Inc.
("NYSE"), owns seats on the American Stock Exchange, Inc. ("AMEX"); the New
York Financial Futures Exchange, Inc. ("NYFE"); the Philadelphia Stock
Exchange, Inc. ("PHLX"); the Chicago Board of Options Exchange, Inc. ("CBOE")
and the Chicago Stock Exchange ("CSE"). Certain seats are leased to third
parties under agreements which may be canceled by either party on 30 days'
notice. M.K. & Co. is a member of the National Association of Securities
Dealers ("NASD"), the Securities Industry Association, and the Securities
Investor Protection Corporation ("SIPC"). SIPC provides protection for
customers up to $500,000 each, with a limitation of $100,000 for claims for
cash balances.
PAGE
M.K. & Co. has thirty-five offices in twelve states. The following table
reflects the number of account executives in each office as of July 31, 1996:
Account Account
Office Executives Office Executives
Birmingham, Alabama 34 New Orleans, Louisiana 22
Decatur, Alabama 5 Shreveport, Louisiana 13
Fairhope, Alabama 1 Boston, Massachusetts 4
Huntsville, Alabama 14 Jackson, Mississippi 25
Mobile, Alabama 16 New York, New York 5
Montgomery, Alabama 25 Durham, North Carolina 8
Little Rock, Arkansas 44 Raleigh, North Carolina 6
Rogers, Arkansas 5 Wilmington, North Carolina 5
Ft. Lauderdale, Florida 6 Jackson, Tennessee 6
Pensacola, Florida 6 Knoxville, Tennessee 25
Athens, Georgia 4 Memphis, Tennessee
Atlanta, Georgia 24 Headquarters 109
Bowling Green, Kentucky 5 Suburban Offices 38
Lexington, Kentucky 7 Nashville, Tennessee 25
Louisville, Kentucky 22 Austin, Texas 27
Baton Rouge, Louisiana 15 Dallas, Texas 7
Lafayette, Louisiana 9 Houston, Texas 29
TOTAL 596
PAGE
Revenues by Source
The following table sets forth the Registrant's consolidated revenues
indicated in dollars and as a percentage of total revenues for the periods:
(Dollars in Thousands)
Year Ended July 31
1996 1995 1994
Amount % Amount % Amount %
REVENUES
Commissions
Listed securities $26,467 8.78 $21,246 9.32 $22,748 9.81
Over-the-counter
securities 21,849 7.25 12,624 5.54 10,076 4.35
Options 3,243 1.08 2,631 1.15 1,990 0.86
Other 16,311 5.41 9,661 4.24 11,723 5.06
TOTAL 67,870 22.52 46,162 20.25 46,537 20.08
Principal transactions
Corporate securities 59,567 19.76 36,724 16.10 33,541 14.47
Municipal securities 16,345 5.42 16,404 7.19 14,135 6.10
U.S. Government
obligations 39,291 13.04 33,982 14.90 41,746 18.02
TOTAL 115,203 38.22 87,110 38.19 89,422 38.59
Investment banking
Corporate securities 25,990 8.62 25,009 10.97 32,850 14.18
Municipal securities 2,427 0.81 1,926 0.84 4,059 1.75
Underwriting, management
and other fees 21,884 7.26 18,259 8.01 18,923 8.17
TOTAL 50,301 16.69 45,194 19.82 55,832 24.10
Interest
Interest on margin
balances 19,752 6.55 17,519 7.68 10,824 4.67
Interest on securities
owned 30,171 10.01 20,261 8.88 14,070 6.07
TOTAL 49,923 16.56 37,780 16.56 24,894 10.74
Other Income 18,109 6.01 11,826 5.18 15,035 6.49
TOTAL REVENUES $301,406 100.0 $228,072 100.0 $231,720 100.0
Because of the interdependence of various activities and departments of the
Registrant's business, and the arbitrary assumptions involved in allocating
overhead, including administrative, communications and securities processing
expenses, it is not possible to state the percentage contribution to net
income of each aspect of the Registrant's operations.
PAGE
Institutional Business
During the three years ended July 31, 1996, approximately 27% of the
Registrant's total consolidated revenues were derived from institutional
clients. M.K. & Co.'s institutional clients include mutual funds, commercial
banks, thrift institutions, insurance companies, pension funds and private
money managers. Most of these clients are located in the United States;
however, some are located abroad, principally in the United Kingdom and
Canada. In the fiscal year ended July 31, 1996, no single institutional
client accounted for more than 2% of the Registrant's total revenues. M.K.
& Co.'s institutional clients purchase or sell fixed income and equity
securities primarily in large dollar amounts; transactions in these
securities are usually executed for these clients on a principal basis. See
PRINCIPAL TRANSACTIONS. M.K. & Co. also provides other services, including
research, to its institutional clients.
For the fiscal years ended July 31, 1996, 1995, and 1994, institutional
revenues and percentages of total consolidated revenues were $73,468,000
(24%), $60,097,000 (26%) and $72,774,000 (31%), respectively.
Retail Business
During each of the three years ended July 31, 1996, approximately 43% of
the Registrant's total revenues were derived from transactions with retail
(individual) customers. For the fiscal years ended July 31, 1996, 1995, and
1994, such revenues of total consolidated revenues were $134,807,000 (45%),
$100,239,000 (44%), and $95,576,000 (41%), respectively.
Retail commissions are charged on both exchange and over-the-counter
transactions in accordance with a schedule which M.K. & Co. has formulated.
In certain cases, discounts from the schedule are granted to retail
customers, generally on large trades or to active customers. In addition to
acting as a broker/dealer for its retail customers, M.K. & Co. supplies them
with equity and fixed income research, conducts seminars and makes available
personal financial planning services.
Transactions in securities may be executed on either a cash or margin
basis. As a service to its retail customers, M.K. & Co. provides margin
accounts which allow the customer to pay less than the full cost of a
security purchased, the balance of the purchase price being provided by M.K.
& Co. as a loan secured by the securities purchased. The amount of the loan
is subject to the margin requirements (Regulation T) of the Board of
Governors of the Federal Reserve System, NYSE margin requirements, and M.K.
& Co. internal policies, which in some instances are more stringent than
Regulation T or exchange requirements. In permitting customers to purchase
securities on margin, M.K. & Co. bears the risk of a market decline which
could reduce the value of its collateral below the customers' indebtedness.
Interest charged on customer margin accounts represented approximately 6.6%
of total revenues in fiscal 1996.
Principal Transactions
M.K. & Co. trades for its own account in corporate and tax-exempt
securities and U.S. government, agency and guaranteed securities. Most of
these transactions are entered into in order to facilitate the execution of
customers' orders to buy or sell these securities. In addition, it trades
certain equity securities in order to "make a market" in these securities.
As of July 31, 1996, the Registrant made a market in common stock or
other equity securities of approximately 178 corporations, many of which are
stocks followed by its research department.
M.K. & Co.'s trading activities require the commitment of capital. All
principal transactions place the Registrant's capital at risk. Profits and
losses are dependent upon the skills of employees and market fluctuations.
In some cases, in order to hedge the risks of carrying inventory, MK & Co.
enters into transactions for U.S. Treasury note futures. The following table
sets forth for the year ended July 31, 1996, the highest, lowest and average
month-end inventories (including the aggregate of both long and short
positions) for the types of securities in which M.K. & Co. acts as principal:
Highest Lowest Average
Inventory Inventory Inventory
Common stocks $ 34,207,250 $ 16,029,898 $ 20,557,670
Corporate debt securities 47,892,718 26,617,863 38,283,982
Tax-exempt securities 128,696,669 45,882,495 79,634,822
U.S. government, agency,
and guaranteed securities 229,145,299 145,894,183 200,377,278
The following table sets forth the composition of revenues from principal
transactions:
Year Ended July 31
1996 1995 1994
Amount % Amount % Amount %
Common stocks $ 52,206,040 45 $31,123,000 36 $27,055,067 30
Corporate debt securities 7,361,130 7 5,601,396 6 6,486,202 7
Tax-exempt securities 16,344,828 14 16,404,132 19 14,135,366 16
U.S. government, agency,
and guaranteed
securities 39,291,236 34 33,981,688 39 41,746,006 47
Total $115,203,234 100 $87,110,216 100 $89,422,641 100
PAGE
M.K. & Co. participates in selling groups organized to distribute new
issues of securities of the Federal Home Loan Bank, the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation, the Federal
Farm Credit Bank and the Student Loan Mortgage Association. The following
table sets forth selling group participation of M.K. & Co. in distributions
of agency securities:
Year Ended Number Amount of
July 31 Issues Participation
1996 46 $317,690,000
1995 52 382,075,000
1994 70 566,630,000
1993 90 690,705,000
1992 99 963,215,000
Repurchase Transactions
M.K. & Co. engages in repurchase transactions primarily to facilitate the
sale of U.S. government, agency and guaranteed securities. A repurchase
transaction is the sale of a security coupled with an agreement by the seller
to repurchase the security at the sale price. A reverse repurchase
transaction is the purchase of the security with an agreement to resell it.
M.K. & Co.'s repurchase transactions are generally matched in order to
minimize the risk of loss due to fluctuation in the underlying securities
prices. In a matched repurchase transaction, M.K. & Co. will simultaneously
engage in a repurchase transaction and a reverse repurchase transaction
covering the same security. The other party to a matched repurchase
agreement looks to M.K. & Co. for delivery of the securities or repurchase of
the securities, as the case may be. M.K. & Co. takes a risk that it will be
obligated to perform whether or not the other party performs. M.K. & Co.
attempts to minimize this risk by dealing with those deemed credit worthy.
Although repurchase transactions are structured as sales, courts recently
have treated them as financing transactions, that is, loans collateralized by
securities. Because of this uncertain nature of the transaction, it is M.K.
& Co.'s practice to take steps to perfect a security interest in the
securities to protect itself if a transaction were deemed a loan. In
repurchase transactions M.K. & Co. bears the risk that the other party to the
transaction will fail to perform its obligation to repurchase the securities
(repay the loan) or to deliver the securities purchased (return the
collateral). In such event, M.K. & Co. could incur a loss equal to the
difference between the price to be paid for the securities and their market
value at the repurchase date. If the transaction is deemed to be a loan and
should M.K. & Co. fail to take possession of the securities acquired by it in
such a transaction, or otherwise fail to perfect a security interest in them,
the loss could be equal to the full repurchase price.
PAGE
Concentrations of Credit Risk
As a securities broker/dealer, M.K. & Co. is engaged in various securities
trading and brokerage activities servicing a diverse group of domestic and
foreign corporations, governments, institutional and retail (individual)
investors. A substantial portion of M.K. & Co.'s transactions are
collateralized and are executed with and on behalf of institutional investors
including other broker/dealers, commercial banks, insurance companies,
pension plans, mutual funds and other financial institutions. M.K. & Co.'s
exposure to credit risk associated with the non-performance of these
customers in fulfilling their contractual obligations pursuant to securities
and commodities transactions, can be directly impacted by volatile trading
markets which may impair the customers' ability to perform. M.K. & Co.'s
principal activities are also subject to the risk of the counterpart's non-
performance.
In connection with these activities, particularly in U.S. government and
agency securities, M.K. & Co. enters into collateralized reverse repurchase
and repurchase agreements, securities lending arrangements and certain other
secured transactions which may result in significant credit exposure in the
event the counterparty to the transaction was unable to fulfill their
contractual obligations. In accordance with industry practice, repurchase
agreements and securities borrowing arrangements are generally collateralized
by cash or securities with a market value in excess of the obligation under
the contract. M.K. & Co. attempts to minimize credit risk associated with
these activities by monitoring customer credit exposure and collateral values
on a daily basis and requiring additional collateral to be deposited when
necessary. M.K. & Co. participates in the trading of some derivative
securities for its customers which is not a major portion of its business.
Investment Banking
M.K. & Co. participates in corporate and tax-exempt securities
distributions as a member of an underwriting syndicate or a member of a
selling group. Tax-exempt securities are obligations issued by state and
municipal governments, hospitals, public utility systems and industrial
development authorities. M.K. & Co.'s underwriting activities, together with
its selling group participation, are important as a source of securities for
sale to its customers. The following table sets forth corporate and tax-
exempt underwriting syndicate participation of the subsidiary:
CORPORATE TAX-EXEMPT
Year Ended Number of Amount of Number of Amount
July 31 Issues Participation Issues Participation
1996 246 $744,497,589 322 $1,449,875,000
1995 195 867,514,389 104 349,005,000
1994 330 774,651,373 159 312,056,000
1993 307 596,588,928 168 430,272,000
1992 245 547,846,000 162 341,310,000
Participation in an underwriting syndicate or a selling group involves both
economic and regulatory risks. A participant may incur losses if it is
unable to resell the securities it has committed to purchase, or if it is
forced to liquidate its commitment at less than the agreed purchase price.
In addition, under federal securities laws, other statutes and court
decisions, a participant may be subject to substantial liability for material
misstatements or omissions in prospectuses and other communications with
respect to such offerings. Further, underwriting commitments involve a
charge against net capital and the ability to make underwriting commitments
may be limited by the requirement that it must at all times be in compliance
with the net capital rule. See Note 10 - Regulatory Requirements - on page
25 of the 1996 Annual Report to Shareholders.
In addition to its underwriting and selling group activities, M.K. & Co.
engages in structuring, managing and marketing private offerings of corporate
and tax-exempt securities, and assists in arranging mergers, acquisitions,
divestitures and venture capital financing. M.K. & Co. provides valuation
and financial consulting services for gift and estate tax purposes, employee
stock ownership trusts, mergers, acquisitions, stock purchase agreements and
other corporate purposes, as well as valuations for private companies in the
process of going public. Other services include long-range financial
planning, financial public relations and cash management services. The
Registrant's subsidiary, Merchant Bankers, Inc., serves as a general partner
in two limited partnerships, Morgan Keegan Merchant Banking Fund Limited
Partnerships I and II, currently together have approximately $20,000,000 in
assets and are engaged in merchant banking activities.
Other Products
M.K. & Co. offers special products, including insurance products and
interests in various tax advantaged investments. Such tax advantaged
investments are generally in the form of limited partnership interests in
real estate, oil drilling, or similar ventures. Neither the Registrant nor
the broker/dealer acts as the general partner for such partnerships. Morgan
Keegan Managed Futures, Inc., a wholly-owned subsidiary of the Registrant,
acts as general partner to the Southern Capital Enhanced Equity Fund Limited
Partnership, (the "FUND"), an investment limited partnership. The Fund seeks
substantial capital appreciation through investing approximately 80% of its
assets in growth stocks and the remaining assets in a stock index futures
trading program.
M.K. & Co. is a distributor of shares of Bedford Money Market Fund, a money
market mutual fund whose shares are sold without a sales charge. The fund is
managed by Provident Institutional Management Corporation. M.K. & Co. also
sells shares in unit investment trusts which hold portfolios of tax-exempt
bonds, and as a service to its customers, offers shares of various mutual
funds including those of Southern Capital Fund. This fund, which invests
primarily in equity securities of companies located in the southern United
States, is a mutual fund managed by Morgan Asset Management, Inc., a
subsidiary of the Registrant, and is solely distributed by M.K. & Co. Also,
M.K. & Co. acts as a broker in the purchase and sale of put and call options
on the CBOE, AMEX and other exchanges.
Research Services
M.K. & Co.'s research services include the review and analysis of the
economy, general market conditions, industries and specific companies;
recommendation of specific action with regard to industries and specific
companies; review of customer portfolios; furnishing of information to retail
and institutional customers; and responses to inquiries from customers and
account executives. These services are made available generally without
charge to customers.
PAGE
Administration and Operations
Administrative and operations personnel are responsible for the execution
of orders; processing of securities transactions; receipt, identification and
delivery of funds and securities; internal financial control; accounting
functions; office services; custody of customers' securities; and compliance
with regulatory requirements.
There is considerable fluctuation in the volume of transactions which a
securities firm must handle. In the past, when the volume of trading in
securities reached record levels, the securities industry experienced serious
operating problems. M.K. & Co. has never experienced any significant
operating difficulties, even during periods of exceptionally heavy trading.
There is, however, no assurance that heavy trading volume in the future will
not result in clearing and processing difficulties.
The following table sets forth high, low and average monthly purchase and
sale transactions processed by M.K. & Co:
Year Ended Number of Transactions
July 31 High Low Average
1996 77,289 47,209 61,618
1995 57,362 41,414 47,875
1994 56,859 38,457 43,340
1993 43,544 28,358 36,584
1992 40,019 24,847 31,344
M.K. & Co. uses its own electronic data processing equipment to process
orders and floor reports, transmit execution reports to its branches, and
record all data pertinent to trades. It also clears its own securities
transactions.
M.K. & Co. believes that its internal controls and safeguards against
securities theft, including use of depositories and periodic securities
counts, are adequate. As required by the NYSE and certain other authorities,
M.K. & Co. carries fidelity bonds covering any loss or theft of securities,
as well as embezzlement and forgery. The amount of such bonds, which provide
total coverage of $20,000,000 (with $500,000 deductible provision per
incident) is considered adequate.
M.K. & Co. posts its books and records daily and believes they are
accurate. Periodic reviews of certain controls are conducted, and
administrative and operations personnel meet frequently with management to
review operational conditions in the firm. Operations personnel monitor day
to day operations to assure compliance with applicable laws, rules and
regulations. There is an internal audit department and an audit committee,
both of which help management place an emphasis on strong internal controls.
Employees
As of July 31, 1996, M.K. & Co. had 1,491 employees, 596 of whom were
account executives, 272 of whom were engaged in other service areas,
including trading, research and investment banking, and 623 of whom were
employed in accounting, clearing, data processing, management and other
activities.
<PAGEp
In large part, the Registrant's future success is dependent upon its
subsidiary's continuing ability to hire, train and retain qualified account
executives. During the fiscal year ended July 31, 1996, M.K. & Co. hired 110
account executives for a net increase of 45 over the beginning of the fiscal
year. M.K. & Co. trains new account executives who are required to take
examinations given by the NYSE, the NASD and certain state securities
regulators in order to be registered and qualified. M.K. & Co. also provides
continuing training programs for account executives. Competition is intense
among securities firms for account executives with good sales production
records.
M.K. & Co. considers its employee relations to be good and considers
compensation and employee benefits offered which includes medical, life and
disability insurance, 401(k) retirement plan and a discounted stock purchase
plan, to be competitive with those offered by other securities firms.
Regulation
The securities industry in the United States is subject to extensive
regulation under federal and state laws. The SEC is the federal agency
charged with administration of the federal securities laws. Much of the
regulation of broker/dealers, however, has been delegated to self-regulatory
organizations, principally the NASD and the national securities exchanges.
These self-regulatory organizations adopt rules (which are subject to
approval by the SEC) which govern the industry and conduct periodic
examinations of member broker/dealers. Securities firms are also subject to
regulation by state securities commissions in the states in which they are
registered. M.K. & Co. is registered in 50 states.
The regulations to which broker/dealers are subject cover all aspects of
the securities business, including sales methods, trade practices among
broker/dealers, capital structure of securities firms, uses and safekeeping
of customers' funds and securities, recordkeeping, and the conduct of
directors, officers and employees. Additional legislation, changes in rules
promulgated by the SEC and by self-regulatory organizations, or changes in
interpretation or enforcement of existing laws and rules, often affect
directly the method of operation and profitability of broker/dealers. The
SEC and the self-regulatory organizations may conduct administrative
proceedings which can result in censure, fines, suspension or expulsion of a
broker/dealer, its officers or employees. The principal purpose of
regulation and discipline of broker/dealers is the protection of customer and
the securities market rather than the protection of creditors and
stockholders of broker/dealers.
One of the most important regulations with which the Registrant's
broker/dealer subsidiary must continually comply is the "net capital rule" of
the Securities and Exchange Commission and a similar rule of the New York
Stock Exchange. These rules, under the alternative method, prohibit a
broker/dealer from engaging in any securities transactions at a time when its
net capital is less than 2% of aggregate debit balances arising from customer
transactions; in addition, restrictions may be imposed on the operations of
a broker/dealer if its net capital is less than 5% of aggregate debit items.
At July 31, 1996, the Registrant's subsidiary's net capital was 33% of
aggregate debit items. See Note 10 - Regulatory Requirements - page 25 of
the 1996 Annual Report to Shareholders.
PAGE
The laws, rules and regulations of the various federal, state and other
regulatory bodies to which the business of the Registrant is subject are
constantly changing. While management believes that it is currently in
compliance in all material respects with all laws, rules and regulations
applicable to its business, it cannot predict what effect any such changes
might have.
Item 2. PROPERTIES
The Registrant's headquarters occupy approximately 134,000 square feet in
Morgan Keegan Tower in Memphis, Tennessee. On May 31, 1996, Morgan Keegan
Tower was purchased by Morgan Properties, LLC, a wholly-owned subsidiary of
the Registrant. The acquisition was financed with a twenty-five year term
mortgage payable at 8.25% fixed rate with the building as collateral.
Management believes the acquisition will allow the Company to better control
and manage its future space needs. The Registrant's offices are leased with
the exception of Morgan Properties, LLC. See Note 4 - Leases - on page 22 of
the 1996 Annual Report to Shareholders.
Item 3. LEGAL PROCEEDINGS
The Registrant is named in and subject to various proceedings and 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 the
resolution of such litigation and claims will have no material adverse effect
on the Registrant's results of operations or financial condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders during the fourth quarter of
the fiscal year covered by this report.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The information required by this item is incorporated herein by reference
to Note 12 - Quarterly Results of Operations (Unaudited) - on page 26 of the
1996 Annual Report to Shareholders, a copy of which is enclosed.
Item 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference
to the Ten Year Financial Summary on pages 14 and 15 and Additional Financial
Information (Unaudited) on page 17 of the 1996 Annual Report to Shareholders,
a copy of this is enclosed.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated herein by reference
to page 16 of the 1996 Annual Report to Shareholders, a copy of which is
enclosed.
PAGE
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference
to pages 18 through 26 of the 1996 Annual Report to Shareholders, a copy of
which is enclosed.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial disclosure.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference
to the Registrant's definitive Proxy Statement which was filed with the
Commission pursuant to Regulation 240.14a(6)(c) on October 18, 1996 and will
be used in connection with the solicitation of proxies to be voted at the
Registrant's annual meeting of shareholders to be held November 22, 1996.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the Registrant's definitive Proxy Statement which was filed with the
Commission pursuant to Regulation 240.14a(6)(c) on October 18, 1996 and will
be used in connection with the solicitation of proxies to be voted at the
Registrant's annual meeting of shareholders to be held November 22, 1996.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the Registrant's definitive Proxy Statement which was filed with the
Commission pursuant to Regulation 240.14a(6)(c) on October 18, 1996 and will
be used in connection with the solicitation of proxies to be voted at the
Registrant's annual meeting of shareholders to be held November 22, 1996.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the Registrant's definitive Proxy Statement which was filed with the
Commission pursuant to Regulation 240.14a(6)(c) on October 18, 1996 and will
be used in connection with the solicitation of proxies to be voted at the
Registrant's annual meeting of shareholders to be held November 22, 1996.
PAGE
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Financial Statements, Financial Statement Schedules and Exhibits
(1) The following consolidated financial statements of the Registrant and its
subsidiaries, included in the 1996 Annual Report to Shareholders are
incorporated by reference in Item 8:
Consolidated Statements of Financial Condition July 31, 1996 and 1995
Consolidated Statements of Income Years ended July 31, 1996
1995, and 1994
Consolidated Statements of Stockholders' Years ended July 31, 1996
Equity 1995, and 1994
Consolidated Statements of Cash Flows Years ended July 31, 1996
1995, and 1994
Notes to Consolidated Financial Statements July 31, 1996
PAGE
(2) The following consolidated financial statement schedule of Morgan
Keegan, Inc. and subsidiaries is included in Item 14 (d):
Schedule I - Condensed Financial Statements of Registrant
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
(3) The following exhibits are filed herewith or incorporated by reference as
indicated. Exhibit numbers refer to Item 601 of Regulation S-K:
Exhibit 3 - Articles of Incorporation filed as Exhibits B & C and Bylaws
to Proxy Statement.
Exhibit 11 - Statement re: Computation of Per Share Earnings Page 19
Exhibit 13 - Annual Report to Shareholders*
Exhibit 22 - List of Subsidiaries of Registrant*
Exhibit 23 - Consent of Independent Auditors Page 20
Exhibit 27 - Financial Data Schedule Page 21
*Certain portions of the Annual Report to Shareholders are incorporated
herein by reference: the Annual Report to Shareholders is not to be deemed
filed as a part of this Annual Report on Form 10-K.
(b) No reports on Form 8-K were filed during the fourth quarter of the year
ended July 31, 1996.
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules - The response to this portion of Item 14
is submitted as a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ Allen B. Morgan, Jr.
Allen B. Morgan, Jr.
Chairman
Date: October 25, 1996
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
/s/ Kenneth F. Clark, Jr.
Kenneth F. Clark, Jr. Director October 25, 1996
/s/ William W. Deupree, Jr.
William W. Deupree, Jr. Director October 25, 1996
/s/ Allen B. Morgan, Jr.
Allen B. Morgan, Jr. Chairman and Director October 25, 1996
/s/ Donald Ratajczak
Donald Ratajczak Director October 25, 1996
/s/ John W. Stokes, Jr.
John W. Stokes, Jr. Vice President and Director October 25, 1996
/s/ Joseph C. Weller
Joseph C. Weller Secretary/Treasurer and October 25, 1996
Director
/s/ Peter S. Willmott
Peter S. Willmott Director October 25, 1996
Schedule I
Condensed Financial Statements of Registrant
Morgan Keegan, Inc. (Parent Company)
Condensed Balance Sheets July 31
1996 1995
ASSETS
Cash $ 1,000 $ 1,000
Securities owned 2,080,105 1,931,470
Furniture, equipment and leasehold
improvements less allowances for
depreciation and amortization
($7,774,721 at July 31, 1996,
$7,324,441 at July 31, 1995) 10,187,711 6,807,524
Investments in subsidiaries (a) 173,434,119 143,568,182
Intercompany receivables (a) 21,803,616
Other assets 5,921,080 6,403,139
Total Assets $213,427,631 $158,711,315
LIABILITIES
Short-term borrowings $ 1,400,000 $11,400,000
Commercial paper 42,928,286 7,468,217
Intercompany payables (a) 384,222
Other liabilities 91,425 1,424
STOCKHOLDERS' EQUITY
Common Stock 12,773,497 12,605,439
Additional paid-in-capital 1,510,383 712,098
Retained earnings 154,724,040 126,139,915
169,007,920 139,457,452
Total Liabilities and
Stockholders' Equity $213,427,631 $158,711,315
Condensed Income Statements July 31
1996 1995 1994
Rental income $ 2,492,649 $ 2,167,988 $ 1,881,486
Interest income 396,957 185,095 4,198,859
Investment income 5,064 2,248,375
Depreciation (2,492,649) (2,167,988) (1,881,486)
Other 7,507 402,300 6,636
Interest expense (90,000)
Income taxes (125,000) (300,000) (915,000)
Equity in net income
of subsidiaries 33,672,460 23,560,974 26,302,292
Net Income $33,866,988 $23,848,369 $31,841,162
<FN>
(a) Eliminated in consolidation
PAGE
Schedule I - Continued
Condensed Financial Statements of Registrant
Morgan Keegan, Inc. (Parent Company)
Condensed Statement of Cash Flows July 31
1996 1995 1994
Cash Flows From Operating Activities
Operations (net income) $33,866,988 $23,848,369 $31,841,162
Less:Income from subsidiaries (33,672,460) (23,560,974) (26,302,292)
Amortization of restricted stock 2,580,000 1,800,000 1,580,000
Depreciation expense 2,492,649 2,167,988 1,881,486
Decrease (increase) in other assets 482,059 (3,494,309) (2,637,163)
(Decrease) increase in intercompany
payables (384,222) (2,672,397) 6,973,383
(Decrease) increase in other
liabilities 90,001 1,424
Increase in intercompany
receivables (21,803,616)
Increase (decrease) from operating
activities (16,348,601) (1,909,899) 13,336,576
Cash Flows From Financing Activities
Proceeds (payments) from short
term borrowings (10,000,000) 10,000,000
Proceeds from sale or
issuance of common stock 2,920,669 2,232,853 6,423,113
Proceeds (payments) of
commercial paper 35,460,069 (1,724,909) (1,863,691)
Dividends paid (5,282,864) (4,438,988) (4,036,931)
Retirement of common stock (4,534,325) (9,349,500) (16,777,386)
(Decrease)increase from
financing activities 18,563,549 (3,280,544) (16,254,895)
Cash Flows From Investing Activities
(Increase) decrease in securities
owned (148,635) (164,105) (396,476)
(Increase) decrease in investment
in subsidiaries 3,806,523 8,754,208 5,386,772
Purchase of furniture, equipment
and leasehold improvements (5,872,836) (3,399,660) (2,071,977)
(Increase) decrease from investing
activities (2,214,948) 5,190,443 2,918,319
Increase in cash 0 0 0
CASH AT BEGINNING OF YEAR 1,000 1,000 1,000
CASH AT END OF YEAR $1,000 $1,000 $1,000
Notes to Financial Statements
1. Basis of Presentation - In the Parent-Company-only financial statements,
the Registrant's investment in subsidiaries is stated at cost plus equity in
undistributed earnings of subsidiaries since date of acquisition. The
Registrant's share of net income of its unconsolidated subsidiaries is
included in consolidated income using the equity method. Parent-Company-only
financial statements should be read in conjunction with the Registrant's
consolidated financial statements.
PAGE
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year Ended July 31
1996 1995 1994
PRIMARY
Average shares outstanding 20,390,236 20,308,407 21,145,595
Net effect of dilutive stock
options - based on the treasury
stock method using average
market price. 95,004 82,360 71,614
TOTAL 20,485,240 20,390,767 21,217,209
Net Income $33,866,988 $23,848,369 $31,841,162
Per share amount $1.65 $1.17 $1.46
FULLY DILUTED
Average shares outstanding 20,390,236 20,308,407 21,145,595
Net effect of dilutive stock
options - based on the treasury
stock method using the year end
market price, if higher than
average market price. 95,004 82,360 71,614
TOTAL 20,485,240 20,390,767 21,217,209
Net Income $33,866,988 $23,848,369 $31,841,162
Per share amount $1.65 $1.17 $1.46
EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Morgan Keegan, Inc. of our report dated September 19, 1996, included
in the 1996 Annual Report to Shareholders of Morgan Keegan, Inc.
Our audit also included the financial statement schedule of Morgan Keegan,
Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-16982) pertaining to the 1985 Restricted Stock and
Stock Option Plan and in the Registration Statement (Form S-8 No. 33-32974)
pertaining to the Employee Stock Purchase Plan of Morgan Keegan, Inc. of our
report dated September 19, 1996, with respect to the consolidated financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedule included
in this Annual Report (Form 10-K) of Morgan Keegan, Inc.
/S/ Ernst & Young LLP
ERNST & YOUNG LLP
Memphis, Tennessee
October 25, 1996
PAGE
Report of Independent Auditors
Board of Directors
Morgan Keegan, Inc.
We have audited the accompanying consolidated statements of financial
condition of Morgan Keegan, Inc. and subsidiaries as of July 31, 1996 and
1995, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended July
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform an audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly
in all material respects, the consolidated financial position of Morgan
Keegan, Inc. and subsidiaries at July 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended July 31, 1996 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Memphis, Tennessee
September 19, 1996
PAGE
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per share amounts)
Years ended July 31 1996
Revenues
Commissions
Listed securities $ 26,467
Over-the-counter 21,849
Options 3,243
Other 16,311
67,870
Principal transactions:
Corporate securities 59,567
Municipal securities 16,345
U.S. government securities 39,291
115,203
Investment banking:
Corporate securities 25,990
Municipal securities 2,427
Underwriting management and other fees 21,884
50,301
Interest:
Interest on margin balances 19,752
Interest on securities owned 30,171
49,923
Other 18,109
301,406
Expenses
Compensation 158,352
Floor brokerage and clearance 4,397
Communications 18,892
Travel and promotional 7,336
Occupancy and equipment costs 11,812
Interest 32,930
Taxes, other than income taxes 7,006
Other operating expenses 5,514
246,239
Income (loss) before income taxes 55,167
Income tax expense (credit) 21,300
Net income $ 33,867
Per Share Data*
Net income $ 1.65
Book value $ 8.27
Other Data (at year end):
Total assets $947,338
Stockholders' equity $169,008
Common shares outstanding* 20,438
<FN>
*Adjusted for a three-for-two stock split in April, 1986, a four-for-three
stock split in September, 1991, a three-for-two stock split in March, 1992,
a three-for-two stock split in June, 1993, and a three-for-two stock split in
June, 1995.
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per share amounts)
Years ended July 31 1995 1994 1993
Revenues
Commissions
Listed securities $ 21,246 $ 22,748 $ 20,457
Over-the-counter 12,624 10,076 10,159
Options 2,631 1,990 1,927
Other 9,661 11,723 11,196
46,162 46,537 43,739
Principal transactions:
Corporate securities 36,724 33,541 34,404
Municipal securities 16,404 14,135 17,432
U.S. government securities 33,982 41,746 51,297
87,110 89,422 103,133
Investment banking:
Corporate securities 25,009 32,850 15,760
Municipal securities 1,926 4,059 3,947
Underwriting management and other fees 18,259 18,923 9,571
45,194 55,832 29,278
Interest:
Interest on margin balances 17,519 10,824 7,047
Interest on securities owned 20,261 14,070 12,627
37,780 24,894 19,674
Other 11,826 15,035 13,371
228,072 231,720 209,195
Expenses
Compensation 120,795 125,205 109,748
Floor brokerage and clearance 3,724 3,875 5,296
Communications 15,962 13,852 12,012
Travel and promotional 5,855 5,721 4,241
Occupancy and equipment costs 9,716 8,320 8,153
Interest 23,600 14,393 11,185
Taxes, other than income taxes 6,298 4,972 4,199
Other operating expenses 3,774 3,741 4,659
189,724 180,079 159,493
Income (loss) before income taxes 38,348 51,641 49,702
Income tax expense (credit) 14,500 19,800 19,000
Net income $ 23,848 $ 31,841 $ 30,702
Per Share Data*
Net income $ 1.17 $ 1.46 $ 1.45
Book value $ 6.91 $ 6.10 $ 4.97
Other Data (at year end):
Total assets $882,292 $571,009 $527,084
Stockholders' equity $139,457 $125,365 $106,335
Common shares outstanding* 20,169 20,556 21,408
<FN>
*Adjusted for a three-for-two stock split in April, 1986, a four-for-three
stock split in September, 1991, a three-for-two stock split in March, 1992,
a three-for-two stock split in June, 1993, and a three-for-two stock split in
June, 1995.
PAGE
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per share amounts)
Years ended July 31 1992 1991 1990
Revenues
Commissions
Listed securities $ 18,378 $ 13,143 $ 14,444
Over-the-counter 9,041 5,347 1,745
Options 2,089 2,143 2,180
Other 7,632 4,824 4,434
37,140 25,448 22,803
Principal transactions:
Corporate securities 28,161 16,554 11,808
Municipal securities 12,037 10,730 7,445
U.S. government securities 48,588 30,279 18,478
88,786 57,563 37,731
Investment banking:
Corporate securities 16,730 4,836 2,947
Municipal securities 3,960 376 159
Underwriting management and other fees 9,862 5,436 3,926
30,552 10,648 7,032
Interest:
Interest on margin balances 5,941 4,867 5,521
Interest on securities owned 12,709 12,490 10,769
18,650 17,357 16,290
Other 7,536 5,501 5,152
182,664 116,517 89,008
Expenses
Compensation 94,348 61,265 48,243
Floor brokerage and clearance 4,571 3,751 3,749
Communications 9,791 8,764 8,436
Travel and promotional 3,699 2,982 2,660
Occupancy and equipment costs 7,557 8,194 7,789
Interest 12,562 12,953 12,591
Taxes, other than income taxes 3,823 3,116 2,682
Other operating expenses 4,122 3,288 3,308
140,473 104,313 89,458
Income (loss) before income taxes 42,191 12,204 (450)
Income tax expense (credit) 16,400 4,500 (475)
Net income $ 25,791 $ 7,704 $ 25
Per Share Data*
Net income $ 1.25 $ .38 $ .01
Book value $ 3.67 $ 2.50 $ 2.14
Other Data (at year end):
Total assets $434,448 $304,445 $236,991
Stockholders' equity $ 76,690 $ 50,837 $ 44,888
Common shares outstanding* 20,893 20,336 20,959
<FN>
*Adjusted for a three-for-two stock split in April, 1986, a four-for-three
stock split in September, 1991, a three-for-two stock split in March, 1992,
a three-for-two stock split in June, 1993, and a three-for-two stock split in
June, 1995.
PAGE
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per share amounts)
Years ended July 31 1989 1988 1987
Revenues
Commissions
Listed securities $ 13,675 $ 12,901 $ 10,829
Over-the-counter 1,848 2,088 2,313
Options 2,339 2,509 2,564
Other 4,192 3,943 6,714
22,054 21,441 22,420
Principal transactions:
Corporate securities 14,369 15,421 17,723
Municipal securities 5,993 6,401 4,550
U.S. government securities 14,707 14,829 19,927
35,069 36,651 42,200
Investment banking:
Corporate securities 3,461 2,225 8,152
Municipal securities 213 19 394
Underwriting management and other fees 4,057 3,302 5,267
7,731 5,546 13,813
Interest:
Interest on margin balances 5,698 5,406 4,753
Interest on securities owned 6,129 3,407 2,307
11,827 8,813 7,060
Other 2,750 1,105 902
79,431 73,556 86,395
Expenses
Compensation 43,953 42,242 50,119
Floor brokerage and clearance 2,966 2,900 2,044
Communications 7,996 7,366 6,744
Travel and promotional 1,990 2,649 3,040
Occupancy and equipment costs 6,852 5,755 4,645
Interest 7,931 4,620 3,928
Taxes, other than income taxes 2,326 2,179 1,934
Other operating expenses 2,330 1,989 1,342
76,344 69,700 73,796
Income (loss) before income taxes 3,087 3,856 12,599
Income tax expense (credit) 715 1,351 5,900
Net income $ 2,372 $ 2,505 $ 6,699
Per Share Data*
Net income $ .10 $ .10 $ .29
Book value $ 2.18 $ 2.11 $ 2.10
Other Data (at year end):
Total assets $397,007 $236,209 $195,128
Stockholders' equity $ 48,432 $ 49,325 $ 55,999
Common shares outstanding* 22,219 23,374 26,697
<FN>
*Adjusted for a three-for-two stock split in April, 1986, a four-for-three
stock split in September, 1991, a three-for-two stock split in March, 1992,
a three-for-two stock split in June, 1993, and a three-for-two stock split in
June, 1995.
PAGE
General Business Environment. Morgan Keegan, Inc. (the "Company") operates a
full service regional brokerage business through its principal subsidiary,
Morgan Keegan & Company, Inc. The Company is involved in the origination,
underwriting, distribution, trading and brokerage of fixed income and equity
securities and also provides investment advisory services. The Company is not
involved with high yield securities, bridge loan financing, or any other
ventures that management feels may not be appropriate for the Company's
strategic approach.
Many factors affect the Company's revenues including changes in economic
conditions, investor sentiment, the level and volatility of interest rates,
inflation, political events and competition. As these factors are beyond the
Company's control, and certain expenses are relatively fixed, earnings can
significantly vary from year to year regardless of management's efforts to
enhance revenue and control costs.
Increasing competition from commercial banks and thrift institutions is
anticipated as these institutions begin to offer investment banking and
financial services which were previously only offered by securities firms.
The Company anticipates increasing regulation in the securities industry,
meaning that continued compliance may be more difficult and costly. At
present, the Company is unable to predict the extent of changes that may be
enacted or the effect on the Company's business.
The Company's long term plan is to continue to grow its regional brokerage
and other services in the southeastern United States.
Results of Operations. Revenues soared past $300,000,000 for the first time
as the Company had a record year for revenues, earnings and earnings per
share. Total revenues of $301,406,000 for fiscal 1996 were $73,334,000 in
excess of fiscal 1995 revenues of $228,072,000 and $69,686,000 in excess of
the previous record 1994 revenues of $231,720,000. Fiscal 1995 saw rising
interest rates and uncertain market conditions for most of the year resulting
in fiscal 1995 revenues trailing fiscal 1994 revenues.
Principal transactions increased in fiscal 1995 $28,093,000 or 32% after a
decline of $2,312,000 or 3% for fiscal 1995 over fiscal 1994. The increase
was primarily due to the higher volume dictated by the outstanding market
conditions for most of the year. The decline in the previous year was due to
lower volumes and OTC trading losses.
Continued expansion of the Investment Banking area allowed the Company to
benefit from the excellent markets in 1996 with banking revenues rising
$5,107,000 to $50,301,000. The decline of $10,638,000 from fiscal 1994 to
fiscal 1995 resulted from less favorable market conditions for equity
securities and continued weakness in the taxable debt securities markets.
Interest income increased in both fiscal years as rates continued to creep up
and the continued expansion of the retail branch system meant an increase in
margin account balances. Other income had the largest percentage increase of
53% from $11,826,000 to $18,109,000. The increase was due to the continued
expansion of the fee-based products coinciding with the growth of the retail
business.
Operating expenses increased $56,515,000 or 30% to $246,239,000. The largest
component of the increase was compensation which rose 31% or $37,557,000 to
$158,352,000. This increase corresponds with the increase in revenues of
32%. Interest expense was second largest component of the increase which
increased $9,330,000 or 40% which was slightly less than the 32% increase in
revenues. Other expenses increased moderately due to the higher volume and
continued growth of the Company.
Operating expenses increased $9,645,000 or 5% for fiscal 1995 over fiscal
1994. The largest component of the increase was the rise in interest expense
which was due to the higher interest rates for the year, as well as larger
inventory and customer credit positions.
Fiscal 1996 was highly profitable for the securities industry in general as
indicated by the Dow's rise from 4700 to 5528 or 18% and the Nasdaq increase
from 999 to 1080 or 8%. During the favorable market conditions, the Company
benefited from its retail office expansion in the southeast and management's
expense cutting efforts to allow record earnings per share of $1.65 which was
$.48 per share above 1995 and $.19 above the previous record of fiscal 1994.
Liquidity and Capital Resources.
Most of the Company's assets are highly liquid, consisting mainly of cash or
assets readily convertible into cash. These assets are financed by the
Company's equity capital, short-term bank loans, commercial paper, repurchase
agreements and other payables. Changes in the amount of securities owned by
the Company and customer and broker receivables affect directly the amount of
the Company's financing requirements. During the year, the Company purchased
its corporate headquarters and negotiated a 25 year mortgage payable for
$20,000,000 at the rate of 8.25%.
The Company's broker-dealer subsidiary is subject to requirements of the
Securities and Exchange Commission and the New York Stock Exchange relating
to liquidity and capital standards. It has historically operated well in
excess of the minimum requirements. At July 31, 1996, the net capital of the
Company's broker-dealer subsidiary exceeded the SEC's minimum requirements by
more than $96,000,000, which is slightly more than the $82,000,000 at the end
of last year. Continued expansion is not expected to have a significant
adverse impact on liquidity or capital. Funds available from operations and
lines of credit should provide sufficient sources to meet capital needs of
the foreseeable future.
During the year, the Company continued its stock repurchase program,
purchasing 381,800 shares for an aggregate value of $4,534,000. This
followed fiscal 1995 repurchases of 1,030,200 shares valued at $9,348,000.
During the year, the board authorized the purchase of an additional 1,000,000
shares to the 3,750,000 which had been previously authorized.
During the prior year, the board of directors declared a three-for-two stock
split. The purpose of the stock split was to allow the shareholders to
participate in the Company's outstanding growth for the past several years
and to increase the cash dividend.
Total assets of the Company were $64,356,000 higher at July 31, 1996 than
1995, with the two most significant increases coming in receivables from
customers of $53,729,000 and securities owned of $19,363,000. These
increases resulted primarily from the favorable securities markets relating
to the retail area.
Liabilities increased from $742,835,000 in the previous year to $777,640,000
or $34,805,000. The biggest component of the increase was payable to
customers which increased $46,029,000 reflecting the strong markets and
continued effects of the industry's change to T+3 in 1995.
Cash used in financing activities was $5,671,000 as the Company was able to
lower its short term borrowings significantly. Cash used for investing was
$29,750,000 in fiscal 1996, which increased mostly by the cost of the
purchase of the headquarters for $20,000,000 mentioned earlier.
Effects of Inflation. The Company's assets are primarily monetary, consisting
of cash, assets convertible into cash, securities and owned and receivables.
Because of their liquidity, these assets are not significantly affected by
inflation. Management believes that replacement costs of furniture,
equipment and leasehold improvements will not materially affect operations.
However, the rate of inflation affects the Company's expenses, such as those
for employee compensation and communications, which may not be readily
recoverable in the price of services offered by the Company.
The table below summarizes the changes in the major categories of revenues
and expense for the past three (3) years.
(Dollars in thousands) Increase (Decrease)
Revenues: 1996 vs 1995 1995 vs 1994
Commissions $21,708 47% $ (375) (1%)
Principal transactions 28,093 32% (2,312) (3%)
Investment banking 5,107 11% (10,638) (19%)
Interest 12,143 32% 12,886 52%
Other 6,283 53% (3,209) (21%)
$73,334 32% $(3,648) (2%)
Expenses:
Compensation $37,557 31% $(4,410) (4%)
Floor brokerage and clearance 673 18% (151) (4%)
Communications 2,930 18% 2,110 15%
Travel and promotional 1,481 25% 134 2%
Occupancy and equipment costs 2,096 22% 1,396 17%
Interest 9,330 40% 9,207 64%
Taxes, other than income taxes 708 11% 1,326 27%
Other operating expenses 1,740 46% 33 1%
$56,515 30% $ 9,645 5%
PAGE
Additional Financial Information (Unaudited)
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per share amounts)
Summary of Quarterly Results
First Second Third Fourth
Quarter Quarter Quarter Quarter
Fiscal 1996
Revenues $68,940 $77,457 $79,297 $75,712
Income before income taxes 14,230 14,917 14,076 11,944
Net income 8,830 9,217 8,576 7,244
Net income per share 0.44 0.45 0.41 0.35
Fiscal 1995
Revenues $56,206 $55,267 $50,147 $66,452
Income before income taxes 10,971 9,537 6,960 10,880
Net income 6,771 5,937 4,360 6,780
Net income per share 0.33 0.29 0.22 0.33
Fiscal 1994
Revenues $57,664 $60,125 $56,294 $57,637
Income before income taxes 13,732 14,310 10,657 12,942
Net income 8,432 8,810 6,657 7,942
Net income per share 0.39 0.40 0.30 0.37
Fiscal 1993
Revenues $47,047 $49,397 $55,312 $57,439
Income before income taxes 11,207 11,270 13,235 13,990
Net income 6,808 7,170 8,085 8,639
Net income per share 0.33 0.34 0.38 0.40
Fiscal 1992
Revenues $37,923 $48,094 $50,837 $45,810
Income before income taxes 7,697 11,126 12,665 10,703
Net income 4,772 6,701 7,715 6,603
Net income per share 0.24 0.33 0.37 0.31
PAGE
Statistical Comparison of Production
1996 1995 1994 1993 1992
Total
production $208,275,740 $160,335,704 $168,350,637 $154,251,186 $136,760,330
Percentage
change in
production +29.9% -4.8% +9.1% +12.8% +58.3%
Number of
tickets 749,560 558,967 480,564 439,006 376,128
Average
commissions
per ticket $ 278 $ 287 $ 350 $ 351 $ 363
Number of
investment
brokers 596 551 492 438 409
Number of
Investment
brokers
(over 1 year) 487 438 436 403 379
Total number
of employees 1,491 1,335 1,218 1,088 969
Average
commissions
per investment
broker
(over 1 year) $ 34,885 $ 334,555 $ 346,274 $ 359,817 $ 327,096
Number of
new accounts
opened 33,835 29,559 25,861 21,451 25,322
PAGE
Consolidated Statements of Income
Morgan Keegan, Inc. and Subsidiaries
Years ended
July 31
(In thousands, except per share amounts)
1996 1995 1994
Revenues
Commissions $ 67,870 $ 46,162 $ 46,537
Principal transactions 115,203 87,110 89,422
Investment banking 50,301 45,194 55,832
Interest 49,923 37,780 24,894
Other 18,109 11,826 15,035
301,406 228,072 231,720
Expenses
Compensation 158,352 120,795 125,205
Floor brokerage and clearance 4,397 3,724 3,875
Communications 18,892 15,962 13,852
Travel and promotional 7,336 5,855 5,721
Occupancy and equipment costs 11,812 9,716 8,320
Interest 32,930 23,600 14,393
Taxes, other than income taxes 7,006 6,298 4,972
Other operating expenses 5,514 3,774 3,741
246,239 189,724 180,079
Income Before Income Taxes 55,167 38,348 51,641
Income Tax Expense 21,300 14,500 19,800
Net Income $ 33,867 $ 23,848 $ 31,841
Net Income Per Share $ 1.65 $ 1.17 $ 1.46
Average shares outstanding 20,516,442 20,390,767 21,786,861
See accompanying notes.
PAGE
Consolidated Statements of Stockholders' Equity
Morgan Keegan, Inc. and Subsidiaries
Common Common Additional Stock-
Stock Stock Paid-In Retained holders'
Shares Amount Capital Earnings Equity
(In thousands, except per share amounts)
Balance at July 31, 1993 14,271,993 8,920 13,941 83,474 106,335
Issuance of restricted
stock 219,073 137 (137)
Issuance of Common
Stock 553,071 346 6,078 6,424
Dividends paid ($.19
per share) (4,037) (4,037)
Repurchase & retirement
of Common Stock (1,340,126) (838) (15,940) (16,778)
Amortization of
restricted stock 1,580 1,580
Net income 31,841 31,841
Balance at July 31, 1994 13,704,011 8,565 5,522 111,278 125,365
Stock split effected
in the form of a stock
dividend 6,852,005 4,283 (81) (4,202)
Issuance of restricted
stock 298,072 186 (186)
Issuance of Common
Stock 344,924 216 2,017 2,233
Dividends paid ($.22
per share) (4,440) (4,440)
Repurchase & retirement
of Common Stock (1,030,309) (645) (8,360) (344) (9,349)
Amortization of
restricted stock 1,800 1,800
Net income 23,848 23,848
Balance at July 31, 1995 20,168,703 $12,605 $ 712 $126,140 $139,457
Issuance of restricted
stock 292,231 183 (183)
Issuance of Common
Stock 358,463 224 2,698 2,922
Dividends paid ($.26
per share) (5,283) (5,283)
Repurchase & retirement
of Common Stock (381,800) (239) (4,296) (4,535)
Amortization of
restricted stock 2,580 2,580
Net income 33,867 33,867
Balance at July 31, 1996 20,437,597 $12,773 $1,511 $154,724 $169,008
See accompanying notes.
Consolidated Statements of Financial Condition
Morgan Keegan, Inc. and Subsidiaries
(In thousands)
July 31 1996 1995
Assets
Cash $ 17,156 $ 22,287
Securities segregated for regulatory purposes,
at market 225,200 226,000
Deposits with clearing organizations and others 7,655 7,655
Receivable from brokers and dealers and
clearing organizations 16,978 25,046
Receivables from customers 314,436 260,707
Securities purchased under agreements to resell 69,278 91,861
Securities owned, at market 229,278 209,915
Memberships in exchanges, at cost (market value-
$3,722,000 at July 31, 1996; $2,367,000 at
July 31, 1995) 719 719
Furniture, equipment and leasehold improvements,
at cost (less allowances for depreciation and
amortization-$13,362,000 at July 31, 1996;
$12,159,000 at July 31, 1995) 18,492 13,037
Building and improvements, at cost (less
allowance for depreciation-$92,000 at
July 31, 1996) 19,908 0
Other assets 27,548 25,065
$946,648 $882,292
Liabilities and Stockholders' Equity
Short-term borrowings $ 31,400 $127,649
Mortgage note payable 19,965 0
Commercial paper 42,928 7,468
Payable to brokers and dealers and clearing
organizations 9,201 5,387
Payable to customers 484,547 438,518
Customers drafts payable 14,456 13,774
Securities sold under agreements to repurchase 54,826 35,360
Securities sold, not yet purchased, at market 62,972 68,430
Other liabilities 57,345 46,249
777,640 742,835
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares;
20,437,597 shares issued and outstanding
at July 31, 1996; 20,168,703 at July 31, 1995 12,773 12,605
Additional paid-in capital 1,511 712
Retained earnings 154,724 126,140
169,008 139,457
$946,648 $882,292
See accompanying notes.
PAGE
Consolidated Statements of Cash Flows
Morgan Keegan, Inc. and Subsidiaries
(In thousands)
Years ended July 31 1996 1995 1994
Cash Flows From Operating Activities:
Net Income $33,867 $23,848 $31,841
Non-cash items included in earnings:
Depreciation and amortization 4,387 3,501 3,321
Deferred income taxes (750) (1,900) (958)
Amortization of restricted stock 2,580 1,800 1,580
40,084 27,249 35,784
(Increase) decease in operating assets:
Receivable from brokers and dealers and
clearing organizations 8,068 4,899 (10,321)
Deposits with clearing organizations
and others (5,064) (127)
Receivable from customers (53,729) (23,943) (80,131)
Securities segregated for regulatory
purposes, at market 800 (190,299) 3,100
Securities owned, at market (19,363) (42,347) 22,114
Other assets (1,733) (10,462) (4,240)
(Decrease) increase in operating liabilities:
Payable to brokers and dealers and
clearing organizations 3,814 (8,194) (3,919)
Payable to customers 46,029 197,377 63,933
Customer drafts payable 682 2,824 3,077
Securities sold, not yet purchased, at market (5,458) 32,445 19,974
Other liabilities 11,096 (8,796) 11,924
(9,794) (51,560) 25,384
Cash provided by (used in) operating activities 30,290 (24,311) 61,168
Cash Flows From Financing Activities:
Commercial paper 35,460 (3,125) (1,864)
Mortgage note payable 20,000 0 0
Mortgage note payments (35) 0 0
Issuance of Common Stock 2,922 2,233 6,424
Retirement of Common Stock (4,535) (9,349) (16,778)
Dividends paid (5,283) (4,440) (4,037)
Short-term borrowings (96,249) 111,149 (51,605)
Securities purchased under agreements
to resell 19,466 (29,050) 25,827
Securities sold under agreement to
repurchase 22,583 (26,489) (16,625)
Cash provided by (used in) financing activities (5,671) 40,929 (58,658)
Cash Flows From Investing Activities:
Payments for furniture, equipment and
leasehold improvements (9,750) (7,185) (4,515)
Building purchase (20,000) 0 0
Cash used in investing activities (29,750) (7,185 (4,515)
Increase (decrease) in cash (5,131) 9,433 (2,005)
Cash at beginning of period 22,287 12,854 14,859
Cash at end of period $17,156 $22,287 $12,854
<FN>
Income tax payments totaled $20,275,000 in 1996, $14,651,000 in 1995, and
$17,769,000 in 1994. Interest payments totaled $32,761,000 in 1996, $23,445,000
in 1995, and $14,519,000 in 1994.
See accompanying notes.
PAGE
Notes to Consolidated Financial Statements
Morgan Keegan, Inc., and Subsidiaries
July 31, 1996
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the
accounts of Morgan Keegan, Inc. and its subsidiaries (collectively referred
to as the Company). All significant intercompany balances and transactions
have been eliminated in consolidation. The Company is in one principal line
of business, that of providing investment services primarily in the Southern
United States.
Financial Assets and Liabilities: Substantially all of the Company's
financial assets and liabilities are carried at market value or at amounts
which because of the short-term nature of the financial instruments,
approximate current fair value.
Securities Transactions: Securities transactions and related commission
revenue and expense are recorded on a settlement date basis, generally the
third business day following the transaction date, which is not materially
different from a trade date basis.
Securities: Securities owned and securities sold, not yet purchased are
carried at market value and unrealized gains and losses are reflected in
revenues.
Investment Banking: Management fees on investment banking transactions and
selling concessions are recorded on settlement date, which is not materially
different from a trade date basis. Underwriting fees are generally recorded
on the date the underwriting syndicate is closed.
Fixed Assets: Furniture, equipment and leasehold improvements are carried at
cost. Depreciation and amortization are provided on a straight-line basis
over the estimated useful lives of the assets. Building and improvements are
carried at cost and are being depreciated over a thirty-one year period.
Reverse Repurchase and Repurchase Agreements: Securities purchased under
agreements to resell (Reverse Repurchase Agreements) and securities sold
under agreements to repurchase (Repurchase Agreements) are carried at the
amounts at which the securities will be subsequently resold or reacquired as
specified in the respective agreements. Government securities segregated in
a special reserve bank account for the benefit of customers under rule 15c3-3
of the Securities and Exchange Commission represent securities purchased
under an agreement to resell of $225,200,000 and $226,000,000 at July 31,
1996 and 1995, respectively.
Income Taxes: The parent and its subsidiaries file a consolidated income tax
return. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Net Income Per Share: Net income per share is computed based on the weighted
average number of shares outstanding including shares issuable under stock
options, when dilutive. All earnings per share date included in the
consolidated financial statements and notes thereto have been adjusted to
give effect to all stock splits.
Accounts with Customers: Accounts with customers include amounts arising from
uncompleted transactions and margin balances. Securities which are owned by
customers but held as collateral for receivables from customers are not
included in the consolidated financial statement.
Restricted Stock: Amortization of restricted stock is provided on the
straight-line basis over the life of the restriction, which is five years.
Stock-based Compensation: The Company grants stock options for a fixed number
of shares to employees with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, recognized no compensation expense for the
stock option grants.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-based Compensation," which provides an
alternative to APB Opinion No. 25 in accounting for stock-based compensation
issued to employees. The statement allows for a fair value based method of
accounting for employee stock options and similar equity instruments.
However, for companies that continue to account for stock-based compensation
arrangements under Opinion No. 25, FAS No. 123 required disclosure of the pro
forma effect on net income and earnings per share of its fair value based
accounting for those arrangements. These disclosure requirements are
effective for fiscal year beginning after December 15, 1995.
Other Accounting Pronouncements: In March 1995, the FASB issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company will adopt Statement 121 in the
first quarter of fiscal 1997 and, based on current circumstances, does not
believe the effect of adoption will be material.
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
provides new accounting and reporting standards for sales, securitization,
and servicing of receivables and other financial assets and extinguishments
of liabilities. The provisions of the Statement are to be applied to
transactions occurring after December 31, 1996, even for transfers of assets
pursuant to securitization transactions that previously were established.
The company does not believe that the adoption of this statement will have a
material adverse effect on its consolidated financial condition or results of
operations.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
PAGE
NOTE 2-BORROWINGS
The mortgage note payable relates to the Memphis headquarters location
acquired May 31, 1996, and requires monthly principal and interest payments
of approximately $160,000. The mortgage bears interest at 8.25% and is
secured by buildings and improvements with a book value of $19,908,000.
Principal maturities under the mortgage note payable for the succeeding 5
years are as follows, in thousands:
1997 $253
1998 275
1999 299
2000 324
2001 352
Thereafter 18,462
$19,965
The short-term borrowings of $31,400,000 and 127,649,000 at July 31, 1996 and
1995 respectively, consist of loans payable on demand primarily used to
finance clearance of securities and to carry customers' margin accounts and
firm positions. The notes bear interest at the broker loan rate, which was
6.0% and 6.5% at July 31, 1996 and 1995, respectively.
The Company had total lines of credit of $345,000,000 at July 31, 1996, with
expirations prior to July 31, 1997, under which a maximum of $170,000,000
could be borrowed on an unsecured basis. There were no compensating balances
associated with these lines of credit.
At July 31, 1995, the secured short-term borrowings were collateralized by
securities with market values of approximately $170,322,000 of firm-owned
securities and $12,581,000 of customer-owned securities.
The Company also issues its own commercial paper to investors at fluctuating
interest rates (5.625% and 5.5% at July 31, 1996 and 1995, respectively).
The paper matures over various terms not to exceed nine months.
NOTE 3-SECURITIES
Securities owned for trading purposes consist of the following at July 31,
in thousands:
1996 1995
U.S. government obligations $121,142 $ 94,814
State and municipal obligations 45,863 72,389
Corporate bonds 48,055 32,058
Stocks 14,202 10,627
Bankers' acceptance 16 27
$229,278 $209,915
State and municipal obligations include an issue with a par value of
$12,700,000 which has been written down to an approximate fair market value
of $5,715,000 at July 31, 1996 and July 31, 1995, as determined by management
of the Company.
PAGE
Securities sold, not yet purchased consist of the following at July 31,
in thousands:
1996 1995
U.S. government obligations $54,422 $58,057
State and municipal obligations 122 2,276
Corporate bonds 3,095 1,758
Stocks 5,333 6,339
$62,972 $68,430
NOTE 4-LEASES
The Company leases office space, furniture and equipment under noncancellable
leases expiring through 2008, with options to renew the leases for up to five
years. Total rental expense for each of the years ended July 31 was as
follows, in thousands:
1996 $8,838
1995 $7,615
1994 $6,729
Aggregate future annual minimum rental commitments, excluding escalations,
for the years ending July 31 are as follows, in thousands:
1997 $ 4,406
1998 4,296
1999 3,380
2000 2,927
2001 1,922
Thereafter 4,678
$21,609
NOTE 5-COMMITMENTS AND CONTINGENCIES
At July 31, 1996, the Company was obligated under commercial letters of
credit of approximately $12,500,000 drawn in favor of certain clearing
organizations which were collateralized by customer-owned securities of
$9,232,232 and firm-owned securities of $5,500,000. These obligations
normally settle through the clearance of the related securities transactions
with the respective organizations.
The Company is named in and subject to various proceedings and 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 the
resolution of such litigation and claims will have no material adverse effect
on the Company's results of operations or financial condition.
PAGE
NOTE 6-INCOME TAXES
Significant components of the provision (credit) for income taxes are as
follows at July 31, in thousands:
1996 1995 1994
Federal:
Current $18,450 $14,000 $17,458
Deferred (750) (1,900) (958)
17,700 12,100 16,500
State 3,600 2,400 3,300
$21,300 $14,500 $19,800
The principal reasons for the difference between the effective rate and the
federal statutory income tax rate for the years ended July 31 are as follows,
in thousands:
1996 1995 1994
Amount Percent Amount Percent Amount Percent
Federal Statutory
rate applied to
pretax earnings $19,308 35.0% $13,422 35.0% $18,074 35.0%
State and local
taxes, less income
tax benefit 2,340 4.2 1,560 4.0 2,145 4.2
Non-taxable interest,
less non-deductible
interest (353) (0.6) (404) (1.0) (410) (0.8)
Other - net 5 - (78) (0.2) (9) (0.1)
$21,300 38.6% $14,500 37.8% $19,800 38.3%
The components of the deferred tax provision (credit) for the years ended
July 31 are as follows, in thousands:
1996 1995 1994
Depreciation and other building
related items $ 537 $ (675) $ (324)
Deferred compensation (163) (73) (27)
Restricted Stock (728) (311) (75)
Non-deductible reserves (220) (356) (281)
Trade date profit (45) (178) 24
Insurance and benefits (168) (341) (377)
Other - net 37 34 102
$ (750) $(1,900) $ (958)
PAGE
Significant components of the Company's deferred tax assets and liabilities
as of July 31 are as follows, in thousands:
1996 1995
Deferred tax assets:
Deferred compensation and restricted stock $2,125 $1,234
Non-deductible reserves 1,915 1,695
Insurance and benefits 1,709 1,541
Trade date profit 271 226
Other 67 20
6,087 4,716
Deferred tax liabilities:
Depreciation and other building related items 1,778 1,241
Other 309 225
2,087 1,466
Net deferred tax assets $4,000 $3,250
NOTE 7-COMMON STOCK
The Board of Directors has reserved 6,112,500 shares for issuance under the
Company's Restricted Stock and Incentive Stock Option plans of 1983 and 1985.
Under provisions of the Restricted Stock and the Incentive Stock Options
Plans, benefits may be granted to key officers and employees in either, or a
combination of, incentive stock options or restricted stock awards.
Incentive stock options are granted at the fair market value of the stock at
the time of grant. There were approximately 1,480,000 remaining shares
available to be granted at July 31, 1996.
The Board of Directors has authorized 450,000 shares to be granted to non-
employee directors in the form of incentive stock options. As of July 31,
1996, 153,000 options were outstanding and exercisable at an average price of
$8.58. During fiscal year 1996, 31,500 options were exercised at an average
price of $4.65 and 36,000 options were granted at an average price of $11.63.
PAGE
Employee stock option activity, which includes 10,850 shares that are
exercisable, is summarized as follows:
Average
Shares Price Aggregate Exercisable
Outstanding at July 31, 1993 68,625 $2.65 181,936
Granted 31,407 $8.35 262,100 1994-1999
Exercised (16,875) ($2.18) (36,788)
Outstanding at July 31, 1994 83,157 $4.90 407,248
Granted 58,750 $8.80 516,790 1995-2001
Exercised (10,125) ($2.55) (25,773)
Forfeited (20,133) ($6.74) (135,651)
Outstanding at July 31, 1995 111,649 $6.83 762,614
Granted 18,875 $8.40 158,463 1995-2001
Exercised (41,625) ($2.55) (106,324)
Outstanding at July 31, 1996 88,899 $9.16 814,753
The Company has approximately 1,550,000 shares of restricted stock included
in common stock outstanding which was issued at the fair market value at the
date of grant.
Under an Employee Stock Purchase Plan, 2,850,000 shares have been reserved to
allow employees to purchase company shares at a 15% discount, not to exceed
337,500 shares to all employees in any year.
Activity by year under the plan is summarized as follows:
Year Shares sold
1994 264,887
1995 325,799
1996 285,338
NOTE 8-REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The Company enters into sales of securities under agreements to repurchase,
with the obligation to repurchase the securities sold reflected as a
liability in the consolidated statement of financial condition.
The Company also enters into purchases of securities under agreements to
resell (reverse repurchase agreements). The amounts advanced under these
agreements represent short-term loans and are reflected as a receivable in
the consolidated statement of financial condition. Securities purchased
under agreements to resell are held in safekeeping in the Company's name.
Should the market value of the underlying securities decrease below the
amount recorded, the counterparty is required to place an equivalent amount
of additional securities in safekeeping in the name of the Company.
NOTE 9-EMPLOYEE BENEFIT PLANS
The Company makes discretionary contributions to its 401k defined
contribution plan and its profit sharing plan covering substantially all
employees. The Company also has a defined retirement plan covering certain
executives. Total provisions for expenses under all plans for each of the
years ended July 31, 1996, 1995, and 1994 totaled $1,475,000, $974,000, and
$916,000, respectively.
PAGE
NOTE 10-REGULATORY REQUIREMENTS
The Company's broker/dealer subsidiary, Morgan Keegan & Company, Inc., is a
member of the New York Stock Exchange and is subject to the Securities and
Exchange Commission's (SEC) uniform net capital rule. The subsidiary
broker/dealer company has elected to operate under the alternate method of
the rule, which prohibits a 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 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 July 31, 1996, subsidiary had net capital of $102,154,559 which was 32% of
its aggregate debit balances and $95,900,041 in excess of the 2% net capital
requirement. At July 31, 1995, subsidiary had net capital of $87,185,586,
which was 32% of its aggregate debit balances and $81,657,792 in excess of
the 2% net capital requirement.
NOTE 11-FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company's activities involve the
execution, settlement and financing of various securities transactions.
These activities may expose the Company to risk in the event the customer is
unable to fulfill its contractual obligations. The Company maintains cash
and margin accounts for its customers located throughout the United States
but primarily in the Southeast.
The Company, as part of its normal brokerage activities, assumes short
positions on securities. The establishment of short positions exposes the
Company to off-balance sheet risk in the event prices increase, as the
Company may be obligated to cover such positions at a loss. The Company
manages its exposure to these instruments by entering into offsetting or
other positions in a variety of financial instruments.
As a securities broker/dealer, a substantial portion of the Company's
transactions are collateralized. The Company's exposure to credit risk
associated with nonperformance in fulfilling contractual obligations pursuant
to securities transactions can be directly impacted by volatile trading
markets which may impair the customer's or contra party's ability to satisfy
their obligations to the Company. Where considered necessary, the Company
requires a deposit of additional collateral, or a reduction of securities
positions.
In the normal course of business, the Company enters into underwriting and
forward and future commitments. At July 31, 1996, the contract amount of
future contracts to purchase and sell U.S. Government securities was
approximately $20 and $36 million, respectively. At July 31, 1995, the
contract amount of future contracts to purchase and sell U.S. Government
securities was approximately $7 million each. The Company typically settles
its position by entering into equal but opposite contracts and, as such, the
contract amounts do not necessarily represent future cash requirements.
Substantially all transactions relating to such commitments were subsequently
settled and had no material effect on the Company's consolidated financial
position.
The Company will occasionally hedge a portion of its long proprietary
inventory position through the use of short positions in financial future
contracts. At July 31, 1996, the Company had approximately $47,000,000 of
these contracts. The contract amounts do not necessarily represent future
cash requirements.
While the Company regularly participates in the trading of some derivative
securities for its customers, this trading is not a significant portion of
the Company's business.
NOTE 12-QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
Quarter Ended
October 31 January 31 April 30 July 31
1995:
Revenues $68,940 $77,457 $79,297 $75,712
Expenses 54,710 62,540 65,221 63,768
Income before income taxes 14,230 14,917 14,076 11,944
Net income 8,830 9,217 8,576 7,244
Net income per share 0.44 0.45 0.41 0.35
Dividends per share 0.06 0.06 0.07 0.07
Stock price range:
High 12.63 13.63 13.38 13.25
Low 10.88 10.88 12.00 12.13
1995:
Revenues $56,206 $55,267 $50,147 $66,452
Expenses 45,235 45,730 43,187 55,572
Income before income taxes 10,971 9,537 6,960 10,880
Net income 6,771 5,937 4,360 6,780
Net income per share 0.33 0.29 0.22 0.33
Dividends per share 0.05 0.05 0.05 0.07
Stock price range:
High 9.00 8.75 10.67 13.13
Low 8.16 7.83 8.50 10.42