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 OCTOBER 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
(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 October 31, 1996
Common Stock $.625 par value 20,428,630
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements
of Financial Condition. . . . . . . . October 31, 1996 and July 31, 1996
Consolidated Statements
of Income . . . . . . . . . . . . . . Three months ended
October 31, 1996 and 1995
Consolidated Statements
of Cash Flows . . . . . . . . . . . . Three months ended
October 31, 1996 and 1995
Notes to Consolidated
Financial Statements. . . . . . . . . October 31, 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
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries
October 31 July 31
1996 1996
(unaudited)
(in thousands)
ASSETS
Cash $ 12,982 $ 17,156
Securities segregated for regulatory
purposes, at market 254,400 225,200
Deposits with clearing organizations
and others 7,950 7,655
Receivable from brokers and dealers and
clearing organizations 30,080 16,978
Receivable from customers 312,041 314,436
Securities purchased under agreements
to resell 95,374 69,278
Securities owned, at market 410,134 229,278
Memberships in exchanges, at cost
(market value-$2,846,000 at 10-31-96;
$3,722,000 at 7-31-96) 719 719
Furniture, equipment and leasehold
improvements, (less allowances for
depreciation and amortization $11,234,000
at 10-31-96; $13,362,000 at 7-31-96) 21,317 18,492
Building and improvements, at cost (less
allowance for depreciation $230,000 at
10-31-96; and $92,000 at 7-31-96) 19,770 19,908
Other assets 35,201 27,548
$1,199,968 $946,648
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 223,700 $ 31,400
Mortgage note payable 19,908 19,965
Commercial paper 37,827 42,928
Payable to brokers and dealers and
clearing organizations 13,894 9,201
Payable to customers 521,528 484,547
Customer drafts payable 12,089 14,456
Securities sold under agreements to
repurchase 62,098 54,826
Securities sold, not yet purchased,
at market 83,103 62,972
Other liabilities 50,259 57,345
1,024,406 777,640
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares;
20,428,630 shares issued and outstanding
at 10-31-96; 20,437,597 at 7-31-96 12,768 12,773
Additional paid-in capital 2,146 1,511
Retained earnings 160,648 154,724
175,562 169,008
$1,199,968 $946,648
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Three Months Ended
October 31
(in thousands, except
per share amounts)
1996 1995
REVENUES
Commissions $16,413 $15,351
Principal transactions 28,104 29,203
Investment banking 9,368 11,512
Interest 14,734 9,542
Other 5,796 3,332
TOTAL 74,415 68,940
EXPENSES
Compensation 37,494 37,243
Floor brokerage and clearance 1,258 1,068
Communications 5,432 4,548
Travel and promotional 1,904 1,756
Occupancy and equipment costs 3,444 2,662
Interest 10,336 5,131
Taxes, other than income taxes 1,465 1,133
Other operating expense 1,333 1,169
62,666 54,710
INCOME BEFORE INCOME TAXES 11,749 14,230
INCOME TAX EXPENSE 4,400 5,400
NET INCOME $ 7,349 $ 8,830
NET INCOME PER SHARE $ 0.36 $ 0.44
DIVIDENDS PER SHARE $ 0.07 $ 0.06
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Three Months Ended
October 31
1996 1995
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 7,349 $ 8,830
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 1,393 871
Deferred income taxes (330) (335)
Amortization of restricted stock 750 390
9,162 9,756
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations (13,102) (18,220)
Deposits with clearing organizations
and others (295) (320)
Receivable from customers 2,395 (10,290)
Securities segregated for regulatory purposes (29,200) 11,800
Securities owned (180,856) (89,138)
Other assets (7,323) (3,093)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations 4,693 11,565
Payable to customers 36,981 16,395
Customer drafts payable (2,367) 2,658
Securities sold, not yet purchased 20,131 (10,959)
Other liabilities (7,086) 460
(176,029) (89,142)
Cash used for operating activities (166,867) (79,386)
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper (5,101) 8,521
Mortgage note payable (57)
Issuance of Common Stock 22 12
Retirement of Common Stock (142) (502)
Dividends paid (1,425) (1,204)
Short-term borrowings 192,300 42,393
Securities purchased under agreements to resell (26,096) 24,657
Securities sold under agreements to repurchase 7,272 (3,498)
Cash provided by financing activities 166,773 70,379
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (4,080) (1,572)
Cash used for investing activities (4,080) (1,572)
Decrease in Cash (4,174) (10,579)
Cash at Beginning of Period 17,156 22,287
Cash at End of Period $ 12,982 $11,708
Income tax payments were $1,255,000 and $918,000 for the three month period
ending October 31, 1996 and 1995, respectively. Interest payments were
$10,127,000 and $5,024,000 for the same periods, respectively.
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
October 31, 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 three months ended October 31, 1996 are not necessarily indicative of the
results that may be expected for the year ending July 31, 1997. 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, 1996.
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 October 31, 1996, M.K. & Co. had net capital of
$92,381,482 which was 29% of its aggregate debit balances and $85,965,895 in
excess of the 2% net capital requirement.
NOTE C - INCOME TAXES
The principal reason for the difference between the Registrant's effective
tax rate and the federal statutory rate is the non-taxable interest earned on
municipal bonds.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Morgan Keegan, Inc. (The Registrant) operates a full service regional
brokerage business through its principal subsidiary, Morgan Keegan & Company,
Inc. (M.K. & Co.). M.K. & Co. is involved in the highly competitive business
of origination, underwriting, distribution, trading and brokerage of fixed
income and equity securities and also provides investment advisory services.
While M.K. & Co. regularly participates in the trading of some derivative
securities for its customers, this trading is not a major portion of M.K. &
Co.'s business. M.K. & Co. typically does not underwrite high yield
securities, and normally is not involved in bridge loan financings or any
other ventures that management believes may not be appropriate for its
strategic approach. Many highly volatile factors affect revenues, including
general market conditions, interest rates, investor sentiment and world
affairs, all of which are outside the Registrant's control. However, certain
expenses are relatively fixed. As a result, net earnings can vary
significantly from quarter to quarter, regardless of management's efforts to
enhance revenues and control costs.
Results of Operations
The Registrant's revenues increased approximately $5,475,000 (8%) to
$74,415,000 compared to $68,940,000 for the first quarter in the previous
year. The increase in revenues was primarily attributable to an increase in
interest income which went up $5,192,000. In spite of the DOW continuing a
record setting pace, individual activity in smaller capital stocks slowed
slightly resulting in decreases in revenues from principal transactions and
investment banking income.
Operating expenses for the quarter increased approximately $7,956,000 (15%)
to $62,666,000 compared to $54,710,000 for the first quarter of fiscal 1996.
The largest components of the increase were interest expense (101%) and
communications expenses (19%). Interest expense increased due to carrying
larger inventory positions to meet the customer needs and communications
expenses increased due to the continued efforts to maintain a state-of-the-
art network communications system between the home office and the branch
office system.
Net income for the quarter decreased approximately $1,481,000 (17%) to
$7,349,000 ($0.36) from $8,830,000 ($0.44) for the same period in the
previous year, primarily due to the softer markets for the smaller capital
stocks.
Liquidity and Capital Resources
High liquidity is reflected in the Registrant's statement of financial
condition with approximately 94% of its assets consisting of cash or assets
readily convertible into cash. Financing resources include the Registrant's
equity capital, commercial paper, short-term borrowings, repurchase
agreements and other payables. For the three month period ended October 31,
1996, cash flows used for operating activities increased by $87,481,000,
which is primarily due to an increase of securities owned of $180,856,000.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Liquidity and Capital Resources (continued)
Cash flows from financing activities were $166,773,000 for the three month
period ended October 31, 1996 compared to $70,379,000 in the same period of
the previous year. The increase was a result of the increase in short-term
borrowings used to carry the increased inventory positions.
Investing activities resulted in a $4,080,000 decrease in cash flows of the
current period compared to a $1,572,000 decrease in the previous period.
This is primarily due to the continued efforts to implement upgrades to the
branch office network system and the implementation of a new
telecommunications system.
At October 31, 1996, the Registrant's broker/dealer subsidiary, which is
regulated under the SEC's uniform net capital rule, had net capital of
$92,381,482 which was $85,965,895 in excess of the 2% net capital
requirement. During the quarter, the Registrant declared and paid cash
dividends of $0.07 per share on the shares outstanding.
The Registrant continued the stock repurchase program begun in November,
1993. During the quarter, the Registrant repurchased 11,600 shares for an
aggregate price of $142,100. Since the beginning of the repurchase program,
the Registrant has purchased 3,438,789 shares for $30,801,989.
MORGAN KEEGAN, INC. and Subsidiaries
PART II OTHER INFORMATION
Item 1. Legal proceedings
Morgan Keegan & Company, Inc. is subject to various claims
incidental to its securities business. While the ultimate
resolution of pending litigation and claims cannot be
predicted with certainty, based upon the information currently
known, management is of the opinion that it has meritorious
defenses and has instructed its counsel to vigorously defend
such lawsuits and claims, and that liability, if any, resulting
from all litigation will have no material adverse effect on the
Registrant's consolidated financial condition.
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
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: December 13, 1996
PART II OTHER INFORMATION (Continued)
MORGAN KEEGAN, INC. and Subsidiaries
Item 6. Exhibit a.1.
COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
Three Months Ended
October 31
1996 1995
PRIMARY
Average Shares outstanding 20,426,882 20,158,409
Net effect of dilutive stock options
based on the treasury stock method
using average market price.
81,880 112,820
TOTAL 20,508,762 20,271,229
Net Income $ 7,348,817 $ 8,829,690
Per Share Amount $ 0.36 $ 0.44
FULLY DILUTED
Average shares outstanding 20,426,882 20,158,409
Net effect of dilutive stock options
based on the treasury stock method
using the quarter end market price,
if higher than average market price. 81,880 112,820
TOTAL 20,508,762 20,271,229
Net Income $ 7,348,817 $ 8,829,690
Per Share Amount $ 0.36 $ 0.44