SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED APRIL 30, 1997
COMMISSION FILE NO. 1-9015
MORGAN KEEGAN, INC.
(Exact name of Registrant as specified in its charter)
Tennessee 62-1153850
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Fifty Front Street
Memphis, Tennessee 38103
(Address of principal executive (Zip Code)
offices)
901-524-4100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for at least the past 90 days. Yes X No .
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. YES NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practical date.
Class Outstanding at April 30, 1997
Common Stock $.625 par value 21,090,928
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements
of Financial Condition. . . . . . . . April 30, 1997 and July 31, 1996
Consolidated Statements
of Income . . . . . . . . . . . . . . Three months and nine months ended
April 30, 1997 and 1996
Consolidated Statements
of Cash Flows . . . . . . . . . . . . Nine months ended
April 30, 1997 and 1996
Notes to Consolidated
Financial Statements. . . . . . . . . April 30, 1997
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
April 30 July 31
1997 1996
(unaudited)
(in thousands)
ASSETS
Cash $ 15,358 $ 17,156
Securities segregated for regulatory
purposes, at market 198,700 225,200
Deposits with clearing organizations
and others 9,244 7,655
Receivable from brokers and dealers and
clearing organizations 14,300 16,978
Receivable from customers 349,319 314,436
Securities purchased under agreements
to resell 160,143 69,278
Securities owned, at market 390,009 229,278
Memberships in exchanges, at cost
(market value-$3,431,000 at 4-30-97;
$3,722,000 at 7-31-96) 719 719
Furniture, equipment and leasehold
improvements, (less allowances for
depreciation and amortization $14,458,000
at 4-30-97; $13,362,000 at 7-31-96) 23,452 18,492
Building and improvements, at cost (less
allowance for depreciation $506,000 at
4-30-97; and $92,000 at 7-31-96) 19,494 19,908
Other assets 37,457 27,548
$1,218,195 $946,648
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 152,070 $ 31,400
Mortgage note payable 19,776 19,965
Commercial paper 76,690 42,928
Payable to brokers and dealers and
clearing organizations 9,609 9,201
Payable to customers 500,428 484,547
Customer drafts payable 11,934 14,456
Securities sold under agreements to
repurchase 85,715 54,826
Securities sold, not yet purchased,
at market 115,571 62,972
Other liabilities 52,271 57,345
1,024,064 777,640
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares;
21,090,928 shares issued and outstanding
at 4-30-97; 20,437,597 at 7-31-96 13,182 12,773
Additional paid-in capital 7,224 1,511
Retained earnings 173,725 154,724
194,131 169,008
$1,218,195 $946,648
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Three Months Ended Nine Months Ended
April 30 April 30
(in thousands, except per share amounts)
1997 1996 1997 1996
REVENUES
Commissions $19,110 $18,190 $ 55,407 $ 49,341
Principal transactions 24,903 29,417 81,643 88,203
Investment banking 12,097 13,251 35,585 37,839
Interest 15,616 13,412 45,994 36,608
Other 5,557 5,027 16,597 13,703
TOTAL 77,283 79,297 235,226 225,694
EXPENSES
Compensation 38,572 41,491 117,838 118,177
Floor brokerage and
clearance 1,583 1,189 4,016 3,364
Communications 5,441 5,003 16,153 13,614
Travel and promotional 2,039 1,520 6,204 5,366
Occupancy and equipment
costs 4,111 3,055 11,532 8,728
Interest 10,906 9,537 32,010 23,718
Taxes, other than income
taxes 2,484 2,387 6,495 5,659
Other operating expense 1,237 1,039 3,645 3,845
66,373 65,221 197,893 182,471
INCOME BEFORE INCOME TAXES 10,910 14,076 37,333 43,223
INCOME TAX EXPENSE 4,000 5,500 13,800 16,600
NET INCOME $ 6,910 $ 8,576 $ 23,533 $ 26,623
NET INCOME PER SHARE $ 0.33 $ 0.41 $ 1.14 $ 1.30
DIVIDENDS PER SHARE $ 0.08 $ 0.07 $ 0.22 $ 0.19
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Nine Months Ended
April 30
1997 1996
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $23,533 $26,623
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 4,672 2,968
Deferred income taxes (891) (1,140)
Amortization of restricted stock 2,150 1,530
29,464 29,981
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations 2,678 (7,514)
Deposits with clearing organizations
and others (1,589) (159)
Receivable from customers (34,883) (30,034)
Securities segregated for regulatory purposes 26,500 3,200
Securities owned (160,731) (90,976)
Other assets (9,018) (3,798)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations 408 15,032
Payable to customers 15,881 36,622
Customer drafts payable (2,522) (439)
Securities sold, not yet purchased 52,599 (840)
Other liabilities (5,074) 2,182
(115,751) (76,724)
Cash used for operating activities (86,287) (46,743)
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper 33,762 23,488
Mortgage note payable (189)
Issuance of Common Stock 4,114 2,862
Retirement of Common Stock (142) (3,548)
Dividends paid (4,532) (3,854)
Short-term borrowings 120,670 7,751
Securities purchased under agreements to resell (90,865) 2,996
Securities sold under agreements to repurchase 30,889 18,732
Cash provided by financing activities 93,707 48,427
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (9,218) (7,345)
Cash used for investing activities (9,218) (7,345)
Decrease in Cash (1,798) (5,661)
Cash at Beginning of Period 17,156 22,287
Cash at End of Period $ 15,358 $16,626
Income tax payments were approximately $14,904,000 and $16,246,000 for the
nine month period ending April 30, 1997, and 1996, respectively. Interest
payments were approximately $31,575,000 and $23,886,000 for the same periods,
respectively.
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
April 30, 1997
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Morgan Keegan,
Inc. and its wholly owned subsidiaries (collectively referred to as the
Registrant). The accompanying unaudited consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the nine months ended April 30, 1997, 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 April 30, 1997, M.K. & Co. had net capital of
$102,729,963 which was 30% of its aggregate debit balances and $95,848,230 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.
NOTE D - EFFECT OF FASB STATEMENT NO. 128
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share", which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact of
Statement 128 on the calculation of primary earnings per share and fully
diluted earnings per share is not expected to be material.
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.
This Form 10-Q may contain or incorporate by reference statements which may
constitute "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. Prospective investors are cautioned that
any such forward-looking statements are not guarantees for future performance
and involve risks and uncertainties, and that actual results may differ
materially from those contemplated by such forward-looking statements.
Results of Operations
The Registrant s revenues were $77,283,000 for the quarter ended April 30,
1997, or $2,014,000 lower than the same quarter of the previous year when
revenues were $79,297,000. The largest component of this decrease was an
15% decrease in principal transactions stemming primarily from an unsettled
equity market during the last two months of the quarter.
Operating expenses increased for the quarter 2% over the same time in the
previous fiscal year from $65,221,000 to $66,373,000. Interest expenses and
occupancy costs were the primary contributors to this increase. Interest
expense increased $1,369,000 as larger inventory positions were carried
during the quarter and occupancy costs increased $1,056,000 from commitments
to enhance the retail branch system office space and communications systems.
Net income for the quarter was $6,910,000 compared to $8,576,000 in the same
period a year ago. Corrections in the market in both March and April
attributed to the decline in net income for the quarter.
Total revenue for the nine months ended April 30, 1997, totaled $235,226,000
for a 4% increase over the same nine month period of the previous year when
revenues totaled $225,694,000. Interest earned on securities owned and
interest earned on customer margin balances comprised the most significant
portions of the increase in revenues by increasing 29% and 20%, respectively.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Results of Operations (continued)
Year-to-date operating expenses increased 8% to $197,893,000 for the nine
months ended April 30, 1997, compared to $182,471,000 for the same period of
the previous year. Factors contributing to this increase include a
$2,804,000 increase in occupancy costs, a $2,539,000 increase in
communication expenses and a $8,293,000 increase in interest expense. Each
of these expenses is relative to the increase in trading volume and revenues
for the nine month period.
Net income for the nine months ended April 30, 1997, was $23,533,000 or
$3,090,000 less than the year-to-date net income at April 30, 1996, when net
income was $26,623,000.
Liquidity and Capital Resources
High liquidity is reflected in the Registrant s statement of financial
condition with approximately 93% 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 nine months ended April 30, 1997,
cash flows used for operating activities increased by $39,544,000 which is
primarily due to an increase in securities owned.
Cash flows from financing activities were $93,707,000 for the nine months
ended April 30, 1997, compared to $48,427,000 for the same period in the
previous year. The increase was largely a result of the increase in short-
term borrowing used to carry increased inventory positions.
Cash flows used for investing activities were $9,218,000 for the current year
versus $7,345,000 in the previous year. This increase is a result of the
commitment to enhance and refine the communications system and links to the
retail branch system offices.
At April 30, 1997, the Registrant s broker/dealer subsidiary, which is
regulated under the SEC s uniform net capital rule, had net capital of
$102,729,963 which was $95,848,230 in excess of the 2% net capital
requirement. During the quarter, the Registrant declared and paid cash
dividends of $.08 per share on the shares outstanding.
The Registrant is authorized to repurchase its own stock under the stock
repurchase program begun in November, 1993. During the quarter no stock was
repurchased under the plan; year-to-date the Registrant has repurchased
11,600 shares for an aggregate price of $142,000. Since the beginning of the
repurchase program, the Registrant has repurchased 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 or results
of operations.
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
During the quarter, Peter S. Wilmott resigned from the
Board of Directors to accept the position of chairman
of Zenith Corporation. Mr. James E. Harwood, III was
unanimously approved by the Board to replace Mr. Wilmott.
The Board further resolved to increase the number of
outside directors to four and upon doing so unanimously
approved Harry J. Phillips to the Board. Mr. Phillips
is the chairman of the Executive Committee of Browning
Ferris Industries, Inc.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
11. Computation of Earnings per Share
b. Reports on Form 8-K
No reports were filed during the quarter on Form 8-K
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Morgan Keegan, Inc.
Registrant
BY /S/ Joseph C. Weller
Joseph C. Weller
EVP, CFO, Sec.-Treas.
Date: June 12, 1997
PART II OTHER INFORMATION (Continued)
MORGAN KEEGAN, INC. and Subsidiaries
Item 6. a. Exhibit 11.
COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
Three Months Ended Nine Months Ended
April 30 April 30
1997 1996 1997 1996
PRIMARY
Average Shares outstanding 20,964,422 20,673,446 20,570,207 20,363,648
Net effect of dilutive
stock options based on
the treasury stock
method using average
market price. 100,429 120,562 115,245 131,437
TOTAL 21,064,851 20,794,008 20,685,452 20,495,085
Net Income $ 6,910,000 $ 8,575,946 $23,532,575 $26,622,853
Per Share Amount $ 0.33 $ 0.41 $ 1.14 $ 1.30
FULLY DILUTED
Average shares outstanding 20,964,422 20,673,446 20,570,207 20,363,648
Net effect of dilutive
stock options based on
the treasury stock
method using the
quarter end market
price,if higher
than average
market price. 100,429 120,562 115,245 131,437
TOTAL 21,064,851 20,794,008 20,685,452 20,495,085
Net Income $ 6,910,000 $ 8,575,946 $23,532,575 $26,622,853
Per Share Amount $ 0.33 $ 0.41 $ 1.14 $ 1.30