SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JANUARY 31, 1999
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 (Zip Code)
executive 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 February 28, 1999
Common Stock $.625 par value 32,659,633
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements
of Financial Condition. . . . . . . . January 31, 1999 and July 31, 1998
Consolidated Statements
of Income . . . . . . . . . . . . . . Three months and six months ended
January 31, 1999 and 1998
Consolidated Statements
of Cash Flows . . . . . . . . . . . . Six months ended
January 31, 1999 and 1998
Notes to Consolidated
Financial Statements. . . . . . . . . January 31, 1999
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Part II. Other Information
Item 1. Legal proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Part I. FINANCIAL INFORMATION
Item 1.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries
January 31 July 31
1999 1998
(unaudited)
(in thousands)
ASSETS
Cash $ 16,525 $ 22,172
Securities segregated for regulatory
purposes, at market 382,200 346,900
Deposits with clearing organizations
and others 9,790 9,818
Receivable from brokers and dealers and
clearing organizations 36,904 31,897
Receivable from customers 471,904 444,609
Securities purchased under agreements
to resell 122,384 174,583
Securities owned, at market 483,885 353,708
Memberships in exchanges, at cost
(market value-$5,097,000 at 1-31-99;
$5,049,000 at 7-31-98) 2,428 2,428
Furniture, equipment and leasehold
improvements, at cost (less allowances for
depreciation and amortization $23,276,000
at 1-31-99; $20,981,000 at 7-31-98) 24,440 24,332
Other assets 59,430 53,374
$1,609,890 $1,463,821
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 140,900 $ 68,400
Commercial paper 56,543 37,502
Payable to brokers and dealers and
clearing organizations 49,033 13,151
Payable to customers 776,207 700,332
Customer drafts payable 20,499 17,615
Securities sold under agreements to
repurchase 171,761 162,734
Securities sold, not yet purchased,
at market 49,336 116,727
Other liabilities 76,744 90,002
1,341,023 1,206,463
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares;
32,747,933 shares issued and outstanding
at 1-31-99; 32,817,204 at 7-31-98 20,467 20,510
Additional paid-in capital 8,158 13,561
Retained earnings 240,242 223,287
268,867 257,358
$1,609,890 $1,463,821
[FN]
See accompanying notes.
</FN>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Three Months Ended Six Months Ended
January 31 January 31
(in thousands, except per share amounts)
1999 1998 1999 1998
REVENUES
Commissions $ 30,050 $ 23,632 $ 56,960 $ 52,083
Principal transactions 37,958 26,521 71,369 57,723
Investment banking 11,065 19,707 21,029 35,502
Interest 18,948 17,847 37,098 35,743
Investment management fees 6,235 4,969 11,478 9,612
Other 2,910 3,896 5,649 7,106
TOTAL 107,166 96,572 203,583 197,769
EXPENSES
Compensation 55,553 47,675 104,930 98,122
Floor brokerage and
clearance 1,434 1,302 3,109 2,898
Communications 5,359 5,426 10,788 10,990
Travel and promotional 2,640 2,780 6,261 5,559
Occupancy and equipment
costs 5,375 4,752 10,485 9,154
Interest 11,491 11,957 22,283 24,455
Taxes, other than income
taxes 3,768 3,187 5,753 5,092
Other operating expense 2,308 1,491 4,690 2,810
87,928 78,570 168,299 159,080
INCOME BEFORE INCOME TAXES 19,238 18,002 35,284 38,689
INCOME TAX EXPENSE 7,500 6,600 13,800 14,500
NET INCOME $ 11,738 $ 11,402 $ 21,484 $ 24,189
NET INCOME PER SHARE:
Basic $ 0.36 $ 0.35 $ 0.66 $ 0.75
Diluted $ 0.36 $ 0.35 $ 0.66 $ 0.75
DIVIDENDS PER SHARE $ 0.07 $ 0.06 $ 0.14 $ 0.12
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 32,353 32,444 32,527 32,281
Diluted 32,464 32,627 32,636 32,457
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Six Months Ended
January 31
1999 1998
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 21,484 $ 24,189
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 4,849 4,816
Deferred income taxes 600 (4,790)
Amortization of gain on sale of building
and related assets (690) (460)
Amortization of restricted stock 2,100 1,500
28,343 25,255
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations (5,007) 3,265
Deposits with clearing organizations and others 28 104
Receivable from customers (27,295) (59,833)
Securities segregated for regulatory purposes (35,300) (15,600)
Securities owned (130,177) (31,441)
Other assets (6,656) (18,762)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations 35,882 7,141
Payable to customers 75,875 43,127
Customer drafts payable 2,884 (999)
Securities sold, not yet purchased (67,391) (35,476)
Other liabilities (12,568) (3,943)
(169,725) (112,417)
Cash used for operating activities (141,382) (87,162)
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper 19,041 (65,618)
Mortgage note payable (19,714)
Issuance of Common Stock 4,761 14,053
Retirement of Common Stock (12,308)
Dividends paid (4,528) (3,858)
Short-term borrowings 72,500 120,530
Securities purchased under agreements to resell 52,199 97,396
Securities sold under agreements to repurchase 9,027 (93,285)
Cash provided by financing activities 140,692 49,504
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (4,957) (4,852)
Proceeds from sale of building and
related assets 34,582
Cash (used for) provided by
investing activities (4,957) 29,730
Decrease in Cash (5,647) (7,928)
Cash at Beginning of Period 22,172 22,423
Cash at End of Period $ 16,525 $ 14,495
[FN]
Income tax payments were approximately $12,172,000 and $22,963,000 for the six
month periods ending January 31, 1999, and 1998, respectively. Interest
payments were approximately $22,883,000 and $24,758,000 for the same periods,
respectively.
See accompanying notes.
</FN>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
January 31, 1999
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Morgan
Keegan, Inc. and its 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 and six months
ended January 31, 1999, are not necessarily indicative of the results
that may be expected for the year ending July 31, 1999. For further
information, refer to the financial statements and notes thereto
included in the Registrant's annual report on Form 10-K for the year
ended July 31, 1998.
NOTE B - NET CAPITAL REQUIREMENT
As a registered broker/dealer and member of the New York Stock
Exchange, the registrant's brokerage subsidiary, Morgan Keegan &
Company, Inc. (M.K. & Co.) is subject to the Securities and Exchange
Commission's (SEC) uniform net capital rule. The broker/dealer
subsidiary has elected to operate under the alternative method of the
rule, which prohibits a broker/dealer from engaging in any securities
transactions when its net capital is less than 2% of its aggregate
debit balances, as defined, arising from customer transactions. The
SEC may also require a member firm to reduce its business and restrict
withdrawal of subordinated capital if its net capital is less than 4%
of aggregate debit balances, and may prohibit a member firm from
expanding its business and declaring cash dividends if its net capital
is less than 5% of aggregate debit balances. At January 31, 1999, M.K.
& Co. had net capital of $150,396,891 which was 31% of its aggregate
debit balances and $140,637,511 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
NOTE D - NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
January 31 January 31
1999 1998 1999 1998
Numerator
Net Income $11,738,103 $11,401,769 $21,484,341 $24,189,350
Denominator
Denominator for basic
earnings per share -
weighted average shares 32,352,961 32,443,664 32,527,308 32,281,245
Effect of dilutive
securities - stock
options 110,662 183,051 108,596 175,543
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversations 32,463,623 32,626,715 32,635,904 32,456,788
Basic earnings per share $ 0.36 $ 0.35 $ 0.66 $ 0.75
Diluted earnings per
share $ 0.36 $ 0.35 $ 0.66 $ 0.75
NOTE E - OTHER ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective
for annual and interim periods beginning after December 15, 1997. This
statement established standards for the method that public entities use
to report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related
disclosures about products and services, geographical areas and major
customers. Management has not completed its review of the statement,
but does not anticipate its adoption will have a significant effect on
the Registrant's annual or interim reporting.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
NOTE E - OTHER ACCOUNTING PRONOUNCEMENTS (continued)
The Financial Accounting Standards Board issued in June 1998 its new
standard on derivatives - Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The new Statement resolves the
inconsistencies that existed with respect to derivatives accounting,
and dramatically changes the way many derivatives transactions and
hedged items are reported. The Statement is effective for years
beginning after June 15, 1999. The Registrant has not yet determined
the effect, if any, Statement 133 will have on the earnings and
financial condition of the Registrant.
Part I. FINANCIAL INFORMATION
Item 2.
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 recognized record revenues for the quarter ended January
31, 1999 when revenues totaled $107,166,000. This exceeds the previous
record of $105,779,000 set in the fourth quarter of fiscal 1998.
Revenues for the quarter were $10,594,000, or 11%, higher than the same
period in fiscal 1998 when they totaled $96,572,000. The largest
component of this increase is in principal transaction revenues.
Increased activity in fixed income securities accounted for a 43%
increase over the same quarter of the prior year. Investment banking
revenues decreased from $19,707,000 in the previous quarter to
$11,065,000 for the current quarter, a 44% decline due to almost no
equity underwritings during the quarter.
Operating expenses increased to $87,928,000 or a 12% increase over the
same period of the prior year when operating expenses totaled
$78,570,000. The largest component of this increase is related to
employee compensation that increased 17%. This increase is
proportionate to the increase noted in revenues for the quarter. Other
expense classifications increased due to the Registrant's expansion in the
southern region, offset by continuing expense cutting efforts which
actively reduced communication expense by 1% for the quarter.
Net income for the quarter increased to $11,738,000 versus $11,402,000
a year ago. Net income per share was $0.36 and $0.35 for the quarters
ended January 31, 1999 and 1998, respectively.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Results of Operations (continued)
Total revenue for the six months ended January 31, 1999 totaled
$203,583,000 compared to $197,769,000 for the six months ended January
31, 1998. The most significant increases were noted in principal
transactions and commission income. These increases are a result of
the strong market for fixed income securities and continued growth of
the Registrant's retail branch system. Investment banking revenues
reflected the market's limited appetite for equity underwritings as it
declined 41% dropping from $35,502,000 in the previous year to
$21,029,000 in the current year.
Year-to-date expenses at January 31, 1999 totaled $168,299,000 or 6%
higher than the same period in the prior year when expenses totaled
$159,080,000. The largest component of this increase is related to a 7%
increase in employee compensation which is in proportion to the
increase in revenues.
Interest expense actually decreased from $24,455,000 for the prior six
months to $22,283,000 as the Registrant continued efforts to manage its
assets and borrowings effectively.
Net income for the six months was $21,484,000 or $0.66 per share is
slightly less than the same six-month period of the previous year when
net income totaled $24,189,000 or $0.75 per share.
Impact of Year 2000
A significant portion of the Registrant's operations and information
systems are provided by third-party service providers. The
Registrant's interface systems are vulnerable to those third parties'
failure to remediate their own year 2000 issues. The Registrant has
developed a plan to analyze how the Year 2000 will impact its
operations, including monitoring the status of its service providers
and evaluating alternatives. Given the Registrant's exposure to third-
party service providers, management does not believe the internal costs
to address the Year 2000 issue will have a material impact on future
operations other than the impact such event will have on the cost of
services provided by its vendors which is unknown at this time. There
is no guarantee that the systems of other companies on which the
Registrant's systems rely will be timely converted and will not have an
adverse effect on the Registrant's information systems. The Registrant
is substantially complete with the testing phase of its Year 2000 plan
and is currently participating in the industry wide testing. The
interdependent nature of securities transactions and the success of the
Registrant's external counterparties and vendors in dealing with this
issue could significantly influence the Registrant's estimate of the
impact the Year 2000 will have on its business.
The Registrant is reviewing the most reasonably likely worst-case
effects of Year 2000 and has a preliminary contingency plan in place
for any such unanticipated negative effects. It is expected that the
plan will be updated and finalized by September 30, 1999.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
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 six month period
ended January 31, 1999, cash flows used for operating activities were
$141,382,000 primarily due to a $130,177,000 increase in securities
owned.
Cash flows from financing activities were $140,692,000 for the six
months ended January 31, 1999 versus $49,504,000 in the previous year.
Increases in short-term borrowings and repurchase transactions were
required to finance changes in securities owned, customer receivables
and broker receivables.
Cash flows used for investing activities totaled $4,957,000 for the
current six-month period versus cash provided by investing activities
of $29,730,000 in the six month period ended January 31, 1998. The
increase in the previous year was from the sale of the Registrant's
home office building for approximately $36 million.
At January 31, 1999, the Registrant's broker/dealer subsidiary, which
is regulated under the SEC's uniform net capital rule, had net capital
of $150,396,891, which was $140,637,511 in excess of the 2% net capital
requirement. During the quarter the Registrant declared and paid cash
dividends of $0.07 per share on shares outstanding.
In November 1993 the Board of Directors authorized a stock repurchase
program. Year-to-date the Registrant has repurchased 720,500 shares of
its common stock for $12,308,000. Since inception of the plan,
6,051,184 shares have been repurchased. The Registrant announced in
fiscal 1998 that it would repurchase approximately 600,000 shares
annually to accommodate restricted stock and employee stock purchase
programs.
Forward Looking Statements
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.
Part I. FINANCIAL INFORMATION
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MORGAN KEEGAN, INC. and Subsidiaries
Interest Rate Sensitivity
No significant changes have occurred since July 31, 1998 in the
Registrant's exposure to market risk. See Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations.
PART II. OTHER INFORMATION
MORGAN KEEGAN, INC. and Subsidiaries
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
On November 24, 1998, at the Registrant's annual meeting
of its shareholders, 74% of the 32,697,954 shares outstanding
at October 2, 1998 were represented by proxy. A quorum as
declared present for the conduct of business and the following
proposals were voted on:
Proposal 1: Election of the directors from the following
nominees to serve the registrant for the ensuing year:
Allen B. Morgan, Jr. John W. Stokes, Jr.
William W. Deupree, Jr. Kenneth F. Clark, Jr.
Joseph C. Weller James E. Harwood
Donald Ratajczak Harry J. Phillips, Sr.
Results of vote: 99.9% of the votes cast were in favor of this
proposal.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule
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: March 12, 1999