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, 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
Registrant's telephone number, including area code: (901) 524-4100
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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 1, 1999, the Registrant had approximately 29,669,753 shares
of Common Stock outstanding. The aggregate market value of Common Stock
held by non-affiliates was approximately $500,677,000.
DOCUMENTS INCORPORATED HEREIN BY REFERENCE:
Portions of the Registrant's Annual Report to Shareholders for the year
ended July 31, 1999, 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 23, 1999,
which will be filed with the Commission pursuant to Regulation 240.14a
(6)(c)prior to October 22, 1999, are incorporated by reference into Part
III and Part IV of this Report on Form 10-K.
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 Registrant has five reportable segments: Private Client, Fixed
Income Capital Markets, Equity Capital Markets, Investment Advisory and
Other. The Private Client segment provides investment services including
stocks, bonds, options, mutual funds and annuities to retail customers
through its branch network. Net interest income from customers' margin
loan and credit account balances is included in this segment. The Fixed
Income Capital Markets segment provides to its institutional clients:
investment-related services involving corporate and tax-exempt bonds;
U.S. government, agency and guaranteed securities; research and capital
raising services for governmental clients. The Equity Capital Markets
segment provides to its institutional clients: investment-related
services involving the distribution of stocks in the primary and
secondary markets, research, economic and business analysis and capital
raising services for corporate clients. The Investment Advisory segment
provides investment advisory services to mutual funds and asset
management to institutional and retail clients and regional mutual
funds managed by Morgan Asset Management, Inc., a subsidiary of the
Registrant. The Other segment includes unallocated revenues and
expenses and asset management for athletes through the Registrant's
subsidiary, Athletic Resource Management, Inc.
The percentage (%) of total revenues derived from the business
segments of the Registrant is as follows:
Year Ended July 31
1999 1998 1997
Private Client 43% 46% 55%
Fixed Income Capital Markets 39 33 26
Equity Capital Markets 11 14 15
Investment Advisory 6 5 3
Other 1 2 1
Total 100% 100% 100%
The broker/dealer subsidiary, M.K. & Co., is a three 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.
2
M.K. & Co. has forty-two offices in thirteen states. The following
table reflects the number of account executives in each office as of
July 31, 1999:
Account Account
Office Executives Office Executives
Birmingham, Alabama 35 Mandeville, Louisiana 5
Decatur, Alabama 6 New Orleans, Louisiana 28
Fairhope, Alabama 1 Shreveport, Louisiana 14
Huntsville, Alabama 13 Boston, Massachusetts 2
Mobile, Alabama 13 Jackson, Mississippi 30
Montgomery, Alabama 26 New York, New York 6
Little Rock, Arkansas 41 Durham, North Carolina 12
Rogers, Arkansas 6 Raleigh, North Carolina 11
Ft. Lauderdale, Florida 6 Wilmington, North Carolina 7
Palm Beach, Florida 3 Jackson, Tennessee 7
Pensacola, Florida 6 Knoxville, Tennessee 20
Sarasota, Florida 6 Memphis, Tennessee
Headquarters 121
Athens, Georgia 8 Suburban Offices 48
Atlanta, Georgia 19 Nashville, Tennessee 30
Bowling Green, Kentucky 7 Austin, Texas 27
Covington, Kentucky 3 Dallas, Texas 17
Lexington, Kentucky 11 Houston, Texas
Post Oak Location 28
Louisville, Kentucky 23 Memorial Location 9
Baton Rouge, Louisiana 15 Richmond, Virginia 7
Lafayette, Louisiana 9
TOTAL 686
3
Revenues by Source
The Registrant's operations consist of various financial services
provided to its clients. The following table sets forth the
Registrant's consolidated revenues consistent with industry practices
for the periods:
(Dollars in Thousands)
Year Ended July 31
1999 1998 1997
Amount % Amount % Amount %
REVENUES
Commissions
Listed securities $ 40,151 9.15 $41,558 10.21 $27,946 8.51
Over-the-counter
securities 36,484 8.32 31,316 7.69 25,776 7.85
Options 6,584 1.50 6,413 1.58 4,149 1.26
Other 37,171 8.48 30,795 7.56 21,988 6.69
TOTAL 120,390 27.45 110,082 27.04 79,859 24.31
Principal transactions
Corporate securities 51,484 11.74 52,004 12.78 56,134 17.09
Municipal securities 28,149 6.42 18,562 4.56 14,867 4.53
U.S. Government
obligations 64,055 14.60 51,224 12.58 38,963 11.86
TOTAL 143,688 32.76 121,790 29.92 109,964 33.48
Investment banking
Corporate securities 15,155 3.46 30,769 7.56 23,814 7.25
Municipal securities 3,825 0.86 4,372 1.07 3,457 1.05
Underwriting, management
and other fees 33,406 7.62 32,622 8.01 23,908 7.28
TOTAL 52,386 11.94 67,763 16.64 51,179 15.58
Interest
Interest on margin
balances 31,481 7.18 30,038 7.38 24,105 7.34
Interest on securities
owned 50,131 11.43 48,827 11.99 40,157 12.22
TOTAL 81,612 18.61 78,865 19.37 64,262 19.56
Investment management
fees 27,680 6.31 20,187 4.96 12,499 3.80
Other income 12,855 2.93 8,407 2.07 10,771 3.27
TOTAL REVENUES $438,611 100.0 $407,094 100.0 $328,534 100.0
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.
4
Commissions
During the three years ended July 31, 1999, approximately 25% 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, 1999,
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, 1999, 1998, and 1997, institutional
revenues and percentages of total consolidated revenues were $119,230,000
(27%), $100,284,000 (25%), and $76,135,000 (23%), respectively.
During each of the three years ended July 31, approximately 41% of
the Registrant's total revenues were derived from transactions with
retail (individual) customers. For the fiscal years ended July 31,
1999, 1998, and 1997, retail revenues and percentages of total
consolidated revenues were $171,164,000 (39%), $166,313,000 (41%),
$137,112,000 (42%), 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. For the three years
ended July 31, 1999, 1998 and 1997, interest charged on customer margin
accounts as a percentage of total revenues was 7.18%, 7.38% and 7.34%,
respectively.
5
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, 1999, the Registrant
made a market in common stock or other equity securities of
approximately 191 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 a low level of activity
involving U.S. Treasury note futures. The following table sets forth
for the year ended July 31, 1999, 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 $ 6,669,328 $ 715,095 $ 2,900,720
Corporate debt securities 56,561,223 9,376,420 32,049,468
Tax-exempt securities 224,292,986 100,573,872 144,325,916
U.S. government, agency,
and guaranteed securities 299,503,421 149,849,034 206,235,869
The following table sets forth the composition of revenues from principal
transactions:
Year Ended July 31
1999 1998 1997
Amount % Amount % Amount %
Common stocks $ 35,012,838 24 $ 42,397,557 35 $ 47,968,002 44
Corporate debt
securities 16,470,942 12 9,606,210 8 8,166,789 7
Tax-exempt securities 28,149,594 19 18,562,001 15 14,866,270 14
U.S. government,
agency, and
guaranteed
securities 64,055,048 45 51,224,537 42 38,963,040 35
Total $143,688,422 100 $121,790,305 100 $109,964,101 100
6
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 of Amount of
July 31 Issues Participation
1999 58 $493,705,000
1998 54 403,105,000
1997 45 327,400,000
1996 46 317,690,000
1995 52 382,075,000
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 of
July 31 Issues Participation Issues Participation
1999 71 $303,037,708 576 $5,491,552,000
1998 187 708,299,008 564 3,924,190,000
1997 181 545,853,372 362 1,818,060,000
1996 246 744,497,589 322 1,449,875,000
1995 195 867,514,389 104 349,005,000
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 28 of
the 1999 Annual Report to Shareholders.
7
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.
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.
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
8
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.
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. MK Chesapeake, LP was organized by Morgan Keegan Funding
to engage in speculative trading of a diverse group of futures interest
contracts. From inception, the Chesapeake Capital Corporation served
as the sole trading advisor utilizing its Diversified Program, their
proprietary trading strategy. The objective of the partnership is to
achieve a rate of return in excess of that available from more
traditional investments.
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 Morgan Keegan
Southern Capital Fund and the Select Fund. These funds, which invest
primarily in equity securities of companies located in the southern
United States and certain fixed income securities, are mutual funds
managed by Morgan Asset Management, Inc., a subsidiary of the Registrant,
and are 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.
9
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
1999 104,247 73,279 87,715
1998 95,579 67,491 78,251
1997 88,770 58,873 72,267
1996 77,289 47,209 61,618
1995 57,362 41,414 47,875
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 $25,000,000 (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.
10
Employees
As of July 31, 1999, M.K. & Co. had 1,788 employees, 686 of whom were
account executives, 755 of whom were engaged in other service areas,
including trading, research and investment banking, and 347 of whom
were employed in accounting, clearing, data processing, management
and other activities.
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, 1999, M.K.
& Co. hired 72 account executives for a net increase of 24 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.
11
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, 1999, the Registrant's subsidiary's net capital
was 29% of aggregate debit items. See Note 10 - Regulatory
Requirements - page 28 of the 1999 Annual Report to Shareholders.
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 160,000 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.
In September, 1997, Morgan Properties, LLC entered into an agreement
to sell the Registrant's corporate headquarters building for $36 million
and lease-back a portion of it under a ten year lease agreement. The
$13.8 million gain was deferred and will be taken into income over the
10-year life of the lease. A portion of the sale proceeds was used to
pay off the mortgage note payable. All of the Registrant's offices are
leased. See Note 4 - Leases - on page 25 of the 1999 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.
12
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 29 of the 1999 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 16 and 17 and
Additional Financial Information (Unaudited) on page 20 of the 1999
Annual Report to Shareholders, a copy of which 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 pages 18 and 19 of the 1999 Annual Report to Shareholders,
a copy of which is enclosed.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by
reference to page 19 of the 1999 Annual Report to Shareholders, a
copy of which is enclosed.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by
reference to pages 21 through 29 of the 1999 Annual Report to
Shareholders, a copy of which is enclosed.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on
accounting and financial disclosure.
13
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 15, 1999 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 23, 1999.
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 15, 1999 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 23, 1999.
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 15, 1999 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 23, 1999.
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 15, 1999 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 23, 1999.
14
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 1999 Annual Report to
Shareholders are incorporated by reference in Item 8:
Consolidated Statements of
Financial Condition July 31, 1999 and 1998
Consolidated Statements of Income Years ended July 31, 1999
1998, and 1997
Consolidated Statements of Stockholders' Years ended July 31, 1999
Equity 1998, and 1997
Consolidated Statements of Cash Flows Years ended July 31, 1999
1998, and 1997
Notes to Consolidated Financial Statements July 31, 1999
(2) 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.
(2) 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 13 - Annual Report to Shareholders*
Exhibit 22 - List of Subsidiaries of Registrant*
Exhibit 23 - Consent of Independent Auditors Page 18
Exhibit 27 - Financial Data Schedule Page 19
*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, 1999.
(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.
15
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 26, 1999
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.
16
SIGNATURE TITLE DATE
/s/Kenneth F. Clark, Jr.
- --------------------------
Kenneth F. Clark, Jr. Director October 26, 1999
/s/William W. Deupree, Jr.
- --------------------------
William W. Deupree, Jr. Director October 26, 1999
/s/James E. Harwood, III
- --------------------------
James E. Harwood, III Director October 26, 1999
/s/Allen B. Morgan, Jr.
- --------------------------
Allen B. Morgan, Jr. Chairman and October 26, 1999
Director
/s/Harry J. Phillips
- --------------------------
Harry J. Phillips Director October 26, 1999
/s/Donald Ratajczak
- --------------------------
Donald Ratajczak Director October 26, 1999
/s/Robert M. Solmson
- --------------------------
Robert M. Solmson Director October 26, 1999
/s/John W. Stokes, Jr.
- --------------------------
John W. Stokes, Jr. Vice President and October 26, 1999
Director
/s/Joseph C. Weller
- --------------------------
Joseph C. Weller Secretary/Treasurer October 26, 1999
and Director
/s/Spence L. Wilson
- --------------------------
Spence L. Wilson Director October 26, 1999
17
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 17,
1999, included in the 1999 Annual Report to Shareholders of Morgan
Keegan, Inc.
We 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. 33-57373) pertaining to the 1994 Restricted Stock and
Stock Option Plan and the 1989 Employee Stock Purchase Plan of Morgan
Keegan, Inc. of our report dated September 17, 1999, with respect to
the consolidated financial statements of Morgan Keegan, Inc.
incorporated by reference in the Annual Report (Form 10-K) for the
year ended July 31, 1999.
/s/ Ernst & Young LLP
Memphis, Tennessee
October 21, 1999
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
19
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per share amounts)
Years ended July 31 1999 1998 1997
Revenues
Commissions:
Listed securities $ 40,151 $ 41,558 $ 27,946
Over-the-counter 36,484 31,316 25,776
Options 6,584 6,413 4,149
Other 37,171 30,795 21,988
120,390 110,082 79,859
Principal transactions:
Corporate securities 51,484 52,004 56,134
Municipal securities 28,149 18,562 14,867
U.S. government securities 64,055 51,224 38,963
143,688 121,790 109,964
Investment banking:
Corporate securities 15,155 30,769 23,814
Municipal securities 3,825 4,372 3,457
Underwriting management and other fees 33,406 32,622 23,908
52,386 67,763 51,179
Interest:
Interest on margin balances 31,481 30,038 24,105
Interest on securities owned 50,131 48,827 40,157
81,612 78,865 64,262
Investment management fees 27,680 20,187 12,499
Other 12,855 8,407 10,771
438,611 407,094 328,534
Expenses
Compensation 227,709 204,829 164,364
Floor brokerage and clearance 6,645 6,028 5,043
Communications 23,664 23,112 21,549
Travel and promotional 13,344 10,612 8,724
Occupancy and equipment costs 21,433 17,403 15,854
Interest 52,603 51,165 44,652
Taxes, other than income taxes 10,438 9,888 7,986
Other operating expenses 8,662 6,871 5,084
364,498 329,908 273,256
Income (loss) before income taxes 74,113 77,186 55,278
Income tax expense (credit) 28,300 29,000 20,900
Net income $ 45,813 $ 48,186 $ 34,378
Net income per share
Basic $ 1.42 $ 1.47 $ 1.10
Diluted $ 1.41 $ 1.47 $ 1.10
Book value $ 8.76 $ 7.84 $ 6.44
Other Data (at year end):
Total assets $1,598,365 $1,463,821 $1,208,257
Stockholders' equity $ 279,062 $ 257,358 $ 203,720
Common shares outstanding* 31,859 32,817 31,652
All per share data has been adjusted for 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, a three-for-two stock split
in June, 1995 and a three-for-two stock split in September, 1997.
20
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per share amounts)
Years ended July 31 1996 1995 1994
Revenues
Commissions:
Listed securities $ 26,467 $ 21,246 $ 22,748
Over-the-counter 21,849 12,624 10,076
Options 3,243 2,631 1,990
Other 16,311 9,661 11,723
67,870 46,162 46,537
Principal transactions:
Corporate securities 59,567 36,724 33,541
Municipal securities 16,345 16,404 14,135
U.S. government securities 39,291 33,982 41,746
115,203 87,110 89,422
Investment banking:
Corporate securities 25,990 25,009 32,850
Municipal securities 2,427 1,926 4,059
Underwriting management and other fees 21,884 18,259 18,923
50,301 45,194 55,832
Interest:
Interest on margin balances 19,752 17,519 10,824
Interest on securities owned 30,171 20,261 14,070
49,923 37,780 24,894
Investment management fees 9,323 7,171 6,063
Other 8,786 4,655 8,972
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 (loss) before income taxes 55,167 38,348 51,641
Income tax expense (credit) 21,300 14,500 19,800
Net income $ 33,867 $ 23,848 $ 31,841
Net income per share
Basic $ 1.11 $ .78 $ .98
Diluted $ 1.10 $ .78 $ .97
Book value $ 5.51 $ 4.61 $ 4.06
Other Data (at year end):
Total assets $946,648 $882,292 $571,009
Stockholders' equity $169,008 $139,457 $125,365
Common shares outstanding* 30,657 30,254 30,834
All per share data has been adjusted for 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, a three-for-two stock split
in June, 1995, and a three-for-two stock split in September, 1997.
21
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per share amounts)
Years ended July 31 1993 1992 1991
Revenues
Commissions:
Listed securities $ 20,457 $ 18,378 $ 13,143
Over-the-counter 10,159 9,041 5,347
Options 1,927 2,089 2,134
Other 11,196 7,632 4,824
43,739 37,140 25,448
Principal transactions:
Corporate securities 34,404 28,161 16,554
Municipal securities 17,432 12,037 10,730
U.S. government securities 51,297 48,588 30,279
103,133 88,786 57,563
Investment banking:
Corporate securities 15,760 16,730 4,836
Municipal securities 3,947 3,960 376
Underwriting management and other fees 9,571 9,862 5,436
29,278 30,552 10,648
Interest:
Interest on margin balances 7,047 5,941 4,867
Interest on securities owned 12,627 12,709 12,490
19,674 18,650 17,357
Investment management fees 5,413 4,627 3,086
Other 7,958 2,909 2,415
209,195 182,664 116,517
Expenses
Compensation 109,748 94,348 61,265
Floor brokerage and clearance 5,296 4,571 3,751
Communications 12,012 9,791 8,764
Travel and promotional 4,241 3,699 2,982
Occupancy and equipment costs 8,153 7,557 8,194
Interest 11,185 12,562 12,953
Taxes, other than income taxes 4,199 3,823 3,116
Other operating expenses 4,659 4,122 3,288
159,493 140,473 104,313
Income (loss) before income taxes 49,702 42,191 12,204
Income tax expense (credit) 19,000 16,400 4,500
Net income $ 30,702 $ 25,791 $ 7,704
Net income per share:
Basic $ .97 $ .83 $ .25
Diluted $ .97 $ .83 $ .25
Book value $ 3.31 $ 2.45 $ 1.67
Other Data (at year end):
Total assets $527,084 $434,448 $304,445
Stockholders' equity $106,335 $ 76,690 $ 50,837
Common shares outstanding* 32,112 31,340 30,504
All per share data has been adjusted for 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, a three-for-two stock split
in June, 1995, and a three-for-two stock split in September, 1997.
22
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per share amounts)
Years ended July 31 1990
Revenues
Commissions:
Listed securities $ 14,444
Over-the-counter 1,745
Options 2,180
Other 4,434
22,803
Principal transactions:
Corporate securities 11,808
Municipal securities 7,445
U.S. government securities 18,478
37,731
Investment banking:
Corporate securities 2,947
Municipal securities 159
Underwriting management and other fees 3,926
7,032
Interest:
Interest on margin balances 5,521
Interest on securities owned 10,769
16,290
Investment management fees 2,415
Other 2,737
89,008
Expenses
Compensation 48,243
Floor brokerage and clearance 3,749
Communications 8,436
Travel and promotional 2,660
Occupancy and equipment costs 7,789
Interest 12,591
Taxes, other than income taxes 2,682
Other operating expenses 3,308
89,458
Income (loss) before income taxes (450)
Income tax expense (credit) (475)
Net income $ 25
Net income per share:
Basic $ .01
Diluted $ .01
Book value $ 1.43
Other Data (at year end):
Total assets $236,991
Stockholders' equity $ 44,888
Common shares outstanding* 31,439
All per share data has been adjusted for 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, a three-for-two stock split
in June, 1995, and a three-for-two stock split in September, 1997.
23
General Business Environment
Morgan Keegan, Inc. and its subsidiaries (the "Company") are principally
engaged in the origination, underwriting, distribution, trading and
brokerage of fixed income and equity securities and also providing
investment advisory services. While the Company regularly participates
in the trading of some derivative securities for its customers, this
trading is not a major portion of the Company's business. 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 strategy.
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.
Market conditions generally continued to be favorable in the U.S.
securities markets; however, during fiscal 1999 the smaller cap stocks,
which represent a significant portion of the Company's business, did
not perform well as noted by the decline in the Russell 2000 Value
Index. The Company's fixed income capital markets segment had an
outstanding year, substantially outperforming the two previous years
and largely compensating for the softness in the smaller cap equity
markets.
Management believes that the strong economic conditions in the
southeastern United States will continue to provide an excellent climate
for expansion. Continued consolidation among financial service firms
also provides opportunities for registered representative growth.
Results of Operations
For the fourth consecutive year, the Company set a record for revenues
for fiscal 1999 with revenues of $438,611,000 exceeding fiscal 1998 by
$31,517,000 or 8%. An outstanding year by the fixed income capital
markets segment fueled an 18% increase in principal transactions which
increased from $121,790,000 in fiscal 1998 to $143,688,000 in the current
year. Investment banking revenues declined 23%, dropping from
$67,763,000 in 1998 to $52,386,000 in fiscal 1999 as the number of
equity financing deals decreased from 66 to 16. The Company continued
to aggressively grow its investment management business as revenues
increased by $7,493,000 or 37%.
Revenues for fiscal 1998 of $407,094,000 exceeded revenues for fiscal
1997 by $78,560,000 as outstanding markets for most of the year helped
each aspect of the Company's business. Commissions increased by
$30,223,000 or 38% over the previous year and investment banking
increased from $51,179,000 in fiscal 1997 to $67,763,000 in fiscal 1998.
These increases were attributed to the strong equity markets for most
of the year. The largest percentage increase for 1998 revenues was in
investment management fees which increased 62% or $7,668,000. Two
small money management firms were acquired during fiscal 1998,
demonstrating management's intention to grow that aspect of the
business.
Operating expenses for fiscal 1999 increased to $364,498,000 from
$329,908,000 in 1998, or 10%. Compensation is the largest component
of expenses and it increased from $204,829,000 in fiscal 1998 to
$227,709,000 in fiscal 1999 or 11%. Compensation as a percentage
of revenues rose to 52% from 50% as the Company continued to
aggressively grow the retail network with the opening of five new
branches and the expansion of the investment advisory infrastructure.
Occupancy and equipment had the second largest dollar increase with
$4,030,000, representing the expansion and commitment to providing
the brokers with state of the art work stations. Travel and
promotional rose $2,732,000 or 26% reflecting the Company's growth
and the drop-off in equity banking markets.
Expenses for fiscal 1998 increased by $56,652,000 or 21% over fiscal
1997 which was in line with the 24% increase in revenues. Other
expenses for fiscal 1998
24
Results of Operations (continued)
increased by similar percentages as the Company continued its
efforts to expand its retail network and control its expenses.
Net income for fiscal 1999 was $45,813,000 or $1.42 per share
versus $48,186,000 or $1.47 per share. In the second, third and
fourth quarters of fiscal 1999, the Company outperformed the same
quarters for the previous year, but was unable to overcome the
first quarter which lagged $.10 per share behind the previous year
due to the slowness in smaller cap equity markets.
Year 2000 Processing Issue
The Year 2000 issue affects the ability of computer systems to correctly
process dates after December 13, 1999. The Company has completed the
inventory and assessment phases of its Year 2000 project plan through an
evaluation of its internal and third party software, as well as its service
providers' computer systems, to determine their ability to accurately
process in the next millennium. The Company has also assessed the Year
2000 status of its non-information technology systems and equipment which
may contain embedded hardware or software.
Having identified and assessed those computer systems, processes and
equipment that require modification, the Company has now completed the
remediation and testing phases of its project plan. The Company has
completed the remediation and testing of its critical internal
applications systems. In addition to internal testing, the Company
actively participated in testing among securities brokerage firms,
securities exchanges, clearing organizations, and other vendors.
The Company is also continuing to communicate with its remaining
vendors and other third parties, including its landlords and utility
suppliers, to determine the likely extent to which the Company may be
affected by third parties' Year 2000 plans and target dates.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. While the Company does not have a current expectation of
any material loss as a result of the Year 2000 issue, there can be no
assurance that the Company's internal systems or the systems of third
parties on which the Company relies will be remediated on a timely basis,
or that a failure to remediate by another party, or a remediation or
conversion that is incompatible with the Company's systems, would not
have a material adverse effect on the Company. The Company has
developed contingency plans in the event that third parties fail
to achieve their Year 2000 plans and target dates. However, there
can be no assurance that any such contingency plans will fully
mitigate the effects of any such failure.
Based on information currently available, including information
provided by third party vendors, the Company expects it aggregate
expenditures for its Year 2000 project plan to be approximately $1.750
million, of which an estimated $1.5 million has been incurred as of
July 31, 1999. A significant portion of these costs will not be
incremental costs to the Company, but rather will represent the
redeployment of existing information technology and operations
resources, primarily to test the remediation efforts of the Company's
third party vendors. The Company expects to fund all Year 2000 related
costs through operating cash flows and a reallocation of the Company's
overall information technology spending. In accordance with generally
accepted accounting principles, Year 2000 expenditures are expensed as
incurred. The costs of the Company's Year 2000 project and the dates
on which the Company plans to complete the Year 2000 modifications are
based on management's best current estimates, which were derived
utilizing numerous assumptions of future events, including the
continued availability of certain resources, third party compliance
plans and other factors. However, there can be no assurance that
these estimates will prove correct and actual results could differ
materially from those plans.
25
Liquidity and Capital Resources
The Company's assets are primarily liquid, consisting mainly of cash
and assets readily convertible into cash. These assets are financed
primarily by customer credit balances, equity capital, commercial
paper, bank lines of credit, and other payables.
During the current fiscal year, cash used in operating activities
increased by $59,207,000 to $102,580,000. It was financed primarily
by $27,609,000 in commercial paper and $46,700,000 in short-term
borrowings. During fiscal 1998, investing activities provided
$34,582,000 from the sale of the Company's headquarters building.
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 standards. At July
31, 1999, the net capital of the Company's broker-dealer subsidiary
exceeded the SEC's minimum requirements by approximately
$149,903,000 which is $7,000,000 more than the previous year's
excess. 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 for the foreseeable future.
During the year, the Company continued its stock repurchase program
purchasing 1,662,300 shares at a cost of $28,147,000. This followed
fiscal 1998 purchases of 180,000 shares and fiscal 1997 purchases of
11,600 shares.
Subsequent to the end of the fiscal year, the Company purchased
approximately 2,100,000 shares for $37,000,000.
Risk Management
Certain of the Company's business activities expose it to market
risk, including its securities inventory positions and securities
held for investment. The Company's market risk generally represents
the risk of loss that may result from the potential change in value
of a financial instrument as a result of fluctuations in interest
rates and equity prices or changes in credit ratings of issuers of
debt securities.
Interest rate risk arises from the exposure of holding interest
sensitive financial instruments such as government, corporate and
municipal bonds and certain preferred equities. The Company manages
its exposure to interest rate risk by setting and monitoring limits
and, where feasible, hedging with offsetting positions in securities
with similar interest rate risk characteristics. The Company's
securities inventories are marked to market, accordingly there are
no unrecorded gains or losses in value. While a significant portion
of the Company's securities inventories have contractual maturities
in excess of five years, these inventories, on average, turn over in
excess of twelve times per year. Accordingly, the exposure to interest
rate risk inherent in the Company's securities inventories is less than
that of similar financial instruments held by firms in other industries.
The Company's equity securities inventories are exposed to risk of loss
in the event of unfavorable price movements. The Company's equity
securities inventories are marked to market and there are no unrecorded
gains or losses.
The Company is also subject to credit risk arising from non-performance
by trading counterparties, customers, and issuers of debt securities owned.
The Company manages this risk by imposing and monitoring position limits,
monitoring trading counterparties, reviewing security concentrations,
holding and marking to market collateral and conducting business through
clearing organizations which guarantee performance. The Company does
not trade or have positions in complex derivative financial instruments.
See interest rate sensitivity below.
26
Recently Issued Accounting Standards
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, 2000. The Company has not yet determined
the effect, if any, Statement 133 will have on the earnings and
financial condition of the Company.
Forward Looking Statements
This Annual Report may be deemed to contain certain forward-looking
statements regarding the anticipated financial and operating results
of the Company. The Company undertakes no obligation to publicly
release any revisions to any forward-looking statements contained
herein to reflect events or circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.
Information contained in these forward-looking statements is
inherently uncertain; and actual performance and results may differ
materially due to many important factors, many of which are beyond
the Company's control. Such factors include the Company's ability to
sustain and manage growth; ability to deal with increasing competition;
additional government regulations; changes in general economic
conditions; and the like.
27
(Dollars in thousands) Increase (Decrease)
1999 vs 1998 1998 vs 1997
Revenues:
Commissions $ 10,308 9% $30,223 38%
Principal transactions 21,898 18% 11,826 11%
Investment banking (15,377) (23)% 16,584 32%
Interest 2,747 3% 14,603 23%
Investment management fees 7,493 37% 7,688 62%
Other 4,448 53% (2,364) (22%)
$ 31,517 8% $78,560 24%
Expenses:
Compensation $ 22,880 11% $40,465 25%
Floor brokerage and clearance 617 10% 985 20%
Communications 552 2% 1,563 7%
Travel and promotional 2,732 26% 1,888 22%
Occupancy and equipment costs 4,030 23% 1,549 10%
Interest 1,438 3% 6,513 15%
Taxes, other than income taxes 550 6% 1,902 24%
Other operating expenses 1,791 26% 1,787 35%
$ 34,590 10% $56,652 21%
Interest Rate Sensitivity
Principal (Notional) Amount by Expected Maturity
Fiscal Interest Fair Value
(Dollars in thousands) 2000 Rate at July 31, 1999
Assets
U.S. government obligations $310,133 5.13% $310,133
State and municipal obligations 112,043 4.43% 112,043
Corporate bonds 48,498 6.39% 48,498
Securities purchased under
agreements to resell 184,852 4.85% 184,852
Margin debits 533,763 8.25% 533,763
Liabilities
Commercial paper $ 65,111 5.25% $ 65,111
Short term borrowings 115,100 5.98% 115,100
Securities sold under
agreements to repurchase 239,019 5.17% 239,019
Securities sold, not yet purchased
U.S. government obligations 53,234 5.13% 53,234
Corporate bonds 2,338 6.39% 2,338
Customer credits 621,122 4.60% 621,122
28
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 1999
Revenues $ 96,416 $107,166 $114,528 $120,500
Income before income taxes 16,046 19,238 19,700 19,129
Net income 9,746 11,738 12,200 12,129
Net income per share* 0.30 0.36 0.38 0.38
Fiscal 1998
Revenues $101,198 $ 96,572 $103,546 $105,779
Income before income taxes 20,688 18,002 19,272 19,225
Net income 12,788 11,402 12,272 11,725
Net income per share* 0.40 0.35 0.37 0.35
Fiscal 1997
Revenues $74,415 $83,527 $77,283 $93,309
Income before income taxes 11,749 14,674 10,910 17,945
Net income 7,349 9,274 6,910 10,845
Net income per share* 0.24 0.30 0.22 0.34
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* 0.29 0.30 0.27 0.24
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* 0.22 0.19 0.15 0.22
<FN>
*After retroactive adjustment for all stock dividends and stock splits
declared through July 31, 1999.
</FN>
29
Statistical Comparison of Production
1999 1998 1997 1996 1995
Total pro-
duction $290,394,166 $266,597,243 $213,247,662 $208,275,740 $160,335,704
Percentage
change in
production +8.9% +25.0% +2.4% +29.9% -4.8%
Number of
tickets 1,052,584 939,013 685,790 749,560 558,967
Average
commissions
per
ticket $ 276 $ 284 $ 311 $ 278 $ 287
Number of
investment
brokers 686 662 623 596 551
Number of
Investment
brokers
(over 1 year) 624 609 566 487 438
Total number
of employees 1,788 1,683 1,549 1,491 1,335
Average
commissions
per investment
broker (over
1 year) $ 446,746 $ 436,669 $ 362,830 $ 345,885 $ 334,555
Number of
new accounts
opened 38,658 37,936 32,166 33,835 29,559
30
Consolidated Statements of Income
Morgan Keegan, Inc. and Subsidiaries
Years ended July 31
(In thousands, except share and per share amounts)
1999 1998 1997
Revenues
Commissions $120,390 $110,082 $ 79,859
Principal transactions 143,688 121,790 109,964
Investment banking 52,386 67,763 51,179
Interest 81,612 78,865 64,262
Investment management fees 27,680 20,187 12,499
Other 12,855 8,407 10,771
438,611 407,094 328,534
Expenses
Compensation 227,709 204,829 164,364
Floor brokerage and clearance 6,645 6,028 5,043
Communications 23,664 23,112 21,549
Travel and promotional 13,344 10,612 8,724
Occupancy and equipment costs 21,433 17,403 15,854
Interest 52,603 51,165 44,652
Taxes, other than income taxes 10,438 9,888 7,986
Other operating expenses 8,662 6,871 5,084
364,498 329,908 273,256
Income Before Income Taxes 74,113 77,186 55,278
Income Tax Expense 28,300 29,000 20,900
Net Income $ 45,813 $ 48,186 $ 34,378
Net Income Per Share
Basic $ 1.42 $ 1.47 $ 1.10
Diluted $ 1.41 $ 1.47 $ 1.10
Weighted Average Shares
Outstanding
Basic 32,356,091 32,671,141 31,169,918
Diluted 32,452,509 32,854,601 31,325,041
<FN>
See accompanying notes.
</FN>
31
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 share and per share amounts)
Balance at August 1, 1996 20,437,597 $12,773 $1,511 $154,724 $169,008
============================================================================
Issuance of restricted
stock 296,771 185 (185)
Issuance of common
stock 378,660 237 3,951 4,188
Dividends paid ($.20
per share) (6,212) (6,212)
Repurchase & retirement
of common stock (11,600) (7) (135) (142)
Amortization of
restricted stock and
related tax benefit 2,500 2,500
Net income 34,378 34,378
Stock split effected in
the form of a stock
dividend 10,550,714 6,594 (6,594)
- -----------------------------------------------------------------------------
Balance at July 31, 1997 31,652,142 19,782 1,048 182,890 203,720
=============================================================================
Issuance of restricted
stock 194,596 122 (122)
Issuance of common
stock 1,150,466 719 13,675 14,394
Dividends paid ($.24
per share) (7,789) (7,789)
Repurchase & retirement
of common stock (180,000) (113) (4,340) (4,453)
Amortization of
restricted stock and
related tax benefit 3,300 3,300
Net income 48,186 48,186
- ----------------------------------------------------------------------------
Balance at July 31, 1998 32,817,204 20,510 13,561 223,287 257,358
============================================================================
Issuance of restricted
stock 350,702 219 (219)
Issuance of common
stock 353,652 221 4,843 5,064
Dividends paid ($.28
per share) (9,026) (9,026)
Repurchase & retirement
of common stock (1,662,300) (1,039) (26,185) (923) (28,147)
Amortization of
restricted stock and
related tax benefit 8,000 8,000
Net income 45,813 45,813
- ----------------------------------------------------------------------------
Balance at July 31, 1999 31,859,258 $19,911 $ - $259,151 $279,062
============================================================================
<FN>
See accompanying notes.
</FN>
32
Consolidated Statements of Financial Condition
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except share and per share amounts)
July 31 1999 1998
- ---------------------------------------------------------------------------
Assets
Cash $ 16,102 $ 22,172
Securities segregated for regulatory purposes,
at market 246,000 346,900
Deposits with clearing organizations and others 9,792 9,818
Receivable from brokers and dealers and
clearing organizations 12,781 31,897
Receivable from customers 557,678 444,609
Securities purchased under agreements to resell 184,852 174,583
Securities owned, at market 480,662 353,708
Memberships in exchanges, at cost (market value-
$6,456 at July 31, 1999; $5,409 at
July 31, 1998) 2,428 2,428
Furniture, equipment and leasehold improvements,
at cost (less allowances for depreciation and
amortization-$27,402 at July 31, 1999;
$20,981 at July 31, 1998) 26,167 24,332
Other assets 61,903 53,374
$1,598,365 $1,463,821
Liabilities and Stockholders' Equity
Short-term borrowings $ 115,100 $ 68,400
Commercial paper 65,111 37,502
Payable to brokers and dealers and clearing
organizations 7,959 13,151
Payable to customers 733,725 700,332
Customer drafts payable 16,076 17,615
Securities sold under agreements to repurchase 239,019 162,734
Securities sold, not yet purchased, at market 58,755 116,727
Other liabilities 83,558 90,002
1,319,303 1,206,463
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares; 31,859,258
shares issued and outstanding at July 31, 1999;
32,817,204 at July 31, 1998 19,911 20,510
Additional paid-in capital - 13,561
Retained earnings 259,151 223,287
279,062 257,358
- --------------------------------------------------------------------------
$1,598,365 $1,463,821
==========================================================================
<FN>
See accompanying notes.
</FN>
33
Consolidated Statements of Cash Flows
Morgan Keegan, Inc. and Subsidiaries
Years ended July 31 1999 1998 1997
(In thousands)
Cash Flows From Operating Activities:
Net income $ 45,813 $48,186 $34,378
Non-cash items included in earnings:
Depreciation and amortization 9,871 8,128 7,023
Deferred income taxes 1,000 (4,700) (1,000)
Amortization of gain on sale of building
and related assets 1,380 1,150
Amortization of restricted stock 4,500 3,300 2,500
62,564 56,064 42,901
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations 19,116 5,833 (20,752)
Deposits with clearing organizations
and others 26 (665) (1,498)
Receivable from customers (113,069) (86,598) (43,584)
Securities segregated for regulatory
purposes, at market 100,900 (66,800) (54,900)
Securities owned, at market (126,954) (78,097) (46,333)
Memberships in exchanges (1,709)
Other assets (9,529) (14,472) (5,654)
(Decrease) increase in operating liabilities:
Payable to brokers and dealers and
clearing organizations (5,192) 433 3,517
Payable to customers 33,393 116,410 99,375
Customer drafts payable (1,539) 253 2,906
Securities sold, not yet purchased, at market (57,972) 22,429 31,326
Other liabilities (4,324) 3,546 14,261
(165,144) (99,437) (21,336)
Cash (used in) provided by operating activities (102,580) (43,373) 21,565
Cash Flows From Financing Activities:
Commercial paper 27,609 (69,428) 64,002
Mortgage note payments (19,714) (251)
Issuance of common stock 5,064 14,394 4,188
Retirement of common stock (28,147) (4,453) (142)
Dividends paid (9,026) (7,789) (6,212)
Short-term borrowings 46,700 67,830 (30,830)
Securities purchased under agreements
to resell (10,269) (27,702) (77,603)
Securities sold under agreements to
repurchase 76,285 65,317 42,591
Cash provided by (used in) financing activities 108,216 18,455 (4,257)
Cash Flows From Investing Activities:
Payments for furniture, equipment and
leasehold improvements (11,706) (9,915) (12,041)
Proceeds from sale of building and related 34,582
assets
Cash (used in) provided by investing activities (11,706) 24,667 (12,041)
Net (decrease) increase in cash (6,070) (251) 5,267
Cash at beginning of period 22,172 22,423 17,156
Cash at end of period $ 16,102 $22,172 $22,423
<FN>
Income tax payments totaled $29,269,000 in 1999, $36,191,000 in 1998, and
$19,400,000 in 1997. Interest payments totaled $52,530,000 in 1999,
$49,722,000 in 1998, and $44,499,000 in 1997.
See accompanying notes.
</FN>
34
Notes to Consolidated Financial Statements
Morgan Keegan, Inc., and Subsidiaries
July 31, 1999
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 the settlement date.
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.
Prior to the fiscal 1998 sale, building and improvements were carried
at cost and depreciated over a thirty-one year period.
Securities-Lending Activities: Securities borrowed and securities
loaned transactions are generally reported as collateralized financings
except where letters of credit or other securities are used as collateral.
Securities borrowed transactions require the Company to deposit cash,
letters of credit, or other collateral with the lender. With respect
to securities loaned, the Company receives collateral in the form of
cash or other collateral in an amount generally in excess of the market
value of securities loaned. The Company monitors the market value of
securities borrowed and loaned on a daily basis, with additional
collateral obtained or refunded as necessary.
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 $246,000,000 and $346,900,000 at July 31, 1999 and 1998,
respectively.
35
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: Basic and diluted earnings per share is calculated
in accordance with Financial Accounting Standards Board ("FASB")
Statement No. 128, "Earnings per Share" ("Statement 128"). All
earnings per share amounts for all periods, have been presented to
conform to the requirements of Statement 128.
The following table sets forth the computation of basic and diluted
earnings per share:
Year ended July 31
1999 1998 1997
(In thousands, except per share data)
Numerator:
Net income $45,813 $48,186 $34,378
Denominator:
Denominator for basic earnings
per share-weighted average shares 32,356 32,671 31,170
Effect of dilutive securities-
stock options 96 183 155
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 32,452 32,854 31,325
Net income per share of common stock $ 1.42 $ 1.47 $ 1.10
Net income per share of common stock,
assuming dilution $ 1.41 $ 1.47 $ 1.10
All earnings per share data 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 statements.
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 Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and,
accordingly, recognizes no compensation expense for the stock option
grants.
36
Other Accounting Pronouncements: In fiscal 1999, the Company adopted
FASB Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("Statement 131"). Statement 131 establishes
standards for the way that public business enterprises 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 shareholders.
It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The adoption of
Statement 131 did not affect the results of operations or financial
position of the Company, but did affect the disclosure of segment
information as the Company was not required to make such disclosure
under previous guidance.
The Financial Accounting Standards Board issued in June 1998 its new
standard on derivatives - Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement 133"). 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, 2000. The Company
has not yet determined the effect, if any, Statement 133 will have
on the earnings and financial condition of the Company.
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.
NOTE 2-BORROWINGS
The short-term borrowings of $115,100,000 and $68,400,000 at July
31, 1999 and 1998 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 6.75% and 6.2% at July 31, 1999
and 1998, respectively.
The Company had total lines of credit of $340,000,000 at July 31,
1999, with expirations prior to July 31, 2000, under which a maximum
of $210,000,000 could be borrowed on an unsecured basis. There were
no compensating balances associated with these lines of credit.
There were no borrowings outstanding on these lines of credit at
July 31, 1999.
The Company also issues its own commercial paper to investors at
fluctuating interest rates (5.25% and 5.45% at July 31, 1999 and
1998, respectively). The paper matures over various terms not to
exceed nine months.
The weighted average interest rate on all forms of short-term
borrowings for the years ended July 31, 1999 and 1998 was 5.49%
and 6.46%, respectively.
37
NOTE 3-SECURITIES
Securities owned for trading purposes consist of the following at
July 31, in thousands:
1999 1998
U.S. government obligations $310,133 $224,716
State and municipal obligations 112,043 85,920
Corporate bonds 48,498 32,970
Stocks 9,929 9,922
Bankers' acceptance 59 180
$480,662 $353,708
State and municipal obligations include an issue with a par value of
$12,700,000 which has been written down to fair market value of
$5,715,000 at July 31, 1999 and July 31, 1998, as determined by
management of the Company.
Securities sold, not yet purchased, at market consist of the following
at July 31, in thousands:
1999 1998
U.S. government obligations $ 53,234 $107,004
State and municipal obligations 73 108
Corporate bonds 2,338 7,360
Stocks 3,110 2,255
$ 58,755 $116,727
NOTE 4-LEASES
The Company leases office space, furniture and equipment under
noncancellable leases expiring through 2009, 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:
1999 $15,038
1998 $14,034
1997 $ 9,124
Aggregate future annual minimum rental commitments, excluding
escalations, for the years ending July 31 are as follows, in thousands:
2000 $ 9,568
2001 8,570
2002 7,553
2003 6,920
2004 6,460
Thereafter 18,496
$57,567
38
NOTE 5-COMMITMENTS AND CONTINGENCIES
At July 31, 1999, the Company pledged $20,000,000 in customer
owned securities to cover customer obligations to a clearing
organization.
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 consolidated results
of operations or financial condition.
In connection with the construction of an office building, the Company
has guaranteed 50% of a construction loan, with a maximum borrowing
limit of $19 million. The building, when completed, will be owned by
a limited liability company which is 50% owned by the Company.
39
NOTE 6-INCOME TAXES
Significant components of the provision (credit) for income taxes
are as follows for the years ended July 31, in thousands:
1999 1998 1997
Federal:
Current $23,000 $28,900 $18,500
Deferred 1,000 (4,700) (1,000)
24,000 24,200 17,500
State 4,300 4,800 3,400
$28,300 $29,000 $20,900
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:
1999 1998 1997
Amount Percent Amount Percent Amount Percent
Federal Statutory
rate applied to
pretax earnings $25,940 35.0% $27,000 35.0% $19,347 35.0%
State and local
taxes, less federal
income tax benefit 2,795 3.8 3,120 4.0 2,210 4.0
Non-taxable interest,
less non-deductible
interest (1,365) (1.8) (795) (1.0) (533) (1.0)
Other - net 930 1.2 (325) (0.4) (124) -
$28,300 38.2% $29,000 37.6% $20,900 38.0%
Significant components of the Company's deferred tax assets and
liabilities as of July 31 are as follows, in thousands:
1999 1998
Deferred tax assets:
Deferred compensation and restricted stock $ 5,843 $4,470
Deferred gain on building sale 4,326 4,865
Non-deductible reserves 1,239 2,312
Insurance and benefits 1,232 1,452
Other 100 280
12,740 13,379
Deferred tax liabilities:
Depreciation and other building related items 2,955 2,903
Other 1,085 776
4,040 3,679
Net deferred tax assets $8,700 $9,700
40
NOTE 7-STOCK PLANS
The Board of Directors has reserved 9,168,750 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 1,063,625 remaining shares available to be granted at
July 31, 1999.
The Board of Directors has authorized 675,000 shares to be granted to
non-employee directors in the form of incentive stock options. As of
July 31, 1999, 175,500 options were outstanding and exercisable at an
average price of $15.03. During fiscal year 1999, 40,500 options were
exercised at an average price of $5.72 and 54,000 options were granted
at an average price of $18.94.
Employee stock option activity is summarized as follows:
Average
Shares Price Exercisable
Outstanding at July 31, 1996 133,349 $ 6.11
Granted 9,750 11.64 1997-2002
Exercised (10,184) ( 5.60)
Outstanding at July 31, 1997 132,915 6.55
Granted 22,500 19.30 1998-2003
Exercised (60,765) (5.82)
Outstanding at July 31, 1998 94,650 10.06
Granted 176,250 21.58 2000-2004
Exercised (16,125) (6.05)
Forfeited (29,500) (21.17)
225,275 $17.91
Options exercisable at July 31, 1999, 1998 and 1997 were 18,450,
7,000 and 33,463, respectively. The weighted average fair value of
the options granted during the years ended July 31, 1999, 1998, and
1997 was $5.61, $5.16, and $4.37, respectively. Options outstanding
at July 31, 1999 have exercise prices ranging from $5.61 to $26.31
with a weighted average remaining contractual life of 5 years.
The Company has approximately 1,956,114 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, 4,275,000 shares have been
reserved to allow employees to purchase company shares at a 15%
discount, not to exceed 506,250 shares to all employees in any year.
Activity by year under the plan is summarized as follows:
Year Shares Sold
1997 449,808
1998 306,872
1999 297,027
The Company accounts for stock-based compensation under the provisions
of (APB) Opinion No. 25, "Accounting for Stock Issued to Employees,"
rather than the fair value method in Financial Accounting Standards
Board Statement No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation costs were charged to earnings for options
granted under the Company's plans.
41
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
The Company's pro forma information for the years ended July 31 are as
follows:
1999 1998 1997
Pro forma net income $ 44,784 $47,657 $33,499
Pro forma earnings per share
Basic $ 1.38 $ 1.46 $ 1.07
Diluted $ 1.38 $ 1.45 $ 1.07
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense
over the vesting period and additional options may be granted in future
years. For disclosure purposes, the fair value of each fixed option
grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions
used for stock option grants in 1999, 1998 and 1997, respectively:
dividend yield of 1.5% for all three years; expected volatility of 25.1%,
24.9% and 28.2%, respectively, riskfree interest rate of 5.00% for all
three years and weighted average expected lives of 5 to 6 years for all
three years.
NOTE 8-REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The Company enters into sales of securities under agreements to
repurchase, which substantially mature in less than 30 days, with the
obligation to repurchase the securities sold reflected as a liability
in the consolidated statement of financial condition. The majority of
the repurchase agreements are matched with a reverse repurchase
agreement.
Repurchase agreement information as of July 31, 1999 is summarized as
follows, in thousands:
Assets Sold Repurchase Liability
Carrying Market Interest
Amount Value Amount Rate
Mortgage-backed
certificates and other $170,531 $171,319 $167,030 4.89%-5.26%
U.S. Treasury securities 70,927 72,404 71,989 3.50%-5.25%
$241,458 $243,723 $239,019
Repurchase agreement information as of July 31, 1998 is summarized as
follows, in thousands:
Assets Sold Repurchase Liability
Carrying Market Interest
Amount Value Amount Rate
Mortgage-backed
certificates and other $164,280 $165,413 $162,734 5.20%-6.20%
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.
42
NOTE 9-EMPLOYEE BENEFIT PLANS
The Company makes discretionary contributions to its 401(k) defined
contribution plan and its profit sharing plan covering substantially
all employees. The Company also has a defined benefit retirement plan
covering certain executives. Total expense under all plans for the
years ended July 31, 1999, 1998, and 1997 totaled $3,035,000, $2,637,000,
and $1,994,000 respectively.
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, 1999, the subsidiary had net capital of $160,931,000 which
was 29% of its aggregate debit balances and $149,903,000 in excess of
the 2% net capital requirement. At July 31, 1998, the subsidiary had net
capital of $151,648,000, which was 35% of its aggregate debit balances
and $142,996,520 in excess of the 2% net capital requirement.
43
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. If another party to the
transaction fails to perform as agreed (such as failure to deliver
a security or failure to pay for a security), the Company may incur
a loss if the market value of the security is different from the
contract amount of the transaction.
In the normal course of business, the Company enters into underwriting
and forward and future commitments. At July 31, 1999, the contract
amount of future contracts to purchase and sell U.S. Government and
municipal securities was approximately $39 and $159 million,
respectively. At July 31, 1998, the contract amount of future
contracts to purchase and sell U.S. Government and municipal securities
was approximately $85 million and $22 million, respectively.
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. Settlement of the transactions
relating to such commitments are not expected to have a material
effect on the Company's consolidated financial position. Transactions
involving future settlement give rise to market risk, which represents
the potential loss that can be caused by a change in the market value
of a particular financial instrument. The Company's exposure to market
risk is determined by a number of factors, including the size,
composition and diversification of positions held, the absolute and
relative levels of interest rates, and market volatility.
The Company will occasionally hedge a portion of its long proprietary
inventory position through the use of short positions in financial
future contracts, which the Company includes in securities sold, not
yet purchased at market value. At July 31, 1999, the Company had
outstanding futures contracts, with a contract amount and market
value of $2 million. At July 31, 1998, the Company did not have any
open futures contracts. The contract amounts do not necessarily
represent future cash requirements. The average fair value of futures
contracts held during 1999 and 1998 was $5 million and $8 million,
respectively.
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. The Company does
not participate in the trading of derivative securities which have
off-balance sheet risk.
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NOTE 12-BUSINESS SEGMENT INFORMATION
The company provides financial services through five business segments:
Investment Advisory; Private Client; Equity Capital Markets; Fixed
Income Capital Markets and Other. Segment results include all direct
revenues and expenses of the operating units in each segment and
allocations of indirect expenses based on specific methodologies.
Investment Advisory provides investment advisory services to
Company-sponsored mutual funds and asset management for institutional
and individual clients.
Private Client distributes a wide range of financial product through
its branch distribution network, including equity and fixed-income
securities, proprietary and non-affiliated mutual funds and annuities.
Net interest income from customers' margin loan and credit account
balances is included in this segment.
Equity Capital Markets consists of the Company's equity institutional
sales and trading, syndicate, corporate and finance activities. Sales
credits associated with underwritten offerings are reported in Private
Client when sold through retail distribution channels and in Capital
Markets when sold through institutional distribution channels.
Fixed Income Capital Markets consists of the Company's fixed income
institutional sales and trading, syndicate, and public finance
activities.
Other businesses are principally the Company's Athletic Resource
Management business and unallocated corporate revenues and expenses.
Business segment financial results are as follows:
Revenues: 1999 1998 1997
Private Client $187,864 $187,792 $181,301
Fixed Income Capital Markets 168,829 135,992 83,705
Equity Capital Markets 47,466 55,181 50,694
Investment Advisory 28,291 20,541 8,786
Other 6,161 7,588 4,048
$438,611 $407,094 $328,534
Income before income taxes:
Private Client $ 31,095 $ 39,794 $ 26,890
Fixed Income Capital Markets 33,897 22,554 15,853
Equity Capital Markets 7,843 14,614 12,526
Investment Advisory 587 (155) (375)
Other 691 379 384
$ 74,113 $ 77,186 $ 55,278
Segment data includes charges allocating corporate overhead to
each segment. Intersegment revenues and charges are eliminated between
segments. The Company evaluates the performance of its segments and
allocates resources to them based on return on investment.
The Company has not disclosed asset information by segment as the
information is not produced internally. All long-lived assets are
located in the U.S.
The Company's business is predominantly in the U.S., with less then
1% of revenues and net income from international operations.
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NOTE 13-QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
Quarter Ended
October 31 January 31 April 30 July 31
1999:
Revenues $ 96,416 $107,166 $114,528 $120,500
Expenses 80,370 87,928 94,828 101,371
Income before income taxes 16,046 19,238 19,700 19,129
Net income 9,746 11,738 12,200 12,129
Net income per share:
Basic 0.30 0.36 0.38 0.38
Diluted 0.30 0.36 0.37 0.38
Dividends per share 0.07 0.07 0.07 0.07
Stock price range:
High 25.28 19.26 18.24 18.94
Low 15.00 16.86 16.00 16.43
1998:
Revenues $101,197 $ 96,572 $103,546 $105,779
Expenses 80,509 78,570 84,275 86,554
Income before income taxes 20,688 18,002 19,271 19,225
Net income 12,788 11,402 12,271 11,725
Net income per share:
Basic 0.40 0.35 0.37 0.35
Diluted 0.40 0.35 0.37 0.35
Dividends per share 0.06 0.06 0.06 0.06
Stock price range:
High 21.38 25.63 24.13 28.44
Low 13.83 15.88 21.06 22.00
46
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, 1999
and 1998, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the
period ended July 31, 1999. 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, 1999 and 1998 and
the consolidated results of their operations and their cash flows for
each of the three years in the period ended July 31, 1999 in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Memphis, Tennessee
September 17, 1999
47