SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED OCTOBER 31, 1999
COMMISSION FILE NO. 1-9015
MORGAN KEEGAN, INC.
(Exact name of Registrant as specified in its charter)
Tennessee 62-1153850
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Fifty Front Street
Memphis, Tennessee 38103
(Address of principal (Zip Code)
executive offices)
901-524-4100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for at least the past 90 days. Yes X No .
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of Common Stock, as of the latest practical date.
Class Outstanding at October 31, 1999
Common Stock $.625 par value 29,361,803
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements
of Financial Condition. . . . . . . . October 31, 1999 and July 31, 1999
Consolidated Statements
of Income . . . . . . . . . . . . . . Three months ended
October 31, 1999 and 1998
Consolidated Statements
of Cash Flows . . . . . . . . . . . . Three months ended
October 31, 1999 and 1998
Notes to Consolidated
Financial Statements. . . . . . . . . October 31, 1999
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Part II. Other Information
Item 1. Legal proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Part I. FINANCIAL INFORMATION
Item 1.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries
October 31 July 31
1999 1999
(unaudited)
(in thousands)
ASSETS
Cash $ 18,996 $ 16,102
Securities segregated for regulatory
purposes, at market 202,700 246,000
Deposits with clearing organizations
and others 9,792 9,792
Receivable from brokers and dealers and
clearing organizations 23,939 12,781
Receivable from customers 621,969 557,678
Securities purchased under agreements
to resell 215,850 184,852
Securities owned, at market 417,563 480,662
Memberships in exchanges, at cost
(market value-$6,153,000 at 10-31-99;
$6,456,000 at 7-31-99) 2,428 2,428
Furniture, equipment and leasehold
improvements, at cost (less allowances for
depreciation and amortization $26,619,000
at 10-31-99; $27,402,000 at 7-31-99) 26,371 26,167
Other assets 60,460 61,903
$1,600,068 $1,598,365
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 170,300 $ 115,100
Commercial paper 55,278 65,111
Payable to brokers and dealers and
clearing organizations 43,414 7,959
Payable to customers 723,193 733,725
Customer drafts payable 15,774 16,076
Securities sold under agreements to
repurchase 192,336 239,019
Securities sold, not yet purchased,
at market 88,993 58,755
Other liabilities 68,121 83,558
1,357,409 1,319,303
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares; 29,361,803
shares issued and outstanding
at 10-31-99; 31,859,258 at 7-31-99 18,339 19,911
Retained earnings 224,320 259,151
242,659 279,062
$1,600,068 $1,598,365
[FN]
See accompanying notes.
</FN>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Three Months Ended
October 31
1999 1998
(in thousands, except
per share amounts)
REVENUES
Commissions $ 27,279 $ 26,910
Principal transactions 30,623 33,411
Investment banking 11,884 9,964
Interest 22,345 18,149
Investment management fees 7,903 5,243
Other 3,001 2,739
TOTAL 103,035 96,416
EXPENSES
Compensation 53,125 49,377
Floor brokerage and clearance 1,770 1,675
Communications 6,559 5,429
Travel and promotional 3,950 3,621
Occupancy and equipment costs 5,862 5,110
Interest 15,204 10,792
Taxes, other than income taxes 2,267 1,984
Other operating expenses 2,433 2,382
91,170 80,370
INCOME BEFORE INCOME TAXES 11,865 16,046
INCOME TAX EXPENSE 4,400 6,300
NET INCOME $ 7,465 $ 9,746
NET INCOME PER SHARE:
Basic $ 0.25 $ 0.30
Diluted $ 0.24 $ 0.30
DIVIDENDS PER SHARE $ 0.08 $ 0.07
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 30,402 32,639
Diluted 30,505 32,754
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Three Months Ended
October 31
1999 1998
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 7,465 $ 9,746
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 2,699 2,359
Deferred income taxes (400) 600
Amortization of gain on sale of building
and related assets (345) (345)
Amortization of restricted stock 1,200 1,050
10,619 13,410
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations (11,158) 12,031
Deposits with clearing organizations and others - 7
Receivable from customers (64,291) 24,736
Securities segregated for regulatory purposes 43,300 12,400
Securities owned 63,099 (23,230)
Other assets 1,843 (474)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations 35,455 3,589
Payable to customers (10,532) (16,539)
Customer drafts payable (302) (4,050)
Securities sold, not yet purchased 30,238 (103,172)
Other liabilities (15,092) (15,936)
72,560 (110,638)
Cash provided by (used for) operating activities 83,179 (97,228)
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper (9,833) 9,517
Issuance of Common Stock 82 12
Retirement of Common Stock (42,751) (8,929)
Dividends paid (2,399) (2,280)
Short-term borrowings 55,200 41,200
Securities purchased under agreements to resell (30,998) 105,491
Securities sold under agreements to repurchase (46,683) (48,360)
Cash (used for)provided by financing activities (77,382) 96,651
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (2,903) (2,616)
Cash used for investing activities (2,903) (2,616)
Increase (decrease) in Cash 2,894 (3,193)
Cash at Beginning of Period 16,102 22,172
Cash at End of Period $ 18,996 $ 18,979
[FN]
Income tax payments were approximately $562,000 and $551,000 for
the three month period ending October 31, 1999, and 1998,
respectively. Interest payments were approximately $14,953,000
and $11,612,000 for the same periods, respectively.
See accompanying notes.
</FN>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
October 31, 1999
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Morgan Keegan, Inc. and its subsidiaries (collectively referred
to as the Registrant). The accompanying unaudited consolidated
financial statements have been prepared in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended October 31,
1999, are not necessarily indicative of the results that may be
expected for the year ending July 31, 2000. For further
information, refer to the financial statements and notes thereto
included in the Registrant's annual report on Form 10-K for the
year ended July 31, 1999.
NOTE B - NET CAPITAL REQUIREMENT
As a registered broker/dealer and member of the New York Stock
Exchange, the registrant's brokerage subsidiary, Morgan Keegan
& Company, Inc. (M.K. & Co.) is subject to the Securities
and Exchange Commission's (SEC) uniform net capital rule. The
broker/dealer subsidiary has elected to operate under the
alternative method of the rule, which prohibits a broker/dealer
from engaging in any securities transactions when its net
capital is less than 2% of its aggregate debit balances, as
defined, arising from customer transactions. The SEC may
also require a member firm to reduce its business and restrict
withdrawal of subordinated capital if its net capital is less
than 4% of aggregate debit balances, and may prohibit a member
firm from expanding its business and declaring cash dividends
if its net capital is less than 5% of aggregate debit balances.
At October 31, 1999, M.K. & Co. had net capital of $137,013,628
which was 22% of its aggregate debit balances and $124,454,522
in excess of the 2% net capital requirement.
NOTE C - INCOME TAXES
The principal reason for the difference between the Registrant's
effective tax rate and the federal statutory rate is the
non-taxable interest earned on municipal bonds.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
NOTE D - NET INCOME PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share:
Three Months Ended
October 31
1999 1998
(in thousands, except
per share amounts)
Numerator
Net Income $ 7,465 $ 9,746
Denominator
Denominator for basic
earnings per share -
weighted average
shares 30,402 32,639
Effect of dilutive
securities - stock
options 103 115
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions 30,505 32,754
Basic earnings per share $ 0.25 $ 0.30
Diluted earnings per share $ 0.24 $ 0.30
NOTE E - OTHER ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) 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 fiscal years beginning
after June 15, 2000. The Registrant has not yet determined the
effect, if any, Statement 133 will have on the earnings
and financial condition of the Registrant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
NOTE F - Business Segment Information
The Registrant 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 products
through its branch distribution network, including equity and
fixed income securities, proprietary and non-affiliated mutual
funds and annuities. Net interest income for customers' margin
loan and credit account balances is included in this segment.
Equity Capital Markets consists of the Registrant's equity
institutional sales and trading, syndicate, and corporate finance
activities. Sales credits associated with underwritten
offerings are reported in the Private Client segment when
sold through retail distribution channels and in the Equity
Capital Markets segment when sold through institutional
distribution channels.
Fixed Income Capital markets consists of the Registrant's
fixed income institutional sales and trading, syndicate, and
public finance activities.
Other businesses are principally the Registrant's Athletic
Resource Management business and unallocated corporate
revenues and expenses.
Business segment financial results for the periods ending
October 31, 1999 and 1998 are as follows:
October 31 October 31
1999 1998
Revenues:
Private Client $ 47,420 $ 40,940
Fixed Income Capital Markets 33,891 37,873
Equity Capital Markets 12,572 10,725
Investment Advisory 7,917 5,444
Other 1,235 1,434
Total $103,035 $ 96,416
Income before income taxes:
Private Client $ 5,154 $ 7,218
Fixed Income Capital Markets 4,649 6,531
Equity Capital Markets 1,263 1,422
Investment Advisory 612 564
Other 187 311
Total $ 11,865 $ 16,046
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
NOTE F - Business Segment Information (continued)
Segment data includes charges allocated to each segment.
Intersegment revenues and charges are eliminated between
segments. The Registrant evaluates the performance of its
segments and allocates resources to them based on return on
investment.
The Registrant 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 Registrant's business is predominantly in the U.S., with
less than 1% of revenues and net income from international
operations.
Part I. FINANCIAL INFORMATION
Item 2.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Morgan Keegan, Inc. (The Registrant) operates a full
service regional brokerage business through its principal
subsidiary, Morgan Keegan & Company, Inc. (M.K. & Co.).
M.K. & Co. is involved in the highly competitive business
of origination, underwriting, distribution, trading and
brokerage of fixed income and equity securities and also
provides investment advisory services. While M.K.
& Co. regularly participates in the trading of some derivative
securities for its customers, this trading is not a major
portion of M.K. & Co.'s business. M.K. & Co. typically
does not underwrite high yield securities, and normally
is not involved in bridge loan financings or any
other ventures that management believes may not be
appropriate for its strategic approach. Many highly volatile
factors affect revenues, including general market conditions,
interest rates, investor sentiment and world affairs,
all of which are outside the Registrant's control. However,
certain expenses are relatively fixed. As a result, net
earnings can vary significantly from quarter to quarter,
regardless of management's efforts to enhance revenues and
control costs.
Results of Operations
The Registrant's revenues increased to $103,035,000 for the
three months ended October 31, 1999, an increase of $6,619,000
(7%) over the three months ended October 31, 1998 when
revenues totaled $96,416,000. The largest components of
this increase included a 51% increase in investment management
fees and a 19% increase in investment banking fees. Compared
to the prior year's stunted equity market activity, investor
sentiment has shown increased interest in equity products.
These increases were offset by an 8% decrease in principal
transactions of fixed income securities.
Operating expenses totaled $91,170,000 for the quarter ended
October 31, 1999 versus $80,370,000 for the same period of
the previous year. Employee compensation increased 8% and
communications expenses increased 21%. The increases were
the result of opening 5 new offices and continued efforts in
upgrading the branch network technology.
Net income for the quarter ended October 31, 1999 was $7,465,000,
or $0.25 per share, versus $9,746,000, or $0.30 per share,
for the same period in the previous year.
Year 2000 Processing Issue
The Year 2000 issue affects the ability of computer systems
to correctly process dates after December 31, 1999. The
Registrant 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 Registrant has also assessed the Year 2000 status
of its non-information technology systems and equipment
which may contain embedded hardware or software.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year 2000 Processing Issue (continued)
Having identified and assessed those computer systems,
processes and equipment that require modification, the
Registrant has substantially completed the remediation
and testing phases of its project plan. The Registrant
has completed the remediation and testing of its critical
internal applications systems. In addition to internal
testing, the Registrant actively participated in testing
among securities brokerage firms, securities exchanges,
clearing organizations, and other vendors.
The Registrant is also continuing to communicate with its
remaining vendors and other third parties, including its
landlords and utility supplies, to determine the likely
extent to which the Registrant 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
Registrant 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 Registrant's internal systems or
the systems of third parties on which the Registrant 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 Registrant's systems, would
not have a material adverse effect on the Registrant. The
Registrant 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 Registrant expects its
aggregate expenditures for its Year 2000 project plan to be
approximately $1.750 million, of which an estimated $1.6
million has been incurred as of October 31, 1999. A
significant portion of these costs will not be incremental
costs to the Registrant, but rather will represent the
redeployment of existing information technology and
operations resources, primarily to test the remediation
efforts of the Registrant's third party vendors. The
Registrant expects to fund all Year 2000 related costs
through operating cash flows and a reallocation of the
Registrant's overall information technology spending.
In accordance with generally accepted accounting principles,
Year 2000 expenditures are expensed as incurred. The
costs of the Registrant's Year 2000 project and the dates
on which the Registrant 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.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Liquidity and Capital Resources
High liquidity is reflected in the Registrant's statement
of financial condition with approximately 95% of its assets
consisting of cash or assets readily convertible into
cash. Financing resources include the Registrant's
equity capital, commercial paper, short-term
borrowings, repurchase agreements and other payables.
For the three months ended October 31, 1999, cash flows
provided by operating activities were $83,179,000 primarily
due to the lower amount of securities owned at October 31, 1999.
Cash flows used for financing activities were $77,382,000
for the quarter ended October 31, 1999 compared to $96,651,000
cash provided by financing activities for the same period
of the previous year. A significant factor in this use
related to the Registrant repurchasing approximately 2.5
million shares of its outstanding common stock for
$42,751,000 during the quarter.
Cash flows used for investing activities during the quarter
ended October 31, 1999 was $2,903,000 versus $2,616,000 for
the quarter ended October 31, 1998. This investing activity
is the result of the Registrant's broker/dealer subsidiary
opening 2 new offices during the quarter and the
continued efforts of upgrading and maintaining the computer
network.
At October 31, 1999, the Registrant's broker/dealer subsidiary,
which is regulated under the SEC's uniform net capital rule,
had net capital of $137,013,628, which was $124,454,522 in
excess of the 2% net capital requirement. During the quarter
the Registrant declared and paid cash dividends of $0.08 per
share on the shares outstanding.
In November 1993 the Board of Directors authorized a
stock repurchase program. During the quarter ended October
31, 1999, the Registrant repurchased approximately 2.5 million
shares, or 9% of its outstanding common stock. At October
31, 1999, a balance of approximately 300,000 shares remains to
be repurchased under the existing authorization.
Forward Looking Statements
This Form 10-Q may contain or incorporate by reference statements
which may constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended
and Section 21E of the Securities Exchange Act of 1934,
as amended. Prospective investors are cautioned that any
such forward-looking statements are not guarantees for future
performance and involve risks and uncertainties, and that actual
results may differ materially from those contemplated by such
forward-looking statements.
Part I. FINANCIAL INFORMATION
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MORGAN KEEGAN, INC. and Subsidiaries
Interest Rate Sensitivity
No significant changes have occurred since July 31, 1999
in the Registrant's exposure to market risk. See
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
PART II. OTHER INFORMATION
MORGAN KEEGAN, INC. and Subsidiaries
Item 1. Legal proceedings
Morgan Keegan & Company, Inc. is subject to
various claims incidental to its securities business.
While the ultimate resolution of pending
litigation and claims cannot be predicted with
certainty, based upon the information currently
known, management is of the opinion that it has
meritorious defenses and has instructed its
counsel to vigorously defend such lawsuits and
claims, and that liability, if any, resulting
from all litigation will have no material adverse
effect on the Registrant's consolidated
financial condition or results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
No reports were filed during the quarter on Form 8-K
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
Morgan Keegan, Inc.
Registrant
BY /s/ Joseph C. Weller
Joseph C. Weller
EVP, CFO, Sec.-Treas.
Date: December 14, 1999
??