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, 1994
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
Identification No.)
incorporation or organization)
Fifty Front Street
Memphis, Tennessee
38103
Registrant's telephone number, including area code: (901)
524-4100
________________________________________________________________
___
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 Art
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 reference in Part III of this Form
10-K or any amendment to this Form 10-K.
At October 1, 1994, the Registrant had approximately 13,557,661
shares of Common Stock outstanding. The aggregate market value
of Common Stock held by non-affiliates was approximately
$176,249,593.
DOCUMENTS INCORPORATED HEREIN BY REFERENCE:
Portions of the Registrant's Annual Report to Shareholders for
the year ended July 31, 1994, 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
22, 1994, which will be filed with the Commission pursuant to
Regulation 240.14a(6)(c) prior to October 27, 1994, are
incorporated by reference into Part III and Part IV of this
Report on Form 10-K.
<PAGE>
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 subsidiary is a trader, broker and underwriter
of fixed income and equity securities and provides related
financial services in support of its broker/dealer activities.
Products offered by M.K. & Co. include stocks; corporate and
tax-exempt bonds; U.S. Government, agency and guaranteed
securities; tax advantaged investments; options; investment and
advisory services; a money market fund; and a regional mutual
fund managed by the Morgan Asset Management. M.K. & Co. also
provides capital raising services for corporate and government
clients, margin credit for individual customers, research, and
economic and business analysis of financial and stock market
data for its customers. The percentage (%) of total revenues
derived from the various business areas is as follows:
<TABLE>
<CAPTION>
Year Ended July 31
1994 1993 1992
<S> <C>
<C> <C>
Institutional clients 31 32 34
Retail customers 41 41 41
Investment banking fees, interest and
other activities 28 27 25
Total 100 100 100
</TABLE>
M.K. & Co. is a two 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.
<PAGE>
M.K. & Co. has twenty-nine offices in twelve states. The
following table reflects the number of account executives in
each office as of July 31, 1994:
<TABLE>
<CAPTION>
Account Account
Office Executives Office Executives
<S> <C> <C>
<C>
Birmingham, Alabama 32 New Orleans, Louisiana 22
Decatur, Alabama 5 Shreveport, Louisiana 13
Fairhope, Alabama 3 Boston, Massachusetts 3
Huntsville, Alabama 9 Jackson, Mississippi 23
Mobile, Alabama 14 New York, New York 4
Montgomery, Alabama 18 Wilmington, North Carolina 3
Little Rock, Arkansas 47 Jackson, Tennessee 7
Ft. Lauderdale, Florida 7 Knoxville, Tennessee 21
Pensacola, Florida 8 Memphis, Tennessee
Atlanta, Georgia 23 Headquarters 105
Bowling Green, Kentucky 5 Suburban Office 32
Lexington, Kentucky 5 Nashville, Tennessee 27
Louisville, Kentucky 7 Austin, Texas 22
Baton Rouge, Louisiana 12 Dallas, Texas 2
Lafayette, Louisiana 6 Houston, Texas 7
TOTAL 492
</TABLE>
<PAGE>
Revenues by Source
The following table sets forth the Registrant's consolidated
revenues indicated in dollars and as a percentage of total
revenues for the periods:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Year Ended July 31
1994 1993 1992
Amount % Amount % Amount % <S>
<C> <C> <C> <C>
<C> <C>
REVENUES
Commissions
Listed securities $22,748 9.81 $20,457 9.78 $18,378
10.00 Over-the-counter securities 10,076 4.35 10,159
4.86 9,041 4.90 Options 1,990 0.86
1,927 0.92 2,089 1.10
Other 11,723 5.06 11,196 5.35 7,632 4.20
TOTAL 46,537 20.08 43,739 20.91 37,140
20.20 Principal transactions
Corporate securities 33,541 14.47 34,404 16.44
28,161 15.40 Municipal securities 14,135 6.10
17,432 8.33 12,037 6.60
U.S. government obligations 41,746 18.02
51,297 24.52 48,588 26.60
TOTAL 89,422 38.59 103,133 49.29 88,786 48.60
Investment banking
Corporate securities 32,850 14.18 15,760 7.53 16,730
9.20 Municipal securities 4,059 1.75 3,947 1.89
3,960 2.20 Underwriting, management
and other fees 18,923 8.17 9,571 4.58 9,862
5.40
TOTAL 55,832 24.10 29,278 14.00 30,552 16.80
Interest
Interest on margin balances 10,824 4.67 7,047 3.37
5,941 3.30 Interest on securities owned 14,070 6.07
12,627 6.04 12,709 7.00
TOTAL 24,894 10.74 19,674 9.41 18,650 10.30 Other
Income 15,035 6.49 13,371 6.39 7,536 4.10
TOTAL REVENUES $231,720 100.0 $209,195 100.0
$182,664 100.0
</TABLE>
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
operation.
<PAGE>
Institutional Business
During the three years ended July 31, 1994, approximately 32%
of the Registrant's total consolidated revenues were derived
from institutional clients. M.K. & Co. 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, 1994, no single
institutional client accounted for more than 2% of the
Registrant's total revenues. M.K. & Co. 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, 1994, 1993, and 1992,
institutional revenues and percentages of total revenues were
$72,774,000 (31%), $66,748,000 (32%) and $62,315,000 (34%)
respectively.
Retail Business
During each of the three years ended July 31, 1994,
approximately 41% of the Registrant's total revenues were
derived from transactions with retail (individual) customers.
For the fiscal years ended July 31, 1994, 1993, and 1992, such
revenues of total consolidated revenues were $95,576,000,
$86,001,000 and $74,219,000 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.
Interest charged on customer margin accounts represented
approximately 4.7% of total revenues in fiscal 1994.
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, 1994, the Registrant made a market in common stock
or other equity securities of approximately 113 corporations,
the majority of which are stocks followed by its research
department.
<PAGE>
M.K. & Co. 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. The following table sets
forth for the year ended July 31, 1994, 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:
<TABLE>
<CAPTION> Highest Lowest Average
Inventory Inventory Inventory
<S> <C> <C>
<C>
Common stocks $28,521,215 $10,907,806 $18,908,357
Corporate debt securities 36,247,759 9,603,462
16,434,438
Tax-exempt securities 71,100,576 30,094,970 46,459,207
U.S. government, agency,
and guaranteed securities 308,516,743 98,902,589 176,756,998
</TABLE>
The following table sets forth the composition of revenues from
principal transactions:
<TABLE>
<CAPTION>
Year Ended July 31
1994 1993 1992
Amount % Amount % Amount % <S>
<C> <C> <C> <C> <C>
<C>
Common stock $27,055,067 30 $27,272,840 26 $21,199,105 24
Corporate debt sec. 6,486,202 7 7,131,304 7
6,961,973 8
Tax-exempt securities 4,135,366 16 17,432,459 17
12,037,414 14
U.S. government, agency
and guaranteed securities 41,746,006 47 51,296,548 50
48,587,900 54
Total $89,422,641 100 $103,133,151 100 $88,786,392 100
</TABLE>
<PAGE>
Item I. BUSINESS (Continued)
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 participations of M.K. & Co. in
distributions of agency securities:
<TABLE>
<CAPTION>
Year Ended Number Amount of
July 31 Issues Participations
<S> <C>
<C>
1994 70 $566,630,000
1993 81 690,705,000
1992 99 963,215,000
1991 102 707,850,000
1990 98 679,730,000
</TABLE>
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. 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.
<PAGE>
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. 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. principal activities are also subject to the risk of
counterpart 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.
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. underwriting activities, together with
its selling group participations, are important as a source of
securities for sale to its customers. The following table sets
forth corporate and tax-exempt underwriting syndicate
participations of the subsidiary:
<TABLE>
<CAPTION>
CORPORATE TAX-EXEMPT
Year Ended Number of Amount of Number of Amount of
July 31 Issues Participations Issues Participations
<S> <C> <C> <C> <C>
1994 330 $774,651,373 159 $312,056,000
1993 307 596,588,928 168 430,272,000
1992 245 547,846,000 162 341,310,000
1991 126 214,325,000 149 195,578,000
1990 149 187,539,000 118 181,265,000
</TABLE>
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 21 of the 1994 Annual Report to
Shareholders.
<PAGE>
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. The Registrant's
subsidiary, Merchant Banking, Inc. which serves as a general
partner in a limited partnership, Morgan Keegan Merchant Banking
Fund Limited Partnership, which currently has approximately
$5,000,000 in assets and is engaged in merchant banking
activities.
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. Morgan
Keegan Managed Futures, Inc., a wholly-owned subsidiary of the
Registrant, act as general partner to the Southern Capital
Enhanced Equity Fund Limited Partnership, (the "Fund"), an
investment limited partnership. The Fund seeks substantial
capital appreciation through investing approximately 80% of its
assets in growth stocks and the remaining assets in a stock
index futures trading program.
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 Southern Capital Fund. This fund,
which invests primarily in equity securities of companies
located in the southern United States, is a mutual fund managed
by Morgan Asset Management, Inc., a subsidiary of the
Registrant, and is 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.
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended Number of Transactions
July 31 High Low Average
<S> <C> <C> <C>
1994 56,859 38,457 43,340
1993 43,544 28,358 36,584
1992 40,019 24,847 31,344
1991 29,898 15,925 22,894
1990 23,072 16,027 19,314 </TABLE>
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 $15,000,000 (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.
Employees
As of July 31, 1994, the M.K. & Co. had 1,218 employees, 492 of
whom were account executives, 536 of whom were engaged in other
service areas, including trading, research and investment
banking, and 190 of whom were employed in accounting, clearing
and processing, management and other activities.
<PAGE>
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, 1994, M.K. & Co. hired 107 account executives for a net
increase of 54 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
include 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.
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, 1994, the
Registrant's subsidiary's net capital was 45% of aggregate debit
items. See Note 10 - Regulatory Requirements - page 21 of Notes
to Consolidated Financial Statements of the 1994 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.
<PAGE>
Item 2. PROPERTIES
The Registrant's headquarters occupy approximately 108,000
square feet in Morgan Keegan Tower in Memphis, Tennessee. All
of the Registrant's offices are leased. See Note 4 - Leases on
page 18 of Notes to Consolidated Financial Statements of the
1994 Annual Report to Shareholders.
Item 3. LEGAL PROCEEDINGS
On August 31, 1994, the Court in In Re Taxable Municipal Bond
Securities Litigation, MDL 863 ("the MDL") gave tentative
approval to a class settlement of $21.2 million to be paid by
the Underwriters in all taxable bond syndicates involved in the
MDL and certain other defendants. The MDL was previously
described in prior Form 10-Q and Form 10-K SEC filings. The
Registrant's broker/dealer subsidiary, Morgan Keegan & Company,
Inc. ("M.K. & Co."), is responsible for a small percentage of
the settlement, and while the settlement is subject to a number
of pre-conditions, including final approval by the Court,
management is of the opinion that the litigation will be
effectively settled and that such a settlement will have no
material adverse effect on M.K. & Co.'s results of operations or
financial condition. In the event a settlement is not achieved,
management is of the opinion that it has meritorious defenses
and has advised its counsel to vigorously defend all claims
arising from the MDL.
In addition to the matters described above, M.K. & Co. is
subject to various claims incidental to its securities business.
While the ultimate resolution of pending litigation and claims
cannot be predicted with certainty, based upon the information
currently known, management is of the opinion that it has
meritorious defenses and has instructed its counsel to
vigorously defend such lawsuits and claims, and that liability,
if any, resulting from all litigation will have no material
adverse effect on the Registrant's consolidated financial
condition.
Item 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.
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 22 of the 1994 Annual Report to
Shareholders, a copy of which is enclosed.
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by
reference to the Ten Year Financial Summary on pages 10 and 11
and Additional Financial Information (Unaudited) on page 13 of
the 1994 Annual Report to Shareholders, a copy of this 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 page 12 of the 1994 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 be
reference to pages 14 through 23 of the 1994 Annual Report to
Shareholders, a copy of which is enclosed.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial
disclosure.
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
will be filed with the Commission pursuant to Regulation 240.14a
(6)(c) on October 11, 1994 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 22, 1994.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the Registrant's definitive Proxy Statement which
will be filed with the Commission pursuant to Regulation 240.14a
(6)(c) on October 11, 1994 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 22, 1994.
<PAGE>
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
will be filed with the Commission pursuant to Regulation 240.14a
(6)(c) on October 11, 1994 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 22, 1994.
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
will be filed with the Commission pursuant to Regulation 240.14a
(6)(c) on October 11, 1994 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 22, 1994.
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 1994 Annual
Report to Shareholders are incorporated by reference in Item 8:
Consolidated Statements of Financial Condition July 31,
1994 and 1993
Consolidated Statements of Income Years ended July 31, 1994,
1993, and 1992
Consolidated Statements of Stockholders' Equity Years ended
July 31, 1994,
1993, and 1992
Consolidated Statements of Cash Flows Years ended July 31, 1994,
1993, and 1992
Notes to Consolidated Financial Statements
<PAGE>
(2) The following consolidated financial statement schedules of
Morgan Keegan, Inc. and subsidiaries are included in Item 14 (d):
Schedule I - Marketable Securities and Other Investments
Schedule III - Condensed Financial Statements of Registrant
Schedule IX - Short Term Borrowings
Schedule X - Supplementary Income Statement Information
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.
(3) 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 11 - Statement re: Computation of Per Share
Earnings Page 22
Exhibit 13 - Annual Report to Shareholders*
Exhibit 22 - List of Subsidiaries of Registrant*
Exhibit 23 - Consent of Independent Auditors Page 23
*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, 1994.
(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.
<PAGE>
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, 1994
Pursuant to the requirements of the 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.
SIGNATURE TITLE DATE
/S/ ALLEN B. MORGAN, JR.
Allen B. Morgan, Jr. Chairman and Director October 26, 1994
/S/ WILLIAM W. DEUPREE, JR.
William W. Deupree, Jr. President October 26, 1994
/S/ JOHN W. STOKES, JR.
John W. Stokes, Jr. Vice President and Director October 26,
1994
/S/ JOSEPH C. WELLER
Joseph C. Weller Secretary/Treasurer and Director October 26,
1994
/S/ KENNETH F. CLARK, JR.
Kenneth F. Clark, Jr. Director October 26, 1994
/S/ JAMES E. HARWOOD, III
James E. Harwood, III Director October 26, 1994
<PAGE>
<TABLE>
Schedule I
Marketable Securities and Other Investments
Morgan Keegan, Inc. and Subsidiaries
July 31, 1994
<CAPTION> Amount at which
Each Portfolio of
Number of Shares Equity
Securities & or Units-Principal
Market Value of Each Other Issue Name of Issuer and
Title Amount of Bonds Cost of Each Issue
at Carried in the of Each Issue and
Notes Each Issue(1)Bal. Sheet Date Balance Sheet(2) <S>
<C> <C>
<C> <C>
MARKETABLE SECURITIES
Stocks 106,591
($12,661,197) ($12,661,197)
State and municipal
obligations (3) 52,522,000 42,698,588
42,698,588
U.S. government obligations 90,828,282
91,082,661 91,082,661
Corporate bonds 8,237,200
8,040,512 8,040,512
Commercial paper & bankers'
acceptances 6,000 5,941
5,941 ______________
_______________ ____________
151,700,073 129,166,505
129,166,505
OTHER INVESTMENTS
Stocks (4) N/A
2,416,777 2,416,777
_____________ ______________
_____________ TOTAL
151,700,073 $131,583,282
$131,583,282
<FN>
(1) Securities are marked to market each month.
(2) Amounts net of securities sold, not yet purchased in the
amount of $35,985,006.
(3) Municipal obligations include an issue with a par value of
$12,700,000 which has been written down to a fair market value
of $5,715,000 at July 31, 1994 as determined by management.
(4) Market value quotations not available; represents market
value at July 31, 1994 as determined by management.
</TABLE>
<PAGE>
<TABLE>
Schedule III
Condensed Financial Statements of Registrant
Morgan Keegan, Inc.
<CAPTION>
Condensed Balance Sheets
July 31
<S>
<C> <C>
ASSETS 1994
1993
Cash $1,000
$1,000
Securities owned
1,767,365 1,370,889
Furniture, equipment and leasehold improvements
less allowances for depreciation and amortization
($7,261,972 at July 31, 1994, $5,962,978 at
July 31, 1993) 5,575,852 5,385,361
Investments in subsidiaries (a)
128,761,416 107,845,791 Intercompany (a)
3,916,764 Other
assets 2,908,830
271,667 Total Assets
$139,014,463 $118,791,472
LIABILITIES
Commercial paper
$10,593,126 $12,456,817 Intercompany (a)
3,056,619
STOCKHOLDERS' EQUITY
Common Stock 8,565,006
8,919,995 Additional paid-in-capital
5,522,052 13,941,237 Retained
earnings 111,277,660
83,473,423
$125,364,718 $106,334,655 Total
Liabilities and Stockholders' Equity
$139,014,463 $118,791,472
</TABLE>
<TABLE>
Condensed Income Statements
Year Ended July 31
1994 1993
1992
<S>
<C> <C> <C>
Rental income $1,881,486
$1,522,033 $1,252,844
Interest income 4,198,859
145,582 267,561
Capital gain 2,248,375
Depreciation (1,881,486)
(1,522,033) (1,252,844)
Other 6,636
608,160 (27,469)
Income taxes (915,000)
(300,000) (97,000)
Income from subsidiaries 26,302,292
30,247,874 25,647,784
____________
____________ ___________
Net income $31,841,162
$30,701,616 $25,790,876
<FN> (a) Eliminated in consolidation See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
Schedule III - Continued
Condensed Financial Statements of Registrant
Morgan Keegan, Inc.
<CAPTION>
Condensed Statement of Cash Flows
Year Ended July 31
<S>
<C> <C> <C>
1994 1993 1992
Cash Flows From Operating Activities
Operations (net income) $31,841,162
$30,701,616 $25,790,876 Less: Income from
subsidiaries (26,302,292) (30,247,874)
(25,647,784) Amortization of restricted stock
1,580,000 822,000 995,000
Depreciation expense 1,881,486
1,522,033 1,252,844 Decrease (increase)
in other assets (2,637,163) 20,000
(291,667) Decrease (increase) in intercompany
receivable 6,973,383
1,726,710 13,734,041 Increase from
operating activities 13,336,576 4,544,485
15,833,310
Cash Flows from Financing Activities
Proceeds from sale or issuance of
common stock 6,423,212 1,453,690
957,239 Payments of commercial paper
(1,863,691) (523,552) (12,135,426)
Dividends paid (4,036,925)
(2,937,420) (1,822,612) Retirement of
Common Stock (16,777,386) (395,695)
(66,775) Decrease from financing activities
(16,254,790) (2,402,977) (13,067,574)
Cash Flows From Investing Activities
(Increase) decrease in securities owned (396,476)
(302,000) 104,291 (Increase) decrease in
investment in
subsidiaries 5,386,667
1,057,338 (1,443,709) Purchase of furniture,
equipment and
leasehold improvements (2,071,977)
(2,896,846) (1,426,318) (Increase) decrease
from investing
activities 2,918,214 (2,141,508)
(2,765,736) Increase in cash
0 0 0
CASH AT BEGINNING OF YEAR 1,000 1,000
1,000 CASH AT END OF YEAR
$1,000 $1,000 $1,000
<FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
Schedule IX Short-Term Borrowings
Morgan Keegan, Inc. and Subsidiaries
<CAPTION>
Weighted
Average
Balance Int. Rate Weighted Category of
Aggregate at End of at End of Maximum Average Amt.
Average Short-Term Borrowings Period Period
Outstanding Outstanding Interest Rate <S>
<C> <C> <C>
<C> <C> Year ended July 31, 1994:
Short-term Borrowings(1) $16,500,000 5.00% $209,951,274
$67,957,244 3.82% Commercial Paper (2) 10,593,126
3.38% 13,555,000 11,767,083 3.38%
Year ended July 31, 1993:
Short-term Borrowings (1) $68,105,000 4.04% $183,500,082
$87,021,599 3.98% Commercial Paper (2) 12,456,817
3.38% 16,420,000 12,182,167 3.53%
Year ended July 31, 1992:
Short-term Borrowings (1) $67,509,000 4.62% $207,490,977
$78,826,906 5.21% Commercial Paper (2) 12,980,369
4.00% 24,231,127 16,073,728 4.80%
<FN>
(1) Short-term borrowings represent borrowings under a line of
credit arrangement that has no termination date but is reviewed
annually.
(2) Commercial paper matures generally less than six months
from date of issue with no provisions for the extension of its
maturity.
(3) The average amount outstanding was computed by dividing the
total of daily outstanding principal balances by 365 days.
</TABLE>
<PAGE>
<TABLE>
Schedule X
Supplementary Income Statement Information
Morgan Keegan, Inc. and Subsidiaries
<CAPTION>
Charged to Costs and
Expenses
Year Ended July 31
1994 1993
1992
<S> <C>
<C> <C>
Depreciation and amortization
of intangible assets, pre-operating
costs and similar deferrals $3,321,066
$2,543,665 $2,165,079
<FN>
All other captions as required by Schedule X are either less
than 1% of total revenues or are furnished in the Consolidated
Statements of Income.
</TABLE>
<PAGE>
<TABLE>
<PAGE>
EXHIBIT II - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Year Ended July 31
1994 1993 1992
<S> <C>
<C> <C>
PRIMARY
Average shares outstanding 14,481,965 14,097,063
13,761,296
Net effect of dilutive stock options -
based on the treasury stock method
using average market price. 42,609 47,743
56,643
TOTAL 14,524,574 14,144,806 13,817,939
Net income $31,841,162 $30,701,616 $25,790,876
Per share amount $2.19 $2.17
$1.87
FULLY DILUTED
Average shares outstanding 14,481,965 14,097,063 13,761,296
Net effect of dilutive stock options -
based on the treasury stock method
using the year-end market price, if
higher than average market price. 42,609 47,743
56,643
TOTAL 14,524,574 14,144,806 13,817,939
Net income $31,841,162 $30,701,616 $25,790,876
Per share amount $2.19 $2.17
$1.87 </TABLE>
<PAGE>
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 9, 1994, included in the 1994 Annual Report to
Shareholders of Morgan Keegan, Inc.
Our audit also included the financial statement schedules of
Morgan Keegan, Inc. listed in Item 14(a). These schedules are
the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material
respects the information set forth therein.
We also 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. 33-32974) pertaining to the
Employee Stock Purchase Plan of Morgan Keegan, Inc. and in the
related Prospectuses of our report dated September 9, 1994, with
respect to the consolidated financial statements incorporated
herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedules
included in this Annual Report (Form 10-K) of Morgan Keegan, Inc.
/S/ERNST & YOUNG LLP
Memphis, Tennessee
October 26, 1994
<PAGE>
<TABLE>
EXHIBIT 13 - ANNUAL REPORT TO SHAREHOLDERS
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
<CAPTION> (In thousands, except per share amounts) Years
ended July 31 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Revenues
Commissions
Listed Securities $22,748 $20,457 $18,378 $13,143
$14,444 Over-the-counter 10,076 10,159 9,041
5,347 1,745 Options 1,990 1,927 2,089
2,143 2,180 Other 11,723 11,196 7,632 4,824
4,434
46,537 43,739 37,140 25,448 22,803
Principal transactions:
Corporate securities 33,541 34,404 28,161 16,554
11,808 Municipal securities 14,135 17,432
12,037 10,730 7,445 U.S. government
securities 41,746 51,297 48,588 30,279 18,478
89,422 103,133 88,786 57,563 37,731
Investment banking:
Corporate securities 32,850 15,760 16,730 4,836
2,947 Municipal securities 4,059 3,947
3,960 376 159 Underwriting
management
and other fees 18,923 9,571 9,862 5,436
3,926
55,832 29,278 30,552 10,648 7,032
Interest:
Interest on margin balances 10,824 7,047 5,941
4,867 5,521 Interest on securities owned
14,070 12,627 12,709 12,490 10,769
24,894 19,674 18,650 17,357 16,290
Other 15,035 13,371 7,536 5,501 5,152
$231,720 $209,195 $182,664
$116,517 $89,008
Expenses
Compensation $125,205 $109,748 $94,348
$61,265 $48,243 Floor brokerage and clearance 3,875
5,296 4,571 3,751 3,749 Communications
13,852 12,012 9,791 8,764 8,436 Travel and
promotional 5,721 4,241 3,699 2,982
2,660 Occupancy and equipment
costs 8,320 8,153 7,557 8,194 7,789
Interest 14,393 11,185 12,562 12,953 12,591
Taxes, other than income taxes 4,972 4,199 3,823
3,116 2,682 Other operating expenses 3,741
4,659 4,122 3,288 3,308
$180,079 $159,493 $140,473 $104,313
$89,458 Income (loss) before
income taxes 51,641 49,702 42,191 12,204
(450)
Income tax expense (credit) 19,800 19,000 16,400 4,500
(475)
Net income $31,841 $30,702 $25,791 $7,704
$25
Per Share Data*
Net income $2.19 $2.17 $1.87 $0.57 $0.01
Book value $9.15 $7.45 $5.51 $3.75 $3.21
Other Data (at year end):
Total assets $571,009 $527,084 $434,448
$304,445 $236,991 Stockholders equity $125,365
$106,335 $76,690 $50,837 $44,888 Common shares
outstanding* 13,704 14,272 13,929 13,558
13,973
<FN>
*Adjusted for a three-for-two stock split in April, 1986, a
four-for-three stock split in September, 1991, a three-for-two
stock split in March, 1992, and a three-for-two stock split in
June, 1993. </TABLE>
<PAGE>
<TABLE>
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
<CAPTION> (In thousands, except per share amounts)
Years ended July 31 1989 1988 1987 1986 1985
<S> <C> <C> <C> <C> <C>
Revenues
Commissions
Listed Securities $13,675 $12,901 $10,829
$7,073 $5,514 Over-the-counter 1,848
2,088 2,313 1,440 1,185
Options 2,339 2,509 2,564 2,030 1,345
Other 4,192 3,943 6,714 6,001 3,569
22,054 21,441 22,420 16,544
11,613 Principal transactions:
Corporate securities 14,369 15,421
17,723 14,430 10,432 Municipal securities
5,993 6,401 4,550 7,428 6,625 U.S.
government securities 14,707 14,829 19,927
17,591 17,072
35,069 36,651 42,200 39,449
34,129 Investment banking:
Corporate securities 3,461 2,225 8,152 3,923
95 Municipal securities 213 19 394
314 358 Underwriting management
and other fees 4,057 3,302
5,267 3,835 935
7,731 5,546 13,813 8,072 1,388
Interest:
Interest on margin balances 5,698 5,406 4,753
3,497 2,548 Interest on securities owned 6,129 3,407
2,307 1,681 1,410
11,827 8,813 7,060 5,178 3,958
Other 2,750 1,105 902 567 249
$79,431 $73,556 $86,395 $69,810
$51,337
Expenses
Compensation $43,953 $42,242 $50,119
$40,846 $29,532 Floor brokerage and clearance
2,966 2,900 2,044 1,897
1,588
Communications 7,996 7,366 6,744
5,801 4,869
Travel and promotional 1,990 2,649 3,040 2,009
2,060 Occupancy and equipment
costs 6,852 5,755 4,645 3,848 2,784
Interest 7,931 4,620 3,928 3,113 2,476 Taxes,
other than income taxes 2,326 2,179 1,934 1,476
1,087 Other operating expenses 2,330 1,989 1,342
1,046 1,399
$76,344 $69,700 $73,796 $60,036
$45,795 Income (loss) before
income taxes 3,087 3,856 12,599 9,774 5,542
Income tax expense (credit) 715 1,351 5,900 4,300
2,300 Net income $2,372 $2,505 $6,699
$5,474 $3,242 Per Share Data*
Net income $0.15 $0.15 $0.43 $0.39 $0.23 Book
value $3.27 $3.17 $3.15 $2.40 $2.07 Other Data
(at year end):
Total assets $397,007 $236,209 $195,128
$180,318 $100,837 Stockholders equity
$48,432 $49,325 $55,999 $33,889
$28,740 Common shares
outstanding* 14,813 15,583 17,798 14,118
13,880
<FN>
*Adjusted for a three-for-two stock split in April, 1986, a
four-for-three stock split in September, 1991, a three-for-two
stock split in March, 1992, and a three-for-two stock split in
June, 1993. </TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
General Business Environment. Morgan Keegan, Inc. (the
"Company") operates a full service regional brokerage business
through its principal subsidiary, Morgan Keegan & Company, Inc.
The Company is involved in the origination, underwriting,
distribution, trading and brokerage of fixed income and equity
securities and also provides 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 strategic approach.
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.
Results of Operations. For the fourth consecutive year, the
Company achieved record revenues, record net earnings and record
earnings per share. For fiscal 1994, the Company's revenues rose
$22,525,000 or 11% to $231,720,000. The increase in revenues for
fiscal 1993 was $26,531,000 or 15%. Favorable conditions in the
securities industry prevailed for all of fiscal 1993 and into
the third quarter of fiscal 1994. Record underwriting levels,
increased commission revenues and strong trading profits
prevailed during that period. In the third quarter of fiscal
1994, interest rates began to rise, depressing stock and bond
prices and adversely impacting commissions and trading profits.
Investment banking revenues increased $26,554,000 or 91% which
was the primary component of the increased revenues for fiscal
1994. Outstanding efforts by the investment bankers resulted in
substantial investment banking revenues from underwriting stocks
of companies such as real estate investment trusts which
continued the strong performance through the third and fourth
quarters even after the market had turned for many firms.
In fiscal 1994, revenue from principal transactions declined
$13,711,000 or 13%. This followed a $14,347,000 or 16% increase
in the previous year. The decline is attributed to the drop in
prices resulting in lower volume and trading losses during the
third quarter. Interest income increased 26% or $5,220,000 for
fiscal 1994, following a $1,024,000 or 5% increase in fiscal
1993. Most of the increase stemmed from higher borrowings in
customer margin accounts for the entire year. Other income
increased by $1,664,000 or 12%, representing the Company's
continued commitment to expand its fee based investment advisory
business. The current year's increase was added to the strong
base contributed in 1993 when other income increased $5,835,000
or 77%, of which
a large part was generated by Cumberland Securities Company,
Inc., a recent acquisition.
Operating expenses increased 13% in fiscal 1994, from
$159,493,000 to $180,079,000. Approximately 75% of the increase
was compensation which rose from $109,748,000 to $125,205,000 or
14%. The increase closely corresponds to the 11% increase in
revenues but also includes an increase in fixed expenses due to
the Capitol acquisition and the opening of several new branch
offices. Floor brokerage expenses and other operating expenses
declined 27% and 20% respectively due to efficiencies derived
from management's continued cost cutting efforts. Other expense
categories increased moderately but were primarily in line with
the higher levels of volume for most of the year.
Operating expenses increased 14% in fiscal 1993, from
$140,473,000 to $159,493,000. Approximately 80% of the total
dollar increase was compensation, which increased from
$94,348,000 to $109,748,000. The 16% increase in compensation
closely corresponds to the 15% increase in revenues.
Communications expense increased $2,221,000 or 23% from
$9,791,000 to $12,012,000. A large part of this increase was due
to the installation of a new state-of-the-art personal
computer-based communication and quotation system completed near
the beginning of fiscal 1993.
Earnings per share for fiscal 1994 were $2.19 per share, which
was $.02 more than the $2.17 earnings for fiscal 1993. The
strong market performance for the first 21/2 quarters, coupled
with the entire year's investment banking performance offset the
lower commissions and trading losses incurred in the last
quarter and a half, allowing the Company to post a record year
in spite of some difficult market conditions. It is impossible
to determine how long the difficult markets might continue;
however, the Company plans to build its branch office network
and continue to grow for the long term.
Liquidity and Capital Resources. The Company's assets are highly
liquid, consisting mainly of cash or assets readily convertible
into cash. These assets are financed by the Company's equity
capital, short-term bank loans, commercial paper and other
payables. Changes in the amount of securities owned by the
Company and customer and broker receivables affect directly the
amount of the Company's financing requirements.
Total assets of the Company were $43,925,000 higher at July 31,
1994, than July 31, 1993, primarily due to increases in
receivables from customers of $80,131,000 offset by decreases in
securities owned of $22,114,000 and securities purchased under
agreements to resell of $25,827,000. The decrease in securities
owned was primarily to manage and reduce the Company's risk as
of the end of the year in a difficult market.
Liabilities increased $24,895,000 from $420,749,000 to
$445,644,000, primarily con-tributing to the increase in
payables to customers of $63,933,000 and a decrease in
securities sold under agreements to repurchase of $16,625,000.
The increase in customer payables correlated closely with
customer receivables.
Cash used in financing activities increased from $1,806,000 for
fiscal 1993 to $67,860,000 for fiscal 1994. The cash provided
from operating activities allowed a significant reduction in the
Company's short-term borrowings. Also during the year the board
approved a stock repurchase plan and repurchased approximately
1,340,000 shares for $16,778,000.
Cash used in investing activities remained about the same for
fiscal 1994 and 1993. The primary expenditure was the
installation of the communication and quotation system as
previously discussed.
During fiscal 1993, the Board of Directors authorized a
three-for-two stock split. This followed two stock splits in
fiscal 1992; one four-for-three, followed by a three-for-two.
The splits were to allow the shareholders to participate in the
outstanding years and to make the stock more attractive to
investors.
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 minimum requirements. At July 31, 1994,
the net capital of the Company's broker-dealer subsidiary
exceeded the SEC's minimum requirements by more than
$84,000,000, which is up from $72,000,000 at the end of last
year. Continued expansion is not expected to have a
significantly adverse impact on liquidity or capital. Funds
available from operations and lines of credit should provide
sufficient sources to meet capital needs of the foreseeable
future.
Effects of Inflation. The Company's assets are primarily
monetary, consisting of cash, assets convertible into cash,
securities and owned and receivables. Because of their
liquidity, these assets are not significantly affected by
inflation. Management believes that replacement costs of
furniture, equipment and leasehold improvements will not
materially affect operations. However, the rate of inflation
affects the Company's expenses, such as those for employee
compensation and communications, which may not be readily
recoverable in the price of services offered by the Company.
The table below summarizes the changes in the major categories
of revenues and expenses for the past three (3) years.
<TABLE>
<CAPTION>
(Dollars in thousands) Increase (Decrease) Revenues:
1994 vs 1993 1993 vs 1992
<S> <C> <C> <C> <C>
Commissions $ 2,798 6% $6,599 18%
Principal transactions (13,711) (13%) 14,347
16%
Investment banking 26,554 91% (1,274) ( 4%)
Interest 5,220 26% 1,024 5%
Other 1,664 12% 5,835 77%
$22,525 11% $26,531 15%
Expenses:
Compensation $,15,457 14% $15,400 16%
Floor brokerage and clearance (1,421) (27%) 725 16%
Communications 1,840 15% 2,221 23%
Travel and promotional 1,480 35% 542 15%
Occupancy and equipment costs 167 2% 596 8%
Interest 3,208 29% (1,377) (11%)
Taxes, other than income 773 18% 376 10%
Other operating expenses (918) (20%) 537 13%
$20,586 13% $19,020 14%
</TABLE>
<PAGE>
Additional Financial Information (Unaudited)
Morgan Keegan, Inc. and Subsidiaries
Summary of Quarterly Results
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Fiscal 1994
Revenues $57,664 $60,125 $56,294 $57,637
Income before income taxes 13,732 14,310 10,657
12,942
Net income 8,432 8,810 6,657 7,942
Net income per share 0.58 0.60 0.45 0.56
Fiscal 1993
Revenues $47,047 $49,397 $55,312 $57,439
Income before income taxes 11,207 11,270 13,235
13,990
Net income 6,808 7,170 8,085 8,639
Net income per share 0.49 0.51 0.57
0.60
Fiscal 1992
Revenues $37,923 $48,094 $50,837 $45,810
Income before income taxes 7,697 11,126 12,665
10,703
Net income 4,772 6,701 7,715 6,603
Net income per share 0.35 0.49 0.56 0.47
Fiscal 1991
Revenues $21,830 $27,598 $33,573 $33,516
Income (loss) before income taxes (18) 1,960
5,055 5,207
Net income 32 1,310 3,180 3,182
Net income per share 0.01 0.10 0.23 0.23
Fiscal 1990
Revenues $23,130 $23,693 $18,718 $23,469
Income (loss) before income taxes 819 718
(3,419) 1,432 Net income (loss) 629 533
(1,944) 807 Net income (loss) per share 0.05
0.03 (0.13) 0.06
</TABLE>
<TABLE>
Statistical Comparison of Production
<CAPTION>
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Total production $168,350,637 $154,251,186 $136,760,330
$86,400,943 $67,155,552 Percent change in
production 9.10% 12.80% 58.30% 28.70%
12.80% Number of tickets 480,564 439,006
376,128 273,288 229,622 Average commissions
per ticket $350 $351 $363 $316 $292
Number of investment brokers 492 438
409 396 377 Number of investment brokers
(over 1 yr.) 436 403 379 326
293
Total number of employees 1,218 1,088 969
878 810
Average commissions
per investment broker
(over 1 yr.) $346,274 $359,817 $327,096 $233,328
$185,487 Number of new
accounts opened 25,861 21,451 25,322
17,789 16,253
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries (in thousands)
<CAPTION>
July 31 1994 1993
<S> <C> <C>
ASSETS
Cash $12,854 $14,859
Securities segregated for regulatory purposes, at market
35,701 38,801
Deposits with clearing organizations and others 2,591
2,464
Receivable from brokers and dealers and
clearing organizations 29,945 19,624
Receivable from customers 236,764 156,633
Securities purchased under agreements to resell 62,811
88,638
Securities owned, at market 167,568 189,682
Memberships in exchanges, at cost (market value-
$2,310,000 at July 31, 1994; $1,924,000 at July 31, 1993)
678 678
Furniture, equipment and leasehold improvements,
(less allowances for depreciation and amortization
$12,296,000 at July 31, 1994; $10,619,000
at July 31, 1993) 9,353 8,159
Other assets 12,744 7,546
$571,009 $527,084
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $16,500 $68,105
Commercial paper 10,593 12,457
Payable to brokers and dealers and clearing organizations
13,581 17,500
Payable to customers 241,141 177,208
Customer drafts payable 10,950 7,873
Securities sold under agreements to repurchase 61,849
78,474
Securities sold, not yet purchased, at market 35,985
16,011
Other liabilities 55,045 43,121
445,644 420,749
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 25,000,000 shares; 13,704,011
shares issued and outstanding at July 31, 1994;
14,271,993 at July 31, 1993 8,565 8,920
Additional paid-in capital 5,522 13,941
Retained earnings 111,278 83,474
125,365 106,335
$571,009 $527,084
<FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
MORGAN KEEGAN, INC. and Subsidiaries (In thousands)
<CAPTION>
Year ended July 31 1994 1993 1992
CASH FLOWS FROM OPERATING
ACTIVITIES <S> <C> <C> <C>
Net income $31,841 $30,702 $25,791 Adjustments to
reconcile net income to cash provided
by operating activities:
Depreciation and amortization 3,321 2,542
2,165 Deferred income taxes (958) (900) (300)
Amortization of restricted stock 1,580 822 995
35,784 33,166 28,651
(Increase) decrease in operating assets:
Receivable from brokers and dealers and clearing
organizations (10,321) 3,312 7,423
Receivable from customers (80,131)
(29,500) (51,792)
Securities segregated for regulatory purposes, at market
3,100 (29,000) (3,500)
Deposits with clearing organizations and others (127)
1,704 (445)
Securities purchased under agreements to resell 25,827
(27,472) (23,509)
Securities owned, at market 22,114 (5,043)
(54,214)
Other assets (4,240) (977) (2,095)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations (3,919) (14,207) 9,474 Payable to
customers 63,933 69,125 32,308 Customer drafts
payable 3,077 1,008 1,801
Securities sold under agreements to repurchase
(16,625) 15,908 29,006
Securities sold, not yet purchased, at market 19,974
(16,704) 20,016
Other liabilities 11,924 8,295 13,934
34,586 (23,551) (21,593)
Cash provided by operating activities 70,370 9,615 7,058
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper (1,864) (523) (12,136)
Issuance of Common Stock 6,424 1,454 957
Retirement of Common Stock (16,778) (396) (67)
Dividends paid (4,037) (2,937) (1,823)
Short-term borrowings (51,605) 596
10,047
Cash used for financing activities (67,860)
(1,806) (3,022)
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (4,515) (4,309)
(2,632)
Proceeds from disposals of furniture, and equipment
596
Cash used for investing activities (4,515)
(4,309) (2,036)
Increase (decrease) in cash (2,005) 3,500 2,000
Cash at beginning of period 14,859 11,359
9,359
Cash at end of period $12,854 $14,859
$11,359
<FN>
Income tax payments totaled $17,769,000 in 1994, $19,300,000 in
1993, and $14,332,000 in 1992. Interest payments totaled
$14,519,000 in 1994, $11,161,000 in 1993, and $12,719,000 in
1992.
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
MORGAN KEEGAN, INC. and Subsidiaries <CAPTION> (In
thousands , except share amounts) Year ended July
31 1994 1993 1992
<S> <C> <C> <C>
REVENUES
Commissions $46,537 $43,739 $37,140
Principal transactions 89,422 103,133 88,786
Investment banking 55,832 29,278 30,552
Interest 24,894 19,674 18,650
Other 15,035 13,371 7,536
231,720 209,195 182,664 EXPENSES
Compensation 125,205 109,748 94,348
Floor brokerage and clearance 3,875 5,296
4,571
Communications 13,852 12,012 9,791
Travel and promotional 5,721 4,241 3,699
Occupancy and equipment costs 8,320 8,153
7,557
Interest 14,393 11,185 12,562
Taxes, other than income taxes 4,972 4,199
3,823
Other operating expenses 3,741 4,659 4,122
180,079 159,493 140,473 Income Before
Income Taxes 51,641 49,702 42,191 Income Tax
Expense 19,800 19,000 16,400
Net Income $31,841 $30,702 $25,791
Net Income Per Share $2.19 $2.17 $1.87
Average shares outstanding 14,524,574
14,144,806 13,817,927
<FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MORGAN KEEGAN, INC. and Subsidiaries <CAPTION>
(In thousands, except share amounts)
Common Common Additional Stock-
Stock Stock Paid-In Retained
holders'
Shares Amount Capital Earnings Equity
<S> <C> <C> <C> <C> <C>
Balance at August 1, 1991 4,519,214 $2,825
$16,271 $31,741 $50,837
Stock splits effected in the
form of stock dividends 4,518,896 2,824 (2,824)
Issuance of restricted stock 95,046 59
(59) Issuance of Common Stock 158,206 99
858 957 Dividends paid ($.14 per share)
(1,823) (1,823) Retirement of Common Stock (5,400)
(3) (64) (67) Amortization of restricted
stock 995 995
Net income 25,791 25,791 Balance at July 31,
1992 9,285,962 $5,804 $15,177 $55,709 $76,690
Stock split effected in the
form of stock dividend 4,643,080 2,901 (2,901)
Issuance of restricted stock 208,834 131
(131) Issuance of Common Stock 183,749 115
1,339 1,454 Dividends paid ($.22 per share)
(2,937) (2,937) Retirement of Common Stock (49,632)
(31) (365) 396 Amortization of restricted stock
822 822
Net income 30,702 30,702 Balance at July 31,
1993 14,271,993 $8,920 $13,941 $83,474 $106,335
Issuance of restricted stock 219,073 137
(137) Issuance of Common Stock 553,071 346
6,078 6,424 Dividends paid ($.28 per share)
(4,037) (4,037) Retirement of Common Stock (1,340,126)
(838) (15,940) (16,778) Amortization of restricted stock
1,580 1,580
Net income 31,841 31,841 Balance at July 31,
1994 13,704,011 $8,565 $5,522 $111,278 $125,365
<FN>
See accompanying notes.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Morgan Keegan, Inc., and Subsidiaries
July 31, 1994
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.
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 fifth business day following the
transaction date, which is not materially different from a trade
date basis.
Securities: Securities owned 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 settlement
date, which is not materially different from a trade date basis.
Underwriting fees are generally recorded on the date the
underwriting syndicate is closed.
Furniture, Equipment and Leasehold Improvements: 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.
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 relate to a Reverse Repurchase Agreement of
$35,701,000 and $38,801,000 at July 31, 1994 and 1993,
respectively.
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.
Effective August 1, 1993, the Company changed its method of
accounting for income taxes from the deferred method to the
liability method required by Financial Accounting Standards
Board Statement No. 109, "Accounting for Income Taxes." As
permitted under the new rules, prior years' financial statements
have not been restated. The initial adoption of the statement
did not have a material effect on financial position, results of
operations, or liquidity.
Net Income Per Share: Net income per share is computed based on
the weighted average number of shares outstanding including
shares issuable under stock options, when dilutive. 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 four or five years.
<PAGE>
NOTE 2 SHORT-TERM BORROWINGS
Short-term borrowings represent bank loans payable on demand
used to finance clearance of securities and to carry customers'
margin accounts. These notes bear interest at the broker loan
rate, which was 5% at July 31, 1994. The notes were
collateralized by securities with approximate market values as
follows, in thousands.
<TABLE>
<CAPTION>
July 31 1994 1993
<S> <C> <C>
Firm-owned securities $55,173 $177,183
Customer-owned
securities 0 24,401
$55,173 $201,584
</TABLE>
The Company also issues its own commercial paper to investors at
fluctuating interest rates (3.375% at July 31, 1994). The paper
matures over various terms not to exceed nine months.
NOTE 3 SECURITIES
Securities owned consist of the following, in thousands:
<TABLE>
<CAPTION>
July 31 1994 1993
<S> <C> <C>
U.S. government obligations $104,210 $113,646
State and municipal obligations 43,540 55,302
Corporate bonds 9,203 10,454
Stocks 10,599 10,196
Bankers' acceptances 16 84
$167,568 $189,682
</TABLE>
State and municipal obligations include an issue with a par
value of $12,700,000 which has been written down to an
approximate fair market value of $5,715,000 at both July 31,
1994 and 1993, as deter-mined by management of the Company.
Securities sold, not yet purchased consist of the following, in
thousands:
<TABLE>
<CAPTION>
July 31 1994 1993
<S> <C> <C>
U.S. government obligations $13,852 $11,601
State and municipal obligations 249 417
Corporate bonds 1,028 1,035
Stocks 20,846 2,958
Bankers' acceptances 10
$35,985 $16,011
</TABLE>
<PAGE>
NOTE 4 LEASES
The Company leases office space, furniture and equipment under
noncancelable leases expiring through 1999, 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:
<TABLE>
<S> <C>
1994 $6,729
1993 6,383
1992 6,039
</TABLE>
Aggregate future annual minimum rental commitments, excluding
escalations, for the years ending July 31 are as follows, in
thousands:
<TABLE>
<S> <C>
1995 $3,923
1996 3,522
1997 3,252
1998 2,989
1999 2,416
Thereafter 5,381
$21,483
</TABLE>
NOTE 5 COMMITMENTS AND CONTINGENCIES
At July 31, 1994, the Company was obligated under commercial
letters of credit of approximately $8,035,000 drawn in favor of
certain clearing organizations which were collateralized by
customer-owned securities of $5,409,000 and firm-owned
securities of $13,270,000. These obligations normally settle
through the clearance of the related securities transactions
with the respective organizations.
The Company is named as one of many defendants in class action
complaints that are part of the Multi-District Litigation (MDL)
involving the underwriting and sale of taxable municipal bonds
issued by several issuing authorities in 1986 and described in
previous share holder reports. On August 31, 1994, the Court
gave tentative approval to a class settlement of $21.2 million
to be paid by the underwriters in all taxable bond syndicates
involved in the MDL and certain other defendants. The Company is
responsible for a small percentage of the settlement, and while
the settlement is subject to a number of pre-conditions,
including final approval by the Court, management is of the
opinion that the litigation will be effectively settled and that
such a settlement will have no material adverse effect on the
Company's results of operations or financial condition. In the
event a settlement is not achieved, management is of the opinion
that it has meritorious defenses and has advised its counsel to
vigorously defend all claims arising from the MDL.
<PAGE>
In addition to the matters described above, the Company is named
in various proceedings 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 Company's consolidated
financial condition.
NOTE 6 INCOME TAX EXPENSE (CREDIT)
Significant components of the provision (credit) for income
taxes are as follows at July 31, in thousands:
<TABLE>
<CAPTION>
Liability Method Deferred Method
1994 1993 1992
<S> <C> <C> <C>
Federal:
Current $17,458 $16,750 $13,500
Deferred (958) (900) (300)
16,500 15,850 13,200
State 3,300 3,150 3,200
$19,800 $19,000 $16,400
</TABLE>
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:
<TABLE>
<CAPTION>
Liability Method Deferred Method
1994 1993 1992
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Federal Statutory rate applied
to pretax earnings $18,074 35.00% $17,396 35.00% $14,345
34.00%
State and local taxes, less
income tax benefit 2,145 4.20 2,048 4.10
2,112 5.00
Non-taxable interest, less non-
deductible interest (410) (0.80) (393) (0.80)
(246) (0.60)
Dividends received exclusion (28) (0.10) (26)
(0.10) (41) (0.10)
Other - net 19 (25) 30 0.10
$19,800 38.30% $19,000 38.20% $16,200 38.40%
</TABLE>
<PAGE>
The components of the deferred tax provision (credit) for the
years ended July 31 are as follows, in thousands:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Depreciation and other
building related items $(324) $(162) $(96)
Deferred Compensation (27) (20) (235)
Restricted Stock (75) (288) 429
Non-deductible reserves (281) (279) (261)
Trade date profit 24 (25) (84)
Insurance and benefits (377) (408)
Other - net 102 (42) (53)
$(958) $(900) $(300)
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities as of July 31, 1994 are as follows, in thousands:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Deferred compensation and restricted stock $ 850
Non-deductible reserves 1,339
Insurance and benefits 1,199
Trade date profit 48
Other 24
3,460
Deferred tax liabilities:
Depreciation and other building related items 1,916
Other 194
2,110
Net deferred tax assets $1,350
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements (Continued)
Morgan Keegan, Inc., and Subsidiaries
NOTE 7 COMMON STOCK
The Board of Directors has reserved 3,075,000 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 Option 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 400,000 remaining shares available to be granted
at July 31, 1994.
The Board of Directors has authorized 300,000 shares to be
granted to non-employee directors in the form of incentive stock
options. As of July 31, 1994, 81,000 options were outstanding at
an average price of $6.94.
Employee stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Average
Shares Price Aggregate Exercisable
<S> <C> <C> <C> <C>
Outstanding at August 1, 1991 137,475 $3.70 $507,214
Granted 10,800 5.22 56,348 1993-1996
Exercised 84,225 3.54 298,224
Outstanding at July 31, 1992 64,050 4.14 265,338
Exercised 18,300 4.56 83,402
Outstanding at July 31, 1993 45,750 3.98 181,936
Granted 20,938 12.52 262,100 1994-1999
Exercised 11,250 3.27 36,788
Outstanding at July 31, 1994 55,438 $7.35 $407,248
</TABLE>
The Company has approximately 800,000 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, 900,000 shares have
been reserved to allow employees to purchase company shares at a
15% discount, not to exceed 225,000 shares to all employees in
any year. In 1992, 153,068 shares were issued under the plan,
162,450 were issued in 1993, and 176,591 were issued in 1994,
leaving 183,147 shares available for future grants at July 31,
1994.
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, 1994 is
summarized as follows, in thousands:
<TABLE>
<CAPTION> Assets Sold Repurchase Liability
Carrying Market Interest
Amount Value Amount Rate
<S> <C> <C> <C> <C>
Mortgage-backed certificates $13,573 $13,627 $13,152
4.75%-5.00%
U.S. Treasury securities 48,697 48,917 48,697
4.20%-4.70%
$62,270 $62,544 $61,849
</TABLE>
Repurchase agreement information as of July 31, 1993 is
summarized as follows, in thousands:
<TABLE>
<CAPTION>
Assets Sold Repurchase Liability
Carrying Market Interest
Amount Value Amount Rate
<S> <C> <C> <C> <C>
Mortgage-backed certificates $39,645 $41,039 $39,674
2.90%-3.42%
U.S. Treasury securities 38,800 39,593 38,800
3.05%
$78,445 $80,632 $78,474
</TABLE>
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.
<PAGE>
Notes to Consolidated Financial Statements (Continued)
Morgan Keegan, Inc., and Subsidiaries
NOTE 9 EMPLOYEE BENEFIT PLANS
The Company makes discretionary contributions to its 401K
defined contribution plan and its profit sharing plan covering
substantially all employees. The Company also has a defined
retirement plan covering certain executives. Total provisions
for expenses under all plans for each of the years ended July
31, 1994, 1993 and 1992 totaled $916,000, $917,000 and
$1,212,000, respectively.
NOTE 10 REGULATORY REQUIREMENTS
The Company's broker/dealer subsidiary, Morgan Keegan & Company,
Inc., 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 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 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, 1994, the subsidiary had net capital of
$89,849,110 which was 36% of its aggregate debit balances and
$84,811,408 in excess of the 2% net capital requirement. At July
31, 1993, the subsidiary had net capital of $76,040,640 which
was 45% of its aggregate debit balances and $72,623,838 in
excess of the 2% net capital requirement.
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 change, 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.
The Company has reserved $85,000 to recognize its credit risk on
unsecured debits.
In the normal course of business, the Company enters into
underwriting and forward and future commitments. At July 31,
1994, the contract amount of future contracts to purchase and
sell U.S. government securities was approximately $20 million
and $11 million, respectively. At July 31, 1993, the contract
amount of future contracts to purchase and sell U.S. government
securities was approximately $46 million and $10 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. (Transactions relating to such commitments were
subsequently settled and had no material effect on financial
position.)
<PAGE>
Notes to Consolidated Financial Statements (Continued)
Morgan Keegan, Inc., and Subsidiaries
NOTE 12 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Quarter Ended October 31 January 31 April 30 July 31
<S> <C> <C> <C> <C>
1994:
Revenues $57,664 $60,125 $56,294 $57,637
Expenses 43,932 45,815 45,637 44,695
Income before income taxes 13,732 14,310 10,657 12,942
Net income 8,432 8,810 6,657 7,942
Net income per share .58 .60 .45
.56
Dividends per share .07 .07 .07
.07
Stock price range:
High 15 13 7/8 13 1/4 13 1/8
Low 12 1/8 11 3/4 12 12
1993:
Revenues $47,047 $49,397 $55,312 $57,439
Expenses 35,840 38,127 42,077 43,449
Income before income taxes 11,207 11,270 13,235 13,990
Net income 6,808 7,170 8,085 8,639
Net income per share .49 .51 .57
.60
Dividends per share .05 .05 .05
.07
Stock price range:
High 9 1/2 13 1/3 13 12
Low 8 8 7/8 11 10 1/2
</TABLE>
<PAGE>
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, 1994 and 1993, and the related consolidated
statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended July 31, 1994. 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, 1994 and 1993, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended July 31, 1994 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Memphis, Tennessee
September 9, 1994
<PAGE>
EXHIBIT 22 - LIST OF SUBSIDIARIES OF REGISTRANT
Morgan Keegan & Company, Inc.
Morgan Keegan Fund Management, Inc.
Morgan Keegan Mortgage Company, Inc.
Morgan Keegan Insurance Agency of Alabama, Inc.
Morgan Keegan Insurance Agency of Arkansas, Inc.
Morgan Keegan Insurance Agency of Louisiana, Inc.
Morgan Keegan Funding Corporation
Merchant Bankers, Inc.
Morgan Asset Management, Inc.
Cumberland Securities Company, Inc.
Capitol Group, Inc.
<PAGE>
