[TYPE] 10-Q
[TEXT] SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended January 31, 1994
Commission file number 1-9015
MORGAN KEEGAN, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1153830
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
50 North Front Street
Memphis, Tennessee 38103
(Address of principal executive (Zip Code)
offices)
901-524-4100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practical date.
Class Outstanding at January 31, 1994
Common Stock, $.625 par value 14,864,637
<PAGE>
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements
of Financial Condition..............July 31, 1994 and July 31, 1993
Consolidated Statements
of Income...........................Three months and six months
ended January 31, 1994 and 1993
Consolidated Statements of
Cash Flows..........................Six months ended January 31,
1994 and 1993
Notes to Consolidated
Financial Statements................January 31, 1994
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. OTHER INFORMATION
Item 1. Legal proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
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<TABLE>
PART I. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries
<CAPTION>
January 31 July 31
1994 1993
(Unaudited)
(in thousands)
ASSETS
<S> <C> <C>
Cash $ 14,168 $ 14,859
Securities segregated for regulatory
purposes, at market 42,601 38,801
Deposits with clearing organizations
and others 2,592 2,464
Receivable from brokers, dealers and
clearing organizations 29,200 19,624
Receivable from customers 217,528 156,633
Securities purchased under agreements
to resell 84,798 88,638
Securities owned, at market 308,215 189,682
Memberships in exchanges, at cost
(market value- $1,905,000 at 1/31/94;
$1,924,000 at 7/31/93) 678 678
Furniture, equipment and leasehold
improvements, (less allowances for
depreciation and amortization -
$10,745,000 at 1/31/94; $10,619,000
at 7/31/93) 8,681 8,159
Other assets 10,646 7,546
$719,107 $527,084
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Short-term borrowings $ 98,401 $ 68,105
Commercial paper 9,830 12,457
Payable to brokers, dealers and
clearing organizations 16,343 17,500
Payable to customers 238,655 177,208
Customer drafts payable 9,884 7,873
Securities sold under agreements
to repurchase 144,066 78,474
Securities sold, not yet purchased,
at market 38,568 16,011
Other liabilities 37,221 43,121
592,968 420,749
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 25,000,000 shares; 14,864,637
shares issued and outstanding at 1/31/94;
14,271,993 at 7/31/93 9,290 8,920
Additional paid-in capital 18,167 13,941
Retained earnings 98,682 83,474
126,139 106,335
$719,107 $527,084
<FN>
See accompanying notes.
</TABLE>
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<TABLE>
CCONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
<CAPTION>
Three Months Ended Six Months Ended
January 31 January 31
(in thousands, except per share amounts)
1994 1993 1994 1993
REVENUES
<S> <C> <C> <C> <C>
Commissions $12,138 $11,335 $24,429 $19,985
Principal transactions 25,930 24,125 52,012 49,637
Investment banking 10,122 6,455 21,280 11,722
Interest 6,337 4,594 11,769 9,175
Other 5,598 2,888 8,299 5,926
60,125 49,397 117,789 96,445
EXPENSES
Compensation 31,401 25,821 63,267 50,447
Floor brokerage and clearance 1,090 1,219 1,925 2,509
Communications 3,299 3,032 6,537 5,632
Travel and promotional 1,615 899 3,055 1,816
Occupancy and equipment cost 2,234 2,028 4,199 3,815
Interest 3,423 2,556 6,429 5,344
Taxes, other than income
taxes 1,570 1,490 2,347 2,277
Other operating expenses 1,183 1,082 1,988 2,127
45,815 38,127 89,747 73,967
INCOME BEFORE INCOME TAXES 14,310 11,270 28,042 22,478
INCOME TAXES 5,500 4,100 10,800 8,500
NET INCOME $ 8,810 $ 7,170 $17,242 $13,978
NET INCOME PER SHARE $ 0.60 $ 0.51 $ 1.18 $ 1.00
DIVIDENDS PER SHARE $ 0.07 $ 0.05 $ 0.14 $ 0.09
<FN>
See accompanying notes.
</TABLE>
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<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
MORGAN KEEGAN, INC. and Subsidiaries
<CAPTION>
Six Months ended
January 31
1994 1993
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 17,242 $13,978
Non-cash items included in earnings:
Depreciation and amortization 1,770 1,064
Deferred income taxes 60 60
Amortization of restricted stock 480 330
19,552 15,432
(Increase) decrease in operating assets:
Receivable from brokers or dealers and
clearing organizations ( 9,576) 12,663
Receivable from customers ( 60,895) (24,249)
Securities segregated for regulatory purposes ( 3,800) ( 7,800)
Deposits with clearing organizations and others ( 128)
Securities purchased under agreements
to resell 3,840 (40,214)
Securities owned (118,533) 29,739
Other assets ( 3,160) ( 1,223)
Increase (decrease) in operating payables:
Payable to brokers or dealers and
clearing organizations ( 1,157) ( 1,057)
Payable to customers 61,447 22,285
Customer drafts payable 2,011 3,241
Securities sold under agreements
to repurchase 65,592 14,473
Securities sold, not yet purchased 22,557 ( 1,314)
Other liabilities ( 5,900) ( 799)
( 47,702) 5,745
Cash (used) provided for operating
activities ( 28,150) 21,177
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments) proceeds from:
Commercial paper ( 2,627) ( 1,537)
Issuance of Common Stock 6,423 1,370
Retirement of Common Stock ( 2,307) ( 394)
Dividends paid ( 2,033) ( 1,287)
Short-term borrowings 30,296 (16,997)
Cash provided (used) by
financing activities 29,752 (18,845)
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements ( 2,293) ( 1,410)
(Decrease) increase in cash ( 691) 922
Cash at Beginning of Period 14,859 11,359
$ 14,168 $12,281
Income tax payments were $12,181 and $10,526 for the six month periods ended
January 31, 1994 and 1993, respectively. Interest payments were $6,323 and $5,382
for the same periods, respectively.
<FN>
See accompanying notes.
</TABLE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
January 31, 1994
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Morgan Keegan,
Inc. and its wholly owned subsidiaries (collectively referred to as the
Registrant). The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and 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 six months ended January 31, 1994 are not necessarily
indicative of the results that may be expected for the year ending July 31,
1994. 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, 1993.
NOTE B - NET CAPITAL REQUIREMENT
As a registered broker/dealer and member of the New York Stock Exchange, the
Registrant's brokerage subsidiary, Morgan Keegan & Company, Inc. (M.K. & Co.)
is subject to the Securities and Exchange Commission's (SEC) uniform net
capital rule. The broker/dealer subsidiary has elected to operate under the
alternative method of the rule, which prohibits a broker/dealer from engaging
in any securities transactions when its net capital is less than 2% of its
aggregate debit balances, as defined, arising from customer transactions.
The SEC may also require a member firm to reduce its business and restrict
withdrawal of subordinated capital if its net capital is less than 4% of
aggregate debit balances, and may prohibit a member firm from expanding its
business and declaring cash dividends if its net capital is less than 5% of
aggregate debit balances. At January 31, 1994, M.K. & Co. had net capital of
$82,230,669 which was 36% of its aggregate debit balances and $77,682,515 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.
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<PAGE>
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. 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 controls costs.
Results of Operations
The Registrant's second quarter set records for both revenues and earnings,
continuing the strong revenue stream which has been in place for the past
four quarters. Revenues increased by $10,728,000 or 21.7% over the second
quarter of fiscal 1993. A substantial portion of the increase is attributed
to investment banking related revenues which increased in excess of 55%. The
Dow Jones Industrial Average continues to hover at record levels, and
interest rates have begun to rise slightly; however, due to the number of new
issues and strong investor activity, management anticipates continued strong
commission levels in the near term future.
Operating expenses increased 20% or $7,688,000 which is 1.5% less than the
increase in revenues for the quarter. Almost three-fourths of the increase
relates to employee compensation, which increased $5,581,000 or 21.6% and is
in proportion to the 21.7% increase in revenues. Travel and promotional
expenses increased $716,000 which reflected continuing marketing efforts and
work force education and compliance seminars.
Net income for the quarter was $8,810,000 or $.60 compared to $7,170,000 or
$.51 for the second quarter of the prior year. The continuing strong
investor activity coupled with the outstanding investment banking results
accounted for most of the increase.
Results of Operations - Fiscal Year To Date
Total revenues increased from $96,445,000 in the prior year to $117,789,000
in the current period, which represents a 22.1% increase. As was the case
with the quarter, a substantial portion of the increase stemmed from
investment banking revenue which rose $9,558,000 or 81.5%. Other increases
were more moderate and could be attributed to strong market activity.
Operating expenses of $89,747,000 represented a 21.3% increase, or
$15,780,000 from the previous years amount of $73,967,000. The biggest
component of the increase was compensation which went up $12,820,000 and was
proportional with the increase in revenues. The increase in travel and
promotional of 68.3% was attributed to the marketing and compliance efforts
and the decline in clearing and floor brokerage of 23.3% due to some
streamlining and expense reduction established in the floor brokerage area.
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<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
MORGAN KEEGAN, INC. and Subsidiaries
Net income for the first six months was $1.18 per share compared with $1.00
per share for fiscal 1993. The 18% increase in profitability is attributed
to the strong investor activity, led by the outstanding performance of the
investment banking area.
Liquidity and Capital Resources
High liquidity is reflected in the Registrant's statement of financial
condition with approximately 97% of its assets consisting of cash or assets
readily convertible to cash. Financing resources include the Registrant's
equity capital, commercial paper, repurchase transactions, short-term
borrowings, and customer and broker payables. For the six months ended
January 31, 1994, cash flows from operating activities decreased $28,150,000
compared with an increase of $21,177,000 for the six months ended
January 31, 1993. This change was primarily a result of the Registrant's
brokerage subsidiary carrying a higher level of inventory.
Cash flows from financing activities increased $27,849,000 for the six months
ended January 31, 1994 compared to a decrease of $18,845,000 for the first
six months of fiscal 1993. The increase in inventory warranted the need for
additional short-term borrowings to carry the higher level of inventory.
Investing activities resulted in a $2,293,000 decrease in cash flows for the
current period compared to the $1,410,000 decrease for the same period in the
previous year. This is primarily due to management's continued commitment to
upgrade and improve the office communication network. The Registrant has no
material commitments for capital expenditures.
At January 31, 1994, the Registrant's broker/dealer subsidiary, which is
regulated under the SEC's uniform new capital rule, had net capital of
$82,230,669 which was $77,682,515 in excess of the 2% net capital
requirement. During the quarter, the Registrant declared and paid cash
dividends of $0.07 per share on the shares outstanding.
During the quarter, the Registrant's board of directors approved a stock
repurchase program to buy the Registrant's stock on the open market. The
board authorized the purchase of up to 1,000,000 shares to be used for
general corporate purposes. The corporation repurchased 179,500 shares for
$2,307,313 during the quarter.
Also during the quarter, the Registrant issued 406,914 shares of stock to
employees in conjunction with its stock incentive and restricted stock plans.
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<PAGE>
PART II OTHER INFORMATION
MORGAN KEEGAN, INC. and Subsidiaries
Item 1. Legal Proceedings
Morgan Keegan & Company, Inc. ("M.K. & Co."), is named as one of many
defendants in class action complaints pending in the United States District
Court for the Eastern District of Louisiana as part of the multi-district
litigation styled In Re Taxable Municipal Bond Securities Litigation, MDL 863
(the "MDL"). The MDL was previously described in prior Form 10-Q and Form
10-K S.E.C. filings. The MDL concerns the underwriting and sale of taxable
municipal bonds issued by several issuing authorities during 1986. All bonds
which are the subject of the amended complaints, including those issued by
the Health, Education and Housing Facility Board of the City of Memphis,
Tennessee were rates AAA by Standard and Poor's corporation at the time of
their issuance, and maintained such rating through December, 1989. In
January, 1990 and thereafter, the Standard and Poor's rating was downgraded
and the market price of the bonds has declined.
In the event the litigation is settled, management is of the opinion that
such a settlement would not have a material adverse effect on M.K. & Co.'s
results of operations or on the financial statements of M.K. & Co., taken as
a whole. 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 the lawsuits.
In addition to the matters described above, M.K. & Co. is named in various
proceedings incidental to its securities business. While the ultimate
resolution of pending litigation 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
the lawsuits.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
On November 23, 1993, at the Registrant's annual meeting of its shareholders
73% of the 14,648,473 shares outstanding at October 1, 1993 were represented
by proxy. A quorum was declared present for the conduct of business and the
following proposal was voted on:
Proposal: Election of the directors from the following nominees to serve the
Registrant for the ensuing year:
Allen B. Morgan, Jr. John W. Stokes, Jr.
William W. Deupree, Jr. Kenneth F. Clark, Jr.
Joseph C. Weller Peter S. Wilmott
Donald Ratajczak James E. Harwood, III
Results of vote: 99.8% of the votes cast were in favor of this proposal.
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<PAGE>
PART II OTHER INFORMATION (Continued)
MORGAN KEEGAN, INC. and Subsidiaries
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
1. Computation of Earnings per share
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<PAGE>
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
Date: March 15, 1994 /S/ Joseph C. Weller
Joseph C. Weller
EVP, CFO, Sec.-Treas.
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<TABLE>
PART II OTHER INFORMATION (Continued)
MORGAN KEEGAN, INC. and Subsidiaries
Item 6. Exhibit a.1.
COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Three Months Ended Six Months Ended
January 31 January 31
1994 1993 1994 1993
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 14,706,018 13,973,789 14,619,414 13,954,227
Net effect of dilutive
stock options based on
the treasury stock method 33,619 53,630 53,311 48,858
TOTAL 14,739,637 14,027,419 14,672,725 14,003,085
Net income $8,810,011 $7,170,243 $17,242,502 $13,978,017
Per share amount $0.60 $0.51 $1.18 $1.00
</TABLE>
<TABLE>
<CAPTION>
FULLY DILUTED
<S> <C> <C> <C> <C>
Average shares outstanding 14,706,018 13,973,789 14,619,414 13,954,227
Net effect of dilutive
stock options based on
the treasury stock
method using the quarter
end market price, if
higher than average
market price 33,619 53,630 53,311 48,858
TOTAL 14,739,637 14,027,419 14,672,725 14,003,085
Net Income $8,810,011 $7,170,243 $17,242,502 $13,978,017
Per share amount $0.60 $0.51 $1.18 $1.00
</TABLE>
