SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended October 31, 1994
Commission file number 1-9015
MORGAN KEEGAN, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1153850
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
50 North Front Street
Memphis, Tennessee 38103
(Address of principal executive offices) (Zip Code)
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 October 31, 1994
Common Stock $.625 par value 13,533,861
<PAGE>
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements
of Financial Condition..............October 31, 1994 and July 31, 1994
Consolidated Statements
of Income.................Three months ended October 31, 1994 and 1993
Consolidated Statements of
Cash Flows................Three months ended October 31, 1994 and 1993
Notes to Consolidated
Financial Statements..................................October 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
Signatures
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries
<S> <C> <C>
October 31 July 31
1994 1994
(unaudited)
ASSETS
Cash $ 33,168 $ 12,854
Securities segregated for regulatory purposes,
at market 73,101 35,701
Deposits with clearing organizations and others 7,300 2,591
Receivable from brokers and dealers and clearing
organizations 20,739 29,945
Receivable from customers 272,341 236,764
Securities purchased under agreements to resell 122,727 62,811
Securities owned, at market 217,549 167,568
Memberships in exchanges, at cost (market value-
$2,164,000 at 10-31-94; $2,310,000 at 7-31-94) 719 678
Furniture, equipment and leasehold improvements,
(less allowances for depreciation and
amortization $9,227,000 at 10-31-94;
$12,296,000 at 7-31-94) 10,410 9,353
Other assets 20,922 12,744
$778,976 $571,009
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 91,774 $ 16,500
Commercial paper 7,285 10,593
Payable to brokers and dealers and clearing
organizations 15,570 13,581
Payable to customers 326,410 241,141
Customer drafts payable 8,229 10,950
Securities sold under agreements to repurchase 78,037 61,849
Securities sold, not yet purchased, at market 65,449 35,985
Other liabilities 57,040 55,045
649,794 445,644
Stockholders' equity
Common Stock; par value $.625 per share:
Authorized 25,000,000 shares; 13,533,861
shares issued and outstanding at 10-31-94;
13,704,011 at 7-31-94 8,459 8,565
Additional paid-in capital 3,755 5,522
Retained earnings 116,968 111,278
129,182 125,365
$778,976 $571,009
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Three Months Ended
October 31
(in thousands, except
per share amounts)
<S> <C> <C>
1994 1993
REVENUES
Commissions $10,089 $12,291
Principal transactions 21,641 26,082
Investment banking 14,407 11,158
Interest 7,554 5,432
Other 2,515 2,701
TOTAL 56,206 57,664
EXPENSES
Compensation 29,975 31,866
Floor brokerage and clearance 873 836
Communications 3,875 3,238
Travel and promotional 1,456 1,440
Occupancy and equipment costs 2,151 1,965
Interest 4,697 3,005
Taxes, other than income taxes 1,173 777
Other operating expenses 1,035 805
45,235 43,932
INCOME BEFORE INCOME TAXES 10,971 13,732
INCOME TAX EXPENSE 4,200 5,300
NET INCOME $ 6,771 $ 8,432
NET INCOME PER SHARE $ 0.50 $ 0.58
DIVIDENDS PER SHARE $ 0.08 $ 0.07
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries Three Months Ended
October 31
<S> <C> <C>
1994 1993
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $6,771 $ 8,432
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 761 988
Deferred income taxes 30 30
Amortization of restricted stock 360 240
7,922 9,690
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations 9,206 (9,411)
Deposits with clearing organizations
and others (4,709) 12
Receivable from customers (35,577) (31,190)
Securities segregated for regulatory purposes (37,400) (27,300)
Securities purchased under agreements to resell (59,916) (36,254)
Securities owned (49,981) 26,490
Other assets (8,208) (4,180)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations 1,989 2,582
Payable to customers 85,269 32,811
Customer drafts payable (2,721) 2,237
Securities sold under agreements to repurchase 16,188 39,219
Securities sold, not yet purchased 29,464 (202)
Other liabilities 1,995 (5,200)
(54,401) (10,386)
Cash used for operating activities (46,479) (696)
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper (3,308) (523)
Issuance of Common Stock 26 4,557
Retirement of Common Stock (2,260)
Dividends paid (1,080) (1,017)
Short-term borrowings 75,274 (5,242)
Cash (used for) provided by financing
activities 68,652 (2,225)
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (1,818) (1,435)
Membership in exchanges (41) ______
Cash used for investing activities (1,859) (1,435)
Increase (decrease) in Cash 20,314 (4,356)
Cash at Beginning of Period 12,854 14,859
Cash at End of Period $33,168 $10,503
</TABLE>
Income tax payments were $956,000 and $5,547,000 for the three month period
ending October 31, 1994 and 1993, respectively. Interest payments were
$4,683,000 and $2,987,000 for the same periods, respectively.
See accompanying notes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
October 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 the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended October 31, 1994 are not necessarily
indicative of the results that may be expected for the year ending July 31,
1995. For further information, refer to the financial statements and notes
hereto included in the Registrant's annual report on Form 10-K for the year
ended July 31, 1994.
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
form engaging in any securities transactions when its net capital is less
than 2% of its aggregate debit balances, as defined, arising from customer
transactions. The SEC may also require a member firm to reduce its
business and restrict withdrawal of subordinated capital if its net capital
is less than 4% of aggregate debit balances, and may prohibit a member firm
from expanding its business and declaring cash dividends if its net capital
is less than 5% of aggregate debit balances. At October 31, 1994, M.K. &
Co. had net capital of $80,383,266 which was 29% of its aggregate debit
balances and $74,885,522 in excess of the 2% net capital requirement.
NOTE C - INCOME TAXES
The principal reason for the difference between the Registrant's effective
tax rate and the federal statutory rate is the non-taxable earned on
municipal bonds.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Morgan Keegan, Inc. (The Registrant) operates a full service regional
brokerage business through its principal subsidiary, Morgan Keegan &
Company, Inc. (M.K. & Co.). M.K. & Co. is involved in the highly
competitive business of origination, underwriting, distribution, trading
and brokerage of fixed income and equity securities and also provides
investment advisory services. While M.K. & Co. regularly participates in
the trading of some derivative securities for its customers, this trading
is not a major portion of M.K. & Co.'s business. M.K. & Co. typically does
not underwrite high yield securities, and normally is not involved in
bridge loan financings or any other ventures that management believes may
not be appropriate for its strategic approach. Many highly volatile
factors affect revenues, including general market conditions, interest
rates, investor sentiment and world affairs, all of which are outside the
Registrant's control. However, certain expenses are relatively fixed. As
a result, net earnings can vary significantly from quarter to quarter,
regardless of management's efforts to enhance revenues and control costs.
Results of Operations
The Registrant's revenue stream continued to be strong for the first
quarter despite market uncertainty. Revenues decreased by $1,458,000 or
only 2.5% below the first quarter of the pervious year. A 29% increase in
investment banking revenues offset an 18% decrease in commissions and a 17%
decrease in principal transactions. These decreases are attributable to
the continued rise in interest rates that began in fiscal 1994.
Operating expenses increased 3%, or $1,303,000, over the same period in the
previous fiscal year. The primary components of the increase were a
$1,692,000 or 56% increase in interest expenses and a 20% increase in
communications expenses. The increase in interest expense is related to
the above noted higher interest rates and the increase in communications
expenses is primarily a result of continued growth in the branch office
system.
Net income for the quarter was $6,771,000 or $.50 per share compared to
$8,432,000 or $.58 per share for the same period of the previous year.
This decrease relates to rising interest rates and fluctuating market
conditions. Company management feels that rising interest rates makes the
short-term outlook less optimistic, but plans to continue to build its
branch office network and grow for the long term.
Liquidity and Capital Resources
High liquidity is reflected in the Registrant's statement of financial
condition with approximately 96% of its assets consisting of cash or assets
readily convertible into cash. Financing resources include the
Registrant's equity capital, commercial paper, short-term borrowings and
customer and broker payables. For the three month period ended October 1,
1994, cash flows from operating activities decreased $46,449,000 compared
with a decrease of $696,000 for the three months ended October 31, 1993.
The change resulted primarily from increases in repurchase transactions and
increases in inventory levels.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)
MORGAN KEEGAN, INC. and Subsidiaries
Liquidity and Capital Resources (Continued)
Cash flows from financing activities increased $68,652,000 for the three
months ended October 31, 1994 compared with a $2,225,000 decrease in the
same period of the prior year. The increase was a result of an increase in
short-term borrowings used to offset the operating effect of the increase
in receivable from customers.
Investing activities resulted in a $1,859,000 decrease in cash flows for
the current period compared to a $1,435,000 decrease in the previous
period. This is primarily due to installing upgraded computer equipment to
accommodate the growth in the branch system. The Registrant has no
material commitments for capital expenditures.
At October 31, 1994, the Registrant's broker/dealer subsidiary, which is
regulated under the SEC's uniform net capital rule, had net capital of
$80,383,266 which was $74,885,522 in excess of the 2% net capital
requirement. During the quarter, the Registrant declared and paid cash
dividends of $0.08 per share on the shares outstanding.
The Registrant continued the stock repurchase program begun in November,
1993. During the quarter, the Registrant repurchased 176,900 shares for an
aggregate price of $2,260,000. Since the beginning of the repurchase
program, the Registrant has purchased 1,517,000 shares for an aggregate
price of $19,037,000.
<PAGE>
MORGAN KEEGAN, INC. and Subsidiaries
PART II OTHER INFORMATION
Item 1. 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 and the settlement were
previously described in prior Form 10-Q and Form 10-K S.E.C.
filings. Management is of the opinion that the settlement will
have no material adverse effect on the Registrant's results of
operations or on the financial statements of the Registrant taken
as a whole. In the event a final 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 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
1. Computation of Earnings per Share
<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 December 14, 1994 /S/ Joseph C. Weller
Joseph C. Weller
EVP, CFO, Sec.-Treas.
<PAGE>
<TABLE>
PART II OTHER INFORMATION (Continued)
MORGAN KEEGAN, INC. and Subsidiaries
Item 6. Exhibit a.1.
COMPUTATION OF EARNINGS PER SHARE
Three Months Ended
October 31
<S> <C> <C>
1994 1993
PRIMARY
Average Shares outstanding 13,595,574 14,554,353
Net effect of dilutive stock options
based on the treasury stock method
using average market price. 26,378 47,171
TOTAL 13,621,952 14,601,524
Net Income $ 6,770,562 $ 8,432,491
Per Share Amount $ 0.50 $ 0.58
FULLY DILUTED
Average shares outstanding 13,595,574 14,554,353
Net effect of dilutive stock options
based on the treasury stock method
using the quarter end market price,
if higher than average market price. 26,378 47,888
TOTAL 13,621,952 14,602,241
Net Income $ 6,770,562 $ 8,432,491
Per Share Amount $ 0.50 $ 0.58
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information
extracted from the Morgan Keegan, Inc. Form 10-Q for
the period ended October 31, 1994 and is qualified in
its entirety by reference to such fiancial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> QTR-1
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> OCT-31-1994
<CASH> 33,168
<RECEIVABLES> 13,539
<SECURITIES-RESALE> 195,828
<SECURITIES-BORROWED> 14,500
<INSTRUMENTS-OWNED> 217,549
<PP&E> 10,410
<TOTAL-ASSETS> 778,976
<SHORT-TERM> 91,774
<PAYABLES> 349,764
<REPOS-SOLD> 78,037
<SECURITIES-LOANED> 445
<INSTRUMENTS-SOLD> 65,449
<LONG-TERM> 0
<COMMON> 8,459
0
0
<OTHER-SE> 120,723
<TOTAL-LIABILITY-AND-EQUITY> 778,976
<TRADING-REVENUE> 21,641
<INTEREST-DIVIDENDS> 7,554
<COMMISSIONS> 10,089
<INVESTMENT-BANKING-REVENUES> 14,407
<FEE-REVENUE> 2,515
<INTEREST-EXPENSE> 4,4697
<COMPENSATION> 29,975
<INCOME-PRETAX> 10,971
<INCOME-PRE-EXTRAORDINARY> 10,971
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,771
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
