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 April 30, 1995
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 April 30, 1995
Common Stock $.625 par value 13,442,875
<PAGE>
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements
of Financial Condition..............April 30, 1995 and July 31, 1994
Consolidated Statements
of Income.........................Three months and nine months ended
April 30, 1995 and 1994
Consolidated Statements
of Cash Flows.............Nine months ended April 30, 1995 and 1994
Notes to Consolidated
Financial Statements..................................April 30, 1995
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>
PART I FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries
<TABLE>
April 30 July 31
1995 1994
(unaudited)
(in thousands)
<S> <C> <C>
ASSETS
Cash $ 12,938 $ 12,854
Securities segregated for regulatory purposes,
at market 180,400 35,701
Deposits with clearing organizations and others 7,305 2,591
Receivable from brokers and dealers and clearing
organizations 46,167 29,945
Receivable from customers 261,325 236,764
Securities purchased under agreements to resell 248,025 62,811
Securities owned, at market 147,400 167,568
Memberships in exchanges, at cost (market value-
$2,202,000 at 4-30-95; $2,310,000 at 7-31-94) 719 678
Furniture, equipment and leasehold improvements,
(less allowances for depreciation and
amortization $10,904,000 at 4-30-95;
$12,296,000 at 7-31-94) 11,867 9,353
Other assets 20,492 12,744
$936,638 $571,009
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 84,169 $ 16,500
Commercial paper 7,385 10,593
Payable to brokers and dealers and clearing
organizations 11,068 13,581
Payable to customers 370,764 241,141
Customer drafts payable 14,325 10,950
Securities sold under agreements to repurchase 221,748 61,849
Securities sold, not yet purchased, at market 59,043 35,985
Other liabilities 34,967 55,045
803,469 445,644
Stockholders' equity
Common Stock; par value $.625 per share:
Authorized 100,000,000 shares; 13,442,875
shares issued and outstanding at 4-30-95;
13,704,011 at 7-31-94 8,402 8,565
Additional paid-in capital 5,522
Retained earnings 124,767 111,278
133,169 125,365
$936,638 $571,009
</TABLE>
[FN]
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
<TABLE>
Three Months Ended Nine Months Ended
April 30 April 30
(in thousands, except per share amounts)
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUES
Commissions $10,916 $12,418 $31,780 $36,848
Principal transactions 19,870 18,807 62,868 70,819
Investment banking 5,672 14,865 30,908 36,144
Interest 10,519 6,731 27,423 18,500
Other 3,170 3,473 8,641 11,773
TOTAL 50,147 56,294 161,620 174,084
EXPENSES
Compensation 25,251 30,902 83,387 94,170
Floor brokerage and clearance 1,026 971 2,822 2,896
Communications 3,961 3,548 11,605 10,085
Travel and promotional 1,292 1,229 4,043 4,284
Occupancy and equipment costs 2,294 1,973 6,821 6,172
Interest 6,915 4,481 18,107 10,910
Taxes, other than income taxes 1,766 1,704 4,750 4,050
Other operating expenses 682 829 2,617 2,817
43,187 45,637 134,152 135,384
INCOME BEFORE INCOME TAXES 6,960 10,657 27,468 38,700
INCOME TAX EXPENSE 2,600 4,000 10,400 14,800
NET INCOME $ 4,360 $ 6,657 $17,068 $23,900
NET INCOME PER SHARE $ 0.32 $ 0.45 $ 1.26 $ 1.63
DIVIDENDS PER SHARE $ 0.08 $ 0.07 $ 0.24 $ 0.21
</TABLE>
[FN]
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
<TABLE>
Nine Months Ended
April 30
1995 1994
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $17,068 $23,900
Adjustments to reconcile net income to
cash (used for) provided by operating activities:
Depreciation and amortization 2,437 2,481
Deferred income taxes 90 90
Amortization of restricted stock 1,110 720
20,705 27,191
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations (16,222) (1,112)
Deposits with clearing organizations
and others (4,714) (128)
Receivable from customers (24,561) (77,852)
Securities segregated for regulatory purposes (144,699) 5,400
Securities purchased under agreements to resell (185,214) 22,806
Securities owned 20,168 (26,195)
Other assets (7,838) (4,349)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations (2,513) (1,007)
Payable to customers 129,623 36,509
Customer drafts payable 3,375 2,694
Securities sold under agreements to repurchase 159,899 32,607
Securities sold, not yet purchased 23,058 3,105
Other liabilities (20,078) 2,516
(69,716) (5,006)
Cash (used for) provided by operating
activities (49,011) 22,185
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper (3,208) (901)
Issuance of Common Stock 2,209 6,423
Retirement of Common Stock (9,348) (8,248)
Dividends paid (3,235) (3,053)
Short-term borrowings 67,669 (15,005)
Cash provided by (used for) financing
activities 54,087 (20,784)
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (4,951) (3,199)
Membership in exchanges (41)
Cash used for investing activities (4,992) (3,199)
Increase (decrease) in Cash 84 (1,798)
Cash at Beginning of Period 12,854 14,859
Cash at End of Period $12,938 $13,061
</TABLE>
[FN]
Income tax payments were approximately $11,818,000 and $17,502,000 for the
nine month period ending April 30, 1995 and 1994, respectively. Interest
payments were approximately $18,085,000 and $10,827,000 for the same
periods, respectively.
See accompanying notes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
April 30, 1995
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 nine months ended April 30, 1995, 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
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. At April 30, 1995, M.K. & Co.
had net capital of $81,671,499 which was 30% of its aggregate debit
balances and $76,293,818 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.
NOTE D - SUBSEQUENT EVENT
On May 17, 1995, the Board of Directors approved a three-for-two split to
be effected as a stock dividend to be distributed on June 9, 1995, to the
shareholders of record June 1, 1995. All earnings per share data will be
restated in the Registrant's fourth quarter and annual report to give
effect to the stock split.
<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 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
Revenues decreased during the third quarter $6,147,000 or 10.9% below the
third quarter of fiscal 1994. An increase of $3,788,000 in interest income
reduced the effect of the $9,193,000 decrease in investment banking
revenues in the current quarter. Investment banking activity was very
strong in the previous year; yet, while this activity has been slower in
the current year, it appears to be rebounding with renewed interest by
investors in equity offerings in the early stages of the fourth quarter of
the current year.
Operating expenses decreased $2,450,000 or 5.4% below the quarter from
$45,637,000 in the previous year to $43,187,000 in the current year.
Employee compensation decreased approximately $5,651,000 while interest
expense increased approximately $2,434,000. These changes correspond with
the fact revenues have decreased and interest rates have increased in the
current year. Other expenses remained relatively comparable between the
quarters.
Net income for the quarter was approximately $4,360,000 or $.32 per share
compared to $6,657,000 or $.45 for the second quarter of fiscal 1994.
Total revenues were approximately $161,620,000 for the nine months ended
April 30, 1995 compared to $174,084,000 for the nine months ended April 30,
1994. Interest income increased by 48.2% over the previous year while
decreases in commissions (13.8%), principal transactions (11.2%), and
investment banking (14.5%) resulted in the overall decrease. These
decreases are attributable to increases in short-term interest rates in the
current year which have created uncertainty in the equity and fixed income
markets.
Operating expenses decreased during the first nine months of fiscal 1995 by
approximately $1,232,000 from $134,384,000 in the previous year to
$135,152,000. Compensation expense decreased approximately $10,783,000
corresponding with the 7.2% decrease in revenues. Interest expense has
increased approximately $7,197,000 as a result of higher interest rates and
the Registrant's broker/dealer subsidiary carrying more inventory
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
MORGAN KEEGAN, INC. and Subsidiaries
Results of Operations (continued)
throughtout the year. Communications expenses have increased approximately
$1,520,000 as a result of continued efforts to enhance the branch
communications network.
Year-to-date net income was $1.26 per share for fiscal 1995 compared to
$1.63 per share for the same period of fiscal 1994.
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 to cash. Financing resources include the Registrant's
equity capital, commercial paper, repurchase transactions, short-term
borrowings, and customer and broker payables. For the nine months ended
April 30, 1995, cash flows from operating activities decreased $49,011,000
compared to a $22,185,000 increase in the same period of fiscal 1994. This
change was primarily a result of the Registrant's brokerage subsidiary
carrying higher reverse repurchase agreement balances and regulatory
deposits.
Cash flow from financing activities increased by $54,087,000 for the nine
months ended April 30, 1995, compared to a $20,784,000 decrease for the
nine month period ended April 30, 1994. This increase is related to the
increase in short-term borrowings used to finance higher inventory levels
throughout the period.
Investing activities resulted in a $4,951,000 decrease in cash flows for
the current period compared to a $3,199,000 decrease in the previous fiscal
year. This decrease is a result of the Registrant's continued commitment
to enhance broker/dealer subsidiary's branch communication network. The
Registrant has no material commitment for capital expenditures.
At April 30, 1995, the Registrant's broker/dealer subsidiary, which is
regulated under the SEC's uniform net capital rule, had net capital of
$81,671,499 which was $76,293,818 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.
Also during the quarter, the Registrant continued to its previously
authorized stock repurchase program by buying 292,700 shares for
$4,329,836. The total repurchased for the year is 686,800 shares at a cost
of $9,348,179.
Subsequent to the end of the quarter, the Registrant's board of directors
declared a three-for-two stock split to be effected as a stock dividend.
This stock split was to reflect management's optimistic outlook and to make
the Registrant's stock more attractive to institutional investors.
<PAGE>
PART II OTHER INFORMATION
MORGAN KEEGAN, INC. and Subsidiaries
Item 1. Legal proceedings
On February 2, 1995, the Court in MDL #863 (described previously
in SEC 10-Q and 10-K filings) gave preliminary approval to the
settlement of the class action lawsuits and related claims in MDL
#863, in which Morgan Keegan and Company, Inc. (the Company) was
one of several named Defendants. The MDL Court established an
April 14, 1995, deadline for class members to request exclusion
from this settlement. While bondholders who have opted out of the
settlement may continue to assert significant claims, management
is of the opinion that this settlement will receive final approval
of the MDL Court on July 31, 1995, and further, that all remaining
potential claims are subject to meritorious defenses, and that
such claims and the Company's portion of the class settlement will
have no material adverse effective on the Company's results of
operations or financial condition.
In addition to the matters described above, the Registrant 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 June 14, 1995 /S/ Joseph C. Weller
Joseph C. Weller
EVP, CFO, Sec.-Treas.
<PAGE>
PART II OTHER INFORMATION (Continued)
MORGAN KEEGAN, INC. and Subsidiaries
Item 6. Exhibit a.1.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
Three Months Ended Nine Months Ended
April 30 April 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 13,608,875 14,674,987 13,566,872 14,620,728
Net effect of dilutive
stock options based
on the treasury stock
method using average
market price. 48,621 26,026 31,084 45,525
TOTAL 13,657,496 14,701,013 13,597,956 14,666,253
Net Income $ 4,360,211 $ 6,657,150 $17,068,163 $23,899,652
Per Share Amount $ 0.32 $ 0.45 $ 1.26 $ 1.63
FULLY DILUTED
Average shares outstanding 13,608,875 14,674,987 13,566,872 14,620,728
Net effect of dilutive
stock options based
on the treasury stock
method using the quarter
end market price,if
higher than average
market price. 48,621 26,026 31,084 45,525
TOTAL 13,657,496 14,701,013 13,597,956 14,666,253
Net Income $ 4,360,211 $ 6,657,150 $17,068,163 $23,899,652
Per Share Amount $ 0.32 $ 0.45 $ 1.26 $ 1.63
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contain summary financial information
extracted from the Morgan Keegan, Inc. Form 10-Q for
the period ended April 30, 1995 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> APR-30-1995
<CASH> 12,938
<RECEIVABLES> 24,524
<SECURITIES-RESALE> 147,400
<SECURITIES-BORROWED> 21,643
<INSTRUMENTS-OWNED> 428,425
<PP&E> 11,867
<TOTAL-ASSETS> 936,638
<SHORT-TERM> 84,169
<PAYABLES> 10,895
<REPOS-SOLD> 221,748
<SECURITIES-LOANED> 173
<INSTRUMENTS-SOLD> 59,043
<LONG-TERM> 0
<COMMON> 8,402
0
0
<OTHER-SE> 124,767
<TOTAL-LIABILITY-AND-EQUITY> 936,638
<TRADING-REVENUE> 19,870
<INTEREST-DIVIDENDS> 10,519
<COMMISSIONS> 10,916
<INVESTMENT-BANKING-REVENUES> 5,672
<FEE-REVENUE> 3,170
<INTEREST-EXPENSE> 6,915
<COMPENSATION> 25,251
<INCOME-PRETAX> 6,960
<INCOME-PRE-EXTRAORDINARY> 6,960
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,360
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
