<PAGE>
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, 1997
COMMISSION FILE NO. 1-9015
MORGAN KEEGAN, INC.
(Exact name of Registrant as specified in its charter)
Tennessee 62-1153850
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Fifty Front Street
Memphis, Tennessee 38103
(Address of principal 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 at least 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, 1997
Common Stock $.625 par value 32,279,100
<PAGE>
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements
of Financial Condition. . . . . . . . October 31, 1997 and
July 31, 1997
Consolidated Statements
of Income . . . . . . . . . . . . . . Three months ended
October 31, 1997 and 1996
Consolidated Statements
of Cash Flows . . . . . . . . . . . . Three months ended
October 31, 1997 and 1996
Notes to Consolidated
Financial Statements. . . . . . . . . October 31, 1997
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>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries
October 31 July 31
1997 1997
(unaudited)
(in thousands)
<TABLE> <C> <C>
ASSETS
Cash $ 22,273 $ 22,423
Securities segregated for regulatory
purposes, at market 272,200 280,100
Deposits with clearing organizations
and others 9,153 9,153
Receivable from brokers and dealers and
clearing organizations 84,631 37,730
Receivable from customers 406,100 358,020
Securities purchased under agreements
to resell 98,802 146,881
Securities owned, at market 498,832 275,611
Memberships in exchanges, at cost
(market value-$3,790,000 at 10-31-97;
$4,202,000 at 7-31-97) 719 719
Furniture, equipment and leasehold
improvements, (less allowances for
depreciation and amortization $14,784,000
at 10-31-97; $16,257,000 at 7-31-97) 22,578 24,062
Building and improvements, at cost (less
allowance for depreciation $644,000
at 7-31-97) 19,356
Other assets 60,969 34,202
$1,476,257 $1,208,257
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 251,300 $ 570
Mortgage note payable 19,714
Commercial paper 52,729 106,930
Payable to brokers and dealers and
clearing organizations 38,782 12,718
Payable to customers 621,164 583,922
Customer drafts payable 14,966 17,362
Securities sold under agreements to
repurchase 95,920 97,417
Securities sold, not yet purchased,
at market 92,095 94,298
Other liabilities 86,035 71,606
1,252,991 1,004,537
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares;
32,279,100 shares issued and outstanding
at 10-31-97; 31,652,142 at 7-31-97 20,174 19,782
Additional paid-in capital 9,344 1,048
Retained earnings 193,748 182,890
223,266 203,720
$1,476,257 $1,208,257
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Three Months Ended
October 31
(in thousands, except
per share amounts)
1997 1996
<TABLE> <C> <C>
REVENUES
Commissions $ 28,452 $16,413
Principal transactions 31,202 28,104
Investment banking 15,795 9,368
Interest 17,895 14,734
Investment management fees 4,643 1,649
Other 3,211 4,147
TOTAL 101,198 74,415
EXPENSES
Compensation 50,447 37,494
Floor brokerage and clearance 1,596 1,258
Communications 5,564 5,432
Travel and promotional 2,779 1,904
Occupancy and equipment costs 4,402 3,444
Interest 12,498 10,336
Taxes, other than income taxes 1,905 1,465
Other operating expenses 1,319 1,333
80,510 62,666
INCOME BEFORE INCOME TAXES 20,688 11,749
INCOME TAX EXPENSE 7,900 4,400
NET INCOME $ 12,788 $ 7,349
NET INCOME PER SHARE $ 0.40 $ 0.24
DIVIDENDS PER SHARE $ 0.06 $ 0.05
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Three Months Ended
October 31
1997 1996
(in thousands)
<TABLE> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $12,788 $ 7,349
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 1,836 1,393
Deferred income taxes (5,140) (330)
Amortization of gain on sale of building
and related assets (115)
Amortization of restricted stock 750 750
(10,119) 9,162
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations (46,901) (13,102)
Deposits with clearing organizations and others (295)
Receivable from customers (48,080) 2,395
Securities segregated for regulatory purposes 7,900 (29,200)
Securities owned (223,221) (180,856)
Other assets (21,627) (7,323)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations 26,064 4,693
Payable to customers 37,242 36,981
Customer drafts payable (2,396) (2,367)
Securities sold, not yet purchased (2,203) 20,131
Other liabilities 959 (7,086)
(272,263) (176,029)
Cash used for operating activities (262,144) (166,867)
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper (54,201) (5,101)
Mortgage note payable (19,714) (57)
Issuance of Common Stock 7,938 22
Retirement of Common Stock (142)
Dividends paid (1,930) (1,425)
Short-term borrowings 250,730 192,300
Securities purchased under agreements to resell 48,079 (26,096)
Securities sold under agreements to repurchase (1,497) 7,272
Cash provided by financing activities 229,405 166,773
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (1,993) (4,080)
Proceeds from sale of building and related
assets 34,582
Cash provided by (used for) investing
activities 32,589 (4,080)
Decrease in Cash (150) (4,174)
Cash at Beginning of Period 22,423 17,156
Cash at End of Period $ 22,273 $ 12,982
</TABLE>
Income tax payments were approximately $3,473,000 and $1,255,000
for the three month period ending October 31, 1997, and 1996,
respectively. Interest payments were approximately $12,457,000
and $10,127,000 for the same periods, respectively.
See accompanying notes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
October 31, 1997
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, 1997, are not necessarily
indicative of the
results that may be expected for the year ending July 31, 1998.
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, 1997.
NOTE B - NET CAPITAL REQUIREMENT
As a registered broker/dealer and member of the New York Stock
Exchange, the
registrant's brokerage subsidiary, Morgan Keegan & Company,
Inc. (M.K. & Co.)
is subject to the Securities and Exchange Commission's (SEC)
uniform net capital rule.
The broker/dealer subsidiary has elected to operate under the
alternative method of the
rule, which prohibits a broker/dealer from engaging in any securities
transactions when
its net capital is less than 2% of its aggregate debit balances, as
defined, arising from
customer transactions. The SEC may also require a member firm
to reduce its business
and restrict withdrawal of subordinated capital if its net capital is
less than 4% of
aggregate debit balances, and may prohibit a member firm from
expanding its business
and declaring cash dividends if its net capital is less than 5% of
aggregate debit balances.
At October 31, 1997, M.K. & Co. had net capital of $117,847,117
which was 27% of
its aggregate debit balances and $109,197,997 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 - EFFECT OF FASB STATEMENT NO. 128
In February 1997, the Financial Accounting Standards Board
issued Statement No. 128,
"Earnings per Share", which is required to be adopted on December
15, 1997. At that time,
the Company will be required to change the method currently used to
compute earnings per
share and to restate all prior periods. Under the new requirements
for calculating primary
earnings per share, the dilutive effect of stock options will be
excluded. The impact of
Statement 128 on the calculation of primary earnings per share
and fully diluted earnings
per share is not expected to be material.
<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.
This Form 10-Q may contain or incorporate by reference statements
which may
constitute "forward-looking statements" within the meaning of
Section 27A of the
Securities Act of 1933, as amended and Section 21E of the
ecurities Exchange
Act of 1934, as amended. Prospective investors are cautioned
that any such
forward-looking statements are not guarantees for future
erformance and involve
risks and uncertainties, and that actual results may differ
materially from those
contemplated by such forward-looking statements.
The Registrant is evaluating Year 2000 compliance issues
including vendors,
software and other systems to determine that internal and
external concerns are
addressed to meet the Year 2000 deadline. The committee
setup to over see this
evaluation and implementation includes key personnel from
various aspects of the
Registrant's business activities. The committee is projecting
full compliance by the
end of current fiscal year with on going testing throughout
1999.
Results of Operations
The Registrant recognized record-setting revenues and net income
for the quarter
ended October 31, 1997. Revenues totaled $101,198,000 with net
income reaching
$12,788,000 surpassing previous records set in the fourth quarter
of fiscal 1997
when revenues were $93,309,000 and net income was $10,845,000.
Revenues increased $26,783,000, or 36%, over the same quarter in
the previous year.
The largest components of this increase included a 73% increase
in commissions
and a 69% increase in investment banking revenues. Strong market
activity pushed
the Dow Jones Industrial Average over 8000 spurning record-level
activity in the
equity markets.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Results of Operations (continued)
Operating expenses increased to $80,510,000 for the current period
versus $62,666,000
for the first quarter of fiscal 1997. Employee compensation expense
increased 35% and
is in direct proportion with the increase in revenues.
Net income increased $5,439,000, or 74%, to $12,788,000 from
$7,349,000 reported in
the same quarter of the previous fiscal year. Earnings per share
were $0.40 and $0.24
for the respective quarters. The growth of the retail branch system
of the Registrant's
broker/dealer subsidiary and the volatility of both fixed income
and equity markets
contributed to the noted increases.
Liquidity and Capital Resources
High liquidity is reflected in the Registrant's statement of
financial condition with
approximately 94% of its assets consisting of cash or assets readily
convertible into
cash. Financing resources include the Registrant's equity capital,
commercial paper,
short-term borrowings, repurchase agreements and other
payables. For the three
month period ended October 31, 1997, cash flows used for
operating activities
increased by $262,144,000 primarily due to the $223,221,000
increase in securities owned.
Cash flows from financing activities were $229,405,000 for
the three month
period ended October 31, 1997, compared to $166,773,000
in the same period
of the previous year. The increase was a result of the
increase in short-term
borrowings used to carry the noted higher level of inventory.
Investing activities resulted in a $32,589,000 increase in cash flows
for the current
period versus a $4,080,000 decrease in cash flows in the same quarter
of the previous
year. The increase is a result of the sale of the homeoffice building
in the month of
October 1997 for approximately $36 million dollars.
At October 31, 1997, the Registrant's broker/dealer subsidiary,
which is regulated
under the SEC's uniform net capital rule, had net capital of
$117,847,117 which was
$109,197,997 in excess of the 2% net capital requirement. During
the quarter, the
Registrant declared and paid cash dividends of $0.06 per share on
the shares outstanding.
Also during the quarter, the Registrant declared and paid a 3-for-2
stock split accounted
for as a stock dividend increasing the number of shares outstanding
by 10,756,101 shares.
During the quarter, the Registrant sold its headquarters building
and signed an
agreement to lease the building back over a 10-year period.
The sale was for $36
million and resulted in a $13.8 million gain, which was deferred
and will be realized
over the 10-year life of the lease.
The Registrant is authorized to repurchase its own stock under
the stock
repurchase program begun in November 1993. During the
quarter no stock was
repurchased under the plan. Since the inception of the repurchase
program, the
Registrant has repurchased 5,158,184 shares for $30,801,989.
<PAGE>
MORGAN KEEGAN, INC. and Subsidiaries
PART II OTHER INFORMATION
Item 1. Legal proceedings
Morgan Keegan & Company, Inc. is subject to various claims
incidental to its securities business. While the ultimate
resolution of pending litigation and claims cannot be
predicted with certainty, based upon the information currently
known, management is of the opinion that it has meritorious
defenses and has instructed its counsel to vigorously defend
such lawsuits and claims, and that liability, if any, resulting
from all litigation will have no material adverse effect on the
Registrant's consolidated financial condition or results
of operations.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
11. Computation of Earnings per Share
b. Reports on Form 8-K
No reports were filed during the quarter on Form 8-K
<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
BY /S/Joseph C. Weller
Joseph C. Weller
EVP, CFO, Sec.-Treas.
Date: December 12, 1997
<PAGE>
PART II OTHER INFORMATION (Continued)
MORGAN KEEGAN, INC. and Subsidiaries
Item 6. Exhibit a.1.
COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
Three Months Ended
October 31
1997 1996
<TABLE> <C> <C>
PRIMARY
Average Shares outstanding 32,118,290 30,640,323
Net effect of dilutive stock options
based on the treasury stock method
using average market price.
164,005 122,820
TOTAL 32,282,295 30,763,143
Net Income $12,787,582 $ 7,348,817
Per Share Amount $ 0.40 $ 0.24
FULLY DILUTED
Average shares outstanding 32,118,290 30,640,323
Net effect of dilutive stock options
based on the treasury stock method
using the quarter end market price,
if higher than average market price. 166,877 129,425
TOTAL 32,285,167 30,769,748
Net Income $12,787,582 $ 7,348,817
Per Share Amount $ 0.40 $ 0.24
</TABLE>
</Page>
??
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Morgan Keegan, Inc. Form 10-Q for the quarter ended October 31, 1997, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> OCT-31-1997
<CASH> 22,273
<RECEIVABLES> 474,116
<SECURITIES-RESALE> 371,002
<SECURITIES-BORROWED> 25,768
<INSTRUMENTS-OWNED> 498,832
<PP&E> 22,578
<TOTAL-ASSETS> 1,476,257
<SHORT-TERM> 251,300
<PAYABLES> 666,899
<REPOS-SOLD> 95,920
<SECURITIES-LOANED> 8,013
<INSTRUMENTS-SOLD> 92,095
<LONG-TERM> 0
0
0
<COMMON> 20,174
<OTHER-SE> 203,092
<TOTAL-LIABILITY-AND-EQUITY> 1,476,257
<TRADING-REVENUE> 31,202
<INTEREST-DIVIDENDS> 17,895
<COMMISSIONS> 28,452
<INVESTMENT-BANKING-REVENUES> 15,795
<FEE-REVENUE> 7,854
<INTEREST-EXPENSE> 12,498
<COMPENSATION> 50,447
<INCOME-PRETAX> 20,688
<INCOME-PRE-EXTRAORDINARY> 20,688
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,788
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>
