<PAGE>
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, 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
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
Act
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 references in Part III of this Form
10-K or any amendment to this Form 10-K.
At October 1, 1997, the Registrant had approximately 32,273,616
shares of Common Stock outstanding. The aggregate market value
of Common Stock held by non-affiliates was approximately
$645,472,000.
DOCUMENTS INCORPORATED HEREIN BY REFERENCE:
Portions of the Registrant's Annual Report to Shareholders for
the year ended July 31, 1997, 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
25, 1997, which will be filed with the Commission pursuant to
Regulation 240.14a(6)(c) prior to October 27, 1997, 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 Morgan Asset Management, Inc., a subsidiary of
the Registrant. M.K. & Co. also produces 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>
Year
Ended July 31
1997
1996 1995
<S> <C>
<C> <C>
Institutional clients 23% 24%
26%
Retail customers 42 45
44
Investment banking and management
fees, interest and other
activities 35
31 30
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 thirty-nine offices in twelve states. The
following table reflects the number of account executives in each
office as of July 31, 1997:
<TABLE>
Account
Account
Office Executives Office
Executives
<S> <C> <S>
<C>
Birmingham, Alabama 32 New Orleans, Louisiana
27
Decatur, Alabama 5 Shreveport,
Louisiana 13
Fairhope, Alabama 1 Boston,
Massachusetts 3
Huntsville, Alabama 13 Jackson, Mississippi
25
Mobile, Alabama 13 New York, New York
5
Montgomery, Alabama 24 Durham, North Carolina
9
Little Rock, Arkansas 45 Raleigh, North Carolina
10
Rogers, Arkansas 5 Wilmington, North
Carolina 7
Ft. Lauderdale, Florida 5 Jackson, Tennessee
6
Pensacola, Florida 7 Knoxville, Tennessee
30
Athens, Georgia 6 Memphis, Tennessee
Atlanta, Georgia 20 Headquarters
112
Bowling Green, Kentucky 7 Suburban Offices
40
Lexington, Kentucky 9 Nashville, Tennessee
25
Louisville, Kentucky 24 Austin, Texas
28
Baton Rouge, Louisiana 14 Dallas, Texas
14
Lafayette, Louisiana 9 Houston, Texas
30
TOTAL
623
</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>
(Dollars in Thousands)
Year Ended July 31
1997 1996
1995
Amount % Amount %
Amount %
<S> <C> <C> <C> <C>
<C> <C>
REVENUES
Commissions
Listed securities $27,946 8.51 $26,467 8.78
$21,246 9.32
Over-the-counter
securities 25,776 7.85 21,849 7.25
12,624 5.54
Options 4,149 1.26 3,243 1.08
2,631 1.15
Other 21,988 6.69 16,311 5.41
9,661 4.24
TOTAL 79,859 24.31 67,870 22.52
46,162 20.25
Principal transactions
Corporate securities 56,134 17.09 59,567 19.76
36,724 16.10
Municipal securities 14,867 4.53 16,345 5.42
16,404 7.19
U.S. Government
obligations 38,963 11.86 39,291 13.04
33,982 14.90
TOTAL 109,964 33.48 115,203 38.22
87,110 38.19
Investment banking
Corporate securities 23,814 7.25 25,990 8.62
25,009 10.97
Municipal securities 3,457 1.05 2,427 0.81
1,926 0.84
Underwriting, management
and other fees 23,908 7.28 21,884 7.26
18,259 8.01
TOTAL 51,179 15.58 50,301 16.69
45,194 19.82
Interest
Interest on margin
balances 24,105 7.34 19,752 6.55
17,519 7.68
Interest on securities
owned 40,157 12.22 30,171 10.01
20,261 8.88
TOTAL 64,262 19.56 49,923 16.56
37,780 16.56
Investment management
fees 12,499 3.80 9,323 3.09
7,171 3.14
Other income 10,771 3.27 8,786 2.92
4,655 2.04
TOTAL REVENUES $328,534 100.0 $301,406 100.0
$228,072 100.0
</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 operations.
<PAGE>
Institutional Business
During the three years ended July 31, 1997, approximately 24%
of the Registrant's total consolidated revenues were derived from
institutional clients. M.K. & Co.'s 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, 1997, no single
institutional client accounted for more than 2% of the
Registrant's total revenues. M.K. & Co.'s 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, 1997, 1996, and 1995,
institutional revenues and percentages of total consolidated
revenues were $76,135,000 (23%), $73,468,000 (24%), and
$60,097,000 (26%), respectively.
Retail Business
During each of the three years ended July 31, approximately 43%
of the Registrant's total revenues were derived from transactions
with retail (individual) customers. For the fiscal years ended
July 31, 1997, 1996, and 1995, revenues and percentages of total
consolidated revenues were $137,112,000 (42%), $134,807,000
(45%), $100,239,000 (44%), 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
7.3% of total revenues in fiscal 1997.
<PAGE>
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, 1997, the Registrant made a market in common stock or
other equity securities of approximately 179 corporations, many
of which are stocks followed by its research department.
M.K. & Co.'s 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. In some cases, in
order to hedge the risks of carrying inventory, MK & Co. enters
into transactions for U.S. Treasury note futures. The following
table sets forth for the year ended July 31, 1997, 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>
Highest
Lowest Average
Inventory Inventory Inventory
<S> <C>
<C> <C>
Common stocks $ 25,197,227 $ 11,816,500 $
18,798,749
Corporate debt securities 82,178,911 34,556,364
45,909,325
Tax-exempt securities 163,415,800 57,317,539
107,094,903
U.S. government, agency,
and guaranteed securities 454,728,277 182,855,334
279,985,892
</TABLE>
The following table sets forth the composition of revenues from
principal transactions:
<TABLE>
Year Ended July 31
1997 1996
1995
Amount % Amount %
Amount %
<S> <C> <C> <C> <C> <C>
<C>
Common stocks $ 47,968,002 44 $ 52,206,040 45
$31,123,000 36
Corporate debt
securities 8,166,789 7 7,361,130 7
5,601,396 6
Tax-exempt securities 14,866,270 14 16,344,828 14
16,404,132 19
U.S. government, agency,
and guaranteed
securities 38,963,040 35 39,291,236 34
33,981,688 39
Total $109,964,101 100 $115,203,234 100
$87,110,216 100
</TABLE>
<PAGE>
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 participation of M.K. & Co. in distributions
of agency securities:
<TABLE>
Year Ended Number Amount of
July 31 Issues
Participation
<C> <C> <C>
1997 45
$327,400,000
1996 46
317,690,000
1995 52
382,075,000
1994 70
566,630,000
1993 90
690,705,000
</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.'s 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.'s 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.'s principal activities are also subject to the risk of the
counterpart's 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.'s underwriting activities, together with its selling group
participation, are important as a source of securities for sale
to its customers. The following table sets forth corporate and
tax-exempt underwriting syndicate participation of the
subsidiary:
<TABLE>
CORPORATE TAX-EXEMPT
Year Ended Number of Amount of Number of
Amount
July 31 Issues Participation Issues
Participation
<C> <C> <C> <C> <C>
1997 181 $545,853,372 362
$1,818,060,000
1996 246 744,497,589 322
1,449,875,000
1995 195 867,514,389 104
349,005,000
1994 330 774,651,373 159
312,056,000
1993 307 596,588,928 168
430,272,000
</TABLE>
<PAGE>
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 25 of the 1997 Annual Report to Shareholders.
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 Bankers, Inc., serves as a general partner
in two limited partnerships, Morgan Keegan Merchant Banking Fund
Limited Partnerships I and II, currently together have
approximately $20,000,000 in assets and are 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
Fund Management, a wholly-owned subsidiary of the Registrant,
acts 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.
<PAGE>
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.
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>
Year Ended Number of Transactions
July 31 High Low
Average
<C> <C> <C> <C>
1997 88,770 58,873
72,267
1996 77,289 47,209
61,618
1995 57,362 41,414
47,875
1994 56,859 38,457
43,340
1993 43,544 28,358
36,584
</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 $25,000,000 (with $500,000 deductible
provision per incident) is considered adequate.
<PAGE>
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.
There is an internal audit department and an audit committee,
both of which help management place an emphasis on strong
internal controls.
Employees
As of July 31, 1997, M.K. & Co. had 1,549 employees, 623 of
whom were account executives, 267 of whom were engaged in other
service areas, including trading, research and investment
banking, and 659 of whom were employed in accounting, clearing,
data processing, management and other activities.
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, 1997, M.K. & Co. hired 106 account executives for
a net increase of 73 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
includes 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.
<PAGE>
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, 1997, the
Registrant's subsidiary's net capital was 31% of aggregate debit
items. See Note 10 - Regulatory Requirements - page 25 of the
1997 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.
Item 2. PROPERTIES
The Registrant's headquarters occupy approximately 134,000
square feet in Morgan Keegan Tower in Memphis, Tennessee. On May
31, 1996, Morgan Keegan Tower was purchased by Morgan Properties,
LLC, a wholly-owned subsidiary of the Registrant. The
acquisition was financed with a twenty-five year term mortgage
payable at 8.25% fixed rate with the building as collateral. The
Registrant's offices are leased with the exception of Morgan
Properties, LLC. See Note 4 - Leases - on page 22 of the 1997
Annual Report to Shareholders.
Subsequent to year end, Morgan Properties, LLC entered into an
agreement to sell the Registrant's corporate headquarters
building for $36 million and lease-back a portion of it under a
ten year lease agreement. The $13.8 million gain will be
deferred and taken into income over the 10-year life of the
lease. A portion of the sale proceeds will be used to pay off
the mortgage note payable.
<PAGE>
Item 3. LEGAL PROCEEDINGS
The Registrant is named in and subject to various proceedings
and 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 the resolution of such
litigation and claims will have no material adverse effect on the
Registrant's results of operations or 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 26 of the 1997 Annual Report to
Shareholders, a copy of which is enclosed.
Item 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by
reference to the Ten Year Financial Summary on pages 12 and 13
and Additional Financial Information (Unaudited) on page 16 of
the 1997 Annual Report to Shareholders, a copy of which 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 pages 14 and 15 of the 1997 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 by
reference to pages 17 through 25 of the 1997 Annual Report to
Shareholders, a copy of which is enclosed.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on
accounting and financial disclosure.
<PAGE>
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
was filed with the Commission pursuant to Regulation
240.14a(6)(c) on October 21, 1997 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 25, 1997.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein
by reference to the Registrant's definitive Proxy Statement which
was filed with the Commission pursuant to Regulation
240.14a(6)(c) on October 21, 1997 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 25, 1997.
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
was filed with the Commission pursuant to Regulation
240.14a(6)(c) on October 21, 1997 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 25, 1997.
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
was filed with the Commission pursuant to Regulation
240.14a(6)(c) on October 21, 1997 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 25, 1997.
<PAGE>
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 1997 Annual
Report to Shareholders are incorporated by reference in Item 8:
<TABLE>
<S> <C>
Consolidated Statements of Financial Condition July 31, 1997
and 1996
Consolidated Statements of Income Years ended
July 31, 1997
1996, and
1995
Consolidated Statements of Stockholders' Years ended
July 31, 1997
Equity 1996,
and 1995
Consolidated Statements of Cash Flows Years ended
July 31, 1997
1996,
and 1995
Notes to Consolidated Financial Statements
July 31, 1997
</TABLE>
<PAGE>
(2) The following consolidated financial statement schedule of
Morgan Keegan, Inc. and subsidiaries is included in
Item 14 (d):
Schedule I - Condensed Financial Statements of Registrant
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 19
Exhibit 13 - Annual Report to Shareholders*
Exhibit 22 - List of Subsidiaries of Registrant*
Exhibit 23 - Consent of Independent Auditors
Page 20
Exhibit 27 - Financial Data Schedule
Page 21
*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, 1997.
(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 27, 1997
Pursuant to the requirements of 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/ Kenneth F. Clark, Jr.
Kenneth F. Clark, Jr. Director
October 27, 1997
/S/ William W. Deupree, Jr.
William W. Deupree, Jr. Director
October 27, 1997
/S/ James E. Harwood, III __
James E. Harwood, III Director
October 27, 1997
/S/ Allen B. Morgan, Jr.
Allen B. Morgan, Jr. Chairman and Director
October 27, 1997
/S/ Harry J. Phillips
Harry J. Phillips Director
October 27, 1997
/S/ Donald Ratajczak
Donald Ratajczak Director
October 27, 1997
/S/ John W. Stokes, Jr.
John W. Stokes, Jr. Vice President and Director
October 27, 1997
/S/ Joseph C. Weller
Joseph C. Weller Secretary/Treasurer and
October 27, 1997
Director
<PAGE>
Schedule I
Condensed Financial Statements of Registrant
Morgan Keegan, Inc. (Parent Company)
<TABLE>
Condensed Balance Sheets July 31
1997 1996
<S> <C>
<C>
ASSETS
Cash $ 1,000
$ 1,000
Securities owned 2,187,313
2,080,105
Furniture, equipment and leasehold
improvements less allowances for
depreciation and amortization
($9,128,734 at July 31, 1997,
$7,774,721 at July 31, 1996) 12,406,839
10,187,711
Investments in subsidiaries (a) 208,346,378
173,434,119
Intercompany receivables (a) 82,874,533
21,803,616
Other assets 5,439,020
5,921,080
Total Assets $311,255,083
$213,427,631
LIABILITIES
Short-term borrowings $ 570,000 $
1,400,000
Commercial paper 106,930,024
42,928,286
Other liabilities 35,305
91,425
STOCKHOLDERS' EQUITY
Common Stock 19,782,585
12,773,497
Additional paid-in-capital 1,047,529
1,510,383
Retained earnings 182,889,640
154,724,040
203,719,754 169,007,920
Total Liabilities and
Stockholders' Equity $311,255,083
$213,427,631
</TABLE>
<TABLE>
Condensed Income Statements July 31
1997
1996 1995
<S> <C>
<C> <C>
Rental income $ 3,574,885 $ 2,492,649 $
2,167,988
Interest income 1,080,975 396,957
185,095
Depreciation (3,574,885) (2,492,649)
(2,167,988)
Other 500,587 7,507
402,300
Interest expense (31,000) (90,000)
Income taxes (550,000) (125,000)
(300,000)
Equity in net income
of subsidiaries 33,377,261 33,672,460
23,560,974
Net Income $34,377,823 $33,866,988
$23,848,369
</TABKE>
(a) Eliminated in consolidation
<PAGE>
Schedule I - Continued
Condensed Financial Statements of Registrant
Morgan Keegan, Inc. (Parent Company)
</TABLE>
<TABLE>
Year Ended
Condensed Statement of Cash Flows July 31
1997 1996
1995
<S> <C> <C>
<C>
Cash Flows From Operating Activities
Operations (net income) $34,377,823 $33,866,988
$23,848,369
Less: Income from subsidiaries (33,377,261) (33,672,460)
(23,560,974)
Amortization of restricted stock 2,500,000 2,580,000
1,800,000
Depreciation expense 3,574,885 2,492,649
2,167,988
Decrease (increase) in other assets 482,060 482,059
(3,494,309)
Decrease in intercompany payables (384,222) (2,672,397)
(Decrease) increase in other
liabilities (56,120) 90,001
1,424
Increase in intercompany
receivables (61,070,917) (21,803,616)
Decrease from operating activities (53,569,530) (16,348,601)
(1,909,899)
Cash Flows From Financing Activities
Proceeds (payments) from short
term borrowings (830,000) (10,000,000)
10,000,000
Proceeds from sale or
issuance of common stock 4,188,335 2,920,669
2,232,853
Proceeds (payments) of
commercial paper 64,001,738 35,460,069
(1,724,909)
Dividends paid (6,212,224) (5,282,864)
(4,438,988)
Retirement of common stock (142,100) (4,534,325)
(9,349,500)
Increase (decrease) from
financing activities 61,005,749 18,563,549
(3,280,544)
Cash Flows From Investing Activities
Increase in securities owned (107,208) (148,635)
(164,105)
(Increase) decrease in investment
in subsidiaries (1,534,998) 3,806,523
8,754,208
Purchase of furniture, equipment
and leasehold improvements (5,794,013) (5,872,836)
(3,399,660)
(Decrease) increase from investing
activities (7,436,219) (2,214,948)
5,190,443
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
</TABLE>
Notes to Financial Statements
1. Basis of Presentation - In the Parent-Company-only financial
statements, the Registrant's investment in subsidiaries is stated
at cost plus equity in undistributed earnings of subsidiaries
since date of acquisition. The Registrant's share of net income
of its unconsolidated subsidiaries is included in consolidated
income using the equity method. Parent-Company-only financial
statements should be read in conjunction with the Registrant's
consolidated financial statements.
<PAGE>
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
Year
Ended July 31
1997
1996 1995
<S> <C>
<C> <C>
PRIMARY
Average shares outstanding 31,169,918 30,632,157
30,462,610
Net effect of dilutive stock
options - based on the
treasury stock method
using average market price. 155,123 142,506
123,541
TOTAL 31,325,041 30,774,663
30,586,151
Net Income $34,377,823 $33,866,988
$23,848,369
Per share amount $1.10 $1.10
$0.78
FULLY DILUTED
Average shares outstanding 31,169,918 30,632,157
30,462,610
Net effect of dilutive stock
options - based on the
treasury stock method
using the year end market
price, if higher than
average market price. 195,023 142,506
123,541
TOTAL 31,364,941 30,774,663
30,586,151
Net Income $34,377,823 $33,866,988
$23,848,369
Per share amount $1.10 $1.10
$0.78
</TABLE>
Information contained in Exhibit 11 had been adjusted for the
effect of the 3-for-2 stock split in September, 1997. See Note -
13 Subsequent Event - on page 26 of the 1997 Annual Report to
Shareholders, a copy of which is enclosed.
<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 18, 1997, included in the 1997 Annual Report to
Shareholders of Morgan Keegan, Inc.
Our audits also included the financial statement schedule of
Morgan Keegan, Inc. listed in Item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion,
the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as
a whole, presents 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. of our report
dated September 18, 1997, 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 schedule included in this Annual Report (Form
10-K) of Morgan Keegan, Inc.
/S/ Ernst & Young LLP
ERNST & YOUNG LLP
Memphis, Tennessee
October 23, 1997
<PAGE>
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
<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, 1997 and 1996, and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the
three years in the period ended July 31, 1997. 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, 1997 and 1996 and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended July 31, 1997 in conformity with generally
accepted accounting principles.
ERNST & YOUNG
LLP
Memphis, Tennessee
September 18, 1997
<PAGE>
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
<TABLE>
(In thousands, except per share
amounts)
Years ended July 31 1997 1996
<S> <C>
<C>
Revenues
Commissions:
Listed securities $ 27,946 $ 26,467
Over-the-counter 25,776 21,849
Options 4,149
3,243
Other 21,988
16,311
79,859
67,870
Principal transactions:
Corporate securities 56,134 59,567
Municipal securities 14,867 16,345
U.S. government securities 38,963 39,291
109,964
115,203
Investment banking:
Corporate securities 23,814 25,990
Municipal securities 3,457 2,427
Underwriting management and other fees 23,908 21,884
51,179 50,301
Interest:
Interest on margin balances 24,105 19,752
Interest on securities owned 40,157 30,171
64,262 49,923
Investment management fees 12,499 9,323
Other
10,771 8,786
328,534 301,406
Expenses
Compensation 164,364
158,352
Floor brokerage and clearance 5,043 4,397
Communications 21,549
18,892
Travel and promotional 8,724 7,336
Occupancy and equipment costs 15,854 11,812
Interest
44,652 32,930
Taxes, other than income taxes 7,986 7,006
Other operating expenses 5,084 5,514
273,256 246,239
Income (loss) before income taxes 55,278 55,167
Income tax expense (credit) 20,900 21,300
Net income $ 34,378 $
33,867
Per Share Data*
Net income $ 1.10
$ 1.10
Book value $ 6.44
$ 5.51
Other Data (at year end):
Total assets $1,208,257
$946,648
Stockholders' equity $ 203,720 $169,008
Common shares outstanding* 31,652 30,657
</TABLE>
*Adjusted for a four-for-three stock split in September, 1991, a
three-for-two stock split in March, 1992, a three-for-two stock
split in June, 1993, a three-for-two stock split in June, 1995
and a three-for-two stock split in September, 1997.
<PAGE>
<TABLE>
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per share
amounts)
Years ended July 31 1995 1994
1993
<S> <C> <C>
<C>
Revenues
Commissions:
Listed securities $ 21,246 $ 22,748 $
20,457
Over-the-counter 12,624 10,076
10,159
Options 2,631 1,990
1,927
Other 9,661 11,723
11,196
46,162
46,537 43,739
Principal transactions:
Corporate securities 36,724 33,541
34,404
Municipal securities 16,404 14,135
17,432
U.S. government securities 33,982 41,746
51,297
87,110
89,422 103,133
Investment banking:
Corporate securities 25,009 32,850
15,760
Municipal securities 1,926 4,059
3,947
Underwriting management and other fees 18,259 18,923
9,571
45,194
55,832 29,278
Interest:
Interest on margin balances 17,519 10,824
7,047
Interest on securities owned 20,261 14,070
12,627
37,780
24,894 19,674
Investment management fees 7,171 6,063
5,413
Other 4,655
8,972 7,958
228,072
231,720 209,195
Expenses
Compensation 120,795 125,205
109,748
Floor brokerage and clearance 3,724 3,875
5,296
Communications 15,962 13,852
12,012
Travel and promotional 5,855 5,721
4,241
Occupancy and equipment costs 9,716 8,320
8,153
Interest 23,600
14,393 11,185
Taxes, other than income taxes 6,298 4,972
4,199
Other operating expenses 3,774 3,741
4,659
189,724
180,079 159,493
Income (loss) before income taxes 38,348 51,641
49,702
Income tax expense (credit) 14,500 19,800
19,000
Net income $ 23,848 $
31,841 $ 30,702
Per Share Data*
Net income $ .78
$ .97 $ .97
Book value $ 4.61
$ 4.06 $ 3.31
Other Data (at year end):
Total assets $882,292
$571,009 $527,084
Stockholders' equity $139,457 $125,365
$106,335
Common shares outstanding* 30,254 30,834
32,112
</TABLE>
*Adjusted for a four-for-three stock split in September, 1991, a
three-for-two stock split in March, 1992, a three-for-two stock
split in June, 1993, a three-for-two stock split in June, 1995,
and a three-for-two stock split in September, 1997.
<PAGE>
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per share
amounts)
Years ended July 31 1992 1991
1990
<TABLE>
<S> <C>
<C> <C>
Revenues
Commissions:
Listed securities $ 18,378 $ 13,143
$ 14,444
Over-the-counter 9,041 5,347
1,745
Options 2,089
2,134 2,180
Other 7,632
4,824 4,434
37,140
25,448 22,803
Principal transactions:
Corporate securities 28,161 16,554
11,808
Municipal securities 12,037 10,730
7,445
U.S. government securities 48,588 30,279 18,478
88,786
57,563 37,731
Investment banking:
Corporate securities 16,730 4,836
2,947
Municipal securities 3,960 376
159
Underwriting management and other fees 9,862 5,436
3,926
30,552
10,648 7,032
Interest:
Interest on margin balances 5,941 4,867
5,521
Interest on securities owned 12,709 12,490
10,769
18,650
17,357 16,290
Investment management fees 4,627 3,086
2,415
Other 2,909
2,415 2,737
182,664 116,517 89,008
Expenses
Compensation 94,348 61,265
48,243
Floor brokerage and clearance 4,571 3,751
3,749
Communications 9,791 8,764
8,436
Travel and promotional 3,699 2,982
2,660
Occupancy and equipment costs 7,557 8,194
7,789
Interest 12,562
12,953 12,591
Taxes, other than income taxes 3,823 3,116
2,682
Other operating expenses 4,122 3,288
3,308
140,473
104,313 89,458
Income (loss) before income taxes 42,191 12,204
(450)
Income tax expense (credit) 16,400 4,500
(475)
Net income $ 25,791 $
7,704 $ 25
Per Share Data*
Net income $ .83
$ .25 $ .01
Book value $ 2.45
$ 1.67 $ 1.43
Other Data (at year end):
Total assets $434,448
$304,445 $236,991
Stockholders' equity $ 76,690 $
50,837 $ 44,888
Common shares outstanding* 31,340 30,504
31,439
</TABLE>
*Adjusted for a four-for-three stock split in September, 1991, a
three-for-two stock split in March, 1992, a three-for-two stock
split in June, 1993, a three-for-two stock split in June, 1995,
and a three-for-two stock split in September, 1997.
<PAGE>
<TABLE>
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per share
amounts)
Years ended July 31 1989 1988
<S> <C>
<C>
Revenues
Commissions:
Listed securities $ 13,675 $ 12,901
Over-the-counter 1,848 2,088
Options 2,339 2,509
Other 4,192 3,943
22,054
21,441
Principal transactions:
Corporate securities 14,369 15,421
Municipal securities 5,993 6,401
U.S. government securities 14,707 14,829
35,069
36,651
Investment banking:
Corporate securities 3,461 2,225
Municipal securities 213 19
Underwriting management and other fees 4,057 3,302
7,731
5,546
Interest:
Interest on margin balances 5,698 5,406
Interest on securities owned 6,129 3,407
11,827
8,813
Investment management fees 1,713 942
Other 1,037
163
79,431
73,556
Expenses
Compensation 43,953 42,242
Floor brokerage and clearance 2,966 2,900
Communications 7,996 7,366
Travel and promotional 1,990 2,649
Occupancy and equipment costs 6,852 5,755
Interest 7,931
4,620
Taxes, other than income taxes 2,326 2,179
Other operating expenses 2,330 1,989
76,344
69,700
Income (loss) before income taxes 3,087 3,856
Income tax expense (credit) 715 1,351
Net income $ 2,372 $ 2,505
Per Share Data*
Net income $ .07 $ .07
Book value $ 1.45 $ 1.41
Other Data (at year end):
Total assets $397,007 $236,209
Stockholders' equity $ 48,432 $ 49,325
Common shares outstanding* 33,329 35,061
</TABLE>
*Adjusted for a four-for-three stock split in September, 1991, a
three-for-two stock split in March, 1992, a three-for-two stock
split in June, 1993, a three-for-two stock split in June, 1995,
and a three-for-two stock split in September, 1997.
<PAGE>
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.
The Company faces increasing competition from commercial banks
and thrift institutions which is anticipated as these
institutions begin to offer investment banking and financial
services which were previously offered only by securities firms.
The Federal Reserve Board has eased numerous restrictions on
commercial banks and thrift institutions which has allowed them
to greatly increase their abilities to compete in the securities
industry. The Company anticipates increasing regulation in the
securities industry, meaning that continued compliance may be
more difficult and costly. At present, the Company is unable to
predict the extent of changes that may be enacted or the effect
on the Company's business.
The Company's long term plan is to continue to grow its
regional brokerage and other services in the southeastern United
States.
Results of Operations.
The Company concluded its second record year in succession as
revenues of $328,534,000 surpassed the 1996 total of $301,406,000
by $27,128,000. Revenues for 1996 were $73,334,000 in excess of
1995 revenues of $228,072,000. An outstanding fourth quarter
which was driven by favorable market conditions pushed the
Company to the record net income level of $34,378,000 which was
$511,000 in excess of the previous years record level. Net income
was $10,019,000 more in fiscal 1996 than in fiscal 1995.
The largest component of the revenue increase was interest income
which went up by $14,339,000 or 29% to $64,262,000 in fiscal 1997
following an increase of $12,143,000 or 32% for fiscal 1996 over
fiscal 1995. The increased interest income was largely due to
increasing margin accounts from the Company's expanding retail
network and the favorable market conditions. Investment
management fees continued to increase, $3,176,000 or 34% for
fiscal 1997, following a similar 30% increase for the previous
fiscal year represents management's continued efforts to increase
the fee based business.
Principal transactions declined by $5,239,000 to $109,964,000
following a 32% increase in the previous year. The decline
resulted from slightly lagging market conditions for corporate
securities and municipal securities during the first three
quarters. Commission income increased by $11,989,000 or 18%
following a 47% or $21,708,000 increase which stemmed from strong
market conditions for blue chip stocks.
<PAGE>
Operating expenses rose from $246,239,000 in fiscal 1996 to
$273,256,000 representing an 11% or $27,017,000 increase for the
year. This follows a 30% increase for fiscal 1996 over fiscal
1995. The largest percentage increase for both years was
interest expense which rose 36% for fiscal 1997, after a 40%
increase in the previous year. The increase in interest was
primarily due to the larger customer credit positions, commercial
paper borrowings and long term debt on the Company's corporate
headquarters.
Compensation expense, which ordinarily closely corresponds to the
revenue increases, was up $6,012,000 or 4% for fiscal 1997 versus
a 31% increase for the year before. The increase did not
correspond directly to the revenue increase as a significant
portion of the revenue was attributed to interest income. Other
expenses increased, as the Company continued to expand its retail
network, communications and branch office system.
Fiscal 1997 turned into a highly profitable year for the
securities industry, as the DOW continued to rise from over 5,500
to over 7,000, with a substantial portion coming in the final
quarter of the fiscal year. During both of the record years, the
Company benefited from its continued expansion efforts within the
southeast United States, as the favorable market conditions and
the ongoing expense management efforts drove earnings per share
to $1.10 for both of the years.
Liquidity and Capital Resources.
Most of 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, repurchase agreements 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.
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, 1997, the net capital of the Company's broker-dealer
subsidiary exceeded the SEC's minimum requirements by more than
$107,000,000, which is slightly more than the $95,000,000 at the
end of last year. Continued expansion is not expected to have a
significant 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.
During the year, the Company continued its stock repurchase
program, purchasing 17,400 shares for an aggregate value of
$142,000. This followed fiscal 1996 repurchases of 572,700
shares valued at $4,535,000. The board previously authorized the
purchase of a total of 7,125,000 shares under the repurchase
program.
Subsequent to the end of the year, the Board of Directors
approved a three-for-two stock split to be distributed on
September 11, 1997. All share, earnings per share, dividends per
share and quarterly stock price data included above and in the
consolidated financial statements and notes thereto have been
adjusted to give effect to the stock split. The split represents
continuing optimism regarding the Company's optimistic outlook.
Also, subsequent to the end of the year, the Company signed an
agreement to sell its corporate headquarters building and to
lease it back over a 10 year period. The sale is for $36 million
and will result in a gain of $13.8 million which will be deferred
and taken into income over the ten year life of the lease. A
portion of the sales proceeds will be used to repay the related
mortgage note payable.
<PAGE>
Forward Looking Statements.
This Annual Report may be deemed to contain certain
forward-looking statements regarding the anticipated financial
and operating results of the Company. The Company undertakes no
obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events or
circumstances occurring after the date hereof or to reflect the
occurrence of unanticipated events. Information contained in
these forward-looking statements in inherently uncertain; and
actual performance and results may differ materially due to many
important factors, many of which are beyond the Company's control
including the Company's ability to sustain and manage growth;
dealing with increasing competition; additional government
regulations; changes in general economic conditions; and the
like.
<PAGE>
<TABLE>
(Dollars in thousands) Increase
(Decrease)
Revenues: 1997 vs 1996
1996 vs 1995
<S> <C> <C>
<C> <C>
Commissions $11,989 18%
$21,708 47%
Principal transactions (5,239) (5%)
28,093 32%
Investment banking 878 2%
5,107 11%
Interest 14,339 29%
12,143 32%
Investment management fees 3,176 34% 2,152 30%
Other 1,985 23%
4,131 89%
$27,128 9%
$73,334 32%
Expenses:
Compensation $ 6,012 4%
$37,557 31%
Floor brokerage and clearance 646 15% 673
18%
Communications 2,657 14%
2,930 18%
Travel and promotional 1,388 19% 1,481
25%
Occupancy and equipment costs 4,042 34%
2,096 22%
Interest 11,722 36%
9,330 40%
Taxes, other than income taxes 980 14% 708
11%
Other operating expenses (430) (8%) 1,740
46%
$27,017
11% $56,515 30%
</TABLE>
<PAGE>
<TABLE>
Additional Financial Information (Unaudited)
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per
share amounts)
Summary of Quarterly Results
First
Second Third Fourth
Quarter
Quarter Quarter Quarter
<S> <C>
<C> <C> <C>
Fiscal 1997
Revenues $74,415 $83,527
$77,283 $93,309
Income before income taxes 11,749 14,674 10,910
17,945
Net income 7,349 9,274
6,910 10,845
Net income per share 0.24 0.30
0.22 0.34
Fiscal 1996
Revenues $68,940 $77,457
$79,297 $75,712
Income before income taxes 14,230 14,917 14,076
11,944
Net income 8,830 9,217
8,576 7,244
Net income per share 0.29 0.30
0.27 0.24
Fiscal 1995
Revenues $56,206 $55,267
$50,147 $66,452
Income before income taxes 10,971 9,537 6,960
10,880
Net income 6,771 5,937
4,360 6,780
Net income per share 0.22 0.19
0.15 0.22
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 0.26 0.26
0.20 0.25
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 0.22 0.24
0.25 0.26
</TABLE>
<PAGE>
<TABLE>
Statistical Comparison of Production
1997 1996 1995 1994
1993
<S> <C> <C> <C> <C>
<C>
Total pro-
duction $213,247,662 $208,275,740 $160,335,704 $168,350,637
$154,251,186
Percentage
change in
production +2.4% +29.9% -4.8% +9.1%
+12.8%
Number of
tickets 685,790 749,560 558,967 480,564
439,006
Average
commissions
per ticket $ 311 $ 278 $ 287 $ 350 $
351
Number of
investment
brokers 623 596 551 492
438
Number of
Investment
brokers
(over 1 year) 566 487 438 436
403
Total number
of employees 1,549 1,491 1,335 1,218
1,088
Average
commissions
per investment
broker (over
1 year) $ 362,830 $ 345,885 $ 334,555 $ 346,274 $
359,817
Number of
new accounts
opened 32,166 33,835 29,559 25,861
21,451
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Income
Morgan Keegan, Inc. and Subsidiaries
Years ended
July 31
(In thousands, except share and per
share amounts)
1997 1996
1995
<S> <C> <C> <C>
Revenues
Commissions $ 79,859 $ 67,870
$ 46,162
Principal transactions 109,964 115,203
87,110
Investment banking 51,179 50,301
45,194
Interest 64,262
49,923 37,780
Investment management fees 12,499 9,323
7,171
Other 10,771
8,786 4,655
328,534
301,406 228,072
Expenses
Compensation 164,364 158,352
120,795
Floor brokerage and clearance 5,043 4,397
3,724
Communications 21,549 18,892
15,962
Travel and promotional 8,724 7,336
5,855
Occupancy and equipment costs 15,854 11,812 9,716
Interest 44,652
32,930 23,600
Taxes, other than income taxes 7,986 7,006
6,298
Other operating expenses 5,084 5,514
3,774
273,256
246,239 189,724
Income Before Income Taxe 55,278 55,167
38,348
Income Tax Expense 20,900 21,300
14,500
Net Income $ 34,378 $ 33,867
$ 23,848
Net Income Per Share $ 1.10 $ 1.10 $
0.78
Average shares outstanding 31,325,041 30,774,663
30,586,151
>/TABLE>
See accompanying notes.
<PAGE>
</TABLE>
<TABLE>
Consolidated Statements of Stockholders' Equity
Morgan Keegan, Inc. and Subsidiaries
Common Common Additional
Stock-
Stock Stock Paid-In Retained
holders'
Shares Amount Capital Earnings
Equity
(In thousands, except share and per
share amounts)
<S> <C> <C> <C> <C>
<C>
Balance at August 1, 1994 13,704,011 $ 8,565 $ 5,522
$111,278 $125,365
Stock split effected
in the form of a stock
dividend 6,852,005 4,283 (81)
(4,202)
Issuance of restricted
stock 298,072 186 (186)
Issuance of Common
Stock 344,924 216 2,017
2,233
Dividends paid ($.15
per share)
(4,440) (4,440)
Repurchase & retirement
of Common Stock (1,030,309) (645) (8,360)
(344) (9,349)
Amortization of
restricted stock 1,800
1,800
Net income
23,848 23,848
Balance at July 31, 1995 20,168,703 12,605 712
126,140 139,457
Issuance of restricted
stock 292,231 183 (183)
Issuance of Common
Stock 358,463 224 2,698
2,922
Dividends paid ($.17
per share)
(5,283) (5,283)
Repurchase & retirement
of Common Stock (381,800) (239) (4,296)
(4,535)
Amortization of
restricted stock 2,580
2,580
Net income
33,867 33,867
Balance at July 31, 1996 20,437,597 12,773 1,511
154,724 169,008
Issuance of restricted
stock 296,771 185 (185)
Issuance of Common
Stock 378,660 237 3,951
4,188
Dividends paid ($.20
per share)
(6,212) (6,212)
Repurchase & retirement
of Common Stock (11,600) (7) (135)
(142)
Amortization of
restricted stock 2,500
2,500
Net income 34,378
34,378
Stock split effected in
the form of a stock
dividend 10,550,714 6,594 (6,594)
Balance at July 31, 1997 31,652,142 $19,782 $ 1,048 $182,890
$203,720
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
Consolidated Statements of Financial Condition
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except share and per
share amounts)
July 31 1997
1996
<S> <C>
<C>
Assets
Cash $ 22,423
$ 17,156
Securities segregated for regulatory purposes,
at market 280,100
225,200
Deposits with clearing organizations and others 9,153
7,655
Receivable from brokers and dealers and
clearing organizations 37,730
16,978
Receivables from customers 358,020
314,436
Securities purchased under agreements to resell 146,881
69,278
Securities owned, at market 275,611
229,278
Memberships in exchanges, at cost (market value-
$4,202 at July 31, 1997; $3,722 at
July 31, 1996) 719
719
Furniture, equipment and leasehold improvements,
at cost (less allowances for depreciation and
amortization-$16,257 at July 31, 1997;
$13,362 at July 31, 1996) 24,062
18,492
Building and improvements, at cost (less
allowance for depreciation-$644 at
July 31, 1997; $92 at July 31, 1996) 19,356
19,908
Other assets 34,202
27,548
$1,208,257
$946,648
Liabilities and Stockholders' Equity
Short-term borrowings $ 570
$ 31,400
Mortgage note payable 19,714
19,965
Commercial paper 106,930
42,928
Payable to brokers and dealers and clearing
organizations 12,718
9,201
Payable to customers 583,922
484,547
Customer drafts payable 17,362
14,456
Securities sold under agreements to repurchase 97,417
54,826
Securities sold, not yet purchased, at market 94,298
62,972
Other liabilities 71,606
57,345
1,004,537
777,640
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares; 31,652,142
shares issued and outstanding at July 31, 1997;
20,437,597 at July 31, 1996 19,782
12,773
Additional paid-in capital 1,048
1,511
Retained earnings 182,890
154,724
203,720
169,008
$1,208,257
$946,648
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
Morgan Keegan, Inc. and Subsidiaries
Years ended July 31 1997 1996
1995
<S> <C> <C>
<C>
Cash Flows From Operating Activities: (In
thousands)
Net income $34,378
$33,867 $23,848
Non-cash items included in earnings:
Depreciation and amortization 7,023
4,387 3,501
Deferred income taxes (1,000)
(750) (1,900)
Amortization of restricted stock 2,500
2,580 1,800
42,901
40,084 27,249
(Increase) decease in operating assets:
Receivable from brokers and dealers and
clearing organizations (20,752)
8,068 4,899
Deposits with clearing organizations
and others (1,498)
(5,064)
Receivable from customers (43,584)
(53,729) (23,943)
Securities segregated for regulatory
purposes, at market (54,900)
800 (190,299)
Securities owned, at market (46,333)
(19,363) (42,347)
Other assets (5,654)
(1,733) (10,462)
(Decrease) increase in operating liabilities:
Payable to brokers and dealers and
clearing organizations 3,517
3,814 (8,194)
Payable to customers 99,375
46,029 197,377
Customer drafts payable 2,906
682 2,824
Securities sold, not yet purchased, at market 31,326
(5,458) 32,445
Other liabilities 14,261
11,096 (8,796)
(21,336)
(9,794) (51,560)
Cash provided by (used in) operating activities 21,565
30,290 (24,311)
Cash Flows From Financing Activities:
Commercial paper 64,002
35,460 (3,125)
Mortgage note payable
20,000
Mortgage note payments (251)
(35)
Issuance of common stock 4,188
2,922 2,233
Retirement of common stock (142)
(4,535) (9,349)
Dividends paid (6,212)
(5,283) (4,440)
Short-term borrowings (30,830)
(96,249) 111,149
Securities purchased under agreements
to resell (77,603)
19,466 (29,050)
Securities sold under agreements to
repurchase 42,591
22,583 (26,489)
Cash provided by (used in) financing activities (4,257)
(5,671) 40,929
Cash Flows From Investing Activities:
Payments for furniture, equipment and
leasehold improvements (12,041)
(9,750) (7,185)
Building purchase
(20,000)
Cash used in investing activities (12,041)
(29,750) (7,185)
Net increase (decrease) in cash 5,267
(5,131) 9,433
Cash at beginning of period 17,156
22,287 12,854
Cash at end of period $22,423
$17,156 $22,287
</TABLE>
Income tax payments totaled $19,400,000 in 1997, $20,275,000 in
1996, and $14,651,000 in 1995. Interest payments totaled
$44,499,000 in 1997, $32,761,000 in 1996, and $23,445,000 in
1995.
See accompanying notes.
<PAGE>
Notes to Consolidated Financial Statements
Morgan Keegan, Inc., and Subsidiaries
July 31, 1997
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 primarily in the southern
United States.
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 third business day following the transaction
date, which is not materially different from a trade date basis.
Securities: Securities owned and securities sold, not yet
purchased 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 the
settlement date. Underwriting fees are generally recorded on the
date the underwriting syndicate is closed.
Fixed Assets: 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. Building and improvements are carried at cost and are
being depreciated over a thirty-one year period.
Securities-Lending Activities: Securities borrowed and securities
loaned transactions are generally reported as collateralized
financings except where letters of credit or other securities are
used as collateral. Securities borrowed transactions require the
Company to deposit cash, letters of credit, or other collateral
with the lender. With respect to securities loaned, the Company
receives collateral in the form of cash or other collateral in an
amount generally in excess of the market value of securities
loaned. The Company monitors the market value of securities
borrowed and loaned on a daily basis, with additional collateral
obtained or refunded as necessary.
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
represent securities purchased under an agreement to resell of
$280,100,000 and $225,200,000 at July 31, 1997 and 1996,
respectively.
<PAGE>
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.
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 five years.
Stock-based Compensation: The Company grants stock options for a
fixed number of shares to employees with an exercise price equal
to the fair value of the shares at the date of grant. The
Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and,
accordingly, recognized no compensation expense for the stock
option grants.
Other Accounting Pronouncements: In December 1996, the Financial
Accounting Standards Board (FASB) issued Statement No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125 Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Statement
127 defers the effective date of provisions of Statement 125
relating to the recognition of collateral, securities lending
transactions, repurchase agreements, dollar-rolls, and similar
transactions until January 1, 1998.
In February 1997, the FASB issued Statement No. 128, "Earnings
Per Share." Statement 128 simplifies the calculation of earnings
per share (EPS) and makes it comparable to international EPS
standards. Statement 128 is effective for both interim and
annual periods ending after December 15, 1997 and earlier
application is not permitted. The Company does not believe that
the adoption of this statement will have a material effect on its
consolidated financial position or results of operations.
In June 1997, the FASB issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which
is effective for annual and interim periods ending after December
15, 1997. This statement established standards for the method
that public entities use to report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments
in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and
services, geographical areas and major customers.
<PAGE>
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
NOTE 2-BORROWINGS
The mortgage note payable relates to the Memphis headquarters
location acquired May 31, 1996, and requires monthly principal
and interest payments of approximately $160,000. The mortgage
bears interest at 8.25% and is secured by buildings and
improvements with a book value of $19,356,000. Principal
maturities under the mortgage note payable for the succeeding 5
years are as follows, in thousands:
<TABLE>
<C> <C>
1998 $ 272
1999 297
2000 318
2001 350
2002 380
Thereafter 18,097
$19,714
</TABLE>
Subsequent to year end, an agreement was entered into to sell the
Memphis headquarters building. A portion of the proceeds will be
used to repay the mortgage not payable (See Note 13).
The short-term borrowings of $570,000 and $31,400,000 at July 31,
1997 and 1996 respectively, consist of loans payable on demand
primarily used to finance clearance of securities and to carry
customers' margin accounts and firm positions. The notes bear
interest at the broker loan rate, which was 6.4% and 6.0% at July
31, 1997 and 1996, respectively.
The Company had total lines of credit of $380,000,000 at July 31,
1997, with expirations prior to July 31, 1998, under which a
maximum of $205,000,000 could be borrowed on an unsecured basis.
There were no compensating balances associated with these lines
of credit. There were no borrowings outstanding on these lines
of credit at July 31, 1997.
The Company also issues its own commercial paper to investors at
fluctuating interest rates (5.75% and 5.625% at July 31, 1997 and
1996, respectively). The paper matures over various terms not to
exceed nine months.
The weighted average interest rate on all forms of short-term
borrowings for the years ended July 31, 1997 and 1996 was 6.85%
and 7.04%, respectively.
<PAGE>
NOTE 3-SECURITIES
Securities owned for trading purposes consist of the following at
July 31,
in thousands:
<TABLE>
1997
1996
<S> <C> <C>
U.S. government obligations $163,544
$121,142
State and municipal obligations 57,690
45,863
Corporate bonds 44,376
48,055
Stocks 9,787
14,202
Bankers' acceptance 214
16
$275,611
$229,278
</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 July 31, 1997 and July 31, 1996, as
determined by management of the Company.
Securities sold, not yet purchased consist of the following at
July 31,
in thousands:
<TABLE>
1997
1996
<S> <C> <C>
U.S. government obligations $80,983
$54,422
State and municipal obligations 230
122
Corporate bonds 525
3,095
Stocks 12,560
5,333
$94,298
$62,972
</TABLE>
NOTE 4-LEASES
The Company leases office space, furniture and equipment under
noncancellable leases expiring through 2007, 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>
<C> <C>
1997 $9,124
1996 $8,838
1995 $7,615
</TABLE>
Aggregate future annual minimum rental commitments, excluding
escalations, for the years ending July 31 are as follows, in
thousands:
<TABLE>
<C> <C>
1998 $ 7,890
1999 6,857
2000 6,278
2001 5,683
2002 4,933
Thereafter 19,085
$50,726
</TABLE>
<PAGE>
NOTE 5-COMMITMENTS AND CONTINGENCIES
At July 31, 1997, the Company was obligated under commercial
letters of credit of approximately $18,500,000 drawn in favor of
certain clearing organizations which were collateralized by
customer-owned securities of $19,266,000 and firm-owned
securities of $5,500,000. These obligations normally settle
through the clearance of the related securities transactions with
the respective organizations.
The Company is named in and subject to various proceedings and
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 the resolution of such
litigation and claims will have no material adverse effect on the
Company's consolidated results of operations or financial
condition.
<PAGE>
NOTE 6-INCOME TAXES
Significant components of the provision (credit) for income taxes
are as follows for the years ended July 31, in thousands:
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
Federal:
Current $18,500 $18,450 $14,000
Deferred (1,000) (750) (1,900)
17,500 17,700 12,100
State 3,400 3,600 2,400
$20,900 $21,300 $14,500
</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>
1997 1996
1995
Amount Percent Amount Percent
Amount Percent
<S> <C> <C> <C> <C> <C>
<C>
Federal Statutory
rate applied to
pretax earnings $19,347 35.0% $19,308 35.0%
$13,422 35.0%
State and local
taxes, less income
tax benefit 2,210 4.0 2,340 4.2
1,560 4.0
Non-taxable interest,
less non-deductible
interest (533) (1.0) (353) (0.6)
(404) (1.0)
Other - net (124) - 5 -
(78) (0.2)
$20,900 38.0% $21,300 38.6%
$14,500 37.8%
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities as of July 31 are as follows, in thousands:
<TABLE>
1997
1996
<S> <C>
<C>
Deferred tax assets:
Deferred compensation and restricted stock $3,212
$2,125
Non-deductible reserves 2,265
1,915
Insurance and benefits 1,649
1,709
Trade date profit 482
271
Other 19
67
7,627
6,087
Deferred tax liabilities:
Depreciation and other building related items 2,464
1,778
Other 163
309
2,627
2,087
Net deferred tax assets $5,000
$4,000
</TABLE>
<PAGE>
NOTE 7-COMMON STOCK
The Board of Directors has reserved 9,168,750 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 Options 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 1,777,500
remaining shares available to be granted at July 31, 1997.
The Board of Directors has authorized 675,000 shares to be
granted to non-employee directors in the form of incentive stock
options. As of July 31, 1997, 162,000 options were outstanding
and exercisable at an average price of $7.07. During fiscal year
1997, 108,000 options were exercised at an average price of $5.99
and 40,500 options were granted at an average price of $11.83.
Employee stock option activity, which includes 32,364 shares
that are exercisable, is summarized as follows:
<TABLE>
Average
Shares Price Aggregate
<S> <C> <C> <C>
<C>
Exercisable
Outstanding at August 1, 1994 124,736 $ 3.27 $407,248
Granted 88,125 5.87 516,790
1995-2001
Exercised (15,188) ( 1.70)
(25,773)
Forfeited (30,199) ( 4.49)
(135,651)
Outstanding at July 31, 1995 167,474 4.55 762,614
Granted 28,313 5.60 158,463
1995-2001
Exercised (62,438) ( 1.70)
(106,324)
Outstanding at July 31, 1996 133,349 6.11 814,753
Granted 9,750 11.64 113,500
1997-2002
Exercised (10,184) ( 5.60)
(57,032)
Outstanding at July 31, 1997 132,915 $ 6.55 $871,221
</TABLE>
The Company has approximately 2,500,500 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, 4,275,000 shares have been
reserved to allow employees to purchase company shares at a 15%
discount, not to exceed 506,250 shares to all employees in any
year.
Activity by year under the plan is summarized as follows:
<TABLE>
<C> <C>
Year Shares sold
1995 488,699
1996 428,007
1997 449,808
</TABLE>
The Company accounts for stock-based compensation under the
provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," rather than the fair
value method in Financial Accounting Standards Board Statement
No. 123, "Accounting for Stock-Based Compensation." Accordingly,
no compensation costs were charged to earnings for options
granted under the Company's plans.
<PAGE>
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period. The Company's pro forma information for the years ended
July 31 are as follows:
<TABLE>
1997 1996
<S> <C>
<C>
Pro forma net income
$33,499 $33,199
Pro forma earnings per share
1.07 1.08
</TABLE>
NOTE 8-REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The Company enters into sales of securities under agreements to
repurchase, with the obligation to repurchase the securities sold
reflected as a liability in the consolidated statement of
financial condition.
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.
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,
1997, 1996, and 1995 totaled $1,994,000, $1,475,000 and $974,000,
respectively.
NOTE 10-REGULATORY REQUIREMENTS
The Company's broker/dealer subsidiary, Morgan Keegan & Company,
Inc., is a member of the New York Stock Exchange and 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 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, 1997, the subsidiary had net capital of $114,572,020
which was 31% of its aggregate debit balances and $107,182,218 in
excess of the 2% net capital requirement. At July 31, 1996, the
subsidiary had net capital of $102,154,559, which was 33% of its
aggregate debit balances and $95,900,041 in excess of the 2% net
capital requirement.
<PAGE>
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 increase, 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.
In the normal course of business, the Company enters into
underwriting and forward and future commitments. At July 31,
1997, the contract amount of future contracts to purchase and
sell U.S. Government and municipal securities was approximately
$104 and $9 million, respectively. At July 31, 1996, the
contract amount of future contracts to purchase and sell U.S.
Government and municipal securities was approximately $20 million
and $36 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. Substantially all transactions relating to
such commitments were subsequently settled and had no material
effect on the Company's consolidated financial position.
The Company will occasionally hedge a portion of its long
proprietary inventory position through the use of short positions
in financial future contracts. At July 31, 1997 and 1996, the
Company had approximately $11 million and $47 million of these
contracts, respectively. The contract amounts do not necessarily
represent future cash requirements.
While the Company regularly participates in the trading of some
derivative securities for its customers, this trading is not a
significant portion of the Company's business.
<PAGE>
NOTE 12-QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
(In thousands, except per share
amounts)
Quarter Ended
October 31 January 31 April 30
July 31
<S> <C> <C> <C>
<C>
1997:
Revenues $74,415 $83,527 $77,283
$93,309
Expenses 62,666 68,853 66,373
75,364
Income before income taxes 11,749 14,674 10,910
17,945
Net income 7,349 9,274 6,910
10,845
Net income per share 0.24 0.30 0.22
0.34
Dividends per share 0.05 0.05 0.05
0.05
Stock price range:
High 10.59 11.92 14.67
14.63
Low 8.25 10.33 10.67
11.92
1996:
Revenues $68,940 $77,457 $79,297
$75,712
Expenses 54,710 62,540 65,221
63,768
Income before income taxes 14,230 14,917 14,076
11,944
Net income 8,830 9,217 8,576
7,244
Net income per share 0.29 0.30 0.27
0.24
Dividends per share 0.04 0.04 0.05
0.05
Stock price range:
High 8.42 9.09 8.92
8.83
Low 7.25 7.25 8.00
8.08
</TABLE>
NOTE 13-SUBSEQUENT EVENTS
On August 21, 1997, the Board of Directors approved a
three-for-two split, effected in the form of a stock dividend, of
the common shares which was distributed on September 11, 1997 to
shareholders of record on September 3, 1997. Common Stock issued
and additional paid-in capital as of July 31, 1997 have been
restated to reflect this split. The number of common shares
issued at July 31, 1997 after giving effect to the split, was
31,652,142 (21,101,428 before the split).
All share, earnings per share, dividends per share and quarterly
stock price data included in the consolidated financial
statements and notes thereto have been adjusted to give effect to
the stock split.
Also, the Company entered into an agreement during September 1997
to sell its corporate headquarters building for $36 million and
lease back a portion of it under a 10-year lease agreement. The
$13.8 million gain will be deferred and taken into income over
the 10-year life of the lease. A portion of the sales proceeds
will be used to pay off the mortgage note payable.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from
the Morgan Keegan, Inc. 1997 Annual Report and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 22,423
<RECEIVABLES> 379,158
<SECURITIES-RESALE> 426,981
<SECURITIES-BORROWED> 25,745
<INSTRUMENTS-OWNED> 275,611
<PP&E> 43,418
<TOTAL-ASSETS> 1,208,257
<SHORT-TERM> 570
<PAYABLES> 606,842
<REPOS-SOLD> 97,417
<SECURITIES-LOANED> 7,160
<INSTRUMENTS-SOLD> 94,298
<LONG-TERM> 19,714
0
0
<COMMON> 19,782
<OTHER-SE> 183,938
<TOTAL-LIABILITY-AND-EQUITY> 1,208,257
<TRADING-REVENUE> 109,964
<INTEREST-DIVIDENDS> 64,262
<COMMISSIONS> 79,859
<INVESTMENT-BANKING-REVENUES> 51,179
<FEE-REVENUE> 23,270
<INTEREST-EXPENSE> 44,652
<COMPENSATION> 164,364
<INCOME-PRETAX> 55,278
<INCOME-PRE-EXTRAORDINARY> 55,278
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,378
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.10
</TABLE>
