<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 APRIL 30, 1998
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 (Zip Code)
executive 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 April 30, 1998
Common Stock $.625 par value 32,985,954
<PAGE>
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements
of Financial Condition. . . . . . . . April 30, 1998 and July 31, 1997
Consolidated Statements
of Income . . . . . . . . . . . . . . Three months and nine months ended
April 30, 1998 and 1997
Consolidated Statements
of Cash Flows . . . . . . . . . . . . Nine months ended
April 30, 1998 and 1997
Notes to Consolidated
Financial Statements. . . . . . . . . April 30, 1998
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
April 30 July 31
1998 1997
(unaudited)
(in thousands)
<TABLE> <C> <C>
ASSETS
Cash $ 27,232 $ 22,423
Securities segregated for regulatory
purposes, at market 366,200 280,100
Deposits with clearing organizations
and others 9,532 9,153
Receivable from brokers and dealers and
clearing organizations 34,272 37,730
Receivable from customers 480,106 358,020
Securities purchased under agreements
to resell 162,322 146,881
Securities owned, at market 505,301 275,611
Memberships in exchanges, at cost
(market value-$5,484,000 at 4-30-98;
$4,202,000 at 7-31-97) 2,428 719
Furniture, equipment and leasehold
improvements, (less allowances for
depreciation and amortization $18,798,000
at 4-30-98; $16,257,000 at 7-31-97) 22,944 24,062
Building and improvements, at cost (less
allowance for depreciation $644,000
at 7-31-97) 19,356
Other assets 49,394 34,202
$1,659,731 $1,208,257
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 195,800 $ 570
Mortgage note payable 19,714
Commercial paper 64,138 106,930
Payable to brokers and dealers and
clearing organizations 58,923 12,718
Payable to customers 751,992 583,922
Customer drafts payable 22,521 17,362
Securities sold under agreements to
repurchase 117,181 97,417
Securities sold, not yet purchased,
at market 121,513 94,298
Other liabilities 76,724 71,606
1,408,792 1,004,537
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares;
32,985,954 shares issued and outstanding
at 4-30-98; 31,652,142 at 7-31-97 20,616 19,782
Additional paid-in capital 16,802 1,048
Retained earnings 213,521 182,890
250,939 203,720
$1,659,731 $1,208,257
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Three Months Ended Nine Months Ended
April 30 April 30
(in thousands, except per share amounts)
1998 1997 1998 1997
<TABLE> <C> <C> <C> <C>
REVENUES
Commissions $ 29,354 $ 19,110 $ 81,437 $ 55,407
Principal transactions 33,459 24,903 91,182 81,643
Investment banking 15,043 12,097 50,545 35,585
Interest 17,200 15,616 52,942 45,994
Investment management fees 4,778 1,896 14,390 5,298
Other 3,712 3,661 10,819 11,299
TOTAL 103,546 77,283 301,315 235,226
EXPENSES
Compensation 53,069 38,572 151,191 117,838
Floor brokerage and
clearance 1,713 1,583 4,611 4,016
Communications 6,156 5,441 17,146 16,153
Travel and promotional 2,154 2,039 7,713 6,204
Occupancy and equipment
costs 4,881 4,111 14,035 11,532
Interest 11,047 10,906 35,502 32,010
Taxes, other than income
taxes 2,993 2,484 8,085 6,495
Other operating expense 2,261 1,237 5,071 3,645
84,274 66,373 243,354 197,893
INCOME BEFORE INCOME TAXES 19,272 10,910 57,961 37,333
INCOME TAX EXPENSE 7,000 4,000 21,500 13,800
NET INCOME $ 12,272 $ 6,910 $ 36,461 $ 23,533
NET INCOME PER SHARE:
Basic $ 0.37 $ 0.22 $ 1.12 $ 0.76
Diluted $ 0.37 $ 0.22 $ 1.12 $ 0.76
DIVIDENDS PER SHARE $ 0.06 $ 0.05 $ 0.18 $ 0.15
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 32,786 31,447 32,488 30,853
Diluted 32,947 31,597 32,663 31,026
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Nine Months Ended
April 30
1998 1997
(in thousands)
<TABLE> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $36,461 $23,533
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 5,850 4,672
Deferred income taxes (5,550) (891)
Amortization of gain on sale of building
and related assets (805)
Amortization of restricted stock 2,250 2,150
38,206 29,464
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations 3,458 2,678
Deposits with clearing organizations and others (379) (1,589)
Receivable from customers (122,086) (34,883)
Securities segregated for regulatory purposes (86,100) 26,500
Securities owned (229,690) (160,731)
Other assets (9,642) (9,018)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations 46,205 408
Payable to customers 168,070 15,881
Customer drafts payable 5,159 (2,522)
Securities sold, not yet purchased 27,215 52,599
Other liabilities (7,662) (5,074)
(205,452) (115,751)
Cash used for operating activities (167,246) (86,287)
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper (42,792) 33,762
Mortgage note payable (19,714) (189)
Issuance of Common Stock 14,337 4,114
Retirement of Common Stock (142)
Dividends paid (5,829) (4,532)
Short-term borrowings 195,230 120,670
Securities purchased under agreements to resell (15,441) (90,865)
Securities sold under agreements to repurchase 19,764 30,889
Cash provided by financing activities 145,555 93,707
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (6,373) (9,218)
Membership in exchanges (1,709)
Proceeds from sale of building and
related assets 34,582
Cash provided by (used for)
investing activities 26,500 (9,218)
Increase (decrease) in Cash 4,809 (1,798)
Cash at Beginning of Period 22,423 17,156
Cash at End of Period $ 27,232 $ 15,358
</TABLE>
Income tax payments were approximately $29,240,000 and $14,904,000
For the nine month period ending April 30, 1998, and 1997, respectively.
Interest payments were approximately $35,873,000 and $31,575,000 for
the same periods, respectively.
See accompanying notes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
April 30, 1998
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Morgan Keegan, Inc. and its wholly owned subsidiaries (collectively
Referred to as the Registrant). The accompanying unaudited
consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting
principles for complete financial statements.
In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered
necessary for a fair presentation have been included.
Operating results for the nine months ended April 30, 1998,
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 April 30, 1998, M.K. & Co. had net capital of $149,755,779
which was 30% of its aggregate debit balances and $139,894,240
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 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share." Statement No. 128
replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings
per share. All earnings per share amounts for all periods
have been presented, and where necessary, restated to conform
to the Statement No. 128 requirements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
The following table sets forth the computation of basic
and diluted earnings per share:
Three Months Ended Nine Months Ended
April 30 April 30
1998 1997 1998 1997
<TABLE> <C> <C> <C> <C>
Numerator
Net Income $12,271,156 $ 6,910,000 $36,460,507 $23,532,575
Denominator
Denominator for basic
earnings per share -
weighted average
shares 32,786,066 31,446,633 32,488,248 30,853,310
Effect of dilutive
securities - stock
options 160,666 150,644 174,294 172,868
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversations 32,946,732 31,597,277 32,662,542 31,026,178
Basic earnings per share $ 0.37 $ 0.22 $ 1.12 $ 0.76
Diluted earnings per
share $ 0.37 $ 0.22 $ 1.12 $ 0.76
</TABLE>
<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 Securities Exchange Act of 1934, as amended.
Prospective investors are cautioned that any such forward-looking
statements are not guarantees for future performance 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. A committee has been 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.
The cost of implementing Year 2000 compliance issues is not
expected to be material to the Registrant's consolidated
results of operations or financial condition.
Results of Operations
The Registrant recognized record level revenues of $103,546,000
for the quarter ended April 30, 1998-surpassing the previous
record set in the first quarter when revenues totaled $101,198,000.
The current quarter revenues exceeded the same period in the
previous year by $26,263,000-a 34% increase over the $77,283,000
recorded in the third quarter of fiscal 1997. The largest
components of this increase include a $10,244,000 (54%) increase
in commissions and a $8,556,000 (34%) increase in principal
transactions. Strong market activity in both fixed income and
equity markets contributed to these increases.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Results of Operations (continued)
Operating expenses increased $17,901,000, or 27%, to $84,274,000
for the quarter compared to $66,373,000 in the previous year.
The most significant increase was in compensation expense that
increased $14,497,000 or 38%. This increase is in direct
proportion to the increase in revenues.
Net income for the quarter increased to $12,272,000, or $0.37
per share, versus $6,910,000, or $0.22 per share in the
previous year. Rewarding opportunities were created for the
Registrant with the fluctuations in the markets. The Dow
Jones Industrial Average reached record levels during the
quarter and closed on April 30th at 9,063.
Total revenues for the nine months ended April 30, 1998,
totaled $301,315,000 or 28% higher than the same nine month
period of the previous year when revenues totaled $235,226,000.
The most significant increases were noted in commission
income (47%), investment banking (42%) and investment advisory
revenues(172%). These increases are the result of the
continued growth of the retail branch system, the bullish
market conditions,and an increasing commitment to the
Registrant's advisory business.
Year-to-date operating expenses increased 23% to $243,354,000
from $197,893,000 for the same period in the previous year.
Factors contributing to this increase included a 28% increase
in compensation expense and an 11% increase in interest expense.
These increases are relative to the increase in associated
revenues and trading volumes for the period.
Net income for the nine months was $36,461,000, or $1.12
per share, which is ahead of last year's record pace when
net income totaled $23,533,000, or $.0.76 per share.
Liquidity and Capital Resources
High liquidity is reflected in the Registrant's statement of
financial condition with approximately 96% of its assets
consisting of cash or assets readily convertible into cash.
Financing resources include the Registrant's equity capital,
commercial paper, short-term borrowings, repurchase agreements
and other payables. For the nine month period ended
April 30, 1998, cash flows used for operating activities were
$167,246,000 primarily due to a $229,690,000 increase in
securities owned.
Cash flows from financing activities were $145,555,000 for
the nine months ended April 30, 1998. Changes in securities
owned and customer receivables directly affect the Registrant's
financing activities as short-term borrowings increased by
$195,230,000.
Investing activities resulted in a $26,500,000 increase in cash
flows for the current period versus a $9,218,000 decrease in
the previous year. The increase is a result of the sale of the
home office building in the month of October 1997 for
approximately $35 million.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Liquidity and Capital Resources (continued)
At April 30, 1998 the Registrant's broker/dealer subsidiary,
which is regulated under the SEC's uniform net capital rule,
had net capital of $149,755,779, which was $139,894,240 in
excess of the 2% net capital requirement. During the quarter,
the Registrant declared and paid cash dividends of $0.06 per
share on shares outstanding.
As previously disclosed in Form 10-Q filed for the quarters
ended October 31, 1997 and January 31, 1998, the Registrant
declared and paid a 3-for-2 stock split accounted for a stock
dividend. This stock split increased the number of shares
outstanding by 10,756,101 shares. All per share information
has been restated for the stock split.
The Registrant is authorized to repurchase its own stock
under the stock repurchase program begun in November 1993.
Since inception of the repurchase program, the Registrant
has repurchased 5,158,184 shares for $30,801,989. During the
quarter the Board of Directors approved an ongoing stock
repurchase initiative to accommodate the restricted stock
and employee stock purchase programs. Under this initiative,
the Registrant will repurchase 600,000 shares of its common
stock annually on the open market. This systematic repurchase
plan will be used to avoid dilution to shareholders as a
result of these important employee incentive programs. As
of May 31, 1998, the firm had repurchased 60,000 shares at
an aggregate cost of approximately $1,416,000.
<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
None
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: June 11, 1998
??
<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 April 30, 1998, 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> APR-30-1998
<CASH> 27,232
<RECEIVABLES> 494,732
<SECURITIES-RESALE> 528,522
<SECURITIES-BORROWED> 29,178
<INSTRUMENTS-OWNED> 505,301
<PP&E> 22,944
<TOTAL-ASSETS> 1,659,731
<SHORT-TERM> 195,800
<PAYABLES> 825,352
<REPOS-SOLD> 117,181
<SECURITIES-LOANED> 8,084
<INSTRUMENTS-SOLD> 121,513
<LONG-TERM> 0
0
0
<COMMON> 20,616
<OTHER-SE> 229,603
<TOTAL-LIABILITY-AND-EQUITY> 1,659,731
<TRADING-REVENUE> 33,459
<INTEREST-DIVIDENDS> 17,200
<COMMISSIONS> 29,354
<INVESTMENT-BANKING-REVENUES> 15,043
<FEE-REVENUE> 8,490
<INTEREST-EXPENSE> 11,047
<COMPENSATION> 53,069
<INCOME-PRETAX> 19,272
<INCOME-PRE-EXTRAORDINARY> 19,272
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,272
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
</TABLE>
