<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 January 31, 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 executive (Zip Code)
offices)
901-524-4100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding
12 months (or for such shorter period that the Registrant was
required to file such reports),
and (2) has been subject to such filing requirements for at
least the past 90 days. Yes X No .
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed
all documents and reports required
to be filed by sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent
to the distribution of securities under a plan confirmed
by a court. YES NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each
of the issuer's classes of Common
Stock, as of the latest practical date.
Class Outstanding at January 31, 1998
Common Stock $.625 par value 32,937,354
<PAGE>
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements
of Financial Condition. . . . . . . . January 31, 1998 and July 31, 1997
Consolidated Statements
of Income . . . . . . . . . . . . . . Three months and six months ended
January 31, 1998 and 1997
Consolidated Statements
of Cash Flows . . . . . . . . . . . . Six months ended
January 31, 1998 and 1997
Notes to Consolidated
Financial Statements. . . . . . . . . January 31, 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
January 31 July 31
1998 1997
(unaudited)
(in thousands)
<TABLE> <C> <C>
ASSETS
Cash $ 14,495 $ 22,423
Securities segregated for regulatory
purposes, at market 295,700 280,100
Deposits with clearing organizations
and others 9,049 9,153
Receivable from brokers and dealers and
clearing organizations 34,465 37,730
Receivable from customers 417,853 358,020
Securities purchased under agreements
to resell 49,485 146,881
Securities owned, at market 307,052 275,611
Memberships in exchanges, at cost
(market value-$4,679,000 at 1-31-98;
$4,202,000 at 7-31-97) 719 719
Furniture, equipment and leasehold
improvements, (less allowances for
depreciation and amortization $16,745,000
at 1-31-98; $16,257,000 at 7-31-97) 22,457 24,062
Building and improvements, at cost (less
allowance for depreciation $644,000
at 7-31-97) 19,356
Other assets 57,754 34,202
$1,209,029 $1,208,257
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 121,100 $ 570
Mortgage note payable 19,714
Commercial paper 41,312 106,930
Payable to brokers and dealers and
clearing organizations 19,859 12,718
Payable to customers 627,049 583,922
Customer drafts payable 16,363 17,362
Securities sold under agreements to
repurchase 4,132 97,417
Securities sold, not yet purchased,
at market 58,822 94,298
Other liabilities 80,788 71,606
969,425 1,004,537
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares;
32,937,354 shares issued and outstanding
at 1-31-98; 31,652,142 at 7-31-97 20,586 19,782
Additional paid-in capital 15,797 1,048
Retained earnings 203,221 182,890
239,604 203,720
$1,209,029 $1,208,257
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Three Months Ended Six Months Ended
January 31 January 31
(in thousands, except per share amounts)
<TABLE> <C> <C> <C> <C>
1998 1997 1998 1997
REVENUES
Commissions $23,632 $19,884 $ 52,083 $ 36,297
Principal transactions 26,521 28,635 57,723 56,739
Investment banking 19,707 14,121 35,502 23,489
Interest 17,847 15,644 35,743 30,378
Investment management fees 4,969 1,753 9,612 3,401
Other 3,896 3,490 7,106 7,638
TOTAL 96,572 83,527 197,769 157,942
EXPENSES
Compensation 47,675 41,772 98,122 79,266
Floor brokerage and
clearance 1,302 1,174 2,898 2,432
Communications 5,426 5,280 10,990 10,712
Travel and promotional 2,780 2,262 5,559 4,165
Occupancy and equipment
costs 4,752 3,977 9,154 7,421
Interest 11,957 10,769 24,455 21,104
Taxes, other than income
taxes 3,187 2,546 5,092 4,011
Other operating expense 1,491 1,073 2,810 2,408
78,570 68,853 159,080 131,519
INCOME BEFORE INCOME TAXES 18,002 14,674 38,689 26,423
INCOME TAX EXPENSE 6,600 5,400 14,500 9,800
NET INCOME $11,402 $ 9,274 $ 24,189 $ 16,623
NET INCOME PER SHARE:
Basic $ 0.35 $ 0.30 $ 0.75 $ 0.54
Diluted $ 0.35 $ 0.30 $ 0.75 $ 0.54
DIVIDENDS PER SHARE $ 0.06 $ 0.05 $ 0.12 $ 0.10
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 32,444 30,877 32,281 30,778
Diluted 32,627 31,048 32,457 30,933
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Six Months Ended
January 31
1998 1997
(in thousands)
</TABLE>
<TABLE> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 24,189 $16,623
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 4,816 3,012
Deferred income taxes (4,790) (670)
Amortization of gain on sale of building
and related assets (460)
Amortization of restricted stock 1,500 1,500
25,255 20,465
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations 3,265 (13,126)
Deposits with clearing organizations and others 104 (1,513)
Receivable from customers (59,833) 172
Securities segregated for regulatory purposes (15,600) (39,600)
Securities owned (31,441) (98,775)
Other assets (18,762) (6,504)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations 7,141 33
Payable to customers 43,127 47,153
Customer drafts payable (999) (1,453)
Securities sold, not yet purchased (35,476) 5,039
Other liabilities (3,943) (5,907)
(112,417) (114,481)
Cash used for operating activities (87,162) (94,016)
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper (65,618) 37,776
Mortgage note payable (19,714) (116)
Issuance of Common Stock 14,053 3,555
Retirement of Common Stock (142)
Dividends paid (3,858) (2,850)
Short-term borrowings 120,530 50,170
Securities purchased under agreements to resell 97,396 (33,004)
Securities sold under agreements to repurchase (93,285) 42,567
Cash provided by financing activities 49,504 97,956
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (4,852) (6,813)
Proceeds from sale of building and related
assets 34,582
Cash provided by (used for) investing
activities 29,730 (6,813)
Decrease in Cash (7,928) (2,873)
Cash at Beginning of Period 22,423 17,156
Cash at End of Period $ 14,495 $ 14,283
</TABLE>
Income tax payments were approximately $22,963,000 and
$9,792,000 for the
six month period ending January 31, 1998, and 1997, respectively.
Interest payments
were approximately $24,758,000 and $20,872,000 for the same
periods, respectively.
See accompanying notes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
January 31, 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 six months ended January 31, 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 January 31, 1998, M.K. & Co. had net capital of
$146,741,276 which was
34% of its aggregate debit balances and $138,154,973
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 Six Months Ended
January 31 January 31
1998 1997 1998 1997
<TABLE> <C> <C> <C> <C>
Numerator
Net Income $11,401,769 $9,273,758 $24,189,350 $16,622,575
Denominator
Denominator for basic
earnings per share -
weighted average shares 32,443,664 30,876,811 32,281,245 30,777,726
Effect of dilutive
securities - stock
options 183,051 170,774 175,543 155,082
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversations 32,626,715 31,047,585 32,456,788 30,932,808
Basic earnings per share $ 0.35 $ 0.30 $ 0.75 $ 0.54
Diluted earnings per
share $ 0.35 $ 0.30 $ 0.75 $ 0.54
<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 the second highest level of revenues and
net income for the quarter ended January 31, 1998. Revenues for the
quarter were $96,572,000--16% higher than the second quarter of fiscal
1997 when revenues were $83,527,000. The largest component of the
increase was a 40% increase in investment banking revenues. Follow-on
offering activity remained high throughout the quarter as many of the
Registrant's clients took advantage of the current markets to finance
their expansion efforts.
Operating expenses increased to $78,570,000 compared to $68,854,000
in the same period a year ago. This $9,716,000 increase is attributable
to a 14% increase in compensation and an 11% increase in interest expense.
Both increases are in proportion to the increase in trading volume.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Results of Operations (continued)
Net income for the quarter increased to $11,402,000, or $.35 per share,
versus $9,274,000, $.30 per share a year ago. Market conditions
continued to be favorable throughout the quarter with the Dow Jones
Industrial Average hovering at 8000.
Total revenues for the six months ended January 31, 1998, totaled
$197,769,000 or 25% higher than the same period of the previous year
when revenues were $157,942,000. The most significant increases
were noted in commission income, investment banking revenues and
investment advisory revenues. These increases are the result of the
bullish market conditions and continued growth of the Registrant's
retail branch system.
Year-to-date operating expenses increased 21% to $159,080,000 from
$131,519,000 for the six months ended January 31, 1997. Factors
contributing to this increase include a 24% increase in compensation
and a 16% increase in interest cost. These increases are relative to
the increase in revenues and trading volumes.
Net income for the six months was $24,189,000 or $.75 per share
which is well ahead of last year's record pace when net income
equaled $16,623,000 or $.54 per share.
Liquidity and Capital Resources
High liquidity is reflected in the Registrant's statement of financial
condition with approximately 93% 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 six month period
ended January 31, 1998, cash flows used for operating activities were
$87,162,000 primarily due to a $59,833,000 increase in receivables
from customers.
Cash flows from financing activities were $49,504,000 for the six
months ended January 31, 1998. Changes in securities owned,
customer receivables and broker receivables directly affect the
financing activities.
Investing activities resulted in a $29,730,000 increase in cash flows
for the current period versus a $6,813,000 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 $36 million dollars.
At January 31, 1998, the Registrant's broker/dealer subsidiary, which
is regulated under the SEC's uniform net capital rule, had net capital
of $146,741,276 which was $138,154,973 in excess of the 2% net
capital requirement. During the quarter, the Registrant declared
and paid cash dividends of $.06 per share on the shares outstanding.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Liquidity and Capital Resources (continued)
As previously disclosed in Form 10-Q filed for the quarter ended
October 31, 1997, the Registrant declared and paid a 3-for-2
stock split accounted for as 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. No
stock has been repurchased under the plan year-to-date. Since
inception of the repurchase program, the Registrant has
repurchased 5,158,184 shares for $30,801,989.
<PAGE>
MORGAN KEEGAN, INC. and Subsidiaries
PART II OTHER INFORMATION
Item 1. Legal proceedings
Morgan Keegan & Company, Inc. is subject to various claims
incidental to its securities business. While the ultimate
resolution of pending litigation and claims cannot be predicted
with certainty, based upon the information currently known,
management is of the opinion that it has meritorious defenses
and has instructed its counsel to vigorously defend such lawsuits
and claims, and that liability, if any, resulting from all
litigation will have no material adverse effect on the Registrant's
consolidated financial condition or results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On November 25, 1997, at the Registrant's annual meeting of its
shareholders, 81% of the 32,273,616 shares outstanding at
October 3, 1997 were represented by proxy. A quorum as
declared present for the conduct of business and the following
proposals were voted on:
Proposal 1: Election of the directors from the following
nominees to serve the registrant for the ensuing year:
Allen B. Morgan, Jr. John W. Stokes, Jr.
William W. Deupree, Jr. Kenneth F. Clark, Jr.
Joseph C. Weller James E. Harwood
Donald Ratajczak Harry Phillips
Results of vote: 99.9% of the votes cast were in favor of this
proposal.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
11. Computation of Earnings per Share
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: March 16, 1998
</Page>
</TABLE>
<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 January 31, 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> JAN-31-1998
<CASH> 14,495
<RECEIVABLES> 446,074
<SECURITIES-RESALE> 345,185
<SECURITIES-BORROWED> 15,293
<INSTRUMENTS-OWNED> 307,052
<PP&E> 22,457
<TOTAL-ASSETS> 1,209,029
<SHORT-TERM> 121,100
<PAYABLES> 660,300
<REPOS-SOLD> 4,132
<SECURITIES-LOANED> 2,971
<INSTRUMENTS-SOLD> 58,822
<LONG-TERM> 0
0
0
<COMMON> 20,586
<OTHER-SE> 219,018
<TOTAL-LIABILITY-AND-EQUITY> 1,209,029
<TRADING-REVENUE> 26,521
<INTEREST-DIVIDENDS> 17,847
<COMMISSIONS> 23,632
<INVESTMENT-BANKING-REVENUES> 19,707
<FEE-REVENUE> 8,865
<INTEREST-EXPENSE> 11,957
<COMPENSATION> 47,675
<INCOME-PRETAX> 18,002
<INCOME-PRE-EXTRAORDINARY> 18,002
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,402
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
