<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, 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
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, 1998, the Registrant had approximately 32,697,954 shares
of Common Stock outstanding. The aggregate market value of Common Stock
held by non-affiliates was approximately $578,345,000.
DOCUMENTS INCORPORATED HEREIN BY REFERENCE:
Portions of the Registrant's Annual Report to Shareholders for the year
ended July 31, 1998, 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 24, 1998, which will be filed with the Commission pursuant to
Regulation 240.14a(6)(c) prior to October 21, 1998, 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>
<CAPTION>
Year Ended July 31
1998 1997 1996
<S> <C> <C> <C>
Institutional clients 25% 23% 24%
Retail customers 41 42 45
Investment banking and management
fees, interest and other
activities 34 35 31
Total 100% 100% 100%
</TABLE>
M.K. & Co. is a three 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.
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, 1998:
<TABLE>
<CAPTION>
Account Account
Office Executives Office Executives
<S> <C> <C> <C>
Birmingham, Alabama 34 New Orleans, Louisiana 29
Decatur, Alabama 5 Shreveport, Louisiana 14
Fairhope, Alabama 1 Boston, Massachusetts 3
Huntsville, Alabama 13 Jackson, Mississippi 26
Mobile, Alabama 14 New York, New York 5
Montgomery, Alabama 29 Durham, North Carolina 11
Little Rock, Arkansas 42 Raleigh, North Carolina 11
Rogers, Arkansas 6 Wilmington, North Carolina 5
Ft. Lauderdale, Florida 7 Jackson, Tennessee 6
Pensacola, Florida 6 Knoxville, Tennessee 29
Athens, Georgia 7 Memphis, Tennessee
Atlanta, Georgia 20 Headquarters 117
Bowling Green, Kentucky 8 Suburban Offices 46
Lexington, Kentucky 11 Nashville, Tennessee 24
Louisville, Kentucky 24 Austin, Texas 28
Baton Rouge, Louisiana 13 Dallas, Texas 18
Lafayette, Louisiana 10 Houston, Texas 36
Mandeville, Louisiana 4
</TABLE>
TOTAL 662
<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>
<CAPTION>
(Dollars in Thousands)
Year Ended July 31
1998 1997 1996
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Commissions
Listed securities $41,558 10.21 $27,946 8.51 $26,467 8.78
Over-the-counter
securities 31,316 7.69 25,776 7.85 21,849 7.25
Options 6,413 1.58 4,149 1.26 3,243 1.08
Other 30,795 7.56 21,988 6.69 16,311 5.41
TOTAL 110,082 27.04 79,859 24.31 67,870 22.52
Principal transactions
Corporate securities 52,004 12.78 56,134 17.09 59,567 19.76
Municipal securities 18,562 4.56 14,867 4.53 16,345 5.42
U.S. Government
obligations 51,224 12.58 38,963 11.86 39,291 13.04
TOTAL 121,790 29.92 109,964 33.48 115,203 38.22
Investment banking
Corporate securities 30,769 7.56 23,814 7.25 25,990 8.62
Municipal securities 4,372 1.07 3,457 1.05 2,427 0.81
Underwriting, management
and other fees 32,622 8.01 23,908 7.28 21,884 7.26
TOTAL 67,763 16.64 51,179 15.58 50,301 16.69
Interest
Interest on margin
balances 30,038 7.38 24,105 7.34 19,752 6.55
Interest on securities
owned 48,827 11.99 40,157 12.22 30,171 10.01
TOTAL 78,865 19.37 64,262 19.56 49,923 16.56
Investment management
fees 20,187 4.96 12,499 3.80 9,323 3.09
Other income 8,407 2.07 10,771 3.27 8,786 2.92
TOTAL REVENUES $407,094 100.0 $328,534 100.0 $301,406 100.0
</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, 1998, 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, 1998, 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, 1998, 1997, and 1996, institutional
revenues and percentages of total consolidated revenues were $100,284,000
(25%), $76,135,000 (23%), and $73,468,000 (24%), 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, 1998, 1997,
and 1996, revenues and percentages of total consolidated revenues were
$166,313,000(41%), $137,112,000 (42%), $134,807,000 (45%), 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% of total
revenues in fiscal 1998.
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, 1998, the Registrant
made a market in common stock or other equity securities of
approximately 191 corporations, many of which are stocks followed
by its research department.
<PAGE>
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, M.K. & Co. enters into transactions for
U.S. Treasury note futures. The following table sets
forth for the year ended July 31, 1998, 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>
<CAPTION>
Highest Lowest Average
Inventory Inventory Inventory
<S> <C> <C> <C>
Common stocks $ 24,249,069 $ 9,871,820 $ 16,111,674
Corporate debt securities 73,375,759 10,181,565 35,188,521
Tax-exempt securities 315,263,226 83,628,484 162,613,458
U.S. government, agency,
and guaranteed securities 348,909,436 188,744,787 292,936,842
</TABLE>
The following table sets forth the composition of revenues from principal
transactions:
<TABLE>
<CAPTION>
Year Ended July 31
1998 1997 1996
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Common stocks $ 42,397,557 35 $ 47,968,002 44 $ 52,206,040 45
Corporate debt
securities 9,606,210 8 8,166,789 7 7,361,130 7
Tax-exempt securities 18,562,001 15 14,866,270 14 16,344,828 14
U.S. government,
agency,and
guaranteed
securities 51,224,537 42 38,963,040 35 39,291,236 34
Total $121,790,305 100 $109,964,101 100 $115,203,234 100
</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>
<CAPTION>
Year Ended Number Amount of
July 31 Issues Participation
<S> <C> <C>
1998 54 $403,105,000
1997 45 327,400,000
1996 46 317,690,000
1995 52 382,075,000
1994 70 566,630,000
</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>
<CAPTION>
CORPORATE TAX-EXEMPT
Year Ended Number of Amount of Number of Amount of
July 31 Issues Participation Issues Participation
<S> <C> <C> <C> <C>
1998 187 $708,299,008 564 $3,924,190,000
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
</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 36 of the 1998 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.
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>
<CAPTION>
Year Ended Number of Transactions
July 31 High Low Average
<S> <C> <C> <C>
1998 95,579 67,491 78,251
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
</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, 1998, M.K. & Co. had 1,683 employees, 662 of whom
were account executives, 693 of whom were engaged in other service
areas, including trading, research and investment banking, and 328
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, 1998,
M.K. & Co. hired 114 account executives for a net increase of 38
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, 1998, the Registrant's subsidiary's net
capital was 35% of aggregate debit items. See Note 10 - Regulatory
Requirements - page 36 of the 1998 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 160,000 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. All of the
Registrant's offices are leased. See Note 4 - Leases - on
page 33 of the 1998 Annual Report to Shareholders.
In September, 1997, 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 was deferred and will be taken into income
over the 10-year life of the lease. A portion of the sale proceeds
was 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 37 of the 1998 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 24 and 25 and
Additional Financial Information (Unaudited) on page 28 of the 1998
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 26 and 27 of the 1998 Annual Report to Shareholders,
a copy of which is enclosed.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by
reference to page 27 of the 1998 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 29 through 37 of the 1998 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 20, 1998 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 24, 1998.
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 20, 1998 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 24, 1998.
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 20, 1998 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 24, 1998.
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 20, 1998 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 24, 1998.
<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 1998 Annual Report to Shareholders
are incorporated by reference in Item 8:
Consolidated Statements of Financial Condition July 31, 1998 and 1997
Consolidated Statements of Income Years ended July 31, 1998
1997, and 1996
Consolidated Statements of Stockholders' Years ended July 31, 1998
Equity 1997, and 1996
Consolidated Statements of Cash Flows Years ended July 31, 1998
1997, and 1996
Notes to Consolidated Financial Statements July 31, 1998
<PAGE>
(2) 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 13 - Annual Report to Shareholders*
Exhibit 22 - List of Subsidiaries of Registrant*
Exhibit 23 - Consent of Independent Auditors Page 18
Exhibit 27 - Financial Data Schedule Page 19
*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, 1998.
(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, 1998
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, 1998
/s/ William W. Deupree, Jr.
William W. Deupree, Jr. Director October 27, 1998
/s/ James E. Harwood, III
James E. Harwood, III Director October 27, 1998
/s/ Allen B. Morgan, Jr.
Allen B. Morgan, Jr. Chairman and Director October 27, 1998
/s/ Harry J. Phillips
Harry J. Phillips Director October 27, 1998
/s/ Donald Ratajczak
Donald Ratajczak Director October 27, 1998
/s/ John W. Stokes, Jr.
John W. Stokes, Jr. Vice President and Director October 27, 1998
/s/ Joseph C. Weller
Joseph C. Weller Secretary/Treasurer and October 27, 1998
Director
<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, 1998,
included in the 1998 Annual Report to Shareholders of Morgan Keegan, Inc.
We 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, 1998, with respect to the consolidated
financial statements of Morgan Keegan, Inc. incorporated by reference
in the Annual Report (Form 10-K) for the year ended July 31, 1998.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Memphis, Tennessee
October 21, 1998
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, 1998
and 1997, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
July 31, 1998. 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, 1998 and 1997 and
the consolidated results of their operations and their cash flows for
each of the three years in the period ended July 31, 1998 in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Memphis, Tennessee
September 18, 1998
<PAGE>
<TABLE>
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
<CAPTION>
(In thousands, except per share amounts)
<S> <C> <C> <C>
Years ended July 31 1998 1997 1996
Revenues
Commissions:
Listed securities $ 41,558 $ 27,946 $ 26,467
Over-the-counter 31,316 25,776 21,849
Options 6,413 4,149 3,243
Other 30,795 21,988 16,311
110,082 79,859 67,870
Principal transactions:
Corporate securities 52,004 56,134 59,567
Municipal securities 18,562 14,867 16,345
U.S. government securities 51,224 38,963 39,291
121,790 109,964 115,203
Investment banking:
Corporate securities 30,769 23,814 25,990
Municipal securities 4,372 3,457 2,427
Underwriting management and other fees 32,622 23,908 21,884
67,763 51,179 50,301
Interest:
Interest on margin balances 30,038 24,105 19,752
Interest on securities owned 48,827 40,157 30,171
78,865 64,262 49,923
Investment management fees 20,187 12,499 9,323
Other 8,407 10,771 8,786
407,094 328,534 301,406
Expenses
Compensation 204,829 164,364 158,352
Floor brokerage and clearance 6,028 5,043 4,397
Communications 23,112 21,549 18,892
Travel and promotional 10,612 8,724 7,336
Occupancy and equipment costs 17,403 15,854 11,812
Interest 51,165 44,652 32,930
Taxes, other than income taxes 9,888 7,986 7,006
Other operating expenses 6,871 5,084 5,514
329,908 273,256 246,239
Income (loss) before income taxes 77,186 55,278 55,167
Income tax expense (credit) 29,000 20,900 21,300
Net income $ 48,186 $ 34,378 $ 33,867
Net income per share
Basic $ 1.47 $ 1.10 $ 1.11
Diluted $ 1.47 $ 1.10 $ 1.10
Book value $ 7.84 $ 6.44 $ 5.51
Other Data (at year end):
Total assets $1,463,821 $1,208,257 $946,648
Stockholders' equity $ 257,358 $ 203,720 $169,008
Common shares outstanding* 32,817 31,652 30,657
<FN>
All per share data has been 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.
</FN>
</TABLE>
<PAGE>
<TABLE>
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
<CAPTION>
(In thousands, except per share amounts)
<S> <C> <C> <C>
Years ended July 31 1995 1994 1993
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
Net income per share
Basic $ .78 $ .98 $ .97
Diluted $ .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
<FN>
All per share data has been 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.
</FN>
</TABLE>
<PAGE>
<TABLE>
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
<CAPTION>
(In thousands, except per share amounts)
<S> <C> <C> <C>
Years ended July 31 1992 1991 1990
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
Net income per share:
Basic $ .83 $ .25 $ .01
Diluted $ .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
<FN>
All per share data has been 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.
</FN>
</TABLE>
<PAGE>
<TABLE>
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
<CAPTION>
(In thousands, except per share amounts)
<S> <C>
Years ended July 31 1989
Revenues
Commissions:
Listed securities $ 13,675
Over-the-counter 1,848
Options 2,339
Other 4,192
22,054
Principal transactions:
Corporate securities 14,369
Municipal securities 5,993
U.S. government securities 14,707
35,069
Investment banking:
Corporate securities 3,461
Municipal securities 213
Underwriting management and other fees 4,057
7,731
Interest:
Interest on margin balances 5,698
Interest on securities owned 6,129
11,827
Investment management fees 1,713
Other 1,037
79,431
Expenses
Compensation 43,953
Floor brokerage and clearance 2,966
Communications 7,996
Travel and promotional 1,990
Occupancy and equipment costs 6,852
Interest 7,931
Taxes, other than income taxes 2,326
Other operating expenses 2,330
76,344
Income (loss) before income taxes 3,087
Income tax expense (credit) 715
Net income $ 2,372
Net income per share:
Basic $ .07
Diluted $ .07
Book value $ 1.45
Other Data (at year end):
Total assets $397,007
Stockholders' equity $ 48,432
Common shares outstanding* 33,329
<FN>
All per share data has been 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.
</FN>
</TABLE>
<PAGE>
General Business Environment
Morgan Keegan, Inc. and its subsidiaries (the "Company") are principally
engaged in the origination, underwriting, distribution, trading and
brokerage of fixed income and equity securities and also providing
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 strategy.
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 as these institutions expand their 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.
Favorable conditions in the U.S. securities markets continued for most
of the Company's fiscal year. U.S. equity markets achieved record
trading volume and price levels, largely due to continued economic
growth, gain in corporate earnings and modest inflation. This was a
contributing factor to the Company's third consecutive record year.
It is uncertain if the favorable conditions experienced in the past
three years will continue. The Company anticipates continuing to
grow its regional brokerage and other services in the southeastern
United States.
Results of Operations
The Company concluded its third consecutive year of record revenues,
surpassing $400,000,000 for the first time and exceeding the 1997
revenues by $78,560,000 or 24%. The 1997 revenues of $328,534,000
were $27,128,000 or 9% ahead of the previous year. Outstanding
markets for most of the year helped each aspect of the Company's
business to contribute to record net income level of $48,186,000
which was $13,808,000 or 40% in excess of the previous years record
level. An outstanding fourth quarter in fiscal 1997 pushed the
Company to a record net income of $34,378,000, which was $511,000
in excess of the previous year.
More than half of the increase in fiscal 1998 revenues came from
the combination of commissions which increased 38% or $30,223,000
and principal transactions which increased $11,826,000. The
increases can be attributed to another strong year from trading
volume equity securities as well as a substantial increase
from government and municipal securities.
The largest percentage increase in fiscal 1998 revenues was in
investment management fees which increased 62% or $7,688,000
following a 34% increase over the 1996 fiscal year. The
increase reflects the commitment of the Company to grow this
aspect of the business with the acquisition of two small money
management firms. Investment banking revenues in fiscal 1998
increased $16,584,000 or 32% as the IPO market remained strong for
most of the year.
<PAGE>
Results of Operations (continued)
Operating expenses rose from $273,256,000 in fiscal 1997 to
$329,908,000 in fiscal 1998 representing a $56,652,000 or 21%
increase. This follows an 11% increase for fiscal 1997 above
1996. More than 70% of the total fiscal 1998 increase was
reflected in compensation which increased 25% or $40,464,000.
The 25% increase in compensation closely corresponds to the 24%
increase in revenues as much of the Company's compensation costs
are directly affected by the increase in production. The increase
in compensation expense did not directly correspond to the revenue
increase for fiscal 1997 over fiscal 1996 as a significant
portion of that revenue increase came from interest income which
does not have a direct effect on compensation expense. Other
operating expense increased in proportion as the Company continued
efforts to expand its retail network and control expenses.
For most of the securities industry, fiscal 1998 was a highly
profitable year, as the Dow rose from 8000 to 9300 and fell back
to 8800 at the year's close. During the past three years,
the Company has benefited from its on-going expansion efforts
and the favorable market conditions. During the past year,
the securities industry has gone through much consolidation.
It is difficult to predict what impact this may have on the Company.
Impact of Year 2000
Many of the world's computer systems currently record years in
a two-digit format. Such computer systems will be unable to
properly interpret dates beyond the year 1999, which could lead
to business disruptions. The potential costs and uncertainties
associated with this issue will depend on a number of factors
including software, hardware, and the nature of the industry in
which a company operates. Additionally, companies must coordinate
with other entities with which they electronically interact,
such as customers, vendors, and borrowers. This is a significant
undertaking for securities firms, as virtually every aspect of
the sale of securities and related processing of transactions
will be affected and the consequences for noncompliance will
be significant.
A significant portion of the Company's operations and information
systems are provided by third-party service providers. The Company's
interface systems are vulnerable to those third parties' failure
to remediate their own year 2000 issues. The Company has developed
a plan to analyze how the Year 2000 will impact its operations,
including monitoring the status of its service providers and
evaluating alternatives. Given the Company's exposure to third-party
service providers, management does not believe the internal
costs to address the Year 2000 issue will have a material impact
on future operations other than the impact such event will have on
the cost of services provided by its vendors which is unknown at
this time. There is no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted and will
not have an adverse effect on the Company's information systems.
The Company is well into the testing phase of its Year 2000 plan
and will participate in the industry wide testing in March, 1999.
The interdependent nature of securities transactions and the
success of the Company's external counterparties and vendors in
dealing with this issue could significantly influence the Company's
estimate of the impact the Year 2000 will have on its business.
The Company is reviewing the most reasonably likely worst-case
effects of Year 2000 and has a preliminary contingency plan in
place for any such unanticipated negative effects. It is expected
this plan will be updated and finalized by December 31, 1998.
More than 95% of the Company's revenue is generated by its
registered broker dealer. Virtually all the securities owned are
held for the short term based on customer demand and are financed
by short term borrowings. The Company marks all the securities to
market. The short position typically reflects any hedges
and all positions are marked to market. While the Company
strictly adheres to this philosophy, circumstances may change
and the Company may reevaluate its financing arrangements.
(See interest rate sensitivity)
<PAGE>
Liquidity and Capital Resources
The Company's assets are primarily liquid, consisting mainly of
cash and assets readily convertible into cash. These assets
are financed primarily by free credit balances, commercial paper,
equity capital, bank lines of credit, repurchase agreements
and other payables.
During the current fiscal year, cash used in operating
activities was $43,373,000 which was financed by $18,455,000
of cash provided by financing activities and $24,667,000 provided
by investing activities which included the sale of the Company's
headquarters building for $34,582,000.
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 standards.
At July 31, 1998, the net capital of the Company's broker-dealer
subsidiary exceeded the SEC's minimum requirements by approximately
$143,000,000 which is $36,000,000 more than the previous years
excess. 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 for the
foreseeable future.
During the year, the Company continued its stock repurchase
program, purchasing 180,000 shares at a cost of $4,453,000.
This followed fiscal 1997 repurchases of 17,400 shares and
572,000 shares in fiscal 1996. The board previously
authorized the purchase of a total of 7,125,000 shares under
the repurchase program.
In fiscal 1998, the board further authorized the company to
repurchase a total of 1,200,000 shares through 3/31/2000 to
fund the Company's restricted stock and employee stock purchase
programs.
In fiscal 1999, the board further authorized the Company to
repurchase a total of 1,200,000 shares through 3/31/2000 to
fund the Company's restricted stock and employee stock purchase
programs.
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.
<TABLE>
<CAPTION>
(Dollars in thousands) Increase (Decrease)
Revenues: 1998 vs 1997 1997 vs 1996
<S> <C> <C> <C> <C>
Commissions $30,223 38% $11,989 18%
Principal transactions 11,826 11% (5,239) (5%)
Investment banking 16,584 32% 878 2%
Interest 14,603 23% 14,339 29%
Investment management fees 7,688 62% 3,176 34%
Other (2,364) (22%) 1,985 23%
$78,560 24% $27,128 9%
Expenses:
Compensation $40,464 25% $ 6,012 4%
Floor brokerage and clearance 985 20% 646 15%
Communications 1,563 7% 2,657 14%
Travel and promotional 1,888 22% 1,388 19%
Occupancy and equipment costs 1,549 10% 4,042 34%
Interest 6,513 15% 11,722 36%
Taxes, other than income taxes 1,902 24% 980 14%
Other operating expenses 1,787 35% (430) (8%)
$56,652 21% $27,017 11%
</TABLE>
<TABLE>
Interest Rate Sensitivity
Principal (Notional) Amount by Expected Maturity
<CAPTION>
Fiscal Interest Fair Value
(Dollars in thousands) 1999 Rate at July 31, 1998
<S> <C> <C> <C>
Assets
U.S. government obligations $224,716 5.50% $224,716
State and municipal obligations 85,920 4.55% 85,920
Corporate bonds 32,970 6.20% 32,970
Securities purchased under
agreements to resell 174,583 5.75% 174,583
Margin debits 430,125 7.94% 430,125
Liabilities
Commercial paper $ 37,502 5.45% $ 37,502
Short term borrowings 68,400 5.98% 68,400
Securities sold under
agreements to repurchase 162,734 5.20% 162,734
Securities sold, not yet purchased
U.S. government obligations 107,004 5.50% 107,004
Corporate bonds 7,360 6.20% 7,360
Customer credits 663,038 4.67% 663,038
</TABLE>
<PAGE>
Additional Financial Information (Unaudited)
Morgan Keegan, Inc. and Subsidiaries
<TABLE>
(In thousands, except per share amounts)
<CAPTION>
Summary of Quarterly Results
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Fiscal 1998
Revenues $101,198 $ 96,572 $103,546 $105,779
Income before income taxes 20,688 18,002 19,272 19,225
Net income 12,788 11,402 12,272 11,725
Net income per share* 0.40 0.35 0.37 0.35
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
<FN>
*After retroactive adjustment for all stock dividends and stock splits
declared through July 31, 1998. The earnings per share amounts prior
to 1998 have been restated as required to comply with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share."
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statistical Comparison of Production
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Total pro-
duction $266,597,243 $213,247,662 $208,275,740 $160,335,704 $168,350,637
Percentage
change in
production +25.0% +2.4% +29.9% -4.8% +9.1%
Number of
tickets 939,013 685,790 749,560 558,967 480,564
Average
commissions
per
ticket $ 284 $ 311 $ 278 $ 287 $ 350
Number of
investment
brokers 662 623 596 551 492
Number of
Investment
brokers
(over 1 year) 609 566 487 438 436
Total number
of employees 1,683 1,549 1,491 1,335 1,218
Average
commissions
per investment
broker (over
1 year) $ 436,669 $ 362,830 $ 345,885 $ 334,555 $ 346,274
Number of
new accounts
opened 37,936 32,166 33,835 29,559 25,861
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Morgan Keegan, Inc. and Subsidiaries
Years ended
July 31
(In thousands, except share and per share amounts)
1998 1997 1996
<S> <C> <C> <C>
Revenues
Commissions $110,082 $ 79,859 $ 67,870
Principal transactions 121,790 109,964 115,203
Investment banking 67,763 51,179 50,301
Interest 78,865 64,262 49,923
Investment management fees 20,187 12,499 9,323
Other 8,407 10,771 8,786
407,094 328,534 301,406
Expenses
Compensation 204,829 164,364 158,352
Floor brokerage and clearance 6,028 5,043 4,397
Communications 23,112 21,549 18,892
Travel and promotional 10,612 8,724 7,336
Occupancy and equipment costs 17,403 15,854 11,812
Interest 51,165 44,652 32,930
Taxes, other than income taxes 9,888 7,986 7,006
Other operating expenses 6,871 5,084 5,514
329,908 273,256 246,239
Income Before Income Taxes 77,186 55,278 55,167
Income Tax Expense 29,000 20,900 21,300
Net Income $ 48,186 $ 34,378 $ 33,867
Net Income Per Share*
Basic $ 1.47 $ 1.10 $ 1.11
Diluted $ 1.47 $ 1.10 $ 1.10
Average shares outstanding 32,671,141 31,325,041 30,774,663
<FN>
*The earnings per share amounts prior to 1998 have been restated as
required to comply with Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share."
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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, 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 ($.20
per share) (6,212) (6,212)
Repurchase & retirement
of common stock (11,600) (7) (135) (142)
Amortization of
restricted stock 2,500 2,500
Net income 34,378 34,378
Stock split effected in
the form of a stock
dividend 10,550,714 6,594 (6,594)
Balance at July 31, 1997 31,652,142 19,782 1,048 182,890 203,720
Issuance of restricted
stock 194,596 122 (122)
Issuance of common
stock 1,150,466 719 13,675 14,394
Dividends paid ($.24
per share) (7,789) (7,789)
Repurchase & retirement
of common stock (180,000) (113) (4,340) (4,453)
Amortization of
restricted stock 3,300 3,300
Net income 48,186 48,186
Balance at July 31, 1998 32,817,204 $20,510 $13,561 $223,287 $257,358
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except share and per share amounts)
July 31 1998 1997
<S> <C> <C>
Assets
Cash $ 22,172 $ 22,423
Securities segregated for regulatory purposes,
at market 346,900 280,100
Deposits with clearing organizations and others 9,818 9,153
Receivable from brokers and dealers and
clearing organizations 31,897 37,730
Receivable from customers 444,609 358,020
Securities purchased under agreements to resell 174,583 146,881
Securities owned, at market 353,708 275,611
Memberships in exchanges, at cost (market value-
$5,049 at July 31, 1998; $4,202 at
July 31, 1997) 2,428 719
Furniture, equipment and leasehold improvements,
at cost (less allowances for depreciation and
amortization-$20,981 at July 31, 1998;
$16,257 at July 31, 1997) 24,332 24,062
Building and improvements, at cost (less
allowance for depreciation-$644 at
July 31, 1997) 19,356
Other assets 53,374 34,202
$1,463,821 $1,208,257
Liabilities and Stockholders' Equity
Short-term borrowings $ 68,400 $ 570
Mortgage note payable - 19,714
Commercial paper 37,502 106,930
Payable to brokers and dealers and clearing
organizations 13,151 12,718
Payable to customers 700,332 583,922
Customer drafts payable 17,615 17,362
Securities sold under agreements to repurchase 162,734 97,417
Securities sold, not yet purchased, at market 116,727 94,298
Other liabilities 90,002 71,606
1,206,463 1,004,537
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares; 32,817,204
shares issued and outstanding at July 31, 1998;
31,652,142 at July 31, 1997 20,510 19,782
Additional paid-in capital 13,561 1,048
Retained earnings 223,287 182,890
257,358 203,720
$1,463,821 $1,208,257
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Morgan Keegan, Inc. and Subsidiaries
Years ended July 31 1998 1997 1996
Cash Flows From Operating Activities: (In thousands)
<S> <C> <C> <C>
Net income $48,186 $34,378 $33,867
Non-cash items included in earnings:
Depreciation and amortization 8,128 7,023 4,387
Deferred income taxes (4,700) (1,000) (750)
Amortization of gain on sale of building
and related assets 1,150
Amortization of restricted stock 3,300 2,500 2,580
56,064 42,901 40,084
(Increase) decease in operating assets:
Receivable from brokers and dealers and
clearing organizations 5,833 (20,752) 8,068
Deposits with clearing organizations
and others (665) (1,498)
Receivable from customers (86,598) (43,584) (53,729)
Securities segregated for regulatory
purposes, at market (66,800) (54,900) 800
Securities owned, at market (78,097) (46,333) (19,363)
Memberships in exchanges (1,709)
Other assets (14,472) (5,654) (1,733)
(Decrease) increase in operating liabilities:
Payable to brokers and dealers and
clearing organizations 433 3,517 3,814
Payable to customers 116,410 99,375 46,029
Customer drafts payable 253 2,906 682
Securities sold, not yet purchased,
at market 22,429 31,326 (5,458)
Other liabilities 3,546 14,261 11,096
(99,437) (21,336) (9,794)
Cash provided by (used in)
operating activities (43,373) 21,565 30,290
Cash Flows From Financing Activities:
Commercial paper (69,428) 64,002 35,460
Mortgage note payable - - 20,000
Mortgage note payments (19,714) (251) (35)
Issuance of common stock 14,394 4,188 2,922
Retirement of common stock (4,453) (142) (4,535)
Dividends paid (7,789) (6,212) (5,283)
Short-term borrowings 67,830 (30,830) (96,249)
Securities purchased under agreements
to resell (27,702) (77,603) 19,466
Securities sold under agreements to
repurchase 65,317 42,591 22,583
Cash provided by (used in)
financing activities 18,455 (4,257) (5,671)
Cash Flows From Investing Activities:
Payments for furniture, equipment and
leasehold improvements (9,915) (12,041) (9,750)
Proceeds from sale of building
and related assets 34,582
Building purchase (20,000)
Cash provided by (used in)
investing activities 24,667 (12,041) (29,750)
Net increase (decrease) in cash (251) 5,267 (5,131)
Cash at beginning of period 22,423 17,156 22,287
Cash at end of period $22,172 $22,423 $17,156
<FN>
Income tax payments totaled $36,191,000 in 1998, $19,400,000 in 1997,and
$20,275,000 in 1996. Interest payments totaled $49,722,000 in 1998,
$44,499,000 in 1997, and $32,761,000 in 1996.
See accompanying notes.
</FN>
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Morgan Keegan, Inc., and Subsidiaries
July 31, 1998
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.
Prior to sale, 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 $346,900,000 and $280,100,000 at
July 31, 1998 and 1997, 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: In fiscal 1998, the Company adopted the
provisions of Financial Accounting Standards Board ("FASB")
Statement No. 128, "Earnings per Share" ("Statement 128").
Statement 128 replaced the calculation of 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 presented have been restated to conform to the requirements
of Statement 128.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Year ended July 31
1998 1997 1996
(In thousands, except per share data)
<S> <C> <C> <C>
Numerator:
Net income $48,186 $34,378 $33,867
Denominator:
Denominator for basic earnings
per share-weighted average shares 32,671 31,170 30,632
Effect of dilutive securities-
stock options 183 155 143
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 32,854 31,325 30,775
Net income per share of common stock $ 1.47 $ 1.10 $ 1.11
Net income per share of common stock,
assuming dilution $ 1.47 $ 1.10 $ 1.10
</TABLE>
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 Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, recognized no compensation expense for the stock
option grants.
<PAGE>
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 deferred 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. The adoption of Statement 125 had no
material effect on the Company's 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. The Company will adopt the new
requirements retroactively in fiscal 1999. 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.
Management has not completed its review of the statement, but
does not anticipate its adoption will have a significant effect
on the company's annual or interim reporting.
The Financial Accounting Standards Board issued in June 1998
its new standard on derivatives - Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. The new
Statement resolves the inconsistencies that existed with respect
to derivatives accounting, and dramatically changes the way many
derivatives transactions and hedged items are reported. The
Statement is effective for years beginning after June 15, 1999.
The Company has not yet determined the effect, if any,
Statement 133 will have on he earnings and financial condition
of the Company.
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 short-term borrowings of $68,400,000 and $570,000 at July 31, 1998
and 1997 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 6.2% and 6.4% at July 31, 1998 and 1997, respectively.
The Company had total lines of credit of $345,000,000 at July 31, 1998,
with expirations prior to July 31, 1999, under which a maximum of
$250,000,000 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 (5.45% and 5.75% at July 31, 1998 and 1997,
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, 1998 and 1997 was 6.46% and 6.85%,
respectively.
<PAGE>
NOTE 3-SECURITIES
Securities owned for trading purposes consist of the following at
July 31, in thousands:
<TABLE>
1998 1997
<S> <C> <C>
U.S. government obligations $224,716 $163,544
State and municipal obligations 85,920 57,690
Corporate bonds 32,970 44,376
Stocks 9,922 9,787
Bankers' acceptance 180 214
$353,708 $275,611
</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, 1998 and July 31, 1997, as determined
by management of the Company.
Securities sold, not yet purchased at market consist of the following
at July 31, in thousands:
<TABLE>
1998 1997
<S> <C> <C>
U.S. government obligations $107,004 $80,983
State and municipal obligations 108 230
Corporate bonds 7,360 525
Stocks 2,255 12,560
$116,727 $94,298
</TABLE>
NOTE 4-LEASES
The Company leases office space, furniture and equipment under
noncancellable leases expiring through 2009, 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>
<S> <C>
1998 $14,034
1997 $ 9,124
1996 $ 8,838
</TABLE>
Aggregate future annual minimum rental commitments, excluding
escalations, for the years ending July 31 are as follows, in thousands:
<TABLE>
<S> <C>
1999 $ 8,723
2000 8,147
2001 7,302
2002 6,614
2003 6,131
Thereafter 20,701
$57,618
</TABLE>
<PAGE>
NOTE 5-COMMITMENTS AND CONTINGENCIES
At July 31, 1998, the Company was obligated under commercial letters of
credit of approximately $20,500,000 drawn in favor of certain clearing
organizations which were collateralized by customer-owned securities of
$25,353,000 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>
1998 1997 1996
<S> <C> <C> <C>
Federal:
Current $28,900 $18,500 $18,450
Deferred (4,700) (1,000) (750)
24,200 17,500 17,700
State 4,800 3,400 3,600
$29,000 $20,900 $21,300
</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>
<CAPTION>
1998 1997 1996
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Federal Statutory
rate applied to
pretax earnings $27,000 35.0% $19,347 35.0% $19,308 35.0%
State and local
taxes, less federal
income tax benefit 3,120 4.0 2,210 4.0 2,340 4.2
Non-taxable interest,
less non-deductible
interest (795) (1.0) (533) (1.0) (353) (0.6)
Other - net (325) (0.4) (124) - 5 -
$29,000 37.6% $20,900 38.0% $21,300 38.6%
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities as of July 31 are as follows, in thousands:
<TABLE>
1998 1997
<S> <C> <C>
Deferred tax assets:
Deferred compensation and restricted stock $4,470 $3,212
Deferred gain on building sale 4,865
Non-deductible reserves 2,312 2,265
Insurance and benefits 1,452 1,649
Other 280 501
13,379 7,627
Deferred tax liabilities:
Depreciation and other building related items 2,903 2,464
Other 776 163
3,679 2,627
Net deferred tax assets $9,700 $5,000
</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 1,561,077 remaining shares available to be granted at
July 31, 1998.
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, 1998, 162,000 options were outstanding and exercisable at an
average price of $11.40.
During fiscal year 1998, 54,000 options were exercised at an average
price of $5.18 and 54,000 options were granted at an average price of $18.875.
Employee stock option activity which includes 6,750 shares that are
exercisable, is summarized as follows:
<TABLE>
<CAPTION>
Average
Shares Price
Exercisable
<S> <C> <C> <C>
Outstanding at July 31, 1995 167,474 4.55
Granted 28,313 5.60 1995-2001
Exercised (62,438) ( 1.70)
Outstanding at July 31, 1996 133,349 6.11
Granted 9,750 11.64 1997-2002
Exercised (10,184) ( 5.60)
Outstanding at July 31, 1997 132,915 6.55
Granted 22,500 19.30 1998-2003
Exercised (60,765) (5.82)
Outstanding at July 31, 1998 94,650 $10.06
</TABLE>
The Company has approximately 2,129,806 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>
<S> <C>
Year Shares Sold
1996 428,007
1997 449,808
1998 306,872
The Company accounts for stock-based compensation under the provisions of (APB)
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>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Pro forma net income $47,657 $33,499 $33,199
Pro forma earnings per share
Basic 1.46 1.07 1.08
Diluted 1.45 1.07 1.08
</TABLE>
NOTE 8-REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The Company enters into sales of securities under agreements to
repurchase, which substantially mature in less than 30 days, with the
obligation to repurchase the securities sold reflected as a liability
in the consolidated statement of financial condition. The majority of
the repurchase agreements are matched with a reverse repurchase
agreement.
Repurchase agreement information as of July 31, 1998 is summarized
as follows, in thousands:
<TABLE>
<CAPTION>
Assets Sold Repurchase Liability
Carrying Market Interest
Amount Value Amount Rate
<S> <C> <C> <C> <C>
Mortgage-backed
certificates and other $164,280 $165,413 $162,734 5.20% - 6.20%
</TABLE>
Repurchase agreement information as of July 31, 1997 is summarized
as follows, in thousands:
<TABLE>
<CAPTION>
Assets Sold Repurchase Liability
Carrying Market Interest
Amount Value Amount Rate
<S> <C> <C> <C> <C>
Mortgage-backed
certificates and other $ 79,444 $ 78,891 $ 80,928 5.49%-5.63%
U.S. Treasury securities 16,505 16,571 16,489 5.10%
$ 95,949 $ 95,462 $ 97,417
</TABLE>
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.
<PAGE>
NOTE 9-EMPLOYEE BENEFIT PLANS
The Company makes discretionary contributions to its 401(k)
defined contribution plan and its profit sharing plan covering
substantially all employees. The Company also has a defined benefit
retirement plan covering certain executives. Total provisions
for expenses under all plans for each of the years ended
July 31, 1998, 1997, and 1996 totaled $2,637,000, $1,994,000,
and $1,475,000, 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, 1998, the subsidiary had net capital of
$151,648,000 which was 35% of its aggregate debit balances
and $142,996,520 in excess of the 2% net capital requirement.
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.
<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, 1998, the contract amount of future contracts to
purchase and sell U.S. Government and municipal securities
was approximately $85 and $22 million, respectively. At
July 31, 1997, the contract amount of future contracts to
purchase and sell U.S. Government and municipal securities
was approximately $104 million and $9 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, 1998, the Company did
not have any open futures contracts. At July 31, 1997, the Company
had $11 million of these contracts. 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>
<TABLE>
<CAPTION>
NOTE 12-QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
Quarter Ended
October 31 January 31 April 30 July 31
<S> <C> <C> <C> <C>
1998:
Revenues $101,197 $ 96,572 $103,546 $105,779
Expenses 80,509 78,570 84,275 86,554
Income before income taxes 20,688 18,002 19,271 19,225
Net income 12,788 11,402 12,271 11,725
Net income per share:
Basic 0.40 0.35 0.37 0.35
Diluted 0.40 0.35 0.37 0.35
Dividends per share 0.06 0.06 0.06 0.06
Stock price range:
High 21.38 25.63 24.13 28.44
Low 13.83 15.88 21.06 22.00
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:
Basic 0.24 0.30 0.22 0.34
Diluted 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
</TABLE>
</PAGE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from
the Morgan Keegan, Inc. 1998 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-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 22,172
<RECEIVABLES> 456,404
<SECURITIES-RESALE> 521,483
<SECURITIES-BORROWED> 29,920
<INSTRUMENTS-OWNED> 353,708
<PP&E> 24,332
<TOTAL-ASSETS> 1,463,821
<SHORT-TERM> 68,400
<PAYABLES> 726,117
<REPOS-SOLD> 162,734
<SECURITIES-LOANED> 4,981
<INSTRUMENTS-SOLD> 116,727
<LONG-TERM> 0
0
0
<COMMON> 20,510
<OTHER-SE> 236,848
<TOTAL-LIABILITY-AND-EQUITY> 1,463,821
<TRADING-REVENUE> 121,790
<INTEREST-DIVIDENDS> 78,865
<COMMISSIONS> 110,082
<INVESTMENT-BANKING-REVENUES> 67,763
<FEE-REVENUE> 28,594
<INTEREST-EXPENSE> 51,165
<COMPENSATION> 204,829
<INCOME-PRETAX> 77,186
<INCOME-PRE-EXTRAORDINARY> 77,186
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,186
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.47
</TABLE>
