SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED OCTOBER 31, 1998
COMMISSION FILE NO. 1-9015
MORGAN KEEGAN, INC.
(Exact name of Registrant as specified in its charter)
Tennessee 62-1153850
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Fifty Front Street
Memphis, Tennessee 38103
(Address of principal (Zip Code)
executive offices)
901-524-4100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for at least the past 90 days. Yes X No .
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. YES NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practical date.
Class Outstanding at October 31, 1998
Common Stock $.625 par value 32,278,204
<PAGE>
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements
of Financial Condition. . . . . . . . October 31, 1998 and July 31, 1998
Consolidated Statements
of Income . . . . . . . . . . . . . . Three months ended
October 31, 1998 and 1997
Consolidated Statements
of Cash Flows . . . . . . . . . . . . Three months ended
October 31, 1998 and 1997
Notes to Consolidated
Financial Statements. . . . . . . . . October 31, 1998
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
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>
Part I. FINANCIAL INFORMATION
Item 1.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries
<TABLE>
<CAPTION>
October 31 July 31
1998 1998
(unaudited)
(in thousands)
<S> <C> <C>
ASSETS
Cash $ 18,979 $ 22,172
Securities segregated for regulatory
purposes, at market 334,500 346,900
Deposits with clearing organizations
and others 9,811 9,818
Receivable from brokers and dealers and
clearing organizations 19,866 31,897
Receivable from customers 419,873 444,609
Securities purchased under agreements
to resell 69,092 174,583
Securities owned, at market 376,938 353,708
Memberships in exchanges, at cost
(market value-$4,508,000 at 10-31-98;
$5,049,000 at 7-31-98) 2,428 2,428
Furniture, equipment and leasehold
Improvements, at cost (less allowances for
depreciation and amortization $20,789,000
at 10-31-98; $20,981,000 at 7-31-98) 24,589 24,332
Other assets 53,248 53,374
$1,329,324 $1,463,821
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 109,600 $ 68,400
Commercial paper 47,019 37,502
Payable to brokers and dealers and
clearing organizations 16,740 13,151
Payable to customers 683,793 700,332
Customer drafts payable 13,565 17,615
Securities sold under agreements to
repurchase 114,374 162,734
Securities sold, not yet purchased,
at market 13,555 116,727
Other liabilities 73,721 90,002
1,072,367 1,206,463
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares;
32,278,204 shares issued and outstanding
at 10-31-98; 32,817,204 at 7-31-98 20,173 20,510
Additional paid-in capital 6,032 13,561
Retained earnings 230,752 223,287
256,957 257,358
$1,329,324 $1,463,821
</TABLE>
[FN]
See accompanying notes.
</FN>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended
October 31
1998 1997
(in thousands, except
per share amounts)
<S> <C> <C>
REVENUES
Commissions $ 26,910 $ 28,452
Principal transactions 33,411 31,202
Investment banking 9,964 15,795
Interest 18,149 17,895
Investment management fees 5,243 4,643
Other 2,739 3,211
TOTAL 96,416 101,198
EXPENSES
Compensation 49,377 50,447
Floor brokerage and clearance 1,675 1,596
Communications 5,429 5,564
Travel and promotional 3,621 2,779
Occupancy and equipment costs 5,110 4,402
Interest 10,792 12,498
Taxes, other than income taxes 1,984 1,905
Other operating expenses 2,382 1,319
80,370 80,510
INCOME BEFORE INCOME TAXES 16,046 20,688
INCOME TAX EXPENSE 6,300 7,900
NET INCOME $ 9,746 $ 12,788
NET INCOME PER SHARE:
Basic $ 0.30 $ 0.40
Diluted $ 0.30 $ 0.40
DIVIDENDS PER SHARE $ 0.07 $ 0.06
</TABLE>
[FN]
See accompanying notes.
</FN>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended
October 31
1998 1997
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 9,746 $12,788
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 2,359 1,836
Deferred income taxes 600 (5,140)
Amortization of gain on sale of building
and related assets (345) (115)
Amortization of restricted stock 1,050 750
13,410 10,119
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations 12,031 (46,901)
Deposits with clearing organizations and others 7
Receivable from customers 24,736 (48,080)
Securities segregated for regulatory purposes 12,400 7,900
Securities owned (23,230) (223,221)
Other assets (474) (21,627)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations 3,589 26,064
Payable to customers (16,539) 37,242
Customer drafts payable (4,050) (2,396)
Securities sold, not yet purchased (103,172) (2,203)
Other liabilities (15,936) 959
(110,638) (272,263)
Cash used for operating activities (97,228) (262,144)
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper 9,517 (54,201)
Mortgage note payable (19,714)
Issuance of Common Stock 12 7,938
Retirement of Common Stock (8,929)
Dividends paid (2,280) (1,930)
Short-term borrowings 41,200 250,730
Securities purchased under agreements to resell 105,491 48,079
Securities sold under agreements to repurchase (48,360) (1,497)
Cash provided by financing activities 96,651 229,405
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (2,616) (1,993)
Proceeds from sale of building and
related assets 34,582
Cash provided by (used for)
investing activities (2,616) 32,589
Decrease in Cash (3,193) (150)
Cash at Beginning of Period 22,172 22,423
Cash at End of Period $ 18,979 $ 22,273
</TABLE>
[FN]
Income tax payments were approximately $551,000 and $3,473,000 for the three
month period ending October 31, 1998, and 1997, respectively. Interest
payments were approximately $11,612,000 and $12,457,000 for the same periods,
respectively.
See accompanying notes.
</FN>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
October 31, 1998
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Morgan Keegan,
Inc. and its subsidiaries (collectively referred to as the Registrant). The
accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months
ended October 31, 1998, are not necessarily indicative of the results that
may be expected for the year ending July 31, 1999. For further information,
refer to the financial statements and notes thereto included in the
Registrant's annual report on Form 10-K for the year ended July 31, 1998.
NOTE B - NET CAPITAL REQUIREMENT
As a registered broker/dealer and member of the New York Stock Exchange, the
registrant's brokerage subsidiary, Morgan Keegan & Company, Inc. (M.K. &
Co.) is subject to the Securities and Exchange Commission's (SEC) uniform
net capital rule. The broker/dealer subsidiary has elected to operate
under the alternative method of the rule, which prohibits a broker/dealer
from engaging in any securities transactions when its net capital is less
than 2% of its aggregate debit balances, as defined, arising from customer
transactions. The SEC may also require a member firm to reduce its
business and restrict withdrawal of subordinated capital if its net capital
is less than 4% of aggregate debit balances, and may prohibit a member firm
from expanding its business and declaring cash dividends if its net capital
is less than 5% of aggregate debit balances. At October 31, 1998, M.K. &
Co. had net capital of $148,183,076 which was 36% of its aggregate debit
balances and $139,886,271 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
NOTE D - NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended
October 31
1998 1997
(in thousands, except
per share amounts)
<S> <C> <C>
Numerator
Net Income $ 9,746 $12,787
Denominator
Denominator for basic
earnings per share -
weighted average
shares 32,639 32,118
Effect of dilutive
securities - stock
options 115 167
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions 32,754 32,285
Basic earnings per share $ 0.30 $ 0.40
Diluted earnings per share $ 0.30 $ 0.40
</TABLE>
NOTE E - OTHER ACCOUNTING PRONOUNCEMENTS
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 beginning after December 15, 1997. This statement
established standards for the method that public entities use to report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographical areas and major customers. Management has not completed its
review of the statement, but does not anticipate its adoption will have a
significant effect on the Registrant's annual or interim reporting.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
NOTE E - OTHER ACCOUNTING PRONOUNCEMENTS (continued)
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 Registrant has not yet determined the effect, if any,
Statement 133 will have on the earnings and financial condition of the
Registrant.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 2.
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.
Results of Operations
The Registrant's revenues were $96,416,000 for the 3 months ended October
31, 1998 and 5% less than the same 3-month period of the previous year
when revenues were $101,198,000. The largest components of this decrease
included a 37% decrease in investment banking and a 5% decrease in
commissions. During the quarter the Dow Jones Industrial Average dropped
approximately 1800 points stunting expansion in the equity markets noted
in the previous quarters.
Operating expenses totaled $80,370,000 for the quarter ended October 31,
1998 versus $80,510,000 for the same period in the previous year.
Employee compensation decreased 2% while travel and promotional expenses
increased 30%. Changes in employee compensation are in-line with changes
in revenues and additional travel and promotional expenses increased as a
result of additional investor conferences and additional employee training
efforts.
Net income was $9,746,000, or $.30 per share, and $12,788,000, or $.40 per
share, for the quarters ended October 31, 1998 and 1997, respectively.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Impact of Year 2000
A significant portion of the Registrant's operations and information systems
are provided by third-party service providers. The Registrant's interface
systems are vulnerable to those third parties' failure to remediate their
own year 2000 issues. The Registrant 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 Registrant'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 Registrant's
systems rely will be timely converted and will not have an adverse effect
on the Registrant's information systems. The Registrant 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 Registrant's external counterparties
and vendors in dealing with this issue could significantly influence the
Registrant's estimate of the impact the Year 2000 will have on its business.
The Registrant 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.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Liquidity and Capital Resources
High liquidity is reflected in the Registrant's statement of financial
condition with approximately 94% of its assets consisting of cash or
assets readily convertible into cash. Financing resources include the
Registrant's equity capital, commercial paper, short-term borrowings,
repurchase agreements and other payables. For the three months ended
October 31, 1998, cash flows used for operating activities were
$97,228,000 primarily due to the decrease in securities sold, not yet
purchased.
Cash flows from financing activities were $96,651,000 for the quarter ended
October 31, 1998, compared to $229,405,000 in the same period of the
previous year. The largest component of this change relates to utilizing
more cost effective borrowing vehicles to finance the Registrant's
operations.
Cash flows used for investing activities totaled $2,616,000 for the current
period versus a $32,589,000 increase in cash flows for the previous year's
same quarter. The increase in cash flows for the prior year was the
result of selling the homeoffice building in October 1997 for
approximately $36 million.
At October 31, 1998, the Registrant's broker/dealer subsidiary, which is
regulated under the SEC's uniform net capital rule, had net capital of
$148,183,076, which was $139,886,271 in excess of the 2% net capital
requirement. During the quarter the Registrant declared and paid cash
dividends of $0.07 per share on the shares outstanding.
In November 1993 the Board of Directors authorized a stock repurchase
program. During the quarter the Registrant repurchased 540,500 shares of
its common stock for $8,929,000. Since inception of the plan, 5,871,184
shares have been repurchased. The Registrant announced in fiscal 1998
that it would repurchase approximately 600,000 shares annually to
accommodate restricted stock and employee stock purchase programs.
Forward Looking Statements
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.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MORGAN KEEGAN, INC. and Subsidiaries
Interest Rate Sensitivity
No significant changes since July 31, 1998. See Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<PAGE>
PART II. OTHER INFORMATION
MORGAN KEEGAN, INC. and Subsidiaries
Item 1. Legal proceedings
Morgan Keegan & Company, Inc. is subject to various claims
incidental to its securities business. While the ultimate
resolution of pending litigation and claims cannot be
predicted with certainty, based upon the information currently
known, management is of the opinion that it has meritorious
defenses and has instructed its counsel to vigorously defend
such lawsuits and claims, and that liability, if any, resulting
from all litigation will have no material adverse effect on the
Registrant's consolidated financial condition or results
of operations.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
No reports were filed during the quarter on Form 8-K
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Morgan Keegan, Inc.
Registrant
BY /S/ Joseph C. Weller
Joseph C. Weller
EVP, CFO, Sec.-Treas.
Date: December 14, 1998
??
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from
the Morgan Keegan, Inc. Form 10-Q for the quarter ended October 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-31-1999
<PERIOD-END> OCT-31-1998
<CASH> 18,979
<RECEIVABLES> 425,918
<SECURITIES-RESALE> 403,592
<SECURITIES-BORROWED> 13,821
<INSTRUMENTS-OWNED> 376,938
<PP&E> 24,589
<TOTAL-ASSETS> 1,329,324
<SHORT-TERM> 109,600
<PAYABLES> 707,199
<REPOS-SOLD> 114,374
<SECURITIES-LOANED> 6,899
<INSTRUMENTS-SOLD> 13,555
<LONG-TERM> 0
0
0
<COMMON> 20,173
<OTHER-SE> 236,784
<TOTAL-LIABILITY-AND-EQUITY> 1,329,324
<TRADING-REVENUE> 33,411
<INTEREST-DIVIDENDS> 18,149
<COMMISSIONS> 26,910
<INVESTMENT-BANKING-REVENUES> 9,964
<FEE-REVENUE> 7,982
<INTEREST-EXPENSE> 10,792
<COMPENSATION> 49,377
<INCOME-PRETAX> 16,046
<INCOME-PRE-EXTRAORDINARY> 16,046
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,746
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
