SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED APRIL 30, 1999
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 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 June 11, 1999
Common Stock $.625 par value 32,063,083
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements
of Financial Condition. . . . . . . . April 30, 1999 and July 31, 1998
Consolidated Statements
of Income . . . . . . . . . . . . . . Three months and nine months ended
April 30, 1999 and 1998
Consolidated Statements
of Cash Flows . . . . . . . . . . . . Nine months ended
April 30, 1999 and 1998
Notes to Consolidated
Financial Statements. . . . . . . . . April 30, 1999
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
Part I. FINANCIAL INFORMATION
Item 1.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries
April 30 July 31
1999 1998
(unaudited)
(in thousands)
ASSETS
Cash $ 20,494 $ 22,172
Securities segregated for regulatory
purposes, at market 332,300 346,900
Deposits with clearing organizations
and others 8,611 9,818
Receivable from brokers and dealers and
clearing organizations 59,073 31,897
Receivable from customers 511,090 444,609
Securities purchased under agreements
to resell 172,274 174,583
Securities owned, at market 593,961 353,708
Memberships in exchanges, at cost
(market value-$6,390,000 at 4-30-99;
$5,049,000 at 7-31-98) 2,428 2,428
Furniture, equipment and leasehold
improvements, at cost (less allowances for
depreciation and amortization $24,741,000
at 4-30-99; $20,981,000 at 7-31-98) 24,822 24,332
Other assets 58,610 53,374
$1,783,663 $1,463,821
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 298,400 $ 68,400
Commercial paper 57,888 37,502
Payable to brokers and dealers and
clearing organizations 43,031 13,151
Payable to customers 750,531 700,332
Customer drafts payable 22,373 17,615
Securities sold under agreements to
repurchase 170,650 162,734
Securities sold, not yet purchased,
at market 97,993 116,727
Other liabilities 70,992 90,002
1,511,858 1,206,463
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares; 32,063,083
shares issued and outstanding
at 4-30-99; 32,817,204 at 7-31-98 20,039 20,510
Additional paid-in capital 1,594 13,561
Retained earnings 250,172 223,287
271,805 257,358
$1,783,663 $1,463,821
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Three Months Ended Nine Months Ended
April 30 April 30
(in thousands, except per share amounts)
1999 1998 1999 1998
REVENUES
Commissions $ 32,739 $ 29,354 $ 89,699 $ 81,437
Principal transactions 41,007 33,459 112,376 91,182
Investment banking 9,276 15,043 30,305 50,545
Interest 20,812 17,200 57,910 52,942
Investment management fees 7,356 4,778 18,833 14,390
Other 3,338 3,712 8,987 10,819
TOTAL 114,528 103,546 318,110 301,315
EXPENSES
Compensation 60,122 53,069 165,052 151,191
Floor brokerage and
clearance 1,814 1,713 4,923 4,611
Communications 6,208 6,156 16,996 17,146
Travel and promotional 2,802 2,154 9,062 7,713
Occupancy and equipment
costs 5,327 4,881 15,811 14,035
Interest 13,896 11,047 36,179 35,502
Taxes, other than income
taxes 2,774 2,993 8,527 8,085
Other operating expense 1,885 2,261 6,576 5,071
94,828 84,274 263,126 243,354
INCOME BEFORE INCOME TAXES 19,700 19,272 54,984 57,961
INCOME TAX EXPENSE 7,500 7,000 21,300 21,500
NET INCOME $ 12,200 $ 12,272 $ 33,684 $ 36,461
NET INCOME PER SHARE:
Basic $ 0.38 $ 0.37 $ 1.04 $ 1.12
Diluted $ 0.37 $ 0.37 $ 1.03 $ 1.12
DIVIDENDS PER SHARE $ 0.07 $ 0.06 $ 0.21 $ 0.18
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 32,497 32,786 32,484 32,488
Diluted 32,585 32,947 32,585 32,663
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
Nine Months Ended
April 30
1999 1998
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 33,684 $ 36,461
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 7,220 5,850
Deferred income taxes 850 (5,550)
Amortization of gain on sale of building
and related assets (1,035) (805)
Amortization of restricted stock 6,800 2,250
47,519 38,206
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations (27,176) 3,458
Deposits with clearing organizations and others 1,207 (379)
Receivable from customers (66,481) (122,086)
Securities segregated for regulatory purposes 14,600 (86,100)
Securities owned (240,253) (229,690)
Other assets (6,086) (9,642)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations 29,880 46,205
Payable to customers 50,199 168,070
Customer drafts payable 4,758 5,159
Securities sold, not yet purchased (18,734) 27,215
Other liabilities (17,975) (7,662)
(276,061) (205,452)
Cash used for operating activities (228,542) (167,246)
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper 20,386 (42,792)
Mortgage note payable (19,714)
Issuance of Common Stock 4,942 14,337
Retirement of Common Stock (24,181)
Dividends paid (6,798) (5,829)
Short-term borrowings 230,000 195,230
Securities purchased under agreements to resell 2,309 (15,441)
Securities sold under agreements to repurchase 7,916 19,764
Cash provided by financing activities 234,574 145,555
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (7,710) (6,373)
Membership in exchanges (1,709)
Proceeds from sale of building and
related assets 34,582
Cash (used for) provided by
investing activities (7,710) 26,500
Decrease in Cash (1,678) 4,809
Cash at Beginning of Period 22,172 22,423
Cash at End of Period $ 20,494 $ 27,232
Income tax payments were approximately $22,997,000 and $29,240,000 for the nine
month periods ending April 30, 1999, and 1998, respectively. Interest payments
were approximately $36,564,000 and $35,873,000 for the same periods,
respectively.
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
April 30, 1999
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 and nine months ended
April 30, 1999, 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 April 30, 1999, M.K. & Co. had net capital of
$151,832,000 which was 28% of its aggregate debit balances and $140,923,000
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.
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:
Three Months Ended Nine Months Ended
April 30 April 30
1999 1998 1999 1998
Numerator (in thousands, except per share amounts)
Net Income $12,200 $12,272 $33,684 $36,461
Denominator
Denominator for basic
earnings per share -
weighted average shares 32,497 32,786 32,484 32,488
Effect of dilutive
securities - stock
options 88 161 101 174
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversations 32,585 32,947 32,585 32,663
Basic earnings per share $ 0.38 $ 0.37 $ 1.04 $ 1.12
Diluted earnings per
share $ 0.37 $ 0.37 $ 1.03 $ 1.12
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
NOTE E - OTHER ACCOUNTING PRONOUNCEMENTS (continued)
The Financial Accounting Standards Board (FASB)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. At its May 19, 1999 meeting, the FASB voted to defer the
implementation date of Statement No. 133 for one year. The Statement would be
effective for fiscal years beginning after June 15, 2000. The
Registrant has not yet determined the effect, if any, Statement 133 will have
on the earnings and financial condition of the Registrant.
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 recognized record level revenues of $114,528,000 for the
quarter ended April 30, 1999-surpassing the previous record of $107,166,000
set in the second quarter of the current fiscal year. Revenues for the
same quarter of fiscal 1998 were $103,546,000. The largest components of
this increase over the third quarter of fiscal 1998 include a $7,548,000
(23%) increase in principal transactions and a $3,385,000 (12%) increase in
commissions. Increased activity in the fixed income securities markets
continued to be strong throughout the quarter. The Dow Jones Industrial
Average reached 11,000 for the first time during the quarter.
Operating expenses increased to $94,828,000 or 13% higher than the same
period of the previous year when expenses totaled $84,274,000. The largest
component of this increase is related to employee compensation that
increased 13% from $53,069,000 to $60,122,000 comparing the two quarters.
This increase is proportionate to the increase noted in revenues for the
quarter. Other expense classifications increased slightly as the
Registrant continue expansion efforts in the southern region.
Net income for the quarter was $12,200,000 versus $12,272,000 a year ago.
Basic income per share was $0.38 and $0.37 for the quarters ended April 30,
1999 and 1998, respectively.
Total revenue for the nine months ended April 30, 1999 was $318,110,000 or
6% higher than the same period of the prior year when revenues totaled
$301,315,000. The most significant increases were noted in the principal
transactions that increased 23% and commissions which increased 10%.
Strong fixed income securities market activity and continued growth of the
Registrant's retail branch system were significant factors in
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Results of Operations (continued)
achieving these results. These increases were offset by a 40% decrease in
investment banking revenues. The lack of activity in equity underwritings
previously discussed in earlier filings continued through the current
quarter.
Year-to-date expenses at April 30, 1999 totaled $263,126,000 versus
$243,354,000 for the same period of the previous year. This 8% increase is
attributable to a 9% increase in employee compensation and a 13% increase in
occupancy costs. Both factors appear reasonable considering the increase
in revenues and the growth of the Registrant's business.
Net income for the nine months ended April 30, 1999, totaled $33,684,000,
or $1.04 per share versus net income of $36,461,000, or $1.12 per share in
the same period of the prior year.
Impact of Year 2000
A significant portion of the Registrant's operations including information
systems and non-information systems is 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. To date, the Registrant has spent approximately $1.2
million and expects to incur an additional $1.0 million of costs associated
with Year 2000 issues.
The Registrant has remediated and successfully tested components of the
systems determined internally as mission critical. The Registrant and many
of its third party service providers participated in the securities
industry wide testing during the quarter without any significant
exceptions. Testing of non-mission critical systems is expected to be
complete by August 1999.
The Registrant has determined that the most reasonably likely worst-case
scenario of Year 2000 would be for a major vendor not to be able to
communicate with the Registrant because of limitations of the vendor's
infrastructure. The Registrant has identified alternative vendors for
mission critical systems to satisfy contingent needs should a primary
vendor be unable to provide their services.
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 95% of its assets consisting of cash or assets
readily convertible into cash. Financing resources include the
Registrant's equity capital, commercial paper, short-term borrowings,
repurchase agreements and other payables. For the nine month period ended
April 30, 1999, cash flows used for operating activities were $228,542,000
primarily due to a $240,253,000 increase in securities owned.
Cash flows from financing activities were $234,574,000 for the nine months
ended April 30, 1999 versus $167,246,000 for the same period of the
previous year. Increases in short-term borrowings and repurchase
transactions were required to finance changes in securities owned, customer
receivables and broker receivables.
Cash flows used for investing activities totaled $7,710,000 for the current
year versus cash provided by investing activities of $26,500,000 for the
nine months ended April 30, 1998. The increase in the prior year was from
the sale of the Registrant's home office building for approximately $36
million.
At April 30, 1999, the Registrant's broker/dealer subsidiary, which is
regulated under the SEC's uniform net capital rule, had net capital of
$151,832,000, which was $140,923,000 in excess of the 2% net capital
requirement. During the quarter the Registrant declared and paid cash
dividends of $0.07 per share on shares outstanding.
In November 1993 the Board of Directors authorized a stock repurchase
program. Year-to-date the Registrant has repurchased 1,437,100 shares of
its common stock for $24,180,988. Since inception of the program,
6,767,784 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.
Part I. FINANCIAL INFORMATION
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MORGAN KEEGAN, INC. and Subsidiaries
Interest Rate Sensitivity
No significant changes have occurred since July 31, 1998 in the Registrant's
exposure to market risk. See Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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
During the quarter the Board of Directors appointed Robert M.
Solmson and Spence L. Wilson to the Board of Directors. Mr.
Solmson is chairman of the board and chief executive officer
of RFS Hotel Investors, Inc., a Memphis, Tennessee-based real
estate investment trust. Mr. Wilson has been president of
Kemmons Wilson, Inc., a real estate development and investment
firm since 1973.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
No reports were filed during the quarter on Form 8-K
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
Joseph C. Weller
EVP, CFO, Sec.-Treas.
Date: June 11, 1999
??
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This schedule contains summary financial information extractecd from the
Morgan Keegan, Inc. Form 10-Q for the quarter ended April 30, 1999, and
is qualified in its entirety by reference to such financial statements.
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