<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, 2000
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, 2000, the Registrant had approximately 28,563,000 shares
of Common Stock outstanding. The aggregate market value of Common Stock
held by non-affiliates was approximately $499,853,000.
DOCUMENTS INCORPORATED HEREIN BY REFERENCE:
Portions of the Registrant's Annual Report to Shareholders for the
year ended July 31, 2000, 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 21, 2000, which will be filed with the Commission pursuant to
Regulation 240.14a(6)(c) prior to October 23, 2000, are incorporated
by reference into Part III and Part IV of this Report on Form 10-K.
1
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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 southern 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 Registrant has five reportable segments: Private Client, Fixed
Income Capital Markets, Equity Capital Markets, Investment Advisory and
Other. The Private Client segment provides investment services including
stocks, bonds, options, mutual funds and annuities to retail customers
through its branch network. Net interest income from customers' margin
loan and credit account balances is included in this segment. The Fixed
Income Capital Markets segment provides to its institutional clients:
investment-related services involving corporate and tax-exempt bonds;
U.S. government, agency and guaranteed securities; research and capital
raising services for governmental clients. The Equity Capital Markets
segment provides to its institutional clients: investment-related
services involving the distribution of stocks in the primary and
secondary markets, research, economic and business analysis and capital
raising services for corporate clients. The Investment Advisory segment
provides investment advisory services to mutual funds and asset
management to institutional and retail clients and regional mutual
funds managed by Morgan Asset Management, Inc., a subsidiary of the
Registrant. The Other segment includes unallocated revenues and
expenses and asset management for athletes through the Registrant's
subsidiary, Athletic Resource Management, Inc.
The percentage (%) of total revenues derived from the business
segments of the Registrant is as follows:
<TABLE>
<CAPTION>
Year Ended July 31
2000 1999 1998
<S> <C> <C> <C>
Private Client 49% 43% 46%
Fixed Income Capital Markets 29 39 33
Equity Capital Markets 12 11 14
Investment Advisory 8 6 5
Other 2 1 2
Total 100% 100% 100%
</TABLE>
The broker/dealer subsidiary, 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.
2
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M.K. & Co. has forty-two offices in thirteen states. The following
table reflects the number of account executives in each office as of
July 31, 2000:
<TABLE>
<S> <C> <C> <C>
Account Account
Office Executives Office Executives
Birmingham, Alabama 37 Baton Rouge, Louisiana 15
Decatur, Alabama 9 Lafayette, Louisiana 9
Fairhope, Alabama 1 Mandeville, Louisiana 5
Huntsville, Alabama 12 New Orleans, Louisiana 24
Mobile, Alabama 11 Shreveport, Louisiana 17
Montgomery, Alabama 25 Boston, Massachusetts 3
Little Rock, Arkansas 38 Jackson, Mississippi 30
Rogers, Arkansas 6 New York, New York 5
Ft. Lauderdale, Florida 6 Charlotte, North Carolina 12
Palm Beach, Florida 8 Durham, North Carolina 10
Pensacola, Florida 8 Raleigh, North Carolina 11
Sarasota, Florida 9 Wilmington, North Carolina 8
Alpharetta, Georgia 1 Jackson, Tennessee 7
Athens, Georgia 12 Knoxville, Tennessee 18
Atlanta, Georgia 20 Memphis, Tennessee
Headquarters 122
Augusta, Georgia 3 Surburban Offices 63
Columbus, Georgia 4 Nashville, Tennessee 32
LaGrange, Georgia 3 Austin, Texas 28
Bowling Green, Kentucky 8 Dallas, Texas 20
Covington, Kentucky 5 Houston, Texas
Post Oak Location 36
Lexington, Kentucky 14 Memorial Location 15
Louisville, Kentucky 22 Richmond, Virginia 9
TOTAL 761
</TABLE>
3
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Revenues by Source
The Registrant's operations consist of various financial services
provided to its clients. The following table sets forth the Registrant's
consolidated revenues consistent with industry practices for the periods:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Year Ended July 31
2000 1999 1998
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Commissions
Listed securities $ 37,696 7.63 $ 40,151 9.15 $41,558 10.21
Over-the-counter
securities 48,128 9.74 36,484 8.32 31,316 7.69
Options 7,802 1.58 6,584 1.50 6,413 1.58
Other 52,299 10.59 37,171 8.48 30,795 7.56
TOTAL 145,925 29.54 120,390 27.45 110,082 27.04
Principal transactions
Corporate securities 66,583 13.48 51,484 11.74 52,004 12.78
Municipal securities 27,934 5.66 28,149 6.42 18,562 4.56
U.S. Government
obligations 45,935 9.30 64,055 14.60 51,224 12.58
TOTAL 140,452 28.43 143,688 32.76 121,790 29.92
Investment banking
Corporate securities 14,147 2.86 15,155 3.46 30,769 7.56
Municipal securities 3,934 0.80 3,825 0.86 4,372 1.07
Underwriting, management
and other fees 36,411 7.37 33,406 7.62 32,622 8.01
TOTAL 54,492 11.03 52,386 11.94 67,763 16.64
Interest
Interest on margin
balances 50,465 10.22 31,481 7.18 30,038 7.38
Interest on securities
owned 50,446 10.21 50,131 11.43 48,827 11.99
TOTAL 100,911 20.43 81,612 18.61 78,865 19.37
Investment management
fees 37,881 7.67 27,680 6.31 20,187 4.96
Other income 14,300 2.90 12,855 2.93 8,407 2.07
TOTAL REVENUES $493,961 100.00 $438,611 100.0 $407,094 100.0
</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.
4
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Commissions
During the three years ended July 31, 2000, 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, 2000, 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, 2000, 1999, and 1998,
institutional revenues and percentages of total consolidated
revenues were $95,607,000 (19%) $119,230,000 (27%), and $100,284,000
(25%), respectively.
During each of the three years ended July 31, approximately 41%
of the Registrant's total revenues were derived from transactions
with retail (individual) customers. For the fiscal years ended
July 31, 2000, 1999, and 1998, retail revenues and percentages of
total consolidated revenues were $215,135,000 (44%), $171,164,000
(39%), and $166,313,000 (41%), 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 cash
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. For the three years ended July
31, 2000, 1999, and 1998, interest charged on customer margin
accounts as a percentage of total revenues was 10.22%, 7.18% and
7.38%, respectively.
5
<PAGE>
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, 2000, the Registrant
made a market in common stock or other equity securities of approximately
190 corporations, many of which are stocks followed by its research
department.
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, MK & Co. enters into a low level of activity
involving U.S. Treasury note futures. The following table sets forth
for the year ended July 31, 2000, 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 $ 5,106,530 $ 1,335,242 $ 1,817,276
Corporate debt securities 53,679,248 14,232,594 32,027,437
Tax-exempt securities 184,096,625 85,181,325 136,949,573
U.S. government, agency,
and guaranteed securities 194,561,371 20,767,869 115,377,826
</TABLE>
The following table sets forth the composition of revenues from
principal transactions:
<TABLE>
<CAPTION>
Year Ended July 31
2000 1999 1998
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Common stocks $ 51,057,305 36 $ 35,012,838 24 $ 42,397,557 35
Corporate debt
securities 15,525,641 11 16,470,942 12 9,606,210 8
Tax-exempt securities 27,933,827 20 28,149,594 19 18,562,001 15
U.S. government,
agency, and
guaranteed
securities 45,935,615 33 64,055,048 45 51,224,537 42
Total $140,452,388 100 $143,688,422 100 $121,790,305 100
</TABLE>
6
<PAGE>
M.K. & Co. participates in competitive and negotiated underwritings
used 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 M.K. & Co.'s
participation in competitive and negotiated underwritings of agency
securities:
<TABLE>
<CAPTION>
Year Ended Number of Amount of
July 31 Issues Participation
<C> <C> <C>
2000 517 $ 10,614,740
1999 747 26,546,000
1998 356 8,047,990
1997 148 7,472,000
1996 84 4,368,000
</TABLE>
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
<S> <C> <C> <C> <C>
Year Ended Number of Amount of Number of Amount of
July 31 Issues Participation Issues Participation
2000 71 $458,900,835 555 $2,846,329,000
1999 71 303,037,708 576 5,491,552,000
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
</TABLE>
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 29 of the 2000
Annual Report to Shareholders.
7
<PAGE>
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.
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.
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.
8
<PAGE>
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.
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. MK Chesapeake, LP was organized by
Morgan Keegan Funding to engage in speculative trading of a diverse
group of futures interest contracts. From inception, the Chesapeake
Capital Corporation served as the sole trading advisor utilizing its
Diversified Program, their proprietary trading strategy. The objective
of the partnership is to achieve a rate of return in excess of that
available from more traditional investments.
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 Morgan Keegan
Southern Capital Fund and the Select Fund. These funds, which invest
primarily in equity securities of companies located in the southern
United States and certain fixed income securities, are mutual funds
managed by Morgan Asset Management, Inc., a subsidiary of the Registrant,
and are 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.
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.
9
<PAGE>
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
<C> <C> <C> <C>
2000 145,311 81,020 105,759
1999 104,247 73,279 87,715
1998 95,579 67,491 78,251
1997 88,770 58,873 72,267
1996 77,289 47,209 61,618
</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.
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.
10
<PAGE>
Employees
As of July 31, 2000, M.K. & Co. had 2,009 employees, 761 of
whom were account executives, 908 of whom were engaged in other
service areas, including trading, research and investment banking,
and 340 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, 2000, M.K.
& Co. hired 93 account executives for a net increase of 75 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.
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.
11
<PAGE>
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, 2000, the Registrant's
subsidiary's net capital was 21% of aggregate debit items. See Note 10 -
Regulatory Requirements - page 29 of the 2000 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.
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. All of the Registrant's offices are
leased. See Note 4 - Leases - on page 26 of the 2000 Annual Report to
Shareholders.
In connection with the construction of an office building, Morgan
Properties, LLC has guaranteed 50% of a construction loan, with a maximum
borrowing limit of $19 million. The building, when completed, will be
owned by a limited liability company which is 50% owned by Morgan
Properties, LLC and 50% owned by Boyle Investment Company, Inc.
Item 3. LEGAL PROCEEDINGS
The Registrant is named in and subject to various proceedings and
claims incidental to its securities business. Subsequent to the
issuance of its financial statements, the Registrant's broker/dealer
subsidiary settled lawsuits resulting in a $1.9 million charge to
pre-tax income for the first quarter of fiscal 2001. 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.
12
<PAGE>
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 13 - Quarterly Results of Operations (Unaudited) -
on page 30 of the 2000 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 16 and 17 and
Additional Financial Information (Unaudited) on page 21 of the 2000
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 18-20 of the 2000 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 19 of the 2000 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 21 through 31 of the 2000 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.
13
<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 23, 2000 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 21, 2000.
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 23, 2000 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 21, 2000.
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 23, 2000 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 21, 2000.
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 23, 2000 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 21, 2000.
14
<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 2000 Annual Report to
Shareholders are incorporated by reference in Item 8:
<TABLE>
<S> <C>
Consolidated Statements of Financial Condition July 31, 2000 and 1999
Consolidated Statements of Income Years ended July 31, 2000
1999, and 1998
Consolidated Statements of Stockholders' Years ended July 31, 2000
Equity 1999, and 1998
Consolidated Statements of Cash Flows Years ended July 31, 2000
1999, and 1998
Notes to Consolidated Financial Statements July 31, 2000
</TABLE>
(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:
<TABLE>
<S> <C>
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 17
Exhibit 27 - Financial Data Schedule Page 18
</TABLE>
*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, 2000.
(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.
15
<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, 2000
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, 2000
/s/Willilam W. Deupree, Jr.
William W. Deupree, Jr. Director October 27, 2000
/s/James E. Harwood, III
James E. Harwood, III Director October 27, 2000
/s/Allen B. Morgan, Jr.
Allen B. Morgan, Jr. Chairman and Director October 27, 2000
/s/Harry J. Phillips
Harry J. Phillips Director October 27, 2000
/s/Donald Ratajczak
Donald Ratajczak Director October 27, 2000
/s/Robert M. Solmson
Robert M. Solmson Director October 27, 2000
/s/John W. Stokes, Jr.
John W. Stokes, Jr. Vice President and Director October 27, 2000
/s/Joseph C. Weller
Joseph C. Weller Secretary/Treasurer and October 27, 2000
Director
/s/Spence L. Wilson
Spence L. Wilson Director October 27, 2000
16
<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 20,
2000, included in the 2000 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. 33-57373) pertaining to the 1994 Restricted Stock
and Stock Option Plan and the 1989 Employee Stock Purchase Plan
of Morgan Keegan, Inc. of our report dated September 20, 2000,
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, 2000.
/s/ Ernst & Young LLP
Memphis, Tennessee
October 24, 2000
17
<PAGE>
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
18
<PAGE>
<TABLE>
<CAPTION>
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per share amounts)
<S> <C>
Years ended July 31 2000
Revenues
Commissions:
Listed securities $ 37,696
Over-the-counter 48,128
Options 7,802
Other 52,299
145,925
Principal transactions:
Corporate securities 66,583
Municipal securities 27,934
U.S. government securities 45,935
140,452
Investment banking:
Corporate securities 14,147
Municipal securities 3,934
Underwriting management and other fees 36,411
54,492
Interest:
Interest on margin balances 50,465
Interest on securities owned 50,446
100,911
Investment management fees 37,881
Other 14,300
493,961
Expenses
Compensation 252,413
Floor brokerage and clearance 6,559
Communications 26,678
Travel and promotional 14,445
Occupancy and equipment costs 24,200
Interest 71,887
Taxes, other than income taxes 12,123
Other operating expenses 13,766
422,071
Income before income taxes 71,890
Income tax expense 27,000
Net income $ 44,890
Net income per share:
Basic $ 1.54
Diluted $ 1.53
Book value $ 9.06
Other Data (at year end):
Total assets $1,732,276
Stockholders' equity $ 258,629
Common shares outstanding* 28,549
</TABLE>
[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>
19
<PAGE>
<TABLE>
<CAPTION>
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per share amounts)
<S> <C> <C> <C>
Years ended July 31 1999 1998 1997
Revenues
Commissions:
Listed securities $ 40,151 $ 41,558 $ 27,946
Over-the-counter 36,484 31,316 25,776
Options 6,584 6,413 4,149
Other 37,171 30,795 21,988
120,390 110,082 79,859
Principal transactions:
Corporate securities 51,484 52,004 56,134
Municipal securities 28,149 18,562 14,867
U.S. government securities 64,055 51,224 38,963
143,688 121,790 109,964
Investment banking:
Corporate securities 15,155 30,769 23,814
Municipal securities 3,825 4,372 3,457
Underwriting management and other fees 33,406 32,622 23,908
52,386 67,763 51,179
Interest:
Interest on margin balances 31,481 30,038 24,105
Interest on securities owned 50,131 48,827 40,157
81,612 78,865 64,262
Investment management fees 27,680 20,187 12,499
Other 12,855 8,407 10,771
438,611 407,094 328,534
Expenses
Compensation 227,709 204,829 164,364
Floor brokerage and clearance 6,645 6,028 5,043
Communications 23,664 23,112 21,549
Travel and promotional 13,344 10,612 8,724
Occupancy and equipment costs 21,433 17,403 15,854
Interest 52,603 51,165 44,652
Taxes, other than income taxes 10,438 9,888 7,986
Other operating expenses 8,662 6,871 5,084
364,498 329,908 273,256
Income before income taxes 74,113 77,186 55,278
Income tax expense 28,300 29,000 20,900
Net income $ 45,813 $ 48,186 $ 34,378
Net income per share
Basic $ 1.42 $ 1.47 $ 1.10
Diluted $ 1.41 $ 1.47 $ 1.10
Book value $ 8.76 $ 7.84 $ 6.44
Other Data (at year end):
Total assets $1,598,365 $1,463,821 $1,208,257
Stockholders' equity $ 279,062 $ 257,358 $ 203,720
Common shares outstanding* 31,859 32,817 31,652
</TABLE>
[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>
20
<PAGE>
<TABLE>
<CAPTION>
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per share amounts)
<S> <C> <C> <C>
Years ended July 31 1996 1995 1994
Revenues
Commissions:
Listed securities $ 26,467 $ 21,246 $ 22,748
Over-the-counter 21,849 12,624 10,076
Options 3,243 2,631 1,990
Other 16,311 9,661 11,723
67,870 46,162 46,537
Principal transactions:
Corporate securities 59,567 36,724 33,541
Municipal securities 16,345 16,404 14,135
U.S. government securities 39,291 33,982 41,746
115,203 87,110 89,422
Investment banking:
Corporate securities 25,990 25,009 32,850
Municipal securities 2,427 1,926 4,059
Underwriting management and other fees 21,884 18,259 18,923
50,301 45,194 55,832
Interest:
Interest on margin balances 19,752 17,519 10,824
Interest on securities owned 30,171 20,261 14,070
49,923 37,780 24,894
Investment management fees 9,323 7,171 6,063
Other 8,786 4,655 8,972
301,406 228,072 231,720
Expenses
Compensation 158,352 120,795 125,205
Floor brokerage and clearance 4,397 3,724 3,875
Communications 18,892 15,962 13,852
Travel and promotional 7,336 5,855 5,721
Occupancy and equipment costs 11,812 9,716 8,320
Interest 32,930 23,600 14,393
Taxes, other than income taxes 7,006 6,298 4,972
Other operating expenses 5,514 3,774 3,741
246,239 189,724 180,079
Income before income taxes 55,167 38,348 51,641
Income tax expense 21,300 14,500 19,800
Net income $ 33,867 $ 23,848 $ 31,841
Net income per share
Basic $ 1.11 $ .78 $ .98
Diluted $ 1.10 $ .78 $ .97
Book value $ 5.51 $ 4.61 $ 4.06
Other Data (at year end):
Total assets $946,648 $882,292 $571,009
Stockholders' equity $169,008 $139,457 $125,365
Common shares outstanding* 30,657 30,254 30,834
</TABLE>
[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>
21
<PAGE>
<TABLE>
<CAPTION
Ten Year Financial Summary
Morgan Keegan, Inc. and Subsidiaries
(In thousands, except per share amounts)
<S> <C> <C> <C>
Years ended July 31 1993 1992 1991
Revenues
Commissions:
Listed securities $ 20,457 $ 18,378 $ 13,143
Over-the-counter 10,159 9,041 5,347
Options 1,927 2,089 2,134
Other 11,196 7,632 4,824
43,739 37,140 25,448
Principal transactions:
Corporate securities 34,404 28,161 16,554
Municipal securities 17,432 12,037 10,730
U.S. government securities 51,297 48,588 30,279
103,133 88,786 57,563
Investment banking:
Corporate securities 15,760 16,730 4,836
Municipal securities 3,947 3,960 376
Underwriting management and other fees 9,571 9,862 5,436
29,278 30,552 10,648
Interest:
Interest on margin balances 7,047 5,941 4,867
Interest on securities owned 12,627 12,709 12,490
19,674 18,650 17,357
Investment management fees 5,413 4,627 3,086
Other 7,958 2,909 2,415
209,195 182,664 116,517
Expenses
Compensation 109,748 94,348 61,265
Floor brokerage and clearance 5,296 4,571 3,751
Communications 12,012 9,791 8,764
Travel and promotional 4,241 3,699 2,982
Occupancy and equipment costs 8,153 7,557 8,194
Interest 11,185 12,562 12,953
Taxes, other than income taxes 4,199 3,823 3,116
Other operating expenses 4,659 4,122 3,288
159,493 140,473 104,313
Income before income taxes 49,702 42,191 12,204
Income tax expense 19,000 16,400 4,500
Net income $ 30,702 $ 25,791 $ 7,704
Net income per share:
Basic $ .97 $ .83 $ .25
Diluted $ .97 $ .83 $ .25
Book value $ 3.31 $ 2.45 $ 1.67
Other Data (at year end):
Total assets $527,084 $434,448 $304,445
Stockholders' equity $106,335 $ 76,690 $ 50,837
Common shares outstanding* 32,112 31,340 30,504
</TABLE>
[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>
22
<PAGE>
General Corporate Description
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.
General Business Environment
The current year brought a certain amount of volatility to the equities
markets as well as a gradual and consistent rise in interest
rates. The Company continued its expansion in the Private Client Group,
increasing revenues and net income. The Fixed Income Capital Markets
segment had the second best year in their history, however they lagged
substantially behind the previous record year. The Equity Capital
Markets segment rebounded from the softness in the prior year's markets
to record a 29% increase.
Management continues to believe that the economic and business conditions
in the South will provide excellent opportunities to continue to
increase the number of registered representatives and add other
professionals to support them.
In addition to competition from firms traditionally engaged in the
financial services business, there has been increased competition in
recent years from other sources, such as commercial banks, insurance
companies, online service providers, sponsors of mutual funds and other
companies offering financial services both in the U.S. and globally.
The financial services industry also has experienced consolidation and
convergence in recent years as financial institutions involved in a broad
range of financial services industries have merged. This convergence
trend is expected to continue and could result in the Company's competitors
gaining greater capital and other resources, such as a broader range of
products and services and geographic diversity. In November 1999, the
Gramm-Leach-Bliley Act was enacted, effectively repealing certain
sections of the 1933 Glass-Steagall Act. Its passage allows commercial
banks, securities firms and insurance firms to affiliate, which may
accelerate consolidation and lead to increasing competition in markets
which traditionally have been dominated by investment banks and retail
securities firms.
Results of Operations
In spite of the volatile equities market and rising interest rates, the
Company set an earnings per share record increasing 9% from $1.42 in
fiscal 1999 to $1.54 for fiscal 2000 as aided by the stock buy back.
A much stronger performance from the Equity Capital Markets segment
and continued retail expansion contributed to a $25,535,000 increase
in commissions from fiscal 1999. Principal transactions declined 2%
or $3,236,000 from the prior year which reflected the drop off from
the Fixed Income Capital Markets segment record year in fiscal 1999.
Investment banking revenues increased 4% to $54,492,000, representing
continued efforts to increase mergers, acquisitions and other fees in
the absence of a strong underwriting market.
Interest income increased $19,299,000 or 24% as retail margin accounts
increased and interest expense edged upward. Interest expense
increased an almost identical $19,284,000, meaning the Company
maintained its spread on interest, in spite of the $68,642,000
which were used for the stock buy back program.
23
<PAGE>
Results of Operations (continued)
Investment management fees increased $10,201,000 or 37% in fiscal
2000 after a similar 37% increase in the prior year representing
the Company's continued effort to increase its assets under
management.
Revenues for fiscal 1999 of $438,611,000 exceeded fiscal 1998 by
$31,517,000 or 8%. An outstanding year by the Fixed Income Capital
Markets segment fueled an 18% increase in principal transactions of
$21,898,000.
Operating expenses for fiscal 2000 increased $57,573,000 or 16%.
Compensation, the largest component, increased $24,704,000 or 11%
which is slightly less than the 13% increase in revenues. Other
operating expense increased in proportion to the Company's efforts
to continue to add registered financial advisers and open new branches.
Other operating expenses increased 59% or $5,104,000 which was
represented by a large increase in legal costs incurred as the
Company further expands its retail business.
Operating expense for fiscal 1999 increased $34,590,000 or 10%
from fiscal 1998 as operating expenses grew in proportion to the
Company's expansion plans.
Net income of $44,890,000 for fiscal 2000 was slightly less than
the previous years $45,813,000 as the Company continued to add new
branches and support personnel. Net income for fiscal 1999 was
$45,813,000 or $1.42 per share versus $1.47 per share in fiscal
1998.
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 customer credit balances, equity capital,
commercial paper, bank lines of credit, and other payables.
During the current fiscal year, cash provided by operations was
$253,298,000 which increased from the prior year by $355,878,000.
A decline in securities owned of $90,006,000 and an increase in
payable to customers of $95,792,000 were the leading providers of
cash. The largest uses of cash were $68,642,000 for the repurchase
and retirement of common stock and $126,083,000 increase in
securities purchased under agreements to resell.
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,
2000, the net capital of the Company's broker-dealer subsidiary
exceeded the SEC's minimum requirements by approximately $134,520,000.
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 4,165,357 shares at a cost of $68,642,000. This followed
fiscal 1999 purchases of 1,662,300 shares and fiscal 1998 purchases
of 180,000 shares.
Risk Management
Certain of the Company's business activities expose it to market
risk, including its securities inventory positions and securities
held for investment. The Company's market risk generally represents
the risk of loss that may result from the potential change in value
of a financial instrument as a result of fluctuations in interest
rates and equity prices or changes in credit ratings of issuers of
debt securities.
Interest rate risk arises from the exposure of holding interest
sensitive financial instruments such as government, corporate and
municipal bonds and certain preferred equities. The Company manages
its exposure to interest rate risk by setting and monitoring limits
and, where feasible, hedging with offsetting positions in securities
with similar interest rate risk characteristics. The Company's
securities inventories are marked to market, accordingly there are
no unrecorded gains or losses in value. While a significant portion
of the Company's securities inventories have contractual maturities
in excess of five years, these inventories, on average, turn over in
25
<PAGE>
Risk Management (continued)
excess of twelve times per year. Accordingly, the exposure to interest
rate risk inherent in the Company's securities inventories is less than
that of similar financial instruments held by firms in other industries.
The Company's equity securities inventories are exposed to risk of loss
in the event of unfavorable price movements. The Company's equity
securities inventories are marked to market and there are no unrecorded
gains or losses.
The Company is also subject to credit risk arising from non-performance
by trading counterparties, customers, and issuers of debt securities
owned. The Company manages this risk by imposing and monitoring
position limits, monitoring trading counterparties, reviewing security
concentrations, holding and marking to market collateral and conducting
business through clearing organizations which guarantee performance.
The Company regularly participates in the trading of some derivative
securities for its customers; however, this activity does not involve
the Company acquiring a position or commitment in these products and
this trading is not a significant portion of the Company's business.
The Company does not participate in the trading of derivative
securities which have off-balance sheet risk.
See interest rate sensitivity below.
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 is inherently
uncertain; and actual performance and results may differ materially due
to many important factors, many of which are beyond the Company's
control. Such factors include the Company's ability to sustain and
manage growth; ability to deal with increasing competition; additional
government regulations; changes in general economic conditions;
and the like.
<TABLE>
<CAPTION>
(Dollars in thousands) Increase (Decrease)
2000 vs 1999 1999 vs 1998
<S> <C> <C> <C> <C>
Revenues
Commissions $ 25,535 21% $ 10,308 9%
Principal transactions (3,236) (2)% 21,898 18%
Investment banking 2,106 4% (15,377) (23)%
Interest 19,299 24% 2,747 3%
Investment management fees 10,201 37% 7,493 37%
Other 1,445 11% 4,448 53%
$ 55,350 13% $ 31,517 8%
Expenses
Compensation $ 24,704 11% $ 22,880 11%
Floor brokerage and clearance (86) (1)% 617 10%
Communications 3,014 13% 552 2%
Travel and promotional 1,101 8% 2,732 26%
Occupancy and equipment costs 2,767 13% 4,030 23%
Interest 19,284 37% 1,438 3%
Taxes, other than income taxes 1,685 16% 550 6%
Other operating expenses 5,104 59% 1,791 26%
$57,573 16% $ 34,590 10%
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity
Principal (Notional) Amount by Expected Maturity
Fiscal Interest Fair Value
(Dollars in thousands) 2001 Rate at July 31, 2000
<S> <C> <C> <C>
Assets
U.S. government obligations $ 257,096 5.7% $257,096
State and municipal obligations 89,460 4.7% 89,460
Corporate bonds 25,957 6.5% 25,957
Securities purchased under
agreements to resell 310,935 5.3% 310,935
Margin debits 691,218 9.0% 691,218
Liabilities
Commercial paper $ 70,741 6.0% $ 70,741
Short term borrowings 100,290 6.9% 100,290
Securities sold under
agreements to repurchase 207,488 5.8% 207,488
Securities sold, not yet purchased
U.S. government obligations 127,974 5.7% 127,974
Corporate bonds 378 6.5% 378
Customer credits 801,320 5.1% 801,320
</TABLE>
<TABLE>
<CAPTION>
Fiscal Interest Fair Value
(Dollars in thousands) 2000 Rate at July 31, 1999
<S> <C> <C> <C>
Assets
U.S. government obligations $310,133 5.1% $310,133
State and municipal obligations 112,043 4.4% 112,043
Corporate bonds 48,498 6.4% 48,498
Securities purchased under
agreements to resell 184,852 4.9% 184,852
Margin debits 533,763 8.3% 533,763
Liabilities
Commercial paper $ 65,111 5.3% $ 65,111
Short term borrowings 115,100 6.0% 115,100
Securities sold under
agreements to repurchase 239,019 5.2% 239,019
Securities sold, not yet purchased
U.S. government obligations 53,234 5.1% 53,234
Corporate bonds 2,338 6.4% 2,338
Customer credits 621,122 4.6% 621,122
</TABLE>
26
<PAGE>
Additional Financial Information (Unaudited)
Morgan Keegan, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Summary of Quarterly Results
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Fiscal 2000
Revenues $103,035 $126,369 $141,808 $122,749
Income before income taxes 11,865 20,496 24,092 15,437
Net income 7,465 12,796 14,892 9,737
Net income per share-basic* 0.25 0.44 0.52 0.34
Fiscal 1999
Revenues $ 96,416 $107,166 $114,528 $120,500
Income before income taxes 16,046 19,238 19,700 19,129
Net income 9,746 11,738 12,200 12,129
Net income per share-basic* 0.30 0.36 0.38 0.38
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-basic* 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-basic* 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-basic* 0.29 0.30 0.27 0.24
</TABLE>
[FN]
*After retroactive adjustment for all stock dividends and stock splits.
</FN>
27
<PAGE>
<TABLE>
<CAPTION>
Statistical Comparison of Production
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Total pro-
duction $310,742,625 $290,394,166 $266,597,243 $213,247,662 $208,275,740
Percentage
change in
production +7.0% +8.9% +25.0% +2.4% +29.9%
Number of
tickets 1,269,110 1,052,584 939,013 685,790 749,560
Average
commissions
per
ticket $ 245 $ 276 $ 284 $ 311 $ 278
Number of
investment
brokers 761 686 662 623 596
Number of
investment
brokers
(over 1 year) 655 624 609 566 487
Total number
of employees 2,009 1,788 1,683 1,549 1,491
Average
commissions
per investment
broker (over
1 year) $ 469,180 $ 446,746 $ 436,669 $ 362,830 $ 345,885
Number of
new accounts
opened 47,472 38,658 37,936 32,166 33,835
</TABLE>
28
<PAGE>
Consolidated Statements of Income
Morgan Keegan, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years ended July 31
(In thousands, except share and per share amounts)
2000 1999 1998
<S> <C> <C> <C>
Revenues
Commissions $145,925 $120,390 $110,082
Principal transactions 140,452 143,688 121,790
Investment banking 54,492 52,386 67,763
Interest 100,911 81,612 78,865
Investment management fees 37,881 27,680 20,187
Other 14,300 12,855 8,407
493,961 438,611 407,094
Expenses
Compensation 252,413 227,709 204,829
Floor brokerage and clearance 6,559 6,645 6,028
Communications 26,678 23,664 23,112
Travel and promotional 14,445 13,344 10,612
Occupancy and equipment costs 24,200 21,433 17,403
Interest 71,887 52,603 51,165
Taxes, other than income taxes 12,123 10,438 9,888
Other operating expenses 13,766 8,662 6,871
422,071 364,498 329,908
Income before income taxes 71,890 74,113 77,186
Income tax expense 27,000 28,300 29,000
Net Income $ 44,890 $ 45,813 $ 48,186
Net income per share
Basic $ 1.54 $ 1.42 $ 1.47
Diluted $ 1.53 $ 1.41 $ 1.47
Weighted average shares
Outstanding
Basic 29,243,241 32,356,091 32,671,141
Diluted 29,338,219 32,452,509 32,854,601
</TABLE>
[FN]
See accompanying notes.
</FN>
29
<PAGE>
Consolidated Statements of Stockholders' Equity
Morgan Keegan, Inc. and Subsidiaries
<TABLE>
<CAPTION>
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, 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 and
related tax benefit 3,300 3,300
Net income 48,186 48,186
Balance at July 31, 1998 32,817,204 $20,510 $13,561 $223,287 $257,358
Issuance of restricted
stock 350,702 219 (219)
Issuance of common
stock 353,652 221 4,843 5,064
Dividends paid ($.28
per share) (9,026) (9,026)
Repurchase & retirement
of common stock (1,662,300) (1,039) (26,185) (923) (28,147)
Amortization of
restricted stock and
related tax benefit 8,000 8,000
Net income 45,813 45,813
Balance at July 31, 1999 31,859,258 $19,911 $ - $259,151 $279,062
Issuance of restricted
stock 436,849 273 (273)
Issuance of common
stock 418,316 261 5,373 5,634
Dividends paid ($.32
per share) (9,265) (9,265)
Repurchase & retirement
of common stock (4,165,357) (2,603) (12,050) (53,989) (68,642)
Amortization of
restricted stock and
related tax benefit 6,950 6,950
Net income 44,890 44,890
Balance at July 31, 2000 28,549,066 $17,842 $ - $240,787 $258,629
</TABLE>
[FN]
See accompanying notes.
</FN>
30
<PAGE>
Consolidated Statements of Financial Condition
Morgan Keegan, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In thousands, except share and per share amounts)
July 31 2000 1999
<S> <C> <C>
Assets
Cash $ 19,716 $ 16,102
Securities segregated for regulatory purposes,
at market 170,600 246,000
Deposits with clearing organizations and others 11,846 9,792
Receivable from brokers and dealers and
clearing organizations 14,062 12,781
Receivable from customers 713,485 557,678
Securities purchased under agreements to resell 310,935 184,852
Securities owned, at market 390,656 480,662
Memberships in exchanges, at cost (market value-
$5,780 at July 31, 2000; $6,456 at
July 31, 1999) 2,428 2,428
Furniture, equipment and leasehold improvements,
at cost (less allowances for depreciation and
amortization-$30,524 at July 31, 2000;
$27,402 at July 31, 1999) 26,498 26,167
Other assets 72,050 61,903
$1,732,276 $1,598,365
Liabilities and Stockholders' Equity
Short-term borrowings $ 100,290 $ 115,100
Commercial paper 70,741 65,111
Payable to brokers and dealers and clearing
organizations 18,768 7,959
Payable to customers 829,517 733,725
Customer drafts payable 17,752 16,076
Securities sold under agreements to repurchase 207,488 239,019
Securities sold, not yet purchased, at market 130,851 58,755
Other liabilities 98,240 83,558
1,473,647 1,319,303
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares; 28,549,066
shares issued and outstanding at July 31, 2000;
31,859,258 at July 31, 1999 17,842 19,911
Retained earnings 240,787 259,151
258,629 279,062
$1,732,276 $1,598,365
</TABLE>
[FN]
See accompanying notes.
</FN>
31
<PAGE>
Consolidated Statements of Cash Flows
Morgan Keegan, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years ended July 31 2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 44,890 $ 45,813 $ 48,186
Non-cash items included in earnings:
Depreciation and amortization 10,286 9,871 8,128
Deferred income taxes (2,500) 1,000 (4,700)
Amortization of gain on sale of building
and related assets 1,380 1,380 1,150
Amortization of restricted stock 4,950 4,500 3,300
59,006 62,564 56,064
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations (1,281) 19,116 5,833
Deposits with clearing organizations
and others (2,054) 26 (665)
Receivable from customers (155,807) (113,069) (86,598)
Securities segregated for regulatory
purposes, at market 75,400 100,900 (66,800)
Securities owned, at market 90,006 (126,954) (78,097)
Memberships in exchanges - - (1,709)
Other assets (7,647) (9,529) (14,472)
(Decrease) increase in operating liabilities:
Payable to brokers and dealers and
clearing organizations 10,809 (5,192) 433
Payable to customers 95,792 33,393 116,410
Customer drafts payable 1,676 (1,539) 253
Securities sold, not yet purchased,
at market 72,096 (57,972) 22,429
Other liabilities 15,302 (4,324) 3,546
194,292 (165,144) (99,437)
Cash provided by (used in) operating activities 253,298 (102,580) (43,373)
Cash Flows From Financing Activities:
Commercial paper 5,630 27,609 (69,428)
Mortgage note payments - - (19,714)
Issuance of common stock 5,634 5,064 14,394
Repurchase of common stock (68,642) (28,147) (4,453)
Dividends paid (9,265) (9,026) (7,789)
Short-term borrowings (14,810) 46,700 67,830
Securities purchased under agreements
to resell (126,083) (10,269) (27,702)
Securities sold under agreements to
repurchase (31,531) 76,285 65,317
Cash (used in) provided by financing
activities (239,067) 108,216 18,455 Cash Flows From Investing Activities:
Payments for furniture, equipment and
leasehold improvements (10,617) (11,706) (9,915)
Proceeds from sale of building and related assets 34,582
Cash (used in) provided by investing activities (10,617) (11,706) 24,667
Net increase (decrease) in cash 3,614 (6,070) (251)
Cash at beginning of period 16,102 22,172 22,423
Cash at end of period $ 19,716 $ 16,102 $ 22,172
</TABLE>
[FN]
Income tax payments totaled $25,600,000 in 2000, $29,269,000 in 1999, and
$36,191,000 in 1998. Interest payments totaled $68,266,000 in 2000,
$52,530,000 in 1999, and $49,722,000 in 1998.
See accompanying notes.
</FN>
32
<PAGE>
Notes to Consolidated Financial Statements
Morgan Keegan, Inc., and Subsidiaries
July 31, 2000
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 presented on 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.
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 $170,600,000 and $246,000,000 at July 31, 2000 and
1999, respectively.
33
<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: Basic and diluted earnings per share is
calculated in accordance with Financial Accounting Standards
Board ("FASB") Statement No. 128, "Earnings per Share" (
"Statement 128"). All earnings per share amounts for all periods,
have been presented 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
2000 1999 1998
(In thousands, except per share data)
<S> <C> <C> <C>
Numerator:
Net income $44,890 $45,813 $48,186
Denominator:
Denominator for basic earnings
per share-weighted average shares 29,243 32,356 32,671
Effect of dilutive securities-
stock options 95 96 183
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 29,338 32,452 32,854
Net income per share of common stock $ 1.54 $ 1.42 $ 1.47
Net income per share of common stock,
assuming dilution $ 1.53 $ 1.41 $ 1.47
</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, recognizes no compensation expense for the stock option grants.
34
<PAGE>
Other Accounting Pronouncements: In fiscal 1999, the Company adopted
FASB Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("Statement 131"). Statement 131 establishes
standards for the way that public business enterprises 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 shareholders.
It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The adoption of
Statement 131 did not affect the results of operations or financial
position of the Company, but did affect the disclosure of segment
information as the Company was not required to make such disclosure
under previous guidance.
The Financial Accounting Standards Board issued in June 1998 its
standard on derivatives - Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("Statement 133").
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's effective date was deferred and is effective for
fiscal years beginning after June 15, 2000. The adoption of this
Statement is not expected to have a material effect on the Company's
financial statements.
Use of Estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States 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 $100,290,000 and $115,100,000 at
July 31, 2000 and 1999 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 7.45% and 6.75%
at July 31, 2000 and 1999, respectively.
The Company had total lines of credit of $335,000,000 at July 31,
2000, with expirations prior to July 31, 2001, under which a
maximum of $200,000,000 could be borrowed on an unsecured basis.
Equipment with a book basis of $9,300,000 was pledged on one of
the borrowings. There were no compensating balances associated
with these lines of credit.
The Company also issues its own commercial paper to investors at
fluctuating interest rates (6.18% and 5.25% at July 31, 2000 and
1999, 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, 2000 and 1999 was 6.29%
and 5.49%, respectively.
35
<PAGE>
NOTE 3-SECURITIES
Securities owned for trading purposes consist of the following
at July 31, in thousands:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
U.S. government obligations $257,096 $310,133
State and municipal obligations 89,460 112,043
Corporate bonds 25,957 48,498
Stocks 17,979 9,929
Bankers' acceptances 164 59
$390,656 $480,662
</TABLE>
State and municipal obligations include an issue with a par value of
$12,700,000 which has been written down to fair market value of
$5,715,000 at July 31, 2000 and July 31, 1999, as determined by
management of the Company.
Securities sold, not yet purchased, at market consist of the
following at July 31,in thousands:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
U.S. government obligations $127,974 $ 53,234
State and municipal obligations 10 73
Corporate bonds 378 2,338
Stocks 2,489 3,110
$130,851 $ 58,755
</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>
<C> <C>
2000 $17,225
1999 $15,038
1998 $14,034
</TABLE>
Aggregate future annual minimum rental commitments, excluding
escalations, for the years ending July 31 are as follows, in
thousands:
<TABLE>
<C> <C>
2001 $11,749
2002 11,966
2003 11,459
2004 10,759
2005 9,559
Thereafter 22,019
$77,511
</TABLE>
36
<PAGE>
NOTE 5-COMMITMENTS AND CONTINGENCIES
At July 31, 1999, the Company pledged $30,000,000 in customer
owned securities to cover customer obligations to a clearing
organization.
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.
In connection with the construction of an office building, the
Company has guaranteed 50% of a construction loan, with a
maximum borrowing limit of $19 million. The building, when
completed, will be owned by a limited liability company which
is 50% owned by the Company.
37
<PAGE>
NOTE 6-INCOME TAXES
Significant components of the provision for income taxes are as
follows for the years ended July 31, in thousands:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Federal:
Current $25,400 $23,000 $28,900
Deferred (2,500) 1,000 (4,700)
22,900 24,000 24,200
State 4,100 4,300 4,800
$27,000 $28,300 $29,000
</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>
2000 1999 1998
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Federal Statutory
rate applied to
pretax earnings $25,200 35.0% $25,940 35.0% $27,000 35.0%
State and local
taxes, less federal
income tax benefit 2,665 3.7 2,795 3.8 3,120 4.0
Non-taxable interest,
less non-deductible
interest (1,508) (2.1) (1,365) (1.8) (795) (1.0)
Other - net 643 .9 930 1.2 (325) (0.4)
$27,000 37.5% $28,300 38.2% $29,000 37.6%
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities as of July 31 are as follows, in thousands:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Deferred tax assets:
Deferred compensation and restricted stock $ 7,586 $ 5,843
Deferred gain on building sale 3,788 4,326
Non-deductible reserves 2,694 1,239
Insurance and benefits 876 1,232
Other - 100
14,944 12,740
Deferred tax liabilities:
Depreciation and other building related items 2,981 2,955
Other 763 1,085
3,744 4,040
Net deferred tax assets $11,200 $ 8,700
</TABLE>
Management has evaluated the need for a valuation allowance for all
or a portion of the deferred tax assets and believes that the deferred
tax assets will be more likely than not realized. Accordingly, a
valuation allowance has not been recorded.
38
<PAGE>
NOTE 7-STOCK PLANS
The Board of Directors has reserved 9,168,750 shares for issuance
under the Company's Restricted Stock and Incentive Stock Option Plan
of 1994. 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 493,526 remaining shares available to be granted
at July 31, 2000.
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, 2000, 222,000 options were outstanding and exercisable
at an average price of $16.65. During fiscal year 2000, 34,500 options
were exercised at an average price of $7.75 and 81,000 options were
granted at an average price of $16.38.
Employee stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Average
Shares Price Exercisable
<S> <C> <C> <C>
Outstanding at August 1, 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
Granted 176,250 21.58 2000-2004
Exercised (16,125) (6.05)
Forfeited (29,500) (21.17)
Outstanding at July 31, 1999 225,275 17.91
Granted 133,250 16.34 2000-2005
Exercised (14,400) (6.04)
Outstanding at July 31, 2000 344,125 17.80
</TABLE>
Options exercisable at July 31, 2000, 1999, and 1998 were 36,625,
18,450 and 7,000, respectively. The weighted average fair value
of the options granted during the years ended July 31, 2000, 1999
and 1998 was $4.46, $5.61 and $5.16, respectively. Options
outstanding at July 31, 2000 have exercise prices ranging from
$5.72 to $26.31 with a weighted average remaining contractual
life of 5 years.
The Company has approximately 2,000,000 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>
<CAPTION>
Year Shares Sold
<C> <C>
1998 306,872
1999 297,027
2000 369,416
</TABLE>
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.
39
<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>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Pro forma net income $ 44,330 $ 44,784 $ 47,657
Pro forma earnings per share
Basic $ 1.51 $ 1.38 $ 1.46
Diluted $ 1.52 $ 1.38 $ 1.45
</TABLE>
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense
over the vesting period and additional options may be granted in future
years. For disclosure purposes, the fair value of each fixed option
grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions
used for stock option grants in 2000, 1999 and 1998, respectively:
dividend yield of 1.5% for all three years; expected volatility of
26.8%, 25.1% and 24.9%, respectively, riskfree interest rate of 5.00%
for all three years and weighted average expected lives of 5 to 6 years
for all three years.
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, 2000 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 $124,405 $125,271 $121,457 6.40%-6.80%
U.S. Treasury securities 84,502 86,765 86,031 5.00%-6.95%
$208,907 $212,036 $207,488
</TABLE>
Repurchase agreement information as of July 31, 1999 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 $170,531 $171,319 $167,030 4.89%-5.26%
U.S. Treasury securities 70,927 72,404 71,989 3.50%-5.25%
$241,458 $243,723 $239,019
</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 statements 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.
40
<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 expense under all plans for
the years ended July 31, 2000, 1999, and 1998 totaled $3,955,000,
$3,035,000, and $2,637,000, 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 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 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, 2000, the subsidiary had net capital of $148,734,000 which
was 21% of its aggregate debit balances and $134,520,000 in excess of
the 2% net capital requirement. At July 31, 1999, the subsidiary had
net capital of $160,931,000, which was 29% of its aggregate debit
balances and $149,903,000 in excess of the 2% net capital requirement.
41
<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. If another party
to the transaction fails to perform as agreed (such as failure to
deliver a security or failure to pay for a security), the Company
may incur a loss if the market value of the security is different
from the contract amount of the transaction.
In the normal course of business, the Company enters into underwriting
and forward and future commitments. At July 31, 2000, the contract
amount of future contracts to purchase and sell U.S. Government and
municipal securities was approximately $12 and $23 million,
respectively. At July 31, 1999, the contract amount of future
contracts to purchase and sell U.S. Government and municipal
securities was approximately $39 million and $159 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. Settlement of the
transactions relating to such commitments are not expected to have
a material effect on the Company's consolidated financial position.
Transactions involving future settlement give rise to market risk,
which represents the potential loss that can be caused by a change
in the market value of a particular financial instrument. The
Company's exposure to market risk is determined by a number of
factors, including the size, composition and diversification of
positions held, the absolute and relative levels of interest rates,
and market volatility.
The Company will occasionally hedge a portion of its long proprietary
inventory position through the use of short positions in financial
future contracts, which the Company includes in securities sold,
not yet purchased at market value. At July 31, 2000, the Company
had no outstanding futures contracts. The contract amounts do not
necessarily represent future cash requirements. The average fair
value of futures contracts held during 2000 and 1999 was $3 million
and $5 million, respectively.
The Company regularly participates in the trading of some derivative
securities for its customers; however, this activity does not involve
the Company acquiring a position or commitment in these products and
this trading is not a significant portion of the Company's business.
The Company does not participate in the trading of derivative
securities which have off-balance sheet risk.
42
<PAGE>
NOTE 12-BUSINESS SEGMENT INFORMATION
The company provides financial services through five business
segments: Investment Advisory; Private Client; Equity Capital
Markets; Fixed Income Capital Markets and Other. Segment results
include all direct revenues and expenses of the operating units
in each segment and allocations of indirect expenses based on
specific methodologies.
Investment Advisory provides investment advisory services to
Company-sponsored mutual funds and asset management for
institutional and individual clients.
Private Client distributes a wide range of financial products
through its branch distribution network, including equity and
fixed-income securities, proprietary and non-affiliated mutual
funds and annuities. Net interest income from customers' margin
loan and credit account balances is included in this segment.
Equity Capital Markets consists of the Company's equity
institutional sales and trading, syndicate, corporate and
finance activities. Sales credits associated with underwritten
offerings are reported in Private Client when sold through retail
distribution channels and in Capital Markets when sold through
institutional distribution channels.
Fixed Income Capital Markets consists of the Company's fixed income
institutional sales and trading, syndicate, and public finance
activities.
Other businesses are principally the Company's Athletic Resource
Management business and unallocated corporate revenues and expenses.
Business segment financial results are for the years ended July
31, as follows:
<TABLE>
<CAPTION>
(in thousands)
2000 1999 1998
<S> <C> <C> <C>
Revenues:
Private Client $242,167 $187,864 $187,792
Fixed Income Capital Markets 143,686 168,829 135,992
Equity Capital Markets 60,965 47,466 55,181
Investment Advisory 38,496 28,291 20,541
Other 8,647 6,161 7,588
$493,961 $438,611 $407,094
Income before income taxes:
Private Client $ 37,042 $ 31,095 $ 39,794
Fixed Income Capital Markets 19,034 33,897 22,554
Equity Capital Markets 14,664 7,843 14,614
Investment Advisory 942 587 (155)
Other 208 691 379
$ 71,890 $ 74,113 $ 77,186
</TABLE>
Segment data includes charges allocating corporate overhead to
each segment. Intersegment revenues and charges are eliminated
between segments. The Company evaluates the performance of its
segments and allocates resources to them based on return on investment.
The Company has not disclosed asset information by segment as the
information is not produced internally. All long-lived assets are
located in the U.S.
The Company's business is predominantly in the U.S., with less
then 1% of revenues and net income from international operations.
43
<PAGE>
NOTE 13-QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Quarter Ended
October 31 January 31 April 30 July 31
<S> <C> <C> <C> <C>
2000:
Revenues $103,035 $126,369 $141,808 $122,749
Expenses 91,170 105,873 117,716 107,312
Income before income taxes 11,865 20,496 24,092 15,437
Net income 7,465 12,796 14,892 9,737
Net income per share:
Basic 0.25 0.44 0.52 0.34
Diluted 0.24 0.44 0.52 0.34
Dividends per share 0.08 0.08 0.08 0.08
Stock price range:
High 17.71 17.80 17.16 19.88
Low 16.41 14.46 12.25 14.74
1999:
Revenues $ 96,416 $107,166 $114,528 $120,500
Expenses 80,370 87,928 94,828 101,371
Income before income taxes 16,046 19,238 19,700 19,129
Net income 9,746 11,738 12,200 12,129
Net income per share:
Basic 0.30 0.36 0.38 0.38
Diluted 0.30 0.36 0.37 0.38
Dividends per share 0.07 0.07 0.07 0.07
Stock price range:
High 25.28 19.26 18.24 18.94
Low 15.00 16.86 16.00 16.43
</TABLE>
44
<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, 2000
and 1999, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
July 31, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999 and the consolidated
results of their operations and their cash flows for each of the three
years in the period ended July 31, 2000 in conformity with accounting
principles generally accepted in the United States.
Memphis, Tennessee
September 20, 2000
45
</PAGE>
