SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED APRIL 30, 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
(Address of principal (Zip Code)
executive offices)
901-524-4100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed
All reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No .
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of Common Stock, as of the latest practical date.
Class Outstanding at April 30, 2000
Common Stock $.625 par value 28,562,566
<PAGE>
INDEX
MORGAN KEEGAN, INC. and Subsidiaries
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements
of Financial Condition. . . . . . . . April 30, 2000 and July 31, 1999
Consolidated Statements
of Income . . . . . . . . . . . . . . Three months and Nine months ended
April 30, 2000 and 1999
Consolidated Statements
of Cash Flows . . . . . . . . . . . . Nine months ended
April 30, 2000 and 1999
Notes to Consolidated
Financial Statements. . . . . . . . . April 30, 2000
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Part II. Other Information
Item 1. Legal proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MORGAN KEEGAN, INC. and Subsidiaries
<TABLE>
<CAPTION>
April 30 July 31
2000 1999
(unaudited)
(in thousands)
<S> <C> <C>
ASSETS
Cash $ 23,459 $ 16,102
Securities segregated for regulatory
purposes, at market 186,200 246,000
Deposits with clearing organizations
and others 8,585 9,792
Receivable from brokers and dealers and
clearing organizations 19,446 12,781
Receivable from customers 731,396 557,678
Securities purchased under agreements
to resell 256,312 184,852
Securities owned, at market 434,952 480,662
Memberships in exchanges, at cost
(market value-$5,615,000 at 4-30-00;
$6,456,000 at 7-31-99) 2,428 2,428
Furniture, equipment and leasehold
improvements, at cost (less allowances for
depreciation and amortization $28,003,000
at 4-30-00; $27,402,000 at 7-31-99) 25,908 26,167
Other assets 70,546 61,903
$1,759,232 $1,598,365
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 197,300 $ 115,100
Commercial paper 41,666 65,111
Payable to brokers and dealers and
clearing organizations 21,114 7,959
Payable to customers 847,865 733,725
Customer drafts payable 20,860 16,076
Securities sold under agreements to
repurchase 191,247 239,019
Securities sold, not yet purchased,
at market 105,349 58,755
Other liabilities 83,543 83,558
1,508,944 1,319,303
Stockholders' equity
Common Stock, par value $.625 per share:
authorized 100,000,000 shares;
shares issued and outstanding 28,562,566
at 4-30-00; 31,859,258 at 7-31-99 17,851 19,911
Retained earnings 232,437 259,151
250,288 279,062
$1,759,232 $1,598,365
</TABLE>
[FN]
See accompanying notes.
</FN>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30 April 30
(in thousands, except per share amounts)
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES
Commissions $ 45,715 $ 32,739 $112,848 $ 89,699
Principal transactions 39,184 41,007 107,490 112,376
Investment banking 16,912 9,276 40,962 30,305
Interest 26,484 20,812 73,124 57,910
Investment management fees 10,086 7,356 26,679 18,833
Other 3,427 3,338 10,109 8,987
TOTAL 141,808 114,528 371,212 318,110
EXPENSES
Compensation 73,216 60,122 190,264 165,052
Floor brokerage and
clearance 1,887 1,814 5,283 4,923
Communications 6,970 6,208 19,442 16,996
Travel and promotional 3,123 2,802 10,689 9,062
Occupancy and equipment
costs 5,882 5,327 18,026 15,811
Interest 19,157 13,896 51,650 36,179
Taxes, other than income
taxes 3,544 2,774 9,933 8,527
Other operating expense 3,938 1,885 9,472 6,576
117,717 94,828 314,759 263,126
INCOME BEFORE INCOME TAXES 24,091 19,700 56,453 54,984
INCOME TAX EXPENSE 9,200 7,500 21,300 21,300
NET INCOME $ 14,891 $ 12,200 $ 35,153 $ 33,684
NET INCOME PER SHARE:
Basic $ 0.52 $ 0.38 $ 1.19 $ 1.04
Diluted $ 0.52 $ 0.37 $ 1.19 $ 1.03
DIVIDENDS PER SHARE $ 0.08 $ 0.07 $ 0.24 $ 0.21
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 28,760 32,497 29,454 32,484
Diluted 28,803 32,585 29,505 32,585
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
<TABLE>
<CAPTION>
Nine Months Ended
April 30
2000 1999
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 35,153 $ 33,684
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 7,638 7,220
Deferred income taxes (900) 850
Amortization of gain on sale of building
and related assets (1,035) (1,035)
Amortization of restricted stock 5,749 6,800
46,605 47,519
(Increase) decrease in operating assets:
Receivable from brokers and dealers and
clearing organizations (6,665) (27,176)
Deposits with clearing organizations and others 1,207 1,207
Receivable from customers (173,718) (66,481)
Securities segregated for regulatory purposes 59,800 14,600
Securities owned 45,710 (240,253)
Other assets (7,743) (6,086)
Increase (decrease) in operating liabilities:
Payable to brokers and dealers and clearing
organizations 13,155 29,880
Payable to customers 114,140 50,199
Customer drafts payable 4,784 4,758
Securities sold, not yet purchased 46,594 (18,734)
Other liabilities 1,020 (17,975)
98,284 (276,061)
Cash provided by (used for)
operating activities 144,889 (228,542)
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper (23,445) 20,386
Issuance of Common Stock 5,529 4,942
Retirement of Common Stock (68,220) (24,181)
Dividends paid (6,985) (6,798)
Short-term borrowings 82,200 230,000
Securities purchased under agreements to resell (71,460) 2,309
Securities sold under agreements to repurchase (47,772) 7,916
Cash (used for) provided by financing activities (130,153) 234,574
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for furniture, equipment and
leasehold improvements (7,379) (7,710)
Cash used for investing activities (7,379) (7,710)
Increase (decrease) in Cash 7,357 (1,678)
Cash at Beginning of Period 16,102 22,172
Cash at End of Period $ 23,459 $ 20,494
</TABLE>
[FN]
Income tax payments were approximately $15,499,000 and $22,997,000 for
the nine month periods ending April 30, 2000, and 1999, respectively.
Interest payments were approximately $50,302,000 and $36,564,000 for
the same periods, respectively.
See accompanying notes.
</FN>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
April 30, 2000
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Morgan Keegan, Inc. and its subsidiaries (collectively referred
to as the Registrant). The accompanying unaudited consolidated
financial statements have been prepared in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three months and nine months
ended April 30, 2000, are not necessarily indicative of the results
that may be expected for the year ending July 31, 2000.
For further information, refer to the financial statements and
notes thereto included in the Registrant's annual report on Form
10-K for the year ended July 31, 1999.
NOTE B - NET CAPITAL REQUIREMENT
As a registered broker/dealer and member of the New York Stock
Exchange, the registrant's brokerage subsidiary, Morgan Keegan
& Company, Inc. (M.K. & Co.) is subject to the Securities
and Exchange Commission's (SEC) uniform net capital rule.
The broker/dealer subsidiary has elected to operate under the
alternative method of the rule, which prohibits a broker/dealer
from engaging in any securities transactions when its net
capital is less than 2% of its aggregate debit balances, as
defined, arising from customer transactions. The SEC may
also require a member firm to reduce its business and restrict
withdrawal of subordinated capital if its net capital is
less than 4% of aggregate debit balances, and may prohibit a
member firm from expanding its business and declaring cash
dividends if its net capital is less than 5% of aggregate debit
balances. At April 30, 2000, M.K. & Co. had net capital
of $124,975,514 which was 17% of its aggregate debit
balances and $110,312,042 in excess of the 2% net capital
requirement.
NOTE C - INCOME TAXES
The principal reason for the difference between the
Registrant's effective tax rate and the federal statutory
rate is the non-taxable interest earned on municipal bonds.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
NOTE D - NET INCOME PER SHARE
The following table sets forth the computation of basic
and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30 April 30
2000 1999 2000 1999
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Numerator
Net Income $14,891 $12,200 $35,153 $33,684
Denominator
Denominator for basic
earnings per share -
weighted average shares 28,760 32,497 29,454 32,484
Effect of dilutive
securities - stock
options 43 88 51 101
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversations 28,803 32,585 29,505 32,585
Basic earnings per share $ 0.52 $ 0.38 $ 1.19 $ 1.04
Diluted earnings per
share $ 0.52 $ 0.37 $ 1.19 $ 1.03
</TABLE>
NOTE E - OTHER ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued in June 1998 its
new 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 is effective for years beginning
after June 15, 2000. The Registrant has not yet determined
the effect, if any, Statement 133 will have on the earnings
and financial condition of the Registrant.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
NOTE F - Business Segment Information
The Registrant 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 for customers'
margin loan and credit account balances is included
in this segment.
Equity Capital Markets consists of the Registrant's
equity institutional sales and trading, syndicate,
and corporate finance activities. Sales credits
associated with underwritten offerings are reported in
the Private Client segment when sold through retail
distribution channels and in the Equity Capital Markets
segment when sold through institutional distribution
channels.
Fixed Income Capital markets consists of the Registrant's
fixed income institutional sales and trading, syndicate,
and public finance activities.
Other businesses are principally the Registrant's
Athletic Resource Management business and unallocated
corporate revenues and expenses.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MORGAN KEEGAN, INC. and Subsidiaries
NOTE F - Business Segment Information (continued)
Business segment financial results for the periods ending
April 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30 April 30
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues:
Private Client $ 67,010 $ 56,428 $178,632 $146,458
Fixed Income Capital Markets 37,119 39,982 110,083 116,524
Equity Capital Markets 21,993 9,263 47,191 29,842
Investment Advisory 9,430 7,372 25,408 19,090
Other 6,256 1,483 9,898 6,196
Total $141,808 $114,528 $371,212 $318,110
Income before income taxes:
Private Client $ 12,834 $ 11,178 $ 28,889 $ 29,551
Fixed Income Capital Markets 4,591 5,312 13,170 16,753
Equity Capital Markets 4,438 1,975 9,322 5,284
Investment Advisory 1,821 1,070 3,964 2,678
Other 407 165 1,108 718
Total $ 24,091 $ 19,700 $ 56,453 $ 54,984
</TABLE>
Segment data includes charges allocated to each segment.
Intersegment revenues and charges are eliminated between
segments. The Registrant evaluates the performance of
its segments and allocates resources to them based on return
on investment.
The Registrant 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 Registrant's business is predominantly in the U.S.,
with less than 1% of revenues and net income from
international operations.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 2.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Morgan Keegan, Inc. (The Registrant) operates a full
service regional brokerage business through its principal
subsidiary, Morgan Keegan & Company, Inc. (M.K. & Co.).
M.K. & Co. is involved in the highly competitive business
of origination, underwriting, distribution, trading and
brokerage of fixed income and equity securities and also
provides investment advisory services. While M.K.
& Co. regularly participates in the trading of some derivative
securities for its customers, this trading is not a major
portion of M.K. & Co.'s business. M.K. & Co. typically
does not underwrite high yield securities, and normally
is not involved in bridge loan financings or any
other ventures that management believes may not be
appropriate for its strategic approach. Many highly
volatile factors affect revenues, including general
market conditions, interest rates, investor sentiment and
world affairs, all of which are outside the Registrant's
control. However, certain expenses are relatively fixed.
As a result, net earnings can vary significantly from
quarter to quarter, regardless of management's efforts
to enhance revenues and control costs.
Results of Operations
The Registrant recognized record-level revenues, net
income and earnings per share for the quarter ended
April 30, 2000. Revenues totaled $141,808,000 for the
quarter surpassing the previous record of $126,369,000
set in the second quarter of the current year. Current
quarter revenues exceeded the same period of the
previous year by $27,280,000, an increase of 24%, when
revenues totaled $114,528,000. The largest components
of this increase were in commission revenues (40% increase)
and investment banking (82% increase). Commission revenues
increased as a result of the increase in retail activity
for the quarter and investment banking revenues increased
primarily due to mergers and acquisitions fee based business.
Operating expenses were $117,717,000 for the quarter ended
April 30, 2000 versus $94,828,000 for the quarter ended
April 30, 1999. The largest component of this increase
was employee compensation that increased 22% to $73,216,000.
This increase is in direct proportion to the noted increase
in revenues.
Net income for the quarter was $14,891,000 exceeding the
Registrant's previous net income record set in the second
quarter of fiscal 2000 when net income totaled $12,796,000.
Net income for the quarter ended April 30, 1999 totaled
$12,200,000. Income per share was $0.52 and $0.38 for the
quarters ended April 30, 2000 and 1999, respectively.
Total revenue for the nine-months ended April 30, 2000 was
$371,212,000, or 17% higher than the same period of the
previous year, when revenues totaled $318,110,000. The
largest components of this increase were commissions
(26% increase) and investment banking revenues (35% increase).
Changes in investor sentiment throughout the year, as noted
in the range of the Dow Jones Industrial Average (11,750 to
9,732), along with the Registrant's efforts to continue to
grow its retail business segment, gave rise to the noted
increase.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Results of Operations (continued)
Operating expenses totaled $314,759,000 for the nine-months
ended April 30, 2000 compared to $263,126,000 for the
nine-months ended April 30, 1999. The largest component
of this increase was for employee compensation that
increased 15% over the same period of the prior year.
Net income for the nine months ended April 30, 2000
totaled $35,153,000 versus $33,684,000 for the nine
months ended April 30, 1999. Earnings per share
total $1.19 and $1.04 year-to-date through April
30, 2000 and 1999, respectively.
Liquidity and Capital Resources
High liquidity is reflected in the Registrant's statement
of financial condition with approximately 95% of its
assets consisting of cash or assets readily convertible
into cash. Financing resources include the Registrant's
equity capital, commercial paper, short-term
borrowings, repurchase agreements and other payables.
For the nine months ended April 30, 2000 cash flows
provided by operating activities were $144,889,000
primarily due to a $114,140,000 increase in the
balance payable to customers.
Cash flows used for financing activities were $130,153,000
for the nine months ended April 30, 2000 compared to cash
flows provided by financing activities of $234,574,000 for
the nine months ended April 30, 1999. The largest
components of this change include a $71,460,000 increase
in securities sold under agreement to resell and a
$47,772,000 decrease in securities sold under agreements
to repurchase compared to the balances at July 31, 1999.
Cash flows used for investing activities during the nine
months ended April 30, 2000 were $7,379,000. This investing
activity is a continuation of the Registrant's efforts
to upgrade and maintain the broker/dealer subsidiary's
branch network.
The Registrant continued its stock buy back program
with the shares purchased during the current fiscal year
totaling more than 4.1 million shares at a cost of
$68,220,000. Management continued the stock buy
back throughout the quarter at slower rate than was
used in the first six months of the fiscal year
when 3.6 million shares were purchased. Management
expects to continue to repurchase the stock at the
slower rate utilized during the third quarter whenever
it is economically feasible to do so.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MORGAN KEEGAN, INC. and Subsidiaries
Forward Looking Statements
This Form 10-Q may contain or incorporate by reference
statements which may constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. Prospective investors are cautioned
that any such forward-looking statements are not guarantees
for future performance and involve risks and uncertainties,
and that actual results may differ materially from those
contemplated by such forward-looking statements.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MORGAN KEEGAN, INC. and Subsidiaries
Interest Rate Sensitivity
No significant changes have occurred since July 31, 1999
in the Registrant's exposure to market risk. See
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
<PAGE>
PART II. OTHER INFORMATION
MORGAN KEEGAN, INC. and Subsidiaries
Item 1. Legal proceedings
Morgan Keegan & Company, Inc. is subject to
various claims incidental to its securities business.
While the ultimate resolution of pending litigation
and claims cannot be predicted with certainty,
based upon the information currently known,
management is of the opinion that it has
meritorious defenses and has instructed
its counsel to vigorously defend such lawsuits
and claims, and that liability, if any, resulting
from all litigation will have no material adverse
effect on the Registrant's consolidated
financial condition or results
of operations.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
No reports were filed during the quarter on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto
duly authorized.
Morgan Keegan, Inc.
Registrant
BY /s/ Joseph C. Weller
Joseph C. Weller
EVP, CFO, Sec.-Treas.
Date: June 13, 2000
</PAGE>
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