-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H0/uuJbEsrW7UeerFk4GQcOC+xIEi0YiJbbSiai3BCC7+WciKDM+iJ7S1/3fa6vq N1kLllXaHebFQI2Z/VQemA== 0000729600-97-000004.txt : 19971031 0000729600-97-000004.hdr.sgml : 19971031 ACCESSION NUMBER: 0000729600-97-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19971028 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN KEEGAN INC CENTRAL INDEX KEY: 0000729600 STANDARD INDUSTRIAL CLASSIFICATION: 6211 IRS NUMBER: 621153850 STATE OF INCORPORATION: TN FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09015 FILM NUMBER: 97701824 BUSINESS ADDRESS: STREET 1: 50 N FRONT ST CITY: MEMPHIS STATE: TN ZIP: 38103 BUSINESS PHONE: 9015244100 10-K 1 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, 1997 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, 1997, the Registrant had approximately 32,273,616 shares of Common Stock outstanding. The aggregate market value of Common Stock held by non-affiliates was approximately $645,472,000. DOCUMENTS INCORPORATED HEREIN BY REFERENCE: Portions of the Registrant's Annual Report to Shareholders for the year ended July 31, 1997, 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 25, 1997, which will be filed with the Commission pursuant to Regulation 240.14a(6)(c) prior to October 27, 1997, are incorporated by reference into Part III and Part IV of this Report on Form 10-K. PART I Item 1. BUSINESS General Morgan Keegan, Inc. (Registrant) is a holding company whose principal subsidiary, Morgan Keegan & Company, Inc. (M.K. & Co.) is a regional securities broker/dealer serving retail customers in the southeastern United States and institutional clients throughout the United States and abroad. The Registrant has very few operations and substantially all of the Registrant's consolidated revenues are generated through the broker/dealer subsidiary. The subsidiary is a trader, broker and underwriter of fixed income and equity securities and provides related financial services in support of its broker/dealer activities. Products offered by M.K. & Co. include stocks; corporate and tax-exempt bonds; U.S. Government, agency and guaranteed securities; tax advantaged investments; options; investment and advisory services; a money market fund; and a regional mutual fund managed by Morgan Asset Management, Inc., a subsidiary of the Registrant. M.K. & Co. also produces capital raising services for corporate and government clients, margin credit for individual customers, research, and economic and business analysis of financial and stock market data for its customers. The percentage (%) of total revenues derived from the various business areas is as follows: Year Ended July 31 1997 1996 1995 Institutional clients 23% 24% 26% Retail customers 42 45 44 Investment banking and management fees, interest and other activities 35 31 30 Total 100% 100% 100%
M.K. & Co. is a two seat member of the New York Stock Exchange, Inc. ("NYSE"), owns seats on the American Stock Exchange, Inc. ("AMEX"); the New York Financial Futures Exchange, Inc. ("NYFE"); the Philadelphia Stock Exchange, Inc. ("PHLX"); the Chicago Board of Options Exchange, Inc. ("CBOE") and the Chicago Stock Exchange ("CSE"). Certain seats are leased to third parties under agreements which may be canceled by either party on 30 days' notice. M.K. & Co. is a member of the National Association of Securities Dealers ("NASD"), the Securities Industry Association, and the Securities Investor Protection Corporation ("SIPC"). SIPC provides protection for customers up to $500,000 each, with a limitation of $100,000 for claims for cash balances. M.K. & Co. has thirty-nine offices in twelve states. The following table reflects the number of account executives in each office as of July 31, 1997: Account Account Office Executives Office Executives Birmingham, Alabama 32 New Orleans, Louisiana 27 Decatur, Alabama 5 Shreveport, Louisiana 13 Fairhope, Alabama 1 Boston, Massachusetts 3 Huntsville, Alabama 13 Jackson, Mississippi 25 Mobile, Alabama 13 New York, New York 5 Montgomery, Alabama 24 Durham, North Carolina 9 Little Rock, Arkansas 45 Raleigh, North Carolina 10 Rogers, Arkansas 5 Wilmington, North Carolina 7 Ft. Lauderdale, Florida 5 Jackson, Tennessee 6 Pensacola, Florida 7 Knoxville, Tennessee 30 Athens, Georgia 6 Memphis, Tennessee Atlanta, Georgia 20 Headquarters 112 Bowling Green, Kentucky 7 Suburban Offices 40 Lexington, Kentucky 9 Nashville, Tennessee 25 Louisville, Kentucky 24 Austin, Texas 28 Baton Rouge, Louisiana 14 Dallas, Texas 14 Lafayette, Louisiana 9 Houston, Texas 30 TOTAL 623
Revenues by Source The following table sets forth the Registrant's consolidated revenues indicated in dollars and as a percentage of total revenues for the periods: (Dollars in Thousands) Year Ended July 31 1997 1996 1995 Amount % Amount % Amount % REVENUES Commissions Listed securities $27,946 8.51 $26,467 8.78 $21,246 9.32 Over-the-counter securities 25,776 7.85 21,849 7.25 12,624 5.54 Options 4,149 1.26 3,243 1.08 2,631 1.15 Other 21,988 6.69 16,311 5.41 9,661 4.24 TOTAL 79,859 24.31 67,870 22.52 46,162 20.25 Principal transactions Corporate securities 56,134 17.09 59,567 19.76 36,724 16.10 Municipal securities 14,867 4.53 16,345 5.42 16,404 7.19 U.S. Government obligations 38,963 11.86 39,291 13.04 33,982 14.90 TOTAL 109,964 33.48 115,203 38.22 87,110 38.19 Investment banking Corporate securities 23,814 7.25 25,990 8.62 25,009 10.97 Municipal securities 3,457 1.05 2,427 0.81 1,926 0.84 Underwriting, management and other fees 23,908 7.28 21,884 7.26 18,259 8.01 TOTAL 51,179 15.58 50,301 16.69 45,194 19.82 Interest Interest on margin balances 24,105 7.34 19,752 6.55 17,519 7.68 Interest on securities owned 40,157 12.22 30,171 10.01 20,261 8.88 TOTAL 64,262 19.56 49,923 16.56 37,780 16.56 Investment management fees 12,499 3.80 9,323 3.09 7,171 3.14 Other income 10,771 3.27 8,786 2.92 4,655 2.04 TOTAL REVENUES $328,534 100.0 $301,406 100.0 $228,072 100.0
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. Institutional Business During the three years ended July 31, 1997, 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, 1997, 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, 1997, 1996, and 1995, institutional revenues and percentages of total consolidated revenues were $76,135,000 (23%), $73,468,000 (24%), and $60,097,000 (26%), respectively. Retail Business During each of the three years ended July 31, approximately 43% of the Registrant's total revenues were derived from transactions with retail (individual) customers. For the fiscal years ended July 31, 1997, 1996, and 1995, revenues and percentages of total consolidated revenues were $137,112,000 (42%), $134,807,000 (45%), $100,239,000 (44%), respectively. Retail commissions are charged on both exchange and over-the-counter transactions in accordance with a schedule which M.K. & Co. has formulated. In certain cases, discounts from the schedule are granted to retail customers, generally on large trades or to active customers. In addition to acting as a broker/dealer for its retail customers, M.K. & Co. supplies them with equity and fixed income research, conducts seminars and makes available personal financial planning services. Transactions in securities may be executed on either a cash or margin basis. As a service to its retail customers, M.K. & Co. provides margin accounts which allow the customer to pay less than the full cost of a security purchased, the balance of the purchase price being provided by M.K. & Co. as a loan secured by the securities purchased. The amount of the loan is subject to the margin requirements (Regulation T) of the Board of Governors of the Federal Reserve System, NYSE margin requirements, and M.K. & Co. internal policies, which in some instances are more stringent than Regulation T or exchange requirements. In permitting customers to purchase securities on margin, M.K. & Co. bears the risk of a market decline which could reduce the value of its collateral below the customers' indebtedness. Interest charged on customer margin accounts represented approximately 7.3% of total revenues in fiscal 1997. 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, 1997, the Registrant made a market in common stock or other equity securities of approximately 179 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 transactions for U.S. Treasury note futures. The following table sets forth for the year ended July 31, 1997, 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: Highest Lowest Average Inventory Inventory Inventory Common stocks $ 25,197,227 $ 11,816,500 $ 18,798,749 Corporate debt securities 82,178,911 34,556,364 45,909,325 Tax-exempt securities 163,415,800 57,317,539 107,094,903 U.S. government, agency, and guaranteed securities 454,728,277 182,855,334 279,985,892
The following table sets forth the composition of revenues from principal transactions: Year Ended July 31 1997 1996 1995 Amount % Amount % Amount % Common stocks $ 47,968,002 44 $ 52,206,040 45 $31,123,000 36 Corporate debt securities 8,166,789 7 7,361,130 7 5,601,396 6 Tax-exempt securities 14,866,270 14 16,344,828 14 16,404,132 19 U.S. government, agency, and guaranteed securities 38,963,040 35 39,291,236 34 33,981,688 39 Total $109,964,101 100 $115,203,234 100 $87,110,216 100
M.K. & Co. participates in selling groups organized to distribute new issues of securities of the Federal Home Loan Bank, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Federal Farm Credit Bank and the Student Loan Mortgage Association. The following table sets forth selling group participation of M.K. & Co. in distributions of agency securities: Year Ended Number Amount of July 31 Issues Participation 1997 45 $327,400,000 1996 46 317,690,000 1995 52 382,075,000 1994 70 566,630,000 1993 90 690,705,000
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. In connection with these activities, particularly in U.S. government and agency securities, M.K. & Co. enters into collateralized reverse repurchase and repurchase agreements, securities lending arrangements and certain other secured transactions which may result in significant credit exposure in the event the counterparty to the transaction was unable to fulfill their contractual obligations. In accordance with industry practice, repurchase agreements and securities borrowing arrangements are generally collateralized by cash or securities with a market value in excess of the obligation under the contract. M.K. & Co. attempts to minimize credit risk associated with these activities by monitoring customer credit exposure and collateral values on a daily basis and requiring additional collateral to be deposited when necessary. M.K. & Co. participates in the trading of some derivative securities for its customers which is not a major portion of its business. Investment Banking M.K. & Co. participates in corporate and tax-exempt securities distributions as a member of an underwriting syndicate or a member of a selling group. Tax-exempt securities are obligations issued by state and municipal governments, hospitals, public utility systems and industrial development authorities. M.K. & Co.'s underwriting activities, together with its selling group participation, are important as a source of securities for sale to its customers. The following table sets forth corporate and tax-exempt underwriting syndicate participation of the subsidiary: CORPORATE TAX-EXEMPT Year Ended Number of Amount of Number of Amount July 31 Issues Participation Issues Participation 1997 181 $545,853,372 362 $1,818,060,000 1996 246 744,497,589 322 1,449,875,000 1995 195 867,514,389 104 349,005,000 1994 330 774,651,373 159 312,056,000 1993 307 596,588,928 168 430,272,000
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 25 of the 1997 Annual Report to Shareholders. In addition to its underwriting and selling group activities, M.K. & Co. engages in structuring, managing and marketing private offerings of corporate and tax-exempt securities, and assists in arranging mergers, acquisitions, divestitures and venture capital financing. M.K. & Co. provides valuation and financial consulting services for gift and estate tax purposes, employee stock ownership trusts, mergers, acquisitions, stock purchase agreements and other corporate purposes, as well as valuations for private companies in the process of going public. Other services include long-range financial planning, financial public relations and cash management services. The Registrant's subsidiary, Merchant Bankers, Inc., serves as a general partner in two limited partnerships, Morgan Keegan Merchant Banking Fund Limited Partnerships I and II, currently together have approximately $20,000,000 in assets and are engaged in merchant banking activities. Other Products M.K. & Co. offers special products, including insurance products and interests in various tax advantaged investments. Such tax advantaged investments are generally in the form of limited partnership interests in real estate, oil drilling, or similar ventures. Neither the Registrant nor the broker/dealer acts as the general partner for such partnerships. Morgan Keegan Fund Management, a wholly-owned subsidiary of the Registrant, acts as general partner to the Southern Capital Enhanced Equity Fund Limited Partnership, (the "FUND"), an investment limited partnership. The Fund seeks substantial capital appreciation through investing approximately 80% of its assets in growth stocks and the remaining assets in a stock index futures trading program. M.K. & Co. is a distributor of shares of Bedford Money Market Fund, a money market mutual fund whose shares are sold without a sales charge. The fund is managed by Provident Institutional Management Corporation. M.K. & Co. also sells shares in unit investment trusts which hold portfolios of tax-exempt bonds, and as a service to its customers, offers shares of various mutual funds including those of Southern Capital Fund. This fund, which invests primarily in equity securities of companies located in the southern United States, is a mutual fund managed by Morgan Asset Management, Inc., a subsidiary of the Registrant, and is solely distributed by M.K. & Co. Also, M.K. & Co. acts as a broker in the purchase and sale of put and call options on the CBOE, AMEX and other exchanges. Research Services M.K. & Co.'s research services include the review and analysis of the economy, general market conditions, industries and specific companies; recommendation of specific action with regard to industries and specific companies; review of customer portfolios; furnishing of information to retail and institutional customers; and responses to inquiries from customers and account executives. These services are made available generally without charge to customers. Administration and Operations Administrative and operations personnel are responsible for the execution of orders; processing of securities transactions; receipt, identification and delivery of funds and securities; internal financial control; accounting functions; office services; custody of customers' securities; and compliance with regulatory requirements. There is considerable fluctuation in the volume of transactions which a securities firm must handle. In the past, when the volume of trading in securities reached record levels, the securities industry experienced serious operating problems. M.K. & Co. has never experienced any significant operating difficulties, even during periods of exceptionally heavy trading. There is, however, no assurance that heavy trading volume in the future will not result in clearing and processing difficulties. The following table sets forth high, low and average monthly purchase and sale transactions processed by M.K. & Co: Year Ended Number of Transactions July 31 High Low Average 1997 88,770 58,873 72,267 1996 77,289 47,209 61,618 1995 57,362 41,414 47,875 1994 56,859 38,457 43,340 1993 43,544 28,358 36,584
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. Employees As of July 31, 1997, M.K. & Co. had 1,549 employees, 623 of whom were account executives, 267 of whom were engaged in other service areas, including trading, research and investment banking, and 659 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, 1997, M.K. & Co. hired 106 account executives for a net increase of 73 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. 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, 1997, the Registrant's subsidiary's net capital was 31% of aggregate debit items. See Note 10 - Regulatory Requirements - page 25 of the 1997 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 134,000 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. The Registrant's offices are leased with the exception of Morgan Properties, LLC. See Note 4 - Leases - on page 22 of the 1997 Annual Report to Shareholders. Subsequent to year end, 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 will be deferred and taken into income over the 10-year life of the lease. A portion of the sale proceeds will be used to pay off the mortgage note payable. Item 3. LEGAL PROCEEDINGS The Registrant is named in and subject to various proceedings and claims incidental to its securities business. While the ultimate resolution of pending litigation and claims cannot be predicted with certainty, based upon the information currently known, management is of the opinion that the resolution of such litigation and claims will have no material adverse effect on the Registrant's results of operations or financial condition. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to security holders during the fourth quarter of the fiscal year covered by this report. PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The information required by this item is incorporated herein by reference to Note 12 - Quarterly Results of Operations (Unaudited) - on page 26 of the 1997 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 12 and 13 and Additional Financial Information (Unaudited) on page 16 of the 1997 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 14 and 15 of the 1997 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 17 through 25 of the 1997 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. 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 21, 1997 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 25, 1997. 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 21, 1997 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 25, 1997. 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 21, 1997 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 25, 1997. 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 21, 1997 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 25, 1997. 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 1997 Annual Report to Shareholders are incorporated by reference in Item 8: Consolidated Statements of Financial Condition July 31, 1997 and 1996 Consolidated Statements of Income Years ended July 31, 1997 1996, and 1995 Consolidated Statements of Stockholders' Years ended July 31, 1997 Equity 1996, and 1995 Consolidated Statements of Cash Flows Years ended July 31, 1997 1996, and 1995 Notes to Consolidated Financial Statements July 31, 1997
(2) The following consolidated financial statement schedule of Morgan Keegan, Inc. and subsidiaries is included in Item 14 (d): Schedule I - Condensed Financial Statements of Registrant All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (3) The following exhibits are filed herewith or incorporated by reference as indicated. Exhibit numbers refer to Item 601 of Regulation S-K: Exhibit 3 - Articles of Incorporation filed as Exhibits B & C and Bylaws to Proxy Statement. Exhibit 11 - Statement re: Computation of Per Share Earnings Page 19 Exhibit 13 - Annual Report to Shareholders* Exhibit 22 - List of Subsidiaries of Registrant* Exhibit 23 - Consent of Independent Auditors Page 20 Exhibit 27 - Financial Data Schedule Page 21 *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, 1997. (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. 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, 1997 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, 1997 /S/ William W. Deupree, Jr. William W. Deupree, Jr. Director October 27, 1997 /S/ James E. Harwood, III __ James E. Harwood, III Director October 27, 1997 /S/ Allen B. Morgan, Jr. Allen B. Morgan, Jr. Chairman and Director October 27, 1997 /S/ Harry J. Phillips Harry J. Phillips Director October 27, 1997 /S/ Donald Ratajczak Donald Ratajczak Director October 27, 1997 /S/ John W. Stokes, Jr. John W. Stokes, Jr. Vice President and Director October 27, 1997 /S/ Joseph C. Weller Joseph C. Weller Secretary/Treasurer and October 27, 1997 Director Schedule I Condensed Financial Statements of Registrant Morgan Keegan, Inc. (Parent Company) Condensed Balance Sheets July 31 1997 1996 ASSETS Cash $ 1,000 $ 1,000 Securities owned 2,187,313 2,080,105 Furniture, equipment and leasehold improvements less allowances for depreciation and amortization ($9,128,734 at July 31, 1997, $7,774,721 at July 31, 1996) 12,406,839 10,187,711 Investments in subsidiaries (a) 208,346,378 173,434,119 Intercompany receivables (a) 82,874,533 21,803,616 Other assets 5,439,020 5,921,080 Total Assets $311,255,083 $213,427,631 LIABILITIES Short-term borrowings $ 570,000 $ 1,400,000 Commercial paper 106,930,024 42,928,286 Other liabilities 35,305 91,425 STOCKHOLDERS' EQUITY Common Stock 19,782,585 12,773,497 Additional paid-in-capital 1,047,529 1,510,383 Retained earnings 182,889,640 154,724,040 203,719,754 169,007,920 Total Liabilities and Stockholders' Equity $311,255,083 $213,427,631
Condensed Income Statements July 31 1997 1996 1995 Rental income $ 3,574,885 $ 2,492,649 $ 2,167,988 Interest income 1,080,975 396,957 185,095 Depreciation (3,574,885) (2,492,649) (2,167,988) Other 500,587 7,507 402,300 Interest expense (31,000) (90,000) Income taxes (550,000) (125,000) (300,000) Equity in net income of subsidiaries 33,377,261 33,672,460 23,560,974 Net Income $34,377,823 $33,866,988 $23,848,369 (a) Eliminated in consolidation Schedule I - Continued Condensed Financial Statements of Registrant Morgan Keegan, Inc. (Parent Company)
Year Ended Condensed Statement of Cash Flows July 31 1997 1996 1995 Cash Flows From Operating Activities Operations (net income) $34,377,823 $33,866,988 $23,848,369 Less: Income from subsidiaries (33,377,261) (33,672,460) (23,560,974) Amortization of restricted stock 2,500,000 2,580,000 1,800,000 Depreciation expense 3,574,885 2,492,649 2,167,988 Decrease (increase) in other assets 482,060 482,059 (3,494,309) Decrease in intercompany payables (384,222) (2,672,397) (Decrease) increase in other liabilities (56,120) 90,001 1,424 Increase in intercompany receivables (61,070,917) (21,803,616) Decrease from operating activities (53,569,530) (16,348,601) (1,909,899) Cash Flows From Financing Activities Proceeds (payments) from short term borrowings (830,000) (10,000,000) 10,000,000 Proceeds from sale or issuance of common stock 4,188,335 2,920,669 2,232,853 Proceeds (payments) of commercial paper 64,001,738 35,460,069 (1,724,909) Dividends paid (6,212,224) (5,282,864) (4,438,988) Retirement of common stock (142,100) (4,534,325) (9,349,500) Increase (decrease) from financing activities 61,005,749 18,563,549 (3,280,544) Cash Flows From Investing Activities Increase in securities owned (107,208) (148,635) (164,105) (Increase) decrease in investment in subsidiaries (1,534,998) 3,806,523 8,754,208 Purchase of furniture, equipment and leasehold improvements (5,794,013) (5,872,836) (3,399,660) (Decrease) increase from investing activities (7,436,219) (2,214,948) 5,190,443 Increase in cash 0 0 0 CASH AT BEGINNING OF YEAR 1,000 1,000 1,000 CASH AT END OF YEAR $1,000 $1,000 $1,000
Notes to Financial Statements 1. Basis of Presentation - In the Parent-Company-only financial statements, the Registrant's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since date of acquisition. The Registrant's share of net income of its unconsolidated subsidiaries is included in consolidated income using the equity method. Parent-Company-only financial statements should be read in conjunction with the Registrant's consolidated financial statements. EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Year Ended July 31 1997 1996 1995 PRIMARY Average shares outstanding 31,169,918 30,632,157 30,462,610 Net effect of dilutive stock options - based on the treasury stock method using average market price. 155,123 142,506 123,541 TOTAL 31,325,041 30,774,663 30,586,151 Net Income $34,377,823 $33,866,988 $23,848,369 Per share amount $1.10 $1.10 $0.78 FULLY DILUTED Average shares outstanding 31,169,918 30,632,157 30,462,610 Net effect of dilutive stock options - based on the treasury stock method using the year end market price, if higher than average market price. 195,023 142,506 123,541 TOTAL 31,364,941 30,774,663 30,586,151 Net Income $34,377,823 $33,866,988 $23,848,369 Per share amount $1.10 $1.10 $0.78
Information contained in Exhibit 11 had been adjusted for the effect of the 3-for-2 stock split in September, 1997. See Note - 13 Subsequent Event - on page 26 of the 1997 Annual Report to Shareholders, a copy of which is enclosed. EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Morgan Keegan, Inc. of our report dated September 18, 1997, included in the 1997 Annual Report to Shareholders of Morgan Keegan, Inc. Our audits also included the financial statement schedule of Morgan Keegan, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-16982) pertaining to the 1985 Restricted Stock and Stock Option Plan and in the Registration Statement (Form S-8 No. 33-32974) pertaining to the Employee Stock Purchase Plan of Morgan Keegan, Inc. of our report dated September 18, 1997, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Morgan Keegan, Inc. /S/ Ernst & Young LLP ERNST & YOUNG LLP Memphis, Tennessee October 23, 1997 EXHIBIT 27 - FINANCIAL DATA SCHEDULE 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, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended July 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly in all material respects, the consolidated financial position of Morgan Keegan, Inc. and subsidiaries at July 31, 1997 and 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 1997 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Memphis, Tennessee September 18, 1997 Ten Year Financial Summary Morgan Keegan, Inc. and Subsidiaries (In thousands, except per share amounts) Years ended July 31 1997 1996 Revenues Commissions: Listed securities $ 27,946 $ 26,467 Over-the-counter 25,776 21,849 Options 4,149 3,243 Other 21,988 16,311 79,859 67,870 Principal transactions: Corporate securities 56,134 59,567 Municipal securities 14,867 16,345 U.S. government securities 38,963 39,291 109,964 115,203 Investment banking: Corporate securities 23,814 25,990 Municipal securities 3,457 2,427 Underwriting management and other fees 23,908 21,884 51,179 50,301 Interest: Interest on margin balances 24,105 19,752 Interest on securities owned 40,157 30,171 64,262 49,923 Investment management fees 12,499 9,323 Other 10,771 8,786 328,534 301,406 Expenses Compensation 164,364 158,352 Floor brokerage and clearance 5,043 4,397 Communications 21,549 18,892 Travel and promotional 8,724 7,336 Occupancy and equipment costs 15,854 11,812 Interest 44,652 32,930 Taxes, other than income taxes 7,986 7,006 Other operating expenses 5,084 5,514 273,256 246,239 Income (loss) before income taxes 55,278 55,167 Income tax expense (credit) 20,900 21,300 Net income $ 34,378 $ 33,867 Per Share Data* Net income $ 1.10 $ 1.10 Book value $ 6.44 $ 5.51 Other Data (at year end): Total assets $1,208,257 $946,648 Stockholders' equity $ 203,720 $169,008 Common shares outstanding* 31,652 30,657
*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. Ten Year Financial Summary Morgan Keegan, Inc. and Subsidiaries (In thousands, except per share amounts) Years ended July 31 1995 1994 1993 Revenues Commissions: Listed securities $ 21,246 $ 22,748 $ 20,457 Over-the-counter 12,624 10,076 10,159 Options 2,631 1,990 1,927 Other 9,661 11,723 11,196 46,162 46,537 43,739 Principal transactions: Corporate securities 36,724 33,541 34,404 Municipal securities 16,404 14,135 17,432 U.S. government securities 33,982 41,746 51,297 87,110 89,422 103,133 Investment banking: Corporate securities 25,009 32,850 15,760 Municipal securities 1,926 4,059 3,947 Underwriting management and other fees 18,259 18,923 9,571 45,194 55,832 29,278 Interest: Interest on margin balances 17,519 10,824 7,047 Interest on securities owned 20,261 14,070 12,627 37,780 24,894 19,674 Investment management fees 7,171 6,063 5,413 Other 4,655 8,972 7,958 228,072 231,720 209,195 Expenses Compensation 120,795 125,205 109,748 Floor brokerage and clearance 3,724 3,875 5,296 Communications 15,962 13,852 12,012 Travel and promotional 5,855 5,721 4,241 Occupancy and equipment costs 9,716 8,320 8,153 Interest 23,600 14,393 11,185 Taxes, other than income taxes 6,298 4,972 4,199 Other operating expenses 3,774 3,741 4,659 189,724 180,079 159,493 Income (loss) before income taxes 38,348 51,641 49,702 Income tax expense (credit) 14,500 19,800 19,000 Net income $ 23,848 $ 31,841 $ 30,702 Per Share Data* Net income $ .78 $ .97 $ .97 Book value $ 4.61 $ 4.06 $ 3.31 Other Data (at year end): Total assets $882,292 $571,009 $527,084 Stockholders' equity $139,457 $125,365 $106,335 Common shares outstanding* 30,254 30,834 32,112
*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. Ten Year Financial Summary Morgan Keegan, Inc. and Subsidiaries (In thousands, except per share amounts) Years ended July 31 1992 1991 1990 Revenues Commissions: Listed securities $ 18,378 $ 13,143 $ 14,444 Over-the-counter 9,041 5,347 1,745 Options 2,089 2,134 2,180 Other 7,632 4,824 4,434 37,140 25,448 22,803 Principal transactions: Corporate securities 28,161 16,554 11,808 Municipal securities 12,037 10,730 7,445 U.S. government securities 48,588 30,279 18,478 88,786 57,563 37,731 Investment banking: Corporate securities 16,730 4,836 2,947 Municipal securities 3,960 376 159 Underwriting management and other fees 9,862 5,436 3,926 30,552 10,648 7,032 Interest: Interest on margin balances 5,941 4,867 5,521 Interest on securities owned 12,709 12,490 10,769 18,650 17,357 16,290 Investment management fees 4,627 3,086 2,415 Other 2,909 2,415 2,737 182,664 116,517 89,008 Expenses Compensation 94,348 61,265 48,243 Floor brokerage and clearance 4,571 3,751 3,749 Communications 9,791 8,764 8,436 Travel and promotional 3,699 2,982 2,660 Occupancy and equipment costs 7,557 8,194 7,789 Interest 12,562 12,953 12,591 Taxes, other than income taxes 3,823 3,116 2,682 Other operating expenses 4,122 3,288 3,308 140,473 104,313 89,458 Income (loss) before income taxes 42,191 12,204 (450) Income tax expense (credit) 16,400 4,500 (475) Net income $ 25,791 $ 7,704 $ 25 Per Share Data* Net income $ .83 $ .25 $ .01 Book value $ 2.45 $ 1.67 $ 1.43 Other Data (at year end): Total assets $434,448 $304,445 $236,991 Stockholders' equity $ 76,690 $ 50,837 $ 44,888 Common shares outstanding* 31,340 30,504 31,439
*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. Ten Year Financial Summary Morgan Keegan, Inc. and Subsidiaries (In thousands, except per share amounts) Years ended July 31 1989 1988 Revenues Commissions: Listed securities $ 13,675 $ 12,901 Over-the-counter 1,848 2,088 Options 2,339 2,509 Other 4,192 3,943 22,054 21,441 Principal transactions: Corporate securities 14,369 15,421 Municipal securities 5,993 6,401 U.S. government securities 14,707 14,829 35,069 36,651 Investment banking: Corporate securities 3,461 2,225 Municipal securities 213 19 Underwriting management and other fees 4,057 3,302 7,731 5,546 Interest: Interest on margin balances 5,698 5,406 Interest on securities owned 6,129 3,407 11,827 8,813 Investment management fees 1,713 942 Other 1,037 163 79,431 73,556 Expenses Compensation 43,953 42,242 Floor brokerage and clearance 2,966 2,900 Communications 7,996 7,366 Travel and promotional 1,990 2,649 Occupancy and equipment costs 6,852 5,755 Interest 7,931 4,620 Taxes, other than income taxes 2,326 2,179 Other operating expenses 2,330 1,989 76,344 69,700 Income (loss) before income taxes 3,087 3,856 Income tax expense (credit) 715 1,351 Net income $ 2,372 $ 2,505 Per Share Data* Net income $ .07 $ .07 Book value $ 1.45 $ 1.41 Other Data (at year end): Total assets $397,007 $236,209 Stockholders' equity $ 48,432 $ 49,325 Common shares outstanding* 33,329 35,061
*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. General Business Environment. Morgan Keegan, Inc. (the "Company") operates a full service regional brokerage business through its principal subsidiary, Morgan Keegan & Company, Inc. The Company is involved in the origination, underwriting, distribution, trading and brokerage of fixed income and equity securities and also provides 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 strategic approach. Many factors affect the Company's revenues including changes in economic conditions, investor sentiment, the level and volatility of interest rates, inflation, political events and competition. As these factors are beyond the Company's control, and certain expenses are relatively fixed, earnings can significantly vary from year to year regardless of management's efforts to enhance revenue and control costs. The Company faces increasing competition from commercial banks and thrift institutions which is anticipated as these institutions begin to offer investment banking and financial services which were previously offered only by securities firms. The Federal Reserve Board has eased numerous restrictions on commercial banks and thrift institutions which has allowed them to greatly increase their abilities to compete in the securities industry. The Company anticipates increasing regulation in the securities industry, meaning that continued compliance may be more difficult and costly. At present, the Company is unable to predict the extent of changes that may be enacted or the effect on the Company's business. The Company's long term plan is to continue to grow its regional brokerage and other services in the southeastern United States. Results of Operations. The Company concluded its second record year in succession as revenues of $328,534,000 surpassed the 1996 total of $301,406,000 by $27,128,000. Revenues for 1996 were $73,334,000 in excess of 1995 revenues of $228,072,000. An outstanding fourth quarter which was driven by favorable market conditions pushed the Company to the record net income level of $34,378,000 which was $511,000 in excess of the previous years record level. Net income was $10,019,000 more in fiscal 1996 than in fiscal 1995. The largest component of the revenue increase was interest income which went up by $14,339,000 or 29% to $64,262,000 in fiscal 1997 following an increase of $12,143,000 or 32% for fiscal 1996 over fiscal 1995. The increased interest income was largely due to increasing margin accounts from the Company's expanding retail network and the favorable market conditions. Investment management fees continued to increase, $3,176,000 or 34% for fiscal 1997, following a similar 30% increase for the previous fiscal year represents management's continued efforts to increase the fee based business. Principal transactions declined by $5,239,000 to $109,964,000 following a 32% increase in the previous year. The decline resulted from slightly lagging market conditions for corporate securities and municipal securities during the first three quarters. Commission income increased by $11,989,000 or 18% following a 47% or $21,708,000 increase which stemmed from strong market conditions for blue chip stocks. Operating expenses rose from $246,239,000 in fiscal 1996 to $273,256,000 representing an 11% or $27,017,000 increase for the year. This follows a 30% increase for fiscal 1996 over fiscal 1995. The largest percentage increase for both years was interest expense which rose 36% for fiscal 1997, after a 40% increase in the previous year. The increase in interest was primarily due to the larger customer credit positions, commercial paper borrowings and long term debt on the Company's corporate headquarters. Compensation expense, which ordinarily closely corresponds to the revenue increases, was up $6,012,000 or 4% for fiscal 1997 versus a 31% increase for the year before. The increase did not correspond directly to the revenue increase as a significant portion of the revenue was attributed to interest income. Other expenses increased, as the Company continued to expand its retail network, communications and branch office system. Fiscal 1997 turned into a highly profitable year for the securities industry, as the DOW continued to rise from over 5,500 to over 7,000, with a substantial portion coming in the final quarter of the fiscal year. During both of the record years, the Company benefited from its continued expansion efforts within the southeast United States, as the favorable market conditions and the ongoing expense management efforts drove earnings per share to $1.10 for both of the years. Liquidity and Capital Resources. Most of the Company's assets are highly liquid, consisting mainly of cash or assets readily convertible into cash. These assets are financed by the Company's equity capital, short-term bank loans, commercial paper, repurchase agreements and other payables. Changes in the amount of securities owned by the Company and customer and broker receivables affect directly the amount of the Company's financing requirements. 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 minimum requirements. At July 31, 1997, the net capital of the Company's broker-dealer subsidiary exceeded the SEC's minimum requirements by more than $107,000,000, which is slightly more than the $95,000,000 at the end of last year. 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 of the foreseeable future. During the year, the Company continued its stock repurchase program, purchasing 17,400 shares for an aggregate value of $142,000. This followed fiscal 1996 repurchases of 572,700 shares valued at $4,535,000. The board previously authorized the purchase of a total of 7,125,000 shares under the repurchase program. Subsequent to the end of the year, the Board of Directors approved a three-for-two stock split to be distributed on September 11, 1997. All share, earnings per share, dividends per share and quarterly stock price data included above and in the consolidated financial statements and notes thereto have been adjusted to give effect to the stock split. The split represents continuing optimism regarding the Company's optimistic outlook. Also, subsequent to the end of the year, the Company signed an agreement to sell its corporate headquarters building and to lease it back over a 10 year period. The sale is for $36 million and will result in a gain of $13.8 million which will be deferred and taken into income over the ten year life of the lease. A portion of the sales proceeds will be used to repay the related mortgage note payable. Forward Looking Statements. This Annual Report may be deemed to contain certain forward-looking statements regarding the anticipated financial and operating results of the Company. The Company undertakes no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Information contained in these forward-looking statements in inherently uncertain; and actual performance and results may differ materially due to many important factors, many of which are beyond the Company's control including the Company's ability to sustain and manage growth; dealing with increasing competition; additional government regulations; changes in general economic conditions; and the like. (Dollars in thousands) Increase (Decrease) Revenues: 1997 vs 1996 1996 vs 1995 Commissions $11,989 18% $21,708 47% Principal transactions (5,239) (5%) 28,093 32% Investment banking 878 2% 5,107 11% Interest 14,339 29% 12,143 32% Investment management fees 3,176 34% 2,152 30% Other 1,985 23% 4,131 89% $27,128 9% $73,334 32% Expenses: Compensation $ 6,012 4% $37,557 31% Floor brokerage and clearance 646 15% 673 18% Communications 2,657 14% 2,930 18% Travel and promotional 1,388 19% 1,481 25% Occupancy and equipment costs 4,042 34% 2,096 22% Interest 11,722 36% 9,330 40% Taxes, other than income taxes 980 14% 708 11% Other operating expenses (430) (8%) 1,740 46% $27,017 11% $56,515 30%
Additional Financial Information (Unaudited) Morgan Keegan, Inc. and Subsidiaries (In thousands, except per share amounts) Summary of Quarterly Results First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal 1997 Revenues $74,415 $83,527 $77,283 $93,309 Income before income taxes 11,749 14,674 10,910 17,945 Net income 7,349 9,274 6,910 10,845 Net income per share 0.24 0.30 0.22 0.34 Fiscal 1996 Revenues $68,940 $77,457 $79,297 $75,712 Income before income taxes 14,230 14,917 14,076 11,944 Net income 8,830 9,217 8,576 7,244 Net income per share 0.29 0.30 0.27 0.24 Fiscal 1995 Revenues $56,206 $55,267 $50,147 $66,452 Income before income taxes 10,971 9,537 6,960 10,880 Net income 6,771 5,937 4,360 6,780 Net income per share 0.22 0.19 0.15 0.22 Fiscal 1994 Revenues $57,664 $60,125 $56,294 $57,637 Income before income taxes 13,732 14,310 10,657 12,942 Net income 8,432 8,810 6,657 7,942 Net income per share 0.26 0.26 0.20 0.25 Fiscal 1993 Revenues $47,047 $49,397 $55,312 $57,439 Income before income taxes 11,207 11,270 13,235 13,990 Net income 6,808 7,170 8,085 8,639 Net income per share 0.22 0.24 0.25 0.26
Statistical Comparison of Production 1997 1996 1995 1994 1993 Total pro- duction $213,247,662 $208,275,740 $160,335,704 $168,350,637 $154,251,186 Percentage change in production +2.4% +29.9% -4.8% +9.1% +12.8% Number of tickets 685,790 749,560 558,967 480,564 439,006 Average commissions per ticket $ 311 $ 278 $ 287 $ 350 $ 351 Number of investment brokers 623 596 551 492 438 Number of Investment brokers (over 1 year) 566 487 438 436 403 Total number of employees 1,549 1,491 1,335 1,218 1,088 Average commissions per investment broker (over 1 year) $ 362,830 $ 345,885 $ 334,555 $ 346,274 $ 359,817 Number of new accounts opened 32,166 33,835 29,559 25,861 21,451
Consolidated Statements of Income Morgan Keegan, Inc. and Subsidiaries Years ended July 31 (In thousands, except share and per share amounts) 1997 1996 1995 Revenues Commissions $ 79,859 $ 67,870 $ 46,162 Principal transactions 109,964 115,203 87,110 Investment banking 51,179 50,301 45,194 Interest 64,262 49,923 37,780 Investment management fees 12,499 9,323 7,171 Other 10,771 8,786 4,655 328,534 301,406 228,072 Expenses Compensation 164,364 158,352 120,795 Floor brokerage and clearance 5,043 4,397 3,724 Communications 21,549 18,892 15,962 Travel and promotional 8,724 7,336 5,855 Occupancy and equipment costs 15,854 11,812 9,716 Interest 44,652 32,930 23,600 Taxes, other than income taxes 7,986 7,006 6,298 Other operating expenses 5,084 5,514 3,774 273,256 246,239 189,724 Income Before Income Taxe 55,278 55,167 38,348 Income Tax Expense 20,900 21,300 14,500 Net Income $ 34,378 $ 33,867 $ 23,848 Net Income Per Share $ 1.10 $ 1.10 $ 0.78 Average shares outstanding 31,325,041 30,774,663 30,586,151 >/TABLE> See accompanying notes.
Consolidated Statements of Stockholders' Equity Morgan Keegan, Inc. and Subsidiaries Common Common Additional Stock- Stock Stock Paid-In Retained holders' Shares Amount Capital Earnings Equity (In thousands, except share and per share amounts) Balance at August 1, 1994 13,704,011 $ 8,565 $ 5,522 $111,278 $125,365 Stock split effected in the form of a stock dividend 6,852,005 4,283 (81) (4,202) Issuance of restricted stock 298,072 186 (186) Issuance of Common Stock 344,924 216 2,017 2,233 Dividends paid ($.15 per share) (4,440) (4,440) Repurchase & retirement of Common Stock (1,030,309) (645) (8,360) (344) (9,349) Amortization of restricted stock 1,800 1,800 Net income 23,848 23,848 Balance at July 31, 1995 20,168,703 12,605 712 126,140 139,457 Issuance of restricted stock 292,231 183 (183) Issuance of Common Stock 358,463 224 2,698 2,922 Dividends paid ($.17 per share) (5,283) (5,283) Repurchase & retirement of Common Stock (381,800) (239) (4,296) (4,535) Amortization of restricted stock 2,580 2,580 Net income 33,867 33,867 Balance at July 31, 1996 20,437,597 12,773 1,511 154,724 169,008 Issuance of restricted stock 296,771 185 (185) Issuance of Common Stock 378,660 237 3,951 4,188 Dividends paid ($.20 per share) (6,212) (6,212) Repurchase & retirement of Common Stock (11,600) (7) (135) (142) Amortization of restricted stock 2,500 2,500 Net income 34,378 34,378 Stock split effected in the form of a stock dividend 10,550,714 6,594 (6,594) Balance at July 31, 1997 31,652,142 $19,782 $ 1,048 $182,890 $203,720
See accompanying notes. Consolidated Statements of Financial Condition Morgan Keegan, Inc. and Subsidiaries (In thousands, except share and per share amounts) July 31 1997 1996 Assets Cash $ 22,423 $ 17,156 Securities segregated for regulatory purposes, at market 280,100 225,200 Deposits with clearing organizations and others 9,153 7,655 Receivable from brokers and dealers and clearing organizations 37,730 16,978 Receivables from customers 358,020 314,436 Securities purchased under agreements to resell 146,881 69,278 Securities owned, at market 275,611 229,278 Memberships in exchanges, at cost (market value- $4,202 at July 31, 1997; $3,722 at July 31, 1996) 719 719 Furniture, equipment and leasehold improvements, at cost (less allowances for depreciation and amortization-$16,257 at July 31, 1997; $13,362 at July 31, 1996) 24,062 18,492 Building and improvements, at cost (less allowance for depreciation-$644 at July 31, 1997; $92 at July 31, 1996) 19,356 19,908 Other assets 34,202 27,548 $1,208,257 $946,648 Liabilities and Stockholders' Equity Short-term borrowings $ 570 $ 31,400 Mortgage note payable 19,714 19,965 Commercial paper 106,930 42,928 Payable to brokers and dealers and clearing organizations 12,718 9,201 Payable to customers 583,922 484,547 Customer drafts payable 17,362 14,456 Securities sold under agreements to repurchase 97,417 54,826 Securities sold, not yet purchased, at market 94,298 62,972 Other liabilities 71,606 57,345 1,004,537 777,640 Stockholders' equity Common Stock, par value $.625 per share: authorized 100,000,000 shares; 31,652,142 shares issued and outstanding at July 31, 1997; 20,437,597 at July 31, 1996 19,782 12,773 Additional paid-in capital 1,048 1,511 Retained earnings 182,890 154,724 203,720 169,008 $1,208,257 $946,648
See accompanying notes. Consolidated Statements of Cash Flows Morgan Keegan, Inc. and Subsidiaries Years ended July 31 1997 1996 1995 Cash Flows From Operating Activities: (In thousands) Net income $34,378 $33,867 $23,848 Non-cash items included in earnings: Depreciation and amortization 7,023 4,387 3,501 Deferred income taxes (1,000) (750) (1,900) Amortization of restricted stock 2,500 2,580 1,800 42,901 40,084 27,249 (Increase) decease in operating assets: Receivable from brokers and dealers and clearing organizations (20,752) 8,068 4,899 Deposits with clearing organizations and others (1,498) (5,064) Receivable from customers (43,584) (53,729) (23,943) Securities segregated for regulatory purposes, at market (54,900) 800 (190,299) Securities owned, at market (46,333) (19,363) (42,347) Other assets (5,654) (1,733) (10,462) (Decrease) increase in operating liabilities: Payable to brokers and dealers and clearing organizations 3,517 3,814 (8,194) Payable to customers 99,375 46,029 197,377 Customer drafts payable 2,906 682 2,824 Securities sold, not yet purchased, at market 31,326 (5,458) 32,445 Other liabilities 14,261 11,096 (8,796) (21,336) (9,794) (51,560) Cash provided by (used in) operating activities 21,565 30,290 (24,311) Cash Flows From Financing Activities: Commercial paper 64,002 35,460 (3,125) Mortgage note payable 20,000 Mortgage note payments (251) (35) Issuance of common stock 4,188 2,922 2,233 Retirement of common stock (142) (4,535) (9,349) Dividends paid (6,212) (5,283) (4,440) Short-term borrowings (30,830) (96,249) 111,149 Securities purchased under agreements to resell (77,603) 19,466 (29,050) Securities sold under agreements to repurchase 42,591 22,583 (26,489) Cash provided by (used in) financing activities (4,257) (5,671) 40,929 Cash Flows From Investing Activities: Payments for furniture, equipment and leasehold improvements (12,041) (9,750) (7,185) Building purchase (20,000) Cash used in investing activities (12,041) (29,750) (7,185) Net increase (decrease) in cash 5,267 (5,131) 9,433 Cash at beginning of period 17,156 22,287 12,854 Cash at end of period $22,423 $17,156 $22,287
Income tax payments totaled $19,400,000 in 1997, $20,275,000 in 1996, and $14,651,000 in 1995. Interest payments totaled $44,499,000 in 1997, $32,761,000 in 1996, and $23,445,000 in 1995. See accompanying notes. Notes to Consolidated Financial Statements Morgan Keegan, Inc., and Subsidiaries July 31, 1997 NOTE 1-SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The consolidated financial statements include the accounts of Morgan Keegan, Inc. and its subsidiaries (collectively referred to as the Company). All significant intercompany balances and transactions have been eliminated in consolidation. The Company is in one principal line of business, that of providing investment services primarily in the southern United States. Financial Assets and Liabilities: Substantially all of the Company's financial assets and liabilities are carried at market value or at amounts which because of the short-term nature of the financial instruments, approximate current fair value. Securities Transactions: Securities transactions and related commission revenue and expense are recorded on a settlement date basis, generally the third business day following the transaction date, which is not materially different from a trade date basis. Securities: Securities owned and securities sold, not yet purchased are carried at market value and unrealized gains and losses are reflected in revenues. Investment Banking: Management fees on investment banking transactions and selling concessions are recorded on the settlement date. Underwriting fees are generally recorded on the date the underwriting syndicate is closed. Fixed Assets: Furniture, equipment and leasehold improvements are carried at cost. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets. Building and improvements are carried at cost and are being depreciated over a thirty-one year period. Securities-Lending Activities: Securities borrowed and securities loaned transactions are generally reported as collateralized financings except where letters of credit or other securities are used as collateral. Securities borrowed transactions require the Company to deposit cash, letters of credit, or other collateral with the lender. With respect to securities loaned, the Company receives collateral in the form of cash or other collateral in an amount generally in excess of the market value of securities loaned. The Company monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as necessary. Reverse Repurchase and Repurchase Agreements: Securities purchased under agreements to resell (Reverse Repurchase Agreements) and securities sold under agreements to repurchase (Repurchase Agreements) are carried at the amounts at which the securities will be subsequently resold or reacquired as specified in the respective agreements. Government securities segregated in a special reserve bank account for the benefit of customers under rule 15c3-3 of the Securities and Exchange Commission represent securities purchased under an agreement to resell of $280,100,000 and $225,200,000 at July 31, 1997 and 1996, respectively. 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: Net income per share is computed based on the weighted average number of shares outstanding including shares issuable under stock options, when dilutive. 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 APB Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognized no compensation expense for the stock option grants. Other Accounting Pronouncements: In December 1996, the Financial Accounting Standards Board (FASB) issued Statement No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Statement 127 defers the effective date of provisions of Statement 125 relating to the recognition of collateral, securities lending transactions, repurchase agreements, dollar-rolls, and similar transactions until January 1, 1998. In February 1997, the FASB issued Statement No. 128, "Earnings Per Share." Statement 128 simplifies the calculation of earnings per share (EPS) and makes it comparable to international EPS standards. Statement 128 is effective for both interim and annual periods ending after December 15, 1997 and earlier application is not permitted. The Company does not believe that the adoption of this statement will have a material effect on its consolidated financial position or results of operations. In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for annual and interim periods ending after December 15, 1997. This statement established standards for the method that public entities use to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographical areas and major customers. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE 2-BORROWINGS The mortgage note payable relates to the Memphis headquarters location acquired May 31, 1996, and requires monthly principal and interest payments of approximately $160,000. The mortgage bears interest at 8.25% and is secured by buildings and improvements with a book value of $19,356,000. Principal maturities under the mortgage note payable for the succeeding 5 years are as follows, in thousands: 1998 $ 272 1999 297 2000 318 2001 350 2002 380 Thereafter 18,097 $19,714
Subsequent to year end, an agreement was entered into to sell the Memphis headquarters building. A portion of the proceeds will be used to repay the mortgage not payable (See Note 13). The short-term borrowings of $570,000 and $31,400,000 at July 31, 1997 and 1996 respectively, consist of loans payable on demand primarily used to finance clearance of securities and to carry customers' margin accounts and firm positions. The notes bear interest at the broker loan rate, which was 6.4% and 6.0% at July 31, 1997 and 1996, respectively. The Company had total lines of credit of $380,000,000 at July 31, 1997, with expirations prior to July 31, 1998, under which a maximum of $205,000,000 could be borrowed on an unsecured basis. There were no compensating balances associated with these lines of credit. There were no borrowings outstanding on these lines of credit at July 31, 1997. The Company also issues its own commercial paper to investors at fluctuating interest rates (5.75% and 5.625% at July 31, 1997 and 1996, 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, 1997 and 1996 was 6.85% and 7.04%, respectively. NOTE 3-SECURITIES Securities owned for trading purposes consist of the following at July 31, in thousands: 1997 1996 U.S. government obligations $163,544 $121,142 State and municipal obligations 57,690 45,863 Corporate bonds 44,376 48,055 Stocks 9,787 14,202 Bankers' acceptance 214 16 $275,611 $229,278
State and municipal obligations include an issue with a par value of $12,700,000 which has been written down to an approximate fair market value of $5,715,000 at July 31, 1997 and July 31, 1996, as determined by management of the Company. Securities sold, not yet purchased consist of the following at July 31, in thousands: 1997 1996 U.S. government obligations $80,983 $54,422 State and municipal obligations 230 122 Corporate bonds 525 3,095 Stocks 12,560 5,333 $94,298 $62,972
NOTE 4-LEASES The Company leases office space, furniture and equipment under noncancellable leases expiring through 2007, 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: 1997 $9,124 1996 $8,838 1995 $7,615
Aggregate future annual minimum rental commitments, excluding escalations, for the years ending July 31 are as follows, in thousands: 1998 $ 7,890 1999 6,857 2000 6,278 2001 5,683 2002 4,933 Thereafter 19,085 $50,726
NOTE 5-COMMITMENTS AND CONTINGENCIES At July 31, 1997, the Company was obligated under commercial letters of credit of approximately $18,500,000 drawn in favor of certain clearing organizations which were collateralized by customer-owned securities of $19,266,000 and firm-owned securities of $5,500,000. These obligations normally settle through the clearance of the related securities transactions with the respective organizations. The Company is named in and subject to various proceedings and claims incidental to its securities business. While the ultimate resolution of pending litigation and claims cannot be predicted with certainty, based upon the information currently known, management is of the opinion that the resolution of such litigation and claims will have no material adverse effect on the Company's consolidated results of operations or financial condition. NOTE 6-INCOME TAXES Significant components of the provision (credit) for income taxes are as follows for the years ended July 31, in thousands: 1997 1996 1995 Federal: Current $18,500 $18,450 $14,000 Deferred (1,000) (750) (1,900) 17,500 17,700 12,100 State 3,400 3,600 2,400 $20,900 $21,300 $14,500
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: 1997 1996 1995 Amount Percent Amount Percent Amount Percent Federal Statutory rate applied to pretax earnings $19,347 35.0% $19,308 35.0% $13,422 35.0% State and local taxes, less income tax benefit 2,210 4.0 2,340 4.2 1,560 4.0 Non-taxable interest, less non-deductible interest (533) (1.0) (353) (0.6) (404) (1.0) Other - net (124) - 5 - (78) (0.2) $20,900 38.0% $21,300 38.6% $14,500 37.8%
Significant components of the Company's deferred tax assets and liabilities as of July 31 are as follows, in thousands: 1997 1996 Deferred tax assets: Deferred compensation and restricted stock $3,212 $2,125 Non-deductible reserves 2,265 1,915 Insurance and benefits 1,649 1,709 Trade date profit 482 271 Other 19 67 7,627 6,087 Deferred tax liabilities: Depreciation and other building related items 2,464 1,778 Other 163 309 2,627 2,087 Net deferred tax assets $5,000 $4,000
NOTE 7-COMMON STOCK The Board of Directors has reserved 9,168,750 shares for issuance under the Company's Restricted Stock and Incentive Stock Option plans of 1983 and 1985. Under provisions of the Restricted Stock and the Incentive Stock Options Plans, benefits may be granted to key officers and employees in either, or a combination of, incentive stock options or restricted stock awards. Incentive stock options are granted at the fair market value of the stock at the time of grant. There were approximately 1,777,500 remaining shares available to be granted at July 31, 1997. 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, 1997, 162,000 options were outstanding and exercisable at an average price of $7.07. During fiscal year 1997, 108,000 options were exercised at an average price of $5.99 and 40,500 options were granted at an average price of $11.83. Employee stock option activity, which includes 32,364 shares that are exercisable, is summarized as follows: Average Shares Price Aggregate Exercisable Outstanding at August 1, 1994 124,736 $ 3.27 $407,248 Granted 88,125 5.87 516,790 1995-2001 Exercised (15,188) ( 1.70) (25,773) Forfeited (30,199) ( 4.49) (135,651) Outstanding at July 31, 1995 167,474 4.55 762,614 Granted 28,313 5.60 158,463 1995-2001 Exercised (62,438) ( 1.70) (106,324) Outstanding at July 31, 1996 133,349 6.11 814,753 Granted 9,750 11.64 113,500 1997-2002 Exercised (10,184) ( 5.60) (57,032) Outstanding at July 31, 1997 132,915 $ 6.55 $871,221
The Company has approximately 2,500,500 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: Year Shares sold 1995 488,699 1996 428,007 1997 449,808
The Company accounts for stock-based compensation under the provisions of Accounting Principles Board 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. 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: 1997 1996 Pro forma net income $33,499 $33,199 Pro forma earnings per share 1.07 1.08
NOTE 8-REPURCHASE AND REVERSE REPURCHASE AGREEMENTS The Company enters into sales of securities under agreements to repurchase, with the obligation to repurchase the securities sold reflected as a liability in the consolidated statement of financial condition. The Company also enters into purchases of securities under agreements to resell (reverse repurchase agreements). The amounts advanced under these agreements represent short-term loans and are reflected as a receivable in the consolidated statement of financial condition. Securities purchased under agreements to resell are held in safekeeping in the Company's name. Should the market value of the underlying securities decrease below the amount recorded, the counterparty is required to place an equivalent amount of additional securities in safekeeping in the name of the Company. NOTE 9-EMPLOYEE BENEFIT PLANS The Company makes discretionary contributions to its 401k defined contribution plan and its profit sharing plan covering substantially all employees. The Company also has a defined retirement plan covering certain executives. Total provisions for expenses under all plans for each of the years ended July 31, 1997, 1996, and 1995 totaled $1,994,000, $1,475,000 and $974,000, respectively. NOTE 10-REGULATORY REQUIREMENTS The Company's broker/dealer subsidiary, Morgan Keegan & Company, Inc., is a member of the New York Stock Exchange and is subject to the Securities and Exchange Commission's (SEC) uniform net capital rule. The subsidiary broker/dealer company has elected to operate under the alternate method of the rule, which prohibits a dealer from engaging in any securities transactions when its net capital is less than 2% of its aggregate debit balances, as defined, arising from customer transactions. The SEC may also require a member to reduce its business and restrict withdrawal of subordinated capital if its net capital is less than 4% of aggregate debit balances, and may prohibit a member firm from expanding its business and declaring cash dividends if its net capital is less than 5% of aggregate debit balances. At July 31, 1997, the subsidiary had net capital of $114,572,020 which was 31% of its aggregate debit balances and $107,182,218 in excess of the 2% net capital requirement. At July 31, 1996, the subsidiary had net capital of $102,154,559, which was 33% of its aggregate debit balances and $95,900,041 in excess of the 2% net capital requirement. NOTE 11-FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, the Company's activities involve the execution, settlement and financing of various securities transactions. These activities may expose the Company to risk in the event the customer is unable to fulfill its contractual obligations. The Company maintains cash and margin accounts for its customers located throughout the United States but primarily in the Southeast. The Company, as part of its normal brokerage activities, assumes short positions on securities. The establishment of short positions exposes the Company to off-balance sheet risk in the event prices increase, as the Company may be obligated to cover such positions at a loss. The Company manages its exposure to these instruments by entering into offsetting or other positions in a variety of financial instruments. As a securities broker/dealer, a substantial portion of the Company's transactions are collateralized. The Company's exposure to credit risk associated with nonperformance in fulfilling contractual obligations pursuant to securities transactions can be directly impacted by volatile trading markets which may impair the customer's or contra party's ability to satisfy their obligations to the Company. Where considered necessary, the Company requires a deposit of additional collateral, or a reduction of securities positions. In the normal course of business, the Company enters into underwriting and forward and future commitments. At July 31, 1997, the contract amount of future contracts to purchase and sell U.S. Government and municipal securities was approximately $104 and $9 million, respectively. At July 31, 1996, the contract amount of future contracts to purchase and sell U.S. Government and municipal securities was approximately $20 million and $36 million, respectively. The Company typically settles its position by entering into equal but opposite contracts and, as such, the contract amounts do not necessarily represent future cash requirements. Substantially all transactions relating to such commitments were subsequently settled and had no material effect on the Company's consolidated financial position. The Company will occasionally hedge a portion of its long proprietary inventory position through the use of short positions in financial future contracts. At July 31, 1997 and 1996, the Company had approximately $11 million and $47 million of these contracts, respectively. The contract amounts do not necessarily represent future cash requirements. While the Company regularly participates in the trading of some derivative securities for its customers, this trading is not a significant portion of the Company's business. NOTE 12-QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (In thousands, except per share amounts) Quarter Ended October 31 January 31 April 30 July 31 1997: Revenues $74,415 $83,527 $77,283 $93,309 Expenses 62,666 68,853 66,373 75,364 Income before income taxes 11,749 14,674 10,910 17,945 Net income 7,349 9,274 6,910 10,845 Net income per share 0.24 0.30 0.22 0.34 Dividends per share 0.05 0.05 0.05 0.05 Stock price range: High 10.59 11.92 14.67 14.63 Low 8.25 10.33 10.67 11.92 1996: Revenues $68,940 $77,457 $79,297 $75,712 Expenses 54,710 62,540 65,221 63,768 Income before income taxes 14,230 14,917 14,076 11,944 Net income 8,830 9,217 8,576 7,244 Net income per share 0.29 0.30 0.27 0.24 Dividends per share 0.04 0.04 0.05 0.05 Stock price range: High 8.42 9.09 8.92 8.83 Low 7.25 7.25 8.00 8.08
NOTE 13-SUBSEQUENT EVENTS On August 21, 1997, the Board of Directors approved a three-for-two split, effected in the form of a stock dividend, of the common shares which was distributed on September 11, 1997 to shareholders of record on September 3, 1997. Common Stock issued and additional paid-in capital as of July 31, 1997 have been restated to reflect this split. The number of common shares issued at July 31, 1997 after giving effect to the split, was 31,652,142 (21,101,428 before the split). All share, earnings per share, dividends per share and quarterly stock price data included in the consolidated financial statements and notes thereto have been adjusted to give effect to the stock split. Also, the Company entered into an agreement during September 1997 to sell its corporate headquarters building for $36 million and lease back a portion of it under a 10-year lease agreement. The $13.8 million gain will be deferred and taken into income over the 10-year life of the lease. A portion of the sales proceeds will be used to pay off the mortgage note payable.
EX-27 2
BD This schedule contains summary financial information extracted from the Morgan Keegan, Inc. 1997 Annual Report and is qualified in its entirety by reference to such financial statements. 1,000 YEAR JUL-31-1997 JUL-31-1997 22,423 379,158 426,981 25,745 275,611 43,418 1,208,257 570 606,842 97,417 7,160 94,298 19,714 0 0 19,782 183,938 1,208,257 109,964 64,262 79,859 51,179 23,270 44,652 164,364 55,278 55,278 0 0 34,378 1.10 1.10
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