Item 1. BUSINESS
General
Morgan Keegan, Inc. (Registrant) is a holding company whose principal subsidiary, Morgan Keegan & Company, Inc. (M.K. & Co.) is a regional securities broker/dealer serving retail customers in the southern United States and institutional clients throughout the United States and abroad. The Registrant has very few operations and substantially all of the Registrant's consolidated revenues are generated through the broker/dealer subsidiary. The Registrant has five reportable segments: Private Client, Fixed Income Capital Markets, Equity Capital Markets, Investment Advisory and Other. The Private Client segment provides investment services including stocks, bonds, options, mutual funds and annuities to retail customers through its branch network. Net interest income from customers' margin loan and credit account balances is included in this segment. The Fixed Income Capital Markets segment provides to its institutional clients: investment-related services involving corporate and tax-exempt bonds; U.S. government, agency and guaranteed securities; research and capital raising services for governmental clients. The Equity Capital Markets segment provides to its institutional clients: investment-related services involving the distribution of stocks in the primary and secondary markets, research, economic and business analysis and capital raising services for corporate clients. The Investment Advisory segment provides investment advisory services to mutual funds and asset management to institutional and retail clients and regional mutual funds managed by Morgan Asset Management, Inc., a subsidiary of the Registrant. The Other segment includes unallocated revenues and expenses and asset management for athletes through the Registrant's subsidiary, Athletic Resource Management, Inc. The percentage (%) of total revenues derived from the business segments of the Registrant is as follows:
The broker/dealer subsidiary, M.K. & Co., is a three seat member of the New York Stock Exchange, Inc. ("NYSE"), owns seats on the American Stock Exchange, Inc. ("AMEX"); the New York Financial Futures Exchange, Inc. ("NYFE"); the Philadelphia Stock Exchange, Inc. ("PHLX"); the Chicago Board of Options Exchange, Inc. ("CBOE") and the Chicago Stock Exchange ("CSE"). Certain seats are leased to third parties under agreements which may be canceled by either party on 30 days' notice. M.K. & Co. is a member of the National Association of Securities Dealers("NASD"), the Securities Industry Association, and the Securities Investor Protection Corporation ("SIPC"). SIPC provides protection for customers up to $500,000 each, with a limitation of $100,000 for claims for cash balances.
M.K. & Co. has forty-two offices in thirteen states. The following table reflects the number of account executives in each office as of July 31, 2000:
Revenues by Source
The Registrant's operations consist of various financial services provided to its clients. The following table sets forth the Registrant's consolidated revenues consistent with industry practices for the periods:
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.
Commissions
During the three years ended July 31, 2000, approximately 24% of the Registrant's total consolidated revenues were derived from institutional clients. M.K. & Co.'s institutional clients include mutual funds, commercial banks, thrift institutions, insurance companies, pension funds and private money managers. Most of these clients are located in the United States; however, some are located abroad, principally in the United Kingdom and Canada. In the fiscal year ended July 31, 2000, no single institutional client accounted for more than 2% of the Registrant's total revenues. M.K. & Co.'s institutional clients purchase or sell fixed income and equity securities primarily in large dollar amounts; transactions in these securities are usually executed for these clients on a principal basis. See PRINCIPAL TRANSACTIONS. M.K. & Co. also provides other services, including research, to its institutional clients.
For the fiscal years ended July 31, 2000, 1999, and 1998, institutional revenues and percentages of total consolidated revenues were $95,607,000 (19%) $119,230,000 (27%), and $100,284,000 (25%), respectively.
During each of the three years ended July 31, approximately 41% of the Registrant's total revenues were derived from transactions with retail (individual) customers. For the fiscal years ended July 31, 2000, 1999, and 1998, retail revenues and percentages of total consolidated revenues were $215,135,000 (44%), $171,164,000 (39%), and $166,313,000 (41%), respectively.
Retail commissions are charged on both exchange and over-the-counter transactions in accordance with a schedule which M.K. & Co. has formulated. In certain cases, discounts from the schedule are granted to retail customers, generally on large trades or to active customers. In addition to acting as a broker/dealer for its retail customers, M.K. & Co. supplies them with equity and fixed income research, conducts seminars and makes available personal financial planning services.
Transactions in securities may be executed on either a cash or margin basis. As a service to its retail customers, M.K. & Co. provides margin accounts which allow the customer to pay less cash than the full cost of a security purchased, the balance of the purchase price being provided by M.K. & Co. as a loan secured by the securities purchased. The amount of the loan is subject to the margin requirements (Regulation T) of the Board of Governors of the Federal Reserve System, NYSE margin requirements, and M.K. & Co. internal policies, which in some instances are more stringent than Regulation T or exchange requirements. In permitting customers to purchase securities on margin, M.K. & Co. bears the risk of a market decline which could reduce the value of its collateral below the customers' indebtedness. For the three years ended July 31, 2000, 1999, and 1998, interest charged on customer margin accounts as a percentage of total revenues was 10.22%, 7.18% and 7.38%, respectively.
Principal Transactions
M.K. & Co. trades for its own account in corporate and tax-exempt securities and U.S. government, agency and guaranteed securities. Most of these transactions are entered into in order to facilitate the execution of customers' orders to buy or sell these securities. In addition, it trades certain equity securities in order to "make a market" in these securities. As of July 31, 2000, the Registrant made a market in common stock or other equity securities of approximately 190 corporations, many of which are stocks followed by its research department. M.K. & Co.'s trading activities require the commitment of capital. All principal transactions place the Registrant's capital at risk. Profits and losses are dependent upon the skills of employees and market fluctuations. In some cases, in order to hedge the risks of carrying inventory, MK & Co. enters into a low level of activity involving U.S. Treasury note futures. The following table sets forth for the year ended July 31, 2000, the highest, lowest and average month-end inventories (including the aggregate of both long and short positions) for the types of securities in which M.K. & Co. acts as principal:
The following table sets forth the composition of revenues from principal transactions:
M.K. & Co. participates in competitive and negotiated underwritings used to distribute new issues of securities of the Federal Home Loan Bank, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Federal Farm Credit Bank and the Student Loan Mortgage Association. The following table sets forth M.K. & Co.'s participation in competitive and negotiated underwritings of agency securities:
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:
Participation in an underwriting syndicate or a selling group involves both economic and regulatory risks. A participant may incur losses if it is unable to resell the securities it has committed to purchase, or if it is forced to liquidate its commitment at less than the agreed purchase price. In addition, under federal securities laws, other statutes and court decisions, a participant may be subject to substantial liability for material misstatements or omissions in prospectuses and other communications with respect to such offerings. Further, underwriting commitments involve a charge against net capital and the ability to make underwriting commitments may be limited by the requirement that it must at all times be in compliance with the net capital rule. See Note 10 - Regulatory Requirements - on page 29 of the 2000 Annual Report to Shareholders.
In addition to its underwriting and selling group activities, M.K. & Co. engages in structuring, managing and marketing private offerings of corporate and tax-exempt securities, and assists in arranging mergers, acquisitions, divestitures and venture capital financing. M.K. & Co. provides valuation and financial consulting services for gift and estate tax purposes, employee stock ownership trusts, mergers, acquisitions, stock purchase agreements and other corporate purposes, as well as valuations for private companies in the process of going public. Other services include long-range financial planning, financial public relations and cash management services.
Repurchase Transactions
M.K. & Co. engages in repurchase transactions primarily to facilitate the sale of U.S. government, agency and guaranteed securities. A repurchase transaction is the sale of a security coupled with an agreement by the seller to repurchase the security at the sale price. A reverse repurchase transaction is the purchase of the security with an agreement to resell it. M.K. & Co.'s repurchase transactions are generally matched in order to minimize the risk of loss due to fluctuation in the underlying securities prices. In a matched repurchase transaction, M.K. & Co. will simultaneously engage in a repurchase transaction and a reverse repurchase transaction covering the same security. The other party to a matched repurchase agreement looks to M.K. & Co. for delivery of the securities or repurchase of the securities, as the case may be. M.K. & Co. takes a risk that it will be obligated to perform whether or not the other party performs. M.K. & Co. attempts to minimize this risk by dealing with those deemed credit worthy.
Although repurchase transactions are structured as sales, courts recently have treated them as financing transactions, that is, loans collateralized by securities. Because of this uncertain nature of the transaction, it is M.K. & Co.'s practice to take steps to perfect a security interest in the securities to protect itself if a transaction were deemed a loan. In repurchase transactions M.K. & Co. bears the risk that the other party to the transaction will fail to perform its obligation to repurchase the securities (repay the loan) or to deliver the securities purchased (return the collateral). In such event, M.K. & Co. could incur a loss equal to the difference between the price to be paid for the securities and their market value at the repurchase date. If the transaction is deemed to be a loan and should M.K. & Co. fail to take possession of the securities acquired by it in such a transaction, or otherwise fail to perfect a security interest in them, the loss could be equal to the full repurchase price.
Concentrations of Credit Risk
As a securities broker/dealer, M.K. & Co. is engaged in various securities trading and brokerage activities servicing a diverse group of domestic and foreign corporations, governments, institutional and retail (individual) investors. A substantial portion of M.K. & Co.'s transactions are collateralized and are executed with and on behalf of institutional investors including other broker/dealers, commercial banks, insurance companies, pension plans, mutual funds and other financial institutions. M.K. & Co.'s exposure to credit risk associated with the non-performance of these customers in fulfilling their contractual obligations pursuant to securities and commodities transactions, can be directly impacted by volatile trading markets which may impair the customers' ability to perform. M.K. & Co.'s principal activities are also subject to the risk of the counterpart's non-performance.
In connection with these activities, particularly in U.S. government and agency securities, M.K. & Co. enters into collateralized reverse repurchase and repurchase agreements, securities lending arrangements and certain other secured transactions which may result in significant credit exposure in the event the counterparty to the transaction was unable to fulfill their contractual obligations. In accordance with industry practice, repurchase agreements and securities borrowing arrangements are generally collateralized by cash or securities with a market value in excess of the obligation under the contract. M.K. & Co. attempts to minimize credit risk associated with these activities by monitoring customer credit exposure and collateral values on a daily basis and requiring additional collateral to be deposited when necessary. M.K. & Co. participates in the trading of some derivative securities for its customers which is not a major portion of its business.
Other Products
M.K. & Co. offers special products, including insurance products and interests in various tax advantaged investments. Such tax advantaged investments are generally in the form of limited partnership interests in real estate, oil drilling, or similar ventures. Neither the Registrant nor the broker/dealer acts as the general partner for such partnerships. MK Chesapeake, LP was organized by Morgan Keegan Funding to engage in speculative trading of a diverse group of futures interest contracts. From inception, the Chesapeake Capital Corporation served as the sole trading advisor utilizing its Diversified Program, their proprietary trading strategy. The objective of the partnership is to achieve a rate of return in excess of that available from more traditional investments.
M.K. & Co. is a distributor of shares of Bedford Money Market Fund, a money market mutual fund whose shares are sold without a sales charge. The fund is managed by Provident Institutional Management Corporation. M.K. & Co. also sells shares in unit investment trusts which hold portfolios of tax-exempt bonds, and as a service to its customers, offers shares of various mutual funds including those of Morgan Keegan Southern Capital Fund and the Select Fund. These funds, which invest primarily in equity securities of companies located in the southern United States and certain fixed income securities, are mutual funds managed by Morgan Asset Management, Inc., a subsidiary of the Registrant, and are solely distributed by M.K. & Co. Also, M.K. & Co. acts as a broker in the purchase and sale of put and call options on the CBOE, AMEX and other exchanges.
Research Services
M.K. & Co.'s research services include the review and analysis of the economy, general market conditions, industries and specific companies; recommendation of specific action with regard to industries and specific companies; review of customer portfolios; furnishing of information to retail and institutional customers; and responses to inquiries from customers and account executives. These services are made available generally without charge to customers.
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:
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, 2000, M.K. & Co. had 2,009 employees, 761 of whom were account executives, 908 of whom were engaged in other service areas, including trading, research and investment banking, and 340 of whom were employed in accounting, clearing, data processing, management and other activities.
In large part, the Registrant's future success is dependent upon its subsidiary's continuing ability to hire, train and retain qualified account executives. During the fiscal year ended July 31, 2000, M.K. & Co. hired 93 account executives for a net increase of 75 over the beginning of the fiscal year. M.K. & Co. trains new account executives who are required to take examinations given by the NYSE, the NASD and certain state securities regulators in order to be registered and qualified. M.K. & Co. also provides continuing training programs for account executives. Competition is intense among securities firms for account executives with good sales production records.
M.K. & Co. considers its employee relations to be good and considers compensation and employee benefits offered which includes medical, life and disability insurance, 401(k) retirement plan and a discounted stock purchase plan, to be competitive with those offered by other securities firms.
Regulation
The securities industry in the United States is subject to extensive regulation under federal and state laws. The SEC is the federal agency charged with administration of the federal securities laws. Much of the regulation of broker/dealers, however, has been delegated to self-regulatory organizations, principally the NASD and the national securities exchanges. These self-regulatory organizations adopt rules (which are subject to approval by the SEC) which govern the industry and conduct periodic examinations of member broker/dealers. Securities firms are also subject to regulation by state securities commissions in the states in which they are registered. M.K. & Co. is registered in 50 states.
The regulations to which broker/dealers are subject cover all aspects of the securities business, including sales methods, trade practices among broker/dealers, capital structure of securities firms, uses and safekeeping of customers' funds and securities, recordkeeping, and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and by self-regulatory organizations, or changes in interpretation or enforcement of existing laws and rules, often affect directly the method of operation and profitability of broker/dealers. The SEC and the self-regulatory organizations may conduct administrative proceedings which can result in censure, fines, suspension or expulsion of a broker/dealer, its officers or employees. The principal purpose of regulation and discipline of broker/dealers is the protection of customer and the securities market rather than the protection of creditors and stockholders of broker/dealers.
One of the most important regulations with which the Registrant's broker/dealer subsidiary must continually comply is the "net capital rule" of the Securities and Exchange Commission and a similar rule of the New York Stock Exchange. These rules, under the alternative method, prohibit a broker/dealer from engaging in any securities transactions at a time when its net capital is less than 2% of aggregate debit balances arising from customer transactions; in addition, restrictions may be imposed on the operations of a broker/dealer if its net capital is less than 5% of aggregate debit items. At July 31, 2000, the Registrant's subsidiary's net capital was 21% of aggregate debit items. See Note 10 - Regulatory Requirements - page 29 of the 2000 Annual Report to Shareholders.
The laws, rules and regulations of the various federal, state and other regulatory bodies to which the business of the Registrant is subject are constantly changing. While management believes that it is currently in compliance in all material respects with all laws, rules and regulations applicable to its business, it cannot predict what effect any such changes might have.
Item 2.
Item 2. PROPERTIES
The Registrant's headquarters occupy approximately 160,000 square feet in Morgan Keegan Tower in Memphis, Tennessee. On May 31, 1996, Morgan Keegan Tower was purchased by Morgan Properties, LLC, a wholly-owned subsidiary of the Registrant. The acquisition was financed with a twenty-five year term mortgage payable at 8.25% fixed rate with the building as collateral.
In September, 1997, Morgan Properties, LLC entered into an agreement to sell the Registrant's corporate headquarters building for $36 million and lease-back a portion of it under a ten year lease agreement. The $13.8 million gain was deferred and will be taken into income over the 10-year life of the lease. A portion of the sale proceeds was used to pay off the mortgage note payable. All of the Registrant's offices are leased. See Note 4 - Leases - on page 26 of the 2000 Annual Report to Shareholders.
In connection with the construction of an office building, Morgan Properties, LLC has guaranteed 50% of a construction loan, with a maximum borrowing limit of $19 million. The building, when completed, will be owned by a limited liability company which is 50% owned by Morgan Properties, LLC and 50% owned by Boyle Investment Company, Inc.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Registrant is named in and subject to various proceedings and claims incidental to its securities business. Subsequent to the issuance of its financial statements, the Registrant's broker/dealer subsidiary settled lawsuits resulting in a $1.9 million charge to pre-tax income for the first quarter of fiscal 2001. While the ultimate resolution of pending litigation and claims cannot be predicted with certainty, based upon the information currently known, management is of the opinion that the resolution of such litigation and claims will have no material adverse effect on the Registrant's results of operations or financial condition.
Item 4.
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.
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The information required by this item is incorporated herein by reference to Note 13 - Quarterly Results of Operations (Unaudited) - on page 30 of the 2000 Annual Report to Shareholders, a copy of which is enclosed.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference to the Ten Year Financial Summary on pages 16 and 17 and Additional Financial Information (Unaudited) on page 21 of the 2000 Annual Report to Shareholders, a copy of which is enclosed.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated herein by reference to pages 18-20 of the 2000 Annual Report to Shareholders, a copy of which is enclosed.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by reference to page 19 of the 2000 Annual Report to Shareholders, a copy of which is enclosed.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference to pages 21 through 31 of the 2000 Annual Report to Shareholders, a copy of which is enclosed.
Item 9.
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.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to the Registrant's definitive Proxy Statement which was filed with the Commission pursuant to Regulation 240.14a(6)(c) on October 23, 2000 and will be used in connection with the solicitation of proxies to be voted at the Registrant's annual meeting of shareholders to be held November 21, 2000.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the Registrant's definitive Proxy Statement which was filed with the Commission pursuant to Regulation 240.14a(6)(c) on October 23, 2000 and will be used in connection with the solicitation of proxies to be voted at the Registrant's annual meeting of shareholders to be held November 21, 2000.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the Registrant's definitive Proxy Statement which was filed with the Commission pursuant to Regulation 240.14a(6)(c) on October 23, 2000 and will be used in connection with the solicitation of proxies to be voted at the Registrant's annual meeting of shareholders to be held November 21, 2000.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the Registrant's definitive Proxy Statement which was filed with the Commission pursuant to Regulation 240.14a(6)(c) on October 23, 2000 and will be used in connection with the solicitation of proxies to be voted at the Registrant's annual meeting of shareholders to be held November 21, 2000.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Financial Statements, Financial Statement Schedules and Exhibits
(1) The following consolidated financial statements of the Registrant and its subsidiaries, included in the 2000 Annual Report to Shareholders are incorporated by reference in Item 8:
(2) All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(3) The following exhibits are filed herewith or incorporated by reference as indicated. Exhibit numbers refer to Item 601 of Regulation S-K:
*Certain portions of the Annual Report to Shareholders are incorporated herein by reference: the Annual Report to Shareholders is not to be deemed filed as a part of this Annual Report on Form 10-K.
(b) No reports on Form 8-K were filed during the fourth quarter of the year ended July 31, 2000.
(c) Exhibits - The response to this portion of Item 14 is submitted as a separate section of this report.
(d) Financial Statement Schedules - The response to this portion of Item 14 is submitted as a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Keegan, Inc. (Registrant)
BY /s/Allen B. Morgan, Jr.
Allen B. Morgan, Jr. Chairman Date: October 27, 2000
Pursuant to the requirements of Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
/s/Kenneth F. Clark, Jr. Kenneth F. Clark, Jr. Director October 27, 2000
/s/Willilam W. Deupree, Jr. William W. Deupree, Jr. Director October 27, 2000
/s/James E. Harwood, III James E. Harwood, III Director October 27, 2000
/s/Allen B. Morgan, Jr. Allen B. Morgan, Jr. Chairman and Director October 27, 2000
/s/Harry J. Phillips Harry J. Phillips Director October 27, 2000
/s/Donald Ratajczak Donald Ratajczak Director October 27, 2000
/s/Robert M. Solmson Robert M. Solmson Director October 27, 2000
/s/John W. Stokes, Jr. John W. Stokes, Jr. Vice President and Director October 27, 2000
/s/Joseph C. Weller Joseph C. Weller Secretary/Treasurer and October 27, 2000 Director /s/Spence L. Wilson Spence L. Wilson Director October 27, 2000
EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K) of Morgan Keegan, Inc. of our report dated September 20, 2000, included in the 2000 Annual Report to Shareholders of Morgan Keegan, Inc.
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-16982) pertaining to the 1985 Restricted Stock and Stock Option Plan and in the Registration Statement (Form S-8 No. 33-57373) pertaining to the 1994 Restricted Stock and Stock Option Plan and the 1989 Employee Stock Purchase Plan of Morgan Keegan, Inc. of our report dated September 20, 2000, with respect to the consolidated financial statements of Morgan Keegan, Inc. incorporated by reference in the Annual Report (Form 10-K) for the year ended July 31, 2000.
/s/ Ernst & Young LLP
Memphis, Tennessee October 24, 2000
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
[FN] *All per share data has been adjusted for a four-for-three stock split in September, 1991, a three-for-two stock split in March, 1992, a three-for-two stock split in June, 1993, a three-for-two stock split in June, 1995, and a three-for-two stock split in September, 1997.
[FN] *All per share data has been adjusted for a four-for-three stock split in September, 1991, a three-for-two stock split in March, 1992, a three-for-two stock split in June, 1993, a three-for-two stock split in June, 1995, and a three-for-two stock split in September, 1997.
[FN] *All per share data has been adjusted for a four-for-three stock split in September, 1991, a three-for-two stock split in March, 1992, a three-for-two stock split in June, 1993, a three-for-two stock split in June, 1995, and a three-for-two stock split in September, 1997.
[FN] *All per share data has been adjusted for a four-for-three stock split in September, 1991, a three-for-two stock split in March, 1992, a three-for-two stock split in June, 1993, a three-for-two stock split in June, 1995, and a three-for-two stock split in September, 1997.
General Corporate Description Morgan Keegan, Inc. and its subsidiaries (the "Company") are principally engaged in the origination, underwriting, distribution, trading and brokerage of fixed income and equity securities and also providing investment advisory services. While the Company regularly participates in the trading of some derivative securities for its customers, this trading is not a major portion of the Company's business. The Company is not involved with high yield securities, bridge loan financing, or any other ventures that management feels may not be appropriate for the Company's strategy. Many factors affect the Company's revenues including changes in economic conditions, investor sentiment, the level and volatility of interest rates, inflation, political events and competition. As these factors are beyond the Company's control, and certain expenses are relatively fixed, earnings can significantly vary from year to year regardless of management's efforts to enhance revenue and control costs.
General Business Environment The current year brought a certain amount of volatility to the equities markets as well as a gradual and consistent rise in interest rates. The Company continued its expansion in the Private Client Group, increasing revenues and net income. The Fixed Income Capital Markets segment had the second best year in their history, however they lagged substantially behind the previous record year. The Equity Capital Markets segment rebounded from the softness in the prior year's markets to record a 29% increase. Management continues to believe that the economic and business conditions in the South will provide excellent opportunities to continue to increase the number of registered representatives and add other professionals to support them. In addition to competition from firms traditionally engaged in the financial services business, there has been increased competition in recent years from other sources, such as commercial banks, insurance companies, online service providers, sponsors of mutual funds and other companies offering financial services both in the U.S. and globally. The financial services industry also has experienced consolidation and convergence in recent years as financial institutions involved in a broad range of financial services industries have merged. This convergence trend is expected to continue and could result in the Company's competitors gaining greater capital and other resources, such as a broader range of products and services and geographic diversity. In November 1999, the Gramm-Leach-Bliley Act was enacted, effectively repealing certain sections of the 1933 Glass-Steagall Act. Its passage allows commercial banks, securities firms and insurance firms to affiliate, which may accelerate consolidation and lead to increasing competition in markets which traditionally have been dominated by investment banks and retail securities firms.
Results of Operations In spite of the volatile equities market and rising interest rates, the Company set an earnings per share record increasing 9% from $1.42 in fiscal 1999 to $1.54 for fiscal 2000 as aided by the stock buy back. A much stronger performance from the Equity Capital Markets segment and continued retail expansion contributed to a $25,535,000 increase in commissions from fiscal 1999. Principal transactions declined 2% or $3,236,000 from the prior year which reflected the drop off from the Fixed Income Capital Markets segment record year in fiscal 1999. Investment banking revenues increased 4% to $54,492,000, representing continued efforts to increase mergers, acquisitions and other fees in the absence of a strong underwriting market. Interest income increased $19,299,000 or 24% as retail margin accounts increased and interest expense edged upward. Interest expense increased an almost identical $19,284,000, meaning the Company maintained its spread on interest, in spite of the $68,642,000 which were used for the stock buy back program.
Results of Operations (continued) Investment management fees increased $10,201,000 or 37% in fiscal 2000 after a similar 37% increase in the prior year representing the Company's continued effort to increase its assets under management. Revenues for fiscal 1999 of $438,611,000 exceeded fiscal 1998 by $31,517,000 or 8%. An outstanding year by the Fixed Income Capital Markets segment fueled an 18% increase in principal transactions of $21,898,000. Operating expenses for fiscal 2000 increased $57,573,000 or 16%. Compensation, the largest component, increased $24,704,000 or 11% which is slightly less than the 13% increase in revenues. Other operating expense increased in proportion to the Company's efforts to continue to add registered financial advisers and open new branches. Other operating expenses increased 59% or $5,104,000 which was represented by a large increase in legal costs incurred as the Company further expands its retail business. Operating expense for fiscal 1999 increased $34,590,000 or 10% from fiscal 1998 as operating expenses grew in proportion to the Company's expansion plans. Net income of $44,890,000 for fiscal 2000 was slightly less than the previous years $45,813,000 as the Company continued to add new branches and support personnel. Net income for fiscal 1999 was $45,813,000 or $1.42 per share versus $1.47 per share in fiscal 1998.
Liquidity and Capital Resources The Company's assets are primarily liquid, consisting mainly of cash and assets readily convertible into cash. These assets are financed primarily by customer credit balances, equity capital, commercial paper, bank lines of credit, and other payables. During the current fiscal year, cash provided by operations was $253,298,000 which increased from the prior year by $355,878,000. A decline in securities owned of $90,006,000 and an increase in payable to customers of $95,792,000 were the leading providers of cash. The largest uses of cash were $68,642,000 for the repurchase and retirement of common stock and $126,083,000 increase in securities purchased under agreements to resell. The Company's broker-dealer subsidiary is subject to requirements of the Securities and Exchange Commission and the New York Stock Exchange relating to liquidity and capital standards. It has historically operated well in excess of the standards. At July 31, 2000, the net capital of the Company's broker-dealer subsidiary exceeded the SEC's minimum requirements by approximately $134,520,000. Continued expansion is not expected to have a significant adverse impact on liquidity or capital funds available from operations and lines of credit should provide sufficient sources to meet capital needs for the foreseeable future. During the year, the Company continued its stock repurchase program purchasing 4,165,357 shares at a cost of $68,642,000. This followed fiscal 1999 purchases of 1,662,300 shares and fiscal 1998 purchases of 180,000 shares.
Risk Management Certain of the Company's business activities expose it to market risk, including its securities inventory positions and securities held for investment. The Company's market risk generally represents the risk of loss that may result from the potential change in value of a financial instrument as a result of fluctuations in interest rates and equity prices or changes in credit ratings of issuers of debt securities. Interest rate risk arises from the exposure of holding interest sensitive financial instruments such as government, corporate and municipal bonds and certain preferred equities. The Company manages its exposure to interest rate risk by setting and monitoring limits and, where feasible, hedging with offsetting positions in securities with similar interest rate risk characteristics. The Company's securities inventories are marked to market, accordingly there are no unrecorded gains or losses in value. While a significant portion of the Company's securities inventories have contractual maturities in excess of five years, these inventories, on average, turn over in
Risk Management (continued) excess of twelve times per year. Accordingly, the exposure to interest rate risk inherent in the Company's securities inventories is less than that of similar financial instruments held by firms in other industries. The Company's equity securities inventories are exposed to risk of loss in the event of unfavorable price movements. The Company's equity securities inventories are marked to market and there are no unrecorded gains or losses. The Company is also subject to credit risk arising from non-performance by trading counterparties, customers, and issuers of debt securities owned. The Company manages this risk by imposing and monitoring position limits, monitoring trading counterparties, reviewing security concentrations, holding and marking to market collateral and conducting business through clearing organizations which guarantee performance. The Company regularly participates in the trading of some derivative securities for its customers; however, this activity does not involve the Company acquiring a position or commitment in these products and this trading is not a significant portion of the Company's business. The Company does not participate in the trading of derivative securities which have off-balance sheet risk. See interest rate sensitivity below.
Forward Looking Statements This Annual Report may be deemed to contain certain forward-looking statements regarding the anticipated financial and operating results of the Company. The Company undertakes no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Information contained in these forward-looking statements is inherently uncertain; and actual performance and results may differ materially due to many important factors, many of which are beyond the Company's control. Such factors include the Company's ability to sustain and manage growth; ability to deal with increasing competition; additional government regulations; changes in general economic conditions; and the like.
Additional Financial Information (Unaudited) Morgan Keegan, Inc. and Subsidiaries
[FN] *After retroactive adjustment for all stock dividends and stock splits.
Consolidated Statements of Income Morgan Keegan, Inc. and Subsidiaries
[FN] See accompanying notes.
Consolidated Statements of Stockholders' Equity Morgan Keegan, Inc. and Subsidiaries
[FN] See accompanying notes.
Consolidated Statements of Financial Condition Morgan Keegan, Inc. and Subsidiaries
[FN]
See accompanying notes.
Consolidated Statements of Cash Flows Morgan Keegan, Inc. and Subsidiaries
[FN] Income tax payments totaled $25,600,000 in 2000, $29,269,000 in 1999, and $36,191,000 in 1998. Interest payments totaled $68,266,000 in 2000, $52,530,000 in 1999, and $49,722,000 in 1998. See accompanying notes.
Notes to Consolidated Financial Statements Morgan Keegan, Inc., and Subsidiaries July 31, 2000
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the accounts of Morgan Keegan, Inc. and its subsidiaries (collectively referred to as the Company). All significant intercompany balances and transactions have been eliminated in consolidation. The Company is in one principal line of business, that of providing investment services primarily in the southern United States.
Financial Assets and Liabilities: Substantially all of the Company's financial assets and liabilities are carried at market value or at amounts which because of the short-term nature of the financial instruments, approximate current fair value.
Securities Transactions: Securities transactions and related commission revenue and expense are presented on a trade date basis.
Securities: Securities owned and securities sold, not yet purchased are carried at market value and unrealized gains and losses are reflected in revenues.
Investment Banking: Management fees on investment banking transactions and selling concessions are recorded on the settlement date. Underwriting fees are generally recorded on the date the underwriting syndicate is closed.
Fixed Assets: Furniture, equipment and leasehold improvements are carried at cost. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets.
Securities-Lending Activities: Securities borrowed and securities loaned transactions are generally reported as collateralized financings except where letters of credit or other securities are used as collateral. Securities borrowed transactions require the Company to deposit cash, letters of credit, or other collateral with the lender. With respect to securities loaned, the Company receives collateral in the form of cash or other collateral in an amount generally in excess of the market value of securities loaned. The Company monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as necessary.
Reverse Repurchase and Repurchase Agreements: Securities purchased under agreements to resell (Reverse Repurchase Agreements) and securities sold under agreements to repurchase (Repurchase Agreements) are carried at the amounts at which the securities will be subsequently resold or reacquired as specified in the respective agreements. Government securities segregated in a special reserve bank account for the benefit of customers under rule 15c3-3 of the Securities and Exchange Commission represent securities purchased under an agreement to resell of $170,600,000 and $246,000,000 at July 31, 2000 and 1999, respectively.
Income Taxes: The parent and its subsidiaries file a consolidated income tax return. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Net Income Per Share: Basic and diluted earnings per share is calculated in accordance with Financial Accounting Standards Board ("FASB") Statement No. 128, "Earnings per Share" ( "Statement 128"). All earnings per share amounts for all periods, have been presented to conform to the requirements of Statement 128.
The following table sets forth the computation of basic and diluted earnings per share:
All earnings per share data included in the consolidated financial statements and notes thereto have been adjusted to give effect to all stock splits.
Accounts with Customers: Accounts with customers include amounts arising from uncompleted transactions and margin balances. Securities which are owned by customers but held as collateral for receivables from customers are not included in the consolidated financial statements.
Restricted Stock: Amortization of restricted stock is provided on the straight-line basis over the life of the restriction, which is five years.
Stock-based Compensation: The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock option grants.
Other Accounting Pronouncements: In fiscal 1999, the Company adopted FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("Statement 131"). Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of Statement 131 did not affect the results of operations or financial position of the Company, but did affect the disclosure of segment information as the Company was not required to make such disclosure under previous guidance.
The Financial Accounting Standards Board issued in June 1998 its standard on derivatives - Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement 133"). The new Statement resolves the inconsistencies that existed with respect to derivatives accounting, and dramatically changes the way many derivatives transactions and hedged items are reported. The Statement's effective date was deferred and is effective for fiscal years beginning after June 15, 2000. The adoption of this Statement is not expected to have a material effect on the Company's financial statements.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
NOTE 2-BORROWINGS
The short-term borrowings of $100,290,000 and $115,100,000 at July 31, 2000 and 1999 respectively, consist of loans payable on demand primarily used to finance clearance of securities and to carry customers' margin accounts and firm positions. The notes bear interest at the broker loan rate, which was 7.45% and 6.75% at July 31, 2000 and 1999, respectively.
The Company had total lines of credit of $335,000,000 at July 31, 2000, with expirations prior to July 31, 2001, under which a maximum of $200,000,000 could be borrowed on an unsecured basis. Equipment with a book basis of $9,300,000 was pledged on one of the borrowings. There were no compensating balances associated with these lines of credit.
The Company also issues its own commercial paper to investors at fluctuating interest rates (6.18% and 5.25% at July 31, 2000 and 1999, respectively). The paper matures over various terms not to exceed nine months.
The weighted average interest rate on all forms of short-term borrowings for the years ended July 31, 2000 and 1999 was 6.29% and 5.49%, respectively.
NOTE 3-SECURITIES
Securities owned for trading purposes consist of the following at July 31, in thousands:
State and municipal obligations include an issue with a par value of $12,700,000 which has been written down to fair market value of $5,715,000 at July 31, 2000 and July 31, 1999, as determined by management of the Company.
Securities sold, not yet purchased, at market consist of the following at July 31,in thousands:
NOTE 4-LEASES
The Company leases office space, furniture and equipment under noncancellable leases expiring through 2009, with options to renew the leases for up to five years. Total rental expense for each of the years ended July 31 was as follows, in thousands:
Aggregate future annual minimum rental commitments, excluding escalations, for the years ending July 31 are as follows, in thousands:
NOTE 5-COMMITMENTS AND CONTINGENCIES
At July 31, 1999, the Company pledged $30,000,000 in customer owned securities to cover customer obligations to a clearing organization.
The Company is named in and subject to various proceedings and claims incidental to its securities business. While the ultimate resolution of pending litigation and claims cannot be predicted with certainty, based upon the information currently known, management is of the opinion that the resolution of such litigation and claims will have no material adverse effect on the Company's consolidated results of operations or financial condition.
In connection with the construction of an office building, the Company has guaranteed 50% of a construction loan, with a maximum borrowing limit of $19 million. The building, when completed, will be owned by a limited liability company which is 50% owned by the Company.
NOTE 6-INCOME TAXES
Significant components of the provision for income taxes are as follows for the years ended July 31, in thousands:
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:
Significant components of the Company's deferred tax assets and liabilities as of July 31 are as follows, in thousands:
Management has evaluated the need for a valuation allowance for all or a portion of the deferred tax assets and believes that the deferred tax assets will be more likely than not realized. Accordingly, a valuation allowance has not been recorded.
NOTE 7-STOCK PLANS
The Board of Directors has reserved 9,168,750 shares for issuance under the Company's Restricted Stock and Incentive Stock Option Plan of 1994. Under provisions of the Restricted Stock and the Incentive Stock Options Plans, benefits may be granted to key officers and employees in either, or a combination of, incentive stock options or restricted stock awards. Incentive stock options are granted at the fair market value of the stock at the time of grant. There were approximately 493,526 remaining shares available to be granted at July 31, 2000.
The Board of Directors has authorized 675,000 shares to be granted to non-employee directors in the form of incentive stock options. As of July 31, 2000, 222,000 options were outstanding and exercisable at an average price of $16.65. During fiscal year 2000, 34,500 options were exercised at an average price of $7.75 and 81,000 options were granted at an average price of $16.38.
Employee stock option activity is summarized as follows:
Options exercisable at July 31, 2000, 1999, and 1998 were 36,625, 18,450 and 7,000, respectively. The weighted average fair value of the options granted during the years ended July 31, 2000, 1999 and 1998 was $4.46, $5.61 and $5.16, respectively. Options outstanding at July 31, 2000 have exercise prices ranging from $5.72 to $26.31 with a weighted average remaining contractual life of 5 years.
The Company has approximately 2,000,000 shares of restricted stock included in common stock outstanding which was issued at the fair market value at the date of grant.
Under an Employee Stock Purchase Plan, 4,275,000 shares have been reserved to allow employees to purchase company shares at a 15% discount, not to exceed 506,250 shares to all employees in any year.
Activity by year under the plan is summarized as follows:
The Company accounts for stock-based compensation under the provisions of (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," rather than the fair value method in Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation costs were charged to earnings for options granted under the Company's plans.
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:
These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period and additional options may be granted in future years. For disclosure purposes, the fair value of each fixed option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for stock option grants in 2000, 1999 and 1998, respectively: dividend yield of 1.5% for all three years; expected volatility of 26.8%, 25.1% and 24.9%, respectively, riskfree interest rate of 5.00% for all three years and weighted average expected lives of 5 to 6 years for all three years.
NOTE 8-REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The Company enters into sales of securities under agreements to repurchase, which substantially mature in less than 30 days, with the obligation to repurchase the securities sold reflected as a liability in the consolidated statement of financial condition. The majority of the repurchase agreements are matched with a reverse repurchase agreement.
Repurchase agreement information as of July 31, 2000 is summarized as follows, in thousands:
Repurchase agreement information as of July 31, 1999 is summarized as follows, in thousands:
The Company also enters into purchases of securities under agreements to resell (reverse repurchase agreements). The amounts advanced under these agreements represent short-term loans and are reflected as a receivable in the consolidated statements of financial condition. Securities purchased under agreements to resell are held in safekeeping in the Company's name. Should the market value of the underlying securities decrease below the amount recorded, the counterparty is required to place an equivalent amount of additional securities in safekeeping in the name of the Company.
NOTE 9-EMPLOYEE BENEFIT PLANS
The Company makes discretionary contributions to its 401(k) defined contribution plan and its profit sharing plan covering substantially all employees. The Company also has a defined benefit retirement plan covering certain executives. Total expense under all plans for the years ended July 31, 2000, 1999, and 1998 totaled $3,955,000, $3,035,000, and $2,637,000, respectively.
NOTE 10-REGULATORY REQUIREMENTS
The Company's broker/dealer subsidiary, Morgan Keegan & Company, Inc., is a member of the New York Stock Exchange and is subject to the Securities and Exchange Commission's (SEC) uniform net capital rule. The subsidiary broker/dealer company has elected to operate under the alternate method of the rule, which prohibits a broker/dealer from engaging in any securities transactions when its net capital is less than 2% of its aggregate debit balances, as defined, arising from customer transactions. The SEC may also require a member to reduce its business and restrict withdrawal of subordinated capital if its net capital is less than 4% of aggregate debit balances, and may prohibit a member firm from expanding its business and declaring cash dividends if its net capital is less than 5% of aggregate debit balances.
At July 31, 2000, the subsidiary had net capital of $148,734,000 which was 21% of its aggregate debit balances and $134,520,000 in excess of the 2% net capital requirement. At July 31, 1999, the subsidiary had net capital of $160,931,000, which was 29% of its aggregate debit balances and $149,903,000 in excess of the 2% net capital requirement.
NOTE 11-FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company's activities involve the execution, settlement and financing of various securities transactions. These activities may expose the Company to risk in the event the customer is unable to fulfill its contractual obligations. The Company maintains cash and margin accounts for its customers located throughout the United States but primarily in the Southeast.
The Company, as part of its normal brokerage activities, assumes short positions on securities. The establishment of short positions exposes the Company to off-balance sheet risk in the event prices increase, as the Company may be obligated to cover such positions at a loss. The Company manages its exposure to these instruments by entering into offsetting or other positions in a variety of financial instruments.
As a securities broker/dealer, a substantial portion of the Company's transactions are collateralized. The Company's exposure to credit risk associated with nonperformance in fulfilling contractual obligations pursuant to securities transactions can be directly impacted by volatile trading markets which may impair the customer's or contra party's ability to satisfy their obligations to the Company. Where considered necessary, the Company requires a deposit of additional collateral, or a reduction of securities positions. If another party to the transaction fails to perform as agreed (such as failure to deliver a security or failure to pay for a security), the Company may incur a loss if the market value of the security is different from the contract amount of the transaction.
In the normal course of business, the Company enters into underwriting and forward and future commitments. At July 31, 2000, the contract amount of future contracts to purchase and sell U.S. Government and municipal securities was approximately $12 and $23 million, respectively. At July 31, 1999, the contract amount of future contracts to purchase and sell U.S. Government and municipal securities was approximately $39 million and $159 million, respectively. The Company typically settles its position by entering into equal but opposite contracts and, as such, the contract amounts do not necessarily represent future cash requirements. Settlement of the transactions relating to such commitments are not expected to have a material effect on the Company's consolidated financial position. Transactions involving future settlement give rise to market risk, which represents the potential loss that can be caused by a change in the market value of a particular financial instrument. The Company's exposure to market risk is determined by a number of factors, including the size, composition and diversification of positions held, the absolute and relative levels of interest rates, and market volatility.
The Company will occasionally hedge a portion of its long proprietary inventory position through the use of short positions in financial future contracts, which the Company includes in securities sold, not yet purchased at market value. At July 31, 2000, the Company had no outstanding futures contracts. The contract amounts do not necessarily represent future cash requirements. The average fair value of futures contracts held during 2000 and 1999 was $3 million and $5 million, respectively.
The Company regularly participates in the trading of some derivative securities for its customers; however, this activity does not involve the Company acquiring a position or commitment in these products and this trading is not a significant portion of the Company's business. The Company does not participate in the trading of derivative securities which have off-balance sheet risk.
NOTE 12-BUSINESS SEGMENT INFORMATION
The company provides financial services through five business segments: Investment Advisory; Private Client; Equity Capital Markets; Fixed Income Capital Markets and Other. Segment results include all direct revenues and expenses of the operating units in each segment and allocations of indirect expenses based on specific methodologies.
Investment Advisory provides investment advisory services to Company-sponsored mutual funds and asset management for institutional and individual clients.
Private Client distributes a wide range of financial products through its branch distribution network, including equity and fixed-income securities, proprietary and non-affiliated mutual funds and annuities. Net interest income from customers' margin loan and credit account balances is included in this segment.
Equity Capital Markets consists of the Company's equity institutional sales and trading, syndicate, corporate and finance activities. Sales credits associated with underwritten offerings are reported in Private Client when sold through retail distribution channels and in Capital Markets when sold through institutional distribution channels.
Fixed Income Capital Markets consists of the Company's fixed income institutional sales and trading, syndicate, and public finance activities.
Other businesses are principally the Company's Athletic Resource Management business and unallocated corporate revenues and expenses.
Business segment financial results are for the years ended July 31, as follows:
Segment data includes charges allocating corporate overhead to each segment. Intersegment revenues and charges are eliminated between segments. The Company evaluates the performance of its segments and allocates resources to them based on return on investment.
The Company has not disclosed asset information by segment as the information is not produced internally. All long-lived assets are located in the U.S.
The Company's business is predominantly in the U.S., with less then 1% of revenues and net income from international operations.
NOTE 13-QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Report of Independent Auditors
Board of Directors Morgan Keegan, Inc.
We have audited the accompanying consolidated statements of financial condition of Morgan Keegan, Inc. and subsidiaries as of July 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended July 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. These standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all material respects, the consolidated financial position of Morgan Keegan, Inc. and subsidiaries at July 31, 2000 and 1999 and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 2000 in conformity with accounting principles generally accepted in the United States.
Memphis, Tennessee September 20, 2000