Annual Report (Form 10-K), fiscal year 1994

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 the Morgan Asset Management. M.K. & Co. also provides 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:
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 twenty-nine offices in twelve states. The following table reflects the number of account executives in each office as of July 31, 1994:
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:
	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 operation.
Institutional Business
	During the three years ended July 31, 1994, approximately 32% of the Registrant's total consolidated revenues were derived from institutional clients. M.K. & Co. 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, 1994, no single institutional client accounted for more than 2% of the Registrant's total revenues. M.K. & Co. 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, 1994, 1993, and 1992, institutional revenues and percentages of total revenues were $72,774,000 (31%), $66,748,000 (32%) and $62,315,000 (34%) respectively.
Retail Business
	During each of the three years ended July 31, 1994, approximately 41% of the Registrant's total revenues were derived from transactions with retail (individual) customers. For the fiscal years ended July 31, 1994, 1993, and 1992, such revenues of total consolidated revenues were $95,576,000, $86,001,000 and $74,219,000 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 4.7% of total revenues in fiscal 1994.
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, 1994, the Registrant made a market in common stock or other equity securities of approximately 113 corporations, the majority of which are stocks followed by its research department.
M.K. & Co. 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. The following table sets forth for the year ended July 31, 1994, 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:
Item I. BUSINESS (Continued)
	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 participations of M.K. & Co. in distributions of agency securities:
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. 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. 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. principal activities are also subject to the risk of counterpart 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. underwriting activities, together with its selling group participations, are important as a source of securities for sale to its customers. The following table sets forth corporate and tax-exempt underwriting syndicate participations 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 21 of the 1994 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 Banking, Inc. which serves as a general partner in a limited partnership, Morgan Keegan Merchant Banking Fund Limited Partnership, which currently has approximately $5,000,000 in assets and is 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 Managed Futures, Inc., a wholly-owned subsidiary of the Registrant, act 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:
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 $15,000,000 (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.
Employees
	As of July 31, 1994, the M.K. & Co. had 1,218 employees, 492 of whom were account executives, 536 of whom were engaged in other service areas, including trading, research and investment banking, and 190 of whom were employed in accounting, clearing and 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, 1994, M.K. & Co. hired 107 account executives for a net increase of 54 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 include 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, 1994, the Registrant's subsidiary's net capital was 45% of aggregate debit items. See Note 10 - Regulatory Requirements - page 21 of Notes to Consolidated Financial Statements of the 1994 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 108,000 square feet in Morgan Keegan Tower in Memphis, Tennessee. All of the Registrant's offices are leased. See Note 4 - Leases on page 18 of Notes to Consolidated Financial Statements of the 1994 Annual Report to Shareholders.
Item 3.

Item 3. LEGAL PROCEEDINGS
	On August 31, 1994, the Court in In Re Taxable Municipal Bond Securities Litigation, MDL 863 ("the MDL") gave tentative approval to a class settlement of $21.2 million to be paid by the Underwriters in all taxable bond syndicates involved in the MDL and certain other defendants. The MDL was previously described in prior Form 10-Q and Form 10-K SEC filings. The Registrant's broker/dealer subsidiary, Morgan Keegan & Company, Inc. ("M.K. & Co."), is responsible for a small percentage of the settlement, and while the settlement is subject to a number of pre-conditions, including final approval by the Court, management is of the opinion that the litigation will be effectively settled and that such a settlement will have no material adverse effect on M.K. & Co.'s results of operations or financial condition. In the event a settlement is not achieved, management is of the opinion that it has meritorious defenses and has advised its counsel to vigorously defend all claims arising from the MDL.
	In addition to the matters described above, M.K. & Co. is subject to various claims incidental to its securities business. While the ultimate resolution of pending litigation and claims cannot be predicted with certainty, based upon the information currently known, management is of the opinion that it has meritorious defenses and has instructed its counsel to vigorously defend such lawsuits and claims, and that liability, if any, resulting from all litigation will have no material adverse effect on the Registrant's consolidated financial condition.
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 12 - Quarterly Results of Operations (Unaudited) - on page 22 of the 1994 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 10 and 11 and Additional Financial Information (Unaudited) on page 13 of the 1994 Annual Report to Shareholders, a copy of this 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 page 12 of the 1994 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 be reference to pages 14 through 23 of the 1994 Annual Report to Shareholders, a copy of which is enclosed.
Item 9.

Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
	There were no disagreements 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 will be filed with the Commission pursuant to Regulation 240.14a (6)(c) on October 11, 1994 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 22, 1994.
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 will be filed with the Commission pursuant to Regulation 240.14a (6)(c) on October 11, 1994 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 22, 1994.
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 will be filed with the Commission pursuant to Regulation 240.14a (6)(c) on October 11, 1994 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 22, 1994.
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 will be filed with the Commission pursuant to Regulation 240.14a (6)(c) on October 11, 1994 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 22, 1994.
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 1994 Annual Report to Shareholders are incorporated by reference in Item 8:
Consolidated Statements of Financial Condition July 31, 1994 and 1993
Consolidated Statements of Income			Years ended July 31, 1994,
							1993, and 1992
Consolidated Statements of Stockholders' Equity Years ended July 31, 1994,
							1993, and 1992
Consolidated Statements of Cash Flows		Years ended July 31, 1994,
							1993, and 1992
Notes to Consolidated Financial Statements
	(2)	The following consolidated financial statement schedules of Morgan Keegan, Inc. and subsidiaries are included in Item 14 (d):
		Schedule I - Marketable Securities and Other Investments
		Schedule III - Condensed Financial Statements of Registrant
		Schedule IX - Short Term Borrowings
		Schedule X - Supplementary Income Statement Information
	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 22
		Exhibit 13 - Annual Report to Shareholders*
		Exhibit 22 - List of Subsidiaries of Registrant*
		Exhibit 23 - Consent of Independent Auditors			Page 23
*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, 1994.
(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 26, 1994
	Pursuant to the requirements of the 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/ ALLEN B. MORGAN, JR.
	 Allen B. Morgan, Jr.		Chairman and Director		October 26, 1994
/S/ WILLIAM W. DEUPREE, JR.
	William W. Deupree, Jr.		President			October 26, 1994
/S/ JOHN W. STOKES, JR.
	John W. Stokes, Jr.		Vice President and Director		October 26,
/S/ JOSEPH C. WELLER
	Joseph C. Weller		Secretary/Treasurer and Director	October 26,
/S/ KENNETH F. CLARK, JR.
	Kenneth F. Clark, Jr.			Director			October 26, 1994
/S/ JAMES E. HARWOOD, III
	James E. Harwood, III		Director			October 26, 1994
	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 9, 1994, included in the 1994 Annual Report to Shareholders of Morgan Keegan, Inc.
	Our audit also included the financial statement schedules of Morgan Keegan, Inc. listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present 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. and in the related Prospectuses of our report dated September 9, 1994, 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 schedules included in this Annual Report (Form 10-K) of Morgan Keegan, Inc.
							
						/S/ERNST & YOUNG LLP
Memphis, Tennessee
October 26, 1994
				
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
Results of Operations. For the fourth consecutive year, the Company achieved record revenues, record net earnings and record earnings per share. For fiscal 1994, the Company's revenues rose $22,525,000 or 11% to $231,720,000. The increase in revenues for fiscal 1993 was $26,531,000 or 15%. Favorable conditions in the securities industry prevailed for all of fiscal 1993 and into the third quarter of fiscal 1994. Record underwriting levels, increased commission revenues and strong trading profits prevailed during that period. In the third quarter of fiscal 1994, interest rates began to rise, depressing stock and bond prices and adversely impacting commissions and trading profits.
Investment banking revenues increased $26,554,000 or 91% which was the primary component of the increased revenues for fiscal 1994. Outstanding efforts by the investment bankers resulted in substantial investment banking revenues from underwriting stocks of companies such as real estate investment trusts which continued the strong performance through the third and fourth quarters even after the market had turned for many firms.
In fiscal 1994, revenue from principal transactions declined $13,711,000 or 13%. This followed a $14,347,000 or 16% increase in the previous year. The decline is attributed to the drop in prices resulting in lower volume and trading losses during the third quarter. Interest income increased 26% or $5,220,000 for fiscal 1994, following a $1,024,000 or 5% increase in fiscal 1993. Most of the increase stemmed from higher borrowings in customer margin accounts for the entire year. Other income increased by $1,664,000 or 12%, representing the Company's continued commitment to expand its fee based investment advisory business. The current year's increase was added to the strong base contributed in 1993 when other income increased $5,835,000 or 77%, of which
a large part was generated by Cumberland Securities Company, Inc., a recent acquisition.
Operating expenses increased 13% in fiscal 1994, from $159,493,000 to $180,079,000. Approximately 75% of the increase was compensation which rose from $109,748,000 to $125,205,000 or 14%. The increase closely corresponds to the 11% increase in revenues but also includes an increase in fixed expenses due to the Capitol acquisition and the opening of several new branch offices. Floor brokerage expenses and other operating expenses declined 27% and 20% respectively due to efficiencies derived from management's continued cost cutting efforts. Other expense categories increased moderately but were primarily in line with the higher levels of volume for most of the year.
Operating expenses increased 14% in fiscal 1993, from $140,473,000 to $159,493,000. Approximately 80% of the total dollar increase was compensation, which increased from $94,348,000 to $109,748,000. The 16% increase in compensation closely corresponds to the 15% increase in revenues. Communications expense increased $2,221,000 or 23% from $9,791,000 to $12,012,000. A large part of this increase was due to the installation of a new state-of-the-art personal computer-based communication and quotation system completed near the beginning of fiscal 1993.
Earnings per share for fiscal 1994 were $2.19 per share, which was $.02 more than the $2.17 earnings for fiscal 1993. The strong market performance for the first 21/2 quarters, coupled with the entire year's investment banking performance offset the lower commissions and trading losses incurred in the last quarter and a half, allowing the Company to post a record year in spite of some difficult market conditions. It is impossible to determine how long the difficult markets might continue; however, the Company plans to build its branch office network and continue to grow for the long term.
Liquidity and Capital Resources. 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 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.
Total assets of the Company were $43,925,000 higher at July 31, 1994, than July 31, 1993, primarily due to increases in receivables from customers of $80,131,000 offset by decreases in securities owned of $22,114,000 and securities purchased under agreements to resell of $25,827,000. The decrease in securities owned was primarily to manage and reduce the Company's risk as of the end of the year in a difficult market.
Liabilities increased $24,895,000 from $420,749,000 to $445,644,000, primarily con-tributing to the increase in payables to customers of $63,933,000 and a decrease in securities sold under agreements to repurchase of $16,625,000. The increase in customer payables correlated closely with customer receivables.
Cash used in financing activities increased from $1,806,000 for fiscal 1993 to $67,860,000 for fiscal 1994. The cash provided from operating activities allowed a significant reduction in the Company's short-term borrowings. Also during the year the board approved a stock repurchase plan and repurchased approximately 1,340,000 shares for $16,778,000.
Cash used in investing activities remained about the same for fiscal 1994 and 1993. The primary expenditure was the installation of the communication and quotation system as previously discussed.
During fiscal 1993, the Board of Directors authorized a three-for-two stock split. This followed two stock splits in fiscal 1992; one four-for-three, followed by a three-for-two. The splits were to allow the shareholders to participate in the outstanding years and to make the stock more attractive to investors.
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, 1994, the net capital of the Company's broker-dealer subsidiary exceeded the SEC's minimum requirements by more than $84,000,000, which is up from $72,000,000 at the end of last year. Continued expansion is not expected to have a significantly 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.
Effects of Inflation. The Company's assets are primarily monetary, consisting of cash, assets convertible into cash, securities and owned and receivables. Because of their liquidity, these assets are not significantly affected by inflation. Management believes that replacement costs of furniture, equipment and leasehold improvements will not materially affect operations. However, the rate of inflation affects the Company's expenses, such as those for employee compensation and communications, which may not be readily recoverable in the price of services offered by the Company.
The table below summarizes the changes in the major categories of revenues and expenses for the past three (3) years.
Additional Financial Information (Unaudited)				
Morgan Keegan, Inc. and Subsidiaries				
Summary of Quarterly Results				
Notes to Consolidated Financial Statements
Morgan Keegan, Inc., and Subsidiaries
July 31, 1994
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.
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 fifth business day following the transaction date, which is not materially different from a trade date basis.
Securities: Securities owned 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 settlement date, which is not materially different from a trade date basis. Underwriting fees are generally recorded on the date the underwriting syndicate is closed.
Furniture, Equipment and Leasehold Improvements: 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.
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 relate to a Reverse Repurchase Agreement of $35,701,000 and $38,801,000 at July 31, 1994 and 1993, 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. Effective August 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes." As permitted under the new rules, prior years' financial statements have not been restated. The initial adoption of the statement did not have a material effect on financial position, results of operations, or liquidity.
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 four or five years.
NOTE 2 SHORT-TERM BORROWINGS
Short-term borrowings represent bank loans payable on demand used to finance clearance of securities and to carry customers' margin accounts. These notes bear interest at the broker loan rate, which was 5% at July 31, 1994. The notes were collateralized by securities with approximate market values as follows, in thousands.
The Company also issues its own commercial paper to investors at fluctuating interest rates (3.375% at July 31, 1994). The paper matures over various terms not to exceed nine months.
NOTE 3 SECURITIES
Securities owned consist of the following, in thousands:
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 both July 31, 1994 and 1993, as deter-mined by management of the Company.
Securities sold, not yet purchased consist of the following, in thousands:
NOTE 4 LEASES
The Company leases office space, furniture and equipment under noncancelable leases expiring through 1999, 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, 1994, the Company was obligated under commercial letters of credit of approximately $8,035,000 drawn in favor of certain clearing organizations which were collateralized by customer-owned securities of $5,409,000 and firm-owned securities of $13,270,000. These obligations normally settle through the clearance of the related securities transactions with the respective organizations.
The Company is named as one of many defendants in class action complaints that are part of the Multi-District Litigation (MDL) involving the underwriting and sale of taxable municipal bonds issued by several issuing authorities in 1986 and described in previous share holder reports. On August 31, 1994, the Court gave tentative approval to a class settlement of $21.2 million to be paid by the underwriters in all taxable bond syndicates involved in the MDL and certain other defendants. The Company is responsible for a small percentage of the settlement, and while the settlement is subject to a number of pre-conditions, including final approval by the Court, management is of the opinion that the litigation will be effectively settled and that such a settlement will have no material adverse effect on the Company's results of operations or financial condition. In the event a settlement is not achieved, management is of the opinion that it has meritorious defenses and has advised its counsel to vigorously defend all claims arising from the MDL.
In addition to the matters described above, the Company is named in various proceedings incidental to its securities business. While the ultimate resolution of pending litigation and claims cannot be predicted with certainty, based upon the information currently known, management is of the opinion that it has meritorious defenses and has instructed its counsel to vigorously defend such lawsuits and claims, and that liability, if any, resulting from all litigation will have no material adverse effect on the Company's consolidated
financial condition.
NOTE 6 INCOME TAX EXPENSE (CREDIT)
Significant components of the provision (credit) for income taxes are as follows at 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:
The components of the deferred tax provision (credit) 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, 1994 are as follows, in thousands:
Notes to Consolidated Financial Statements (Continued)
Morgan Keegan, Inc., and Subsidiaries
NOTE 7 COMMON STOCK
The Board of Directors has reserved 3,075,000 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 Option 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 400,000 remaining shares available to be granted at July 31, 1994.
The Board of Directors has authorized 300,000 shares to be granted to non-employee directors in the form of incentive stock options. As of July 31, 1994, 81,000 options were outstanding at an average price of $6.94.
Employee stock option activity is summarized as follows:
The Company has approximately 800,000 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, 900,000 shares have been reserved to allow employees to purchase company shares at a 15% discount, not to exceed 225,000 shares to all employees in any year. In 1992, 153,068 shares were issued under the plan, 162,450 were issued in 1993, and 176,591 were issued in 1994, leaving 183,147 shares available for future grants at July 31, 1994.
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, 1994 is summarized as follows, in thousands:
Repurchase agreement information as of July 31, 1993 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 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.
Notes to Consolidated Financial Statements (Continued)
Morgan Keegan, Inc., and Subsidiaries
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, 1994, 1993 and 1992 totaled $916,000, $917,000 and $1,212,000, respectively.
NOTE 10 REGULATORY REQUIREMENTS
The Company's broker/dealer subsidiary, Morgan Keegan & Company, Inc., 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, 1994, the subsidiary had net capital of $89,849,110 which was 36% of its aggregate debit balances and $84,811,408 in excess of the 2% net capital requirement. At July 31, 1993, the subsidiary had net capital of $76,040,640 which was 45% of its aggregate debit balances and $72,623,838 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 change, 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. The Company has reserved $85,000 to recognize its credit risk on unsecured debits.
In the normal course of business, the Company enters into underwriting and forward and future commitments. At July 31, 1994, the contract amount of future contracts to purchase and sell U.S. government securities was approximately $20 million and $11 million, respectively. At July 31, 1993, the contract amount of future contracts to purchase and sell U.S. government securities was approximately $46 million and $10 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. (Transactions relating to such commitments were subsequently settled and had no material effect on financial position.)
Notes to Consolidated Financial Statements (Continued)
Morgan Keegan, Inc., and Subsidiaries
NOTE 12 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, 1994 and 1993, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended July 31, 1994. 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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 1994 in conformity with generally accepted accounting principles.
							/s/ Ernst & Young LLP
Memphis, Tennessee
September 9, 1994
EXHIBIT 22 - LIST OF SUBSIDIARIES OF REGISTRANT
Morgan Keegan & Company, Inc.
Morgan Keegan Fund Management, Inc.
Morgan Keegan Mortgage Company, Inc.
Morgan Keegan Insurance Agency of Alabama, Inc.
Morgan Keegan Insurance Agency of Arkansas, Inc.
Morgan Keegan Insurance Agency of Louisiana, Inc.
Morgan Keegan Funding Corporation
Merchant Bankers, Inc.
Morgan Asset Management, Inc.
Cumberland Securities Company, Inc.
Capitol Group, Inc.