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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
OR
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-8529
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LEGG MASON, INC.
(Exact name of registrant as specified in its charter)
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Maryland 52-1200960
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Light Street 21202
Baltimore, Maryland (Zip Code)
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (410) 539-0000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of May 18, 1999, the aggregate market value of the registrant's
common stock held by non-affiliates was $1,873,409,000.
As of May 18, 1999, the number of shares outstanding of the
registrant's common stock was 56,507,106
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement dated June 17,
1999 are incorporated by reference into Part III.
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Part I
Item 1. BUSINESS.
GENERAL
Legg Mason, Inc. is a holding company which, through its
subsidiaries, is engaged in investment management of institutional and
individual accounts and Company-sponsored mutual funds, securities brokerage and
trading, investment banking for corporations and municipalities, commercial
mortgage banking and other related financial services.
The Company's principal investment advisory subsidiaries are Legg
Mason Fund Adviser, Inc., which serves as investment adviser to or manager of
Company-sponsored mutual funds; Western Asset Management Company, which manages
fixed income assets for institutional clients; Brandywine Asset Management,
Inc., which primarily manages equity portfolios for institutional and high net
worth individual clients; Batterymarch Financial Management, Inc., which manages
U.S., international and emerging markets equity portfolios for institutional
clients; Bartlett & Co., which manages equity, balanced and fixed income
portfolios for high net worth individuals and institutional clients; Legg Mason
Capital Management, Inc., which manages equity and fixed income portfolios for
individual and institutional accounts; Gray, Seifert & Co., Inc., which
primarily manages equity portfolios for wealthy individual, family group,
endowment and foundation clients; and Western Asset Global Management Limited,
which manages international fixed income and currency assets for institutional
clients. In addition to Legg Mason Fund Adviser, all of the above firms also
serve as investment advisor to Company-sponsored mutual funds and/or other
Company-structured investment products.
As of March 31, 1999, the Company's investment advisory
subsidiaries had approximately $89 billion of assets under management, of which
approximately 38% were equity assets and approximately 62% were fixed income
assets.
The Company's principal broker-dealer subsidiary is Legg Mason Wood
Walker, Incorporated ("Legg Mason Wood Walker"), a full service regional
broker-dealer and investment banking firm operating primarily in the Eastern and
Mid-South regions of the United States. Another broker-dealer subsidiary,
Howard, Weil, Labouisse, Friedrichs Incorporated ("Howard Weil"), engages
primarily in energy-related investment banking and institutional brokerage.
The Company's real estate finance subsidiary is Legg Mason Real
Estate Services, Inc., which is primarily engaged in commercial mortgage banking
and commercial loan servicing. On April 1, 1999, Legg Mason Dorman & Wilson,
Inc., the Company's other real estate finance subsidiary, was merged into Legg
Mason Real Estate Services, Inc.
See "Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition - Business Description" for the revenues and
pre-tax earnings of each of the Company's business segments.
The Company was incorporated in Maryland in 1981 to serve as a
holding company for Legg Mason Wood Walker and other subsidiaries. The
predecessor company to Legg Mason Wood Walker was formed in 1970 under the name
Legg Mason & Co., Inc. to combine the operations of Legg & Co., a Maryland-based
broker-dealer formed in 1899, and Mason & Company, Inc., a Virginia-based
broker-dealer formed in 1962. The Company's subsequent growth has occurred
through internal expansion as well as through its acquisitions of investment
management, broker-dealer and commercial mortgage banking firms.
Unless the context otherwise requires, all references in this
Report to the Company include Legg Mason, Inc. and its predecessors and
subsidiaries.
REGISTRATIONS AND EXCHANGE MEMBERSHIPS
Legg Mason Wood Walker and Howard Weil are registered as
broker-dealers with the Securities and Exchange Commission ("SEC"), are members
of the New York Stock Exchange, Inc. ("NYSE"), the New York Futures Exchange,
Inc., the National Association of Securities Dealers, Inc. ("NASD") and the
Securities Investors Protection Corporation ("SIPC"), and are registered as
futures commission merchants with the Commodity Futures Trading Commission. In
addition, Legg Mason Wood Walker is a member of the Philadelphia, Pacific,
Cincinnati, Boston and Chicago Stock Exchanges.
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BROKERAGE OFFICES
The following table reflects, as of March 31, 1999, certain information
with respect to the Company's securities brokerage offices.
Number of
Financial Number of
Location Advisors Offices
-------- --------- ---------
United States:
Maryland 292 17
Pennsylvania 203 23
Virginia 108 13
Louisiana 90 10
North Carolina 71 10
Florida 63 10
Massachusetts 60 3
Texas 45 5
Ohio 44 6
New York 42 3
New Jersey 38 5
District of Columbia 36 1
Alabama 27 3
Connecticut 17 3
South Carolina 17 3
Maine 16 1
Mississippi 15 3
West Virginia 15 2
Delaware 9 1
Tennessee 6 1
Rhode Island 6 1
Illinois 4 1
California 3 1
United Kingdom:
London 6 1
Switzerland:
Geneva 7 1
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Total 1,240 128
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3
REVENUES BY SOURCE
The following table sets forth certain information regarding the
revenues of the Company by source.
LEGG MASON, INC. AND SUBSIDIARIES (1)
Years Ended March 31,
---------------------------------------------------------------------------------------
1997 1998 1999
---- ---- ----
(Dollars in thousands)
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- --------- ------- --------- -------
Investment Advisory and
Related Fees $ 208,243 31.3% $ 295,645 33.3% $ 390,216 37.3%
Commissions
Listed and Over-the-Counter 124,841 18.8 164,022 18.4 187,560 17.9
Mutual Funds 41,054 6.2 48,687 5.5 57,586 5.5
Insurance and Annuities 20,436 3.1 22,613 2.5 26,172 2.5
Options and Commodities 3,649 0.5 5,962 0.7 7,818 0.8
------------ ----------- ------------- ----------- ------------- -----------
Total 189,980 28.6 241,284 27.1 279,136 26.7
------------ ----------- ------------- ----------- ------------- -----------
Principal Transactions (2)
Customer Related:
Government and Agency 14,660 2.2 15,405 1.7 17,631 1.7
Municipal 15,662 2.4 17,102 1.9 22,387 2.1
Corporate Debt 8,437 1.3 11,301 1.3 15,580 1.5
Over-the-Counter 31,327 4.7 34,179 3.9 26,976 2.6
------------ ----------- ------------- ----------- ------------- -----------
70,086 10.6 77,987 8.8 82,574 7.9
------------ ----------- ------------- ----------- ------------- -----------
Dealer Related:
Government and Agency 1,602 0.2 2,312 0.3 2,575 0.2
Municipal 46 - 1,159 0.1 816 0.1
Corporate Debt 295 - 1,035 0.1 1,645 0.2
Over-the-Counter 1,152 0.2 4,255 0.5 6,495 0.6
------------ ----------- ------------- ----------- ------------- -----------
3,095 0.4 8,761 1.0 11,531 1.1
------------ ----------- ------------- ----------- ------------- -----------
Total 73,181 11.0 86,748 9.8 94,105 9.0
------------ ----------- ------------- ----------- ------------- -----------
Investment Banking (3)
Corporate 63,850 9.6 90,123 10.1 66,640 6.4
Municipal 8,212 1.2 7,015 0.8 9,478 0.9
------------ ----------- ------------- ----------- ------------- -----------
Total 72,062 10.8 97,138 10.9 76,118 7.3
------------ ----------- ------------- ----------- ------------- -----------
Interest Income 84,129 12.7 127,268 14.3 160,292 15.3
Other Sources (4) 37,006 5.6 40,977 4.6 46,139 4.4
------------ ----------- ------------- ----------- ------------- -----------
Total Revenues $ 664,601 100.0% $ 889,060 100.0% $1,046,006 100.0%
============ =========== ============= =========== ============= ===========
(1) All financial information includes the results of Brandywine Asset
Management, Inc., acquired on a pooling of interests basis on January 16,
1998.
(2) Principal transactions (securities transactions in which the Company buys
for or sells from its own inventory) are classified as "Customer Related"
when such transactions are effected with a customer of the Company (whether
an individual or institutional investor) and as "Dealer Related" when such
transactions are effected with another dealer.
(3) Principally selling concessions from underwriting participations and fees
from managed and co-managed offerings.
(4) Includes revenues from mortgage servicing and loan originations (1997:
$16,922; 1998: $21,475; 1999: $22,618).
4
INVESTMENT ADVISORY BUSINESS SEGMENT
The Investment Advisory business segment provides investment
advisory services to Company-sponsored mutual funds and asset management for
institutional and individual clients.
COMPANY-SPONSORED MUTUAL FUNDS
Through various subsidiaries, the Company sponsors and serves
as investment advisor and distributor for domestic and international equity,
fixed-income and money market mutual funds and offshore investment funds. As of
March 31, 1998 and 1999, the aggregate net assets of all of these proprietary
funds were approximately $13.8 billion and $20.8 billion, respectively.
For the fiscal years ended March 31, 1997, 1998 and 1999, the
Company received approximately $37.8 million, $66.5 million and $102.7 million,
respectively, in asset-based sales charges from its proprietary mutual funds and
offshore investment funds.
INVESTMENT ADVISORY SERVICES
Legg Mason Fund Adviser, Inc. serves as investment adviser to
or manager of various Company-sponsored mutual funds. In addition, all of the
firms described in the following paragraphs also serve as investment advisor to
Company-sponsored mutual funds and/or other Company-structured investment
products. The amounts indicated as assets under management by those firms
include the assets in such funds and/or other products.
Western Asset Management Company manages fixed-income assets
for institutional clients. At March 31, 1998 and 1999, Western managed assets
with a value of approximately $39.6 billion and $49.2 billion, respectively.
Brandywine Asset Management, Inc. primarily manages equity
portfolios for institutional and high net worth individual clients. At March 31,
1998 and 1999, Brandywine managed assets with a value of approximately $8.2
billion and $7.0 billion, respectively.
Bartlett & Co. manages equity, balanced and fixed-income
portfolios for high net worth individuals and institutional clients. At March
31, 1998 and 1999, Bartlett managed assets with a value of approximately $3.1
billion and $3.0 billion, respectively.
Gray, Seifert & Co., Inc. primarily manages equity portfolios
for wealthy individuals and family groups, endowments and foundations. At March
31, 1998 and 1999, Gray Seifert managed assets with a value of approximately
$1.4 billion and $1.2 billion, respectively.
Batterymarch Financial Management, Inc. manages U.S.,
international and emerging markets equity portfolios for institutional clients.
At March 31, 1998 and 1999, Batterymarch managed assets with a value of
approximately $4.3 billion and $4.5 billion, respectively.
Western Asset Global Management Limited manages international
fixed-income and currency assets for institutions worldwide. At March 31, 1998
and 1999, Western Asset Global managed assets with a value of approximately $1.9
billion and $3.3 billion, respectively.
Legg Mason Capital Management, Inc. manages equity and
fixed-income portfolios for individual and institutional clients. At March 31,
1998 and 1999, this subsidiary managed assets with values of approximately $2.7
billion and $4.3 billion, respectively.
The Company has revenue sharing agreements with Legg Mason
Fund Adviser, Western Asset Management Company, Brandywine, Bartlett and Gray
Seifert and/or certain of their key officers pursuant to which a specified
percentage of the subsidiary's revenues is required to be distributed to Legg
Mason, Inc., and the balance of
5
the revenues is retained to pay operating expenses, including salaries and
bonuses, with specific expense and compensation allocations being determined by
the subsidiary's management.
The Company is terminating the operations of its Fairfield
Group, Inc. subsidiary. Fairfield's Navigator REPO/LINE, a service structured to
meet the specialized investment needs of banks and bank trust departments, was
assigned to a third party in May 1999.
PRIVATE CLIENT BUSINESS SEGMENT
The Private Client business segment, principally consisting of the
operations of Legg Mason Wood Walker, 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.
RETAIL SECURITIES BUSINESS
For the fiscal years ended March 31, 1997, 1998 and 1999,
revenues derived from securities transactions for individual investors
(excluding interest on margin accounts) constituted approximately 84%, 83% and
82%, respectively, of total revenues from securities transactions and 37%, 34%
and 30%, respectively, of the Company's total revenues. Management believes that
such services will continue to be a significant source of revenues in the
foreseeable future, although the percentage of total revenues may continue to
decrease primarily as a result of increases in investment advisory and
investment banking revenues. Retail commissions are charged on both exchange and
over-the-counter ("OTC") transactions in accordance with a schedule which the
Company has formulated and may change from time to time. Discounts from the
schedule are granted in certain cases. The Company also offers certain account
arrangements under which a single fee is charged based on a percentage of the
assets held in a customer's account and no commissions are charged on a
transaction-by-transaction basis. This fee covers all execution and advisory
services, including advisory services provided by the Company's investment
advisory affiliates and selected independent advisory firms. In addition, the
Company provides asset allocation and advisor performance and selection
consultation services. When OTC transactions are executed by the Company as a
dealer, the Company receives, in lieu of commissions, mark-ups or mark-downs
that are included in the "Revenues by Source" table as customer-related
principal transactions. The Company has dealer-sales agreements with major
distributors that offer mutual fund shares through broker-dealers. In addition,
the Company sells shares of Company-sponsored mutual funds. See "Investment
Advisory Business Segment--Company-Sponsored Mutual Funds."
MARGIN ACCOUNTS, INTEREST INCOME AND FREE CREDIT BALANCES
Customers' securities transactions are effected on either a
cash or a margin basis. In a margin account, the customer pays less than the
full cost of the securities purchased and the broker-dealer makes a loan for the
balance of the purchase price secured by the securities purchased or other
securities owned by the customer. The amount of the loan is subject to the
margin regulations (Regulation T) of the Board of Governors of the Federal
Reserve System, NYSE margin requirements, and the Company's internal policies,
which in some instances are more stringent than Regulation T or NYSE
requirements. In permitting a customer to purchase securities on margin, the
Company is subject to the risk that a market decline could reduce the value of
its collateral below the amount of the customer's indebtedness and that the
customer might be unable otherwise to repay the indebtedness.
Interest is charged on amounts borrowed by customers (debit
balances) to finance their margin transactions. The rate of interest charged to
customers is the prime rate plus or minus an additional amount that varies
depending upon the size of the customer's average debit balance. Interest income
derived from these sources constituted approximately 5%, 6% and 6% of the
Company's total revenues for the fiscal years ended March 31, 1997, 1998 and
1999, respectively. Interest is also earned on securities owned by the Company
and on operating and segregated cash balances.
Free credit balances (excess funds kept by customers in their
brokerage accounts) is the primary source of funds used to finance customers'
margin account borrowings. Legg Mason Wood Walker pays interest on certain free
credit balances in customers' accounts when the customer has indicated that the
funds will be used for
6
reinvestment at a future date. In fiscal 1999, Legg Mason
Wood Walker paid interest on approximately 94% of customer free credit balances.
INSURANCE BROKERAGE AND FINANCIAL PLANNING
Approximately 1,100 of the Company's financial advisors are
licensed to sell insurance. Legg Mason Financial Services, Inc., a wholly-owned
subsidiary of the Company, acts as general agent for several life insurance
companies and sells fixed and variable annuities and insurance. The Company also
offers comprehensive financial planning services to individuals. See "Revenues
by Source" for information regarding revenue generated by insurance brokerage
activities.
OTHER SERVICES
At March 31, 1999, the Company served as a non-bank custodian
for approximately 245,000 IRA's, 26,000 Simplified Employee Pension Plans and
9,000 Qualified Plans.
Legg Mason Trust Company, a state chartered, non-depository
bank, provides services as a trustee for trusts established by the Company's
individual and employee benefit plan clients. The Company provides brokerage and
advisory services for a significant portion of the assets held in the Trust
Company's accounts. The Company's application to establish a unitary thrift
institution with authority to exercise trust powers was granted by the United
States Office of Thrift Supervision on May 21, 1999, subject to satisfaction of
certain conditions. The Company expects to establish the thrift, to be named
Legg Mason Trust Bank, F.S.B., during fiscal year 2000. Legg Mason Trust Company
will be merged into the new entity, which will continue to provide the same
trust services as are presently provided by Legg Mason Trust Company.
CAPITAL MARKETS BUSINESS SEGMENT
The Capital Markets business segment, which is conducted
through Legg Mason Wood Walker and Howard Weil, consists of the Company's equity
and fixed income institutional sales and trading, syndicate, corporate and
public finance activities.
INSTITUTIONAL BUSINESS
The Company is engaged in executing securities transactions
for institutional investors such as banks, mutual funds, insurance companies and
pension and profit-sharing plans. Such investors normally purchase and sell
securities in large quantities which require special marketing and trading
expertise. The Company believes that a significant portion of its institutional
brokerage commissions is received as a consequence of provision to institutions
of research opinions and services regarding specific corporations and industries
and other matters affecting the securities markets. See "Research."
Transactions are executed by the Company acting as broker or
as principal. The Company permits discounts from its commission schedule to its
institutional customers. The size of such discounts varies with the size of
particular transactions and other factors. For the fiscal years ended March 31,
1997, 1998 and 1999, revenues derived from securities transactions for
institutional investors constituted approximately 16%, 17% and 18%,
respectively, of total revenues from securities transactions and 7% of the
Company's total revenues in each year.
PRINCIPAL TRANSACTIONS
The Company makes primary markets in equity securities that
are traded OTC, particularly securities of companies located in the Mid-Atlantic
and Mid-South regions. The Company is also an active market maker and
distributor of municipal bonds, particularly bonds issued by municipalities
located in the Mid-Atlantic and Mid-South regions.
7
As of March 31, 1999, the Company made markets in equity
securities of approximately 400 corporations, including corporations for which
the Company has acted as a managing or co-managing underwriter. The Company has
46 traders involved in trading corporate equity and debt securities, 22 in
trading municipal securities, and 11 in trading government securities.
The Company's market-making activities are also conducted with
other dealers, and with institutional and individual customers of its branch
office system. Mark ups and mark downs from market-marking activities are
allocated to the Private Client business segment when the transaction involves
an individual client. In making markets in equity and debt securities, the
Company maintains positions in such securities to service its customers and
accordingly exposes its own capital to the risk of fluctuations in market value.
While the Company seeks to avoid substantial market risk, and may engage in
hedging transactions to minimize risk, it does, nonetheless, realize profits and
losses from market fluctuations. Trading profits (or losses) depend upon the
skills of the employees engaged in market making, the amount of capital
allocated to positions in securities and the general level of activity and trend
of prices in the securities markets.
INVESTMENT BANKING
Corporate and Municipal Finance
The Company participates as an underwriter in public offerings
of corporate debt and equity issues as well as municipal securities. The Company
also serves as manager or co-manager of corporate equity and municipal
offerings, generally involving issuers located in the Mid-Atlantic and Mid-South
regions.
The following tables set forth, for the periods indicated, (i)
the total number and dollar amount of corporate stock and bond and municipal
bond offerings managed or co-managed by the Company, and (ii) the total number
and dollar amount of its underwriting participations in those offerings and in
offerings managed by others.
Managed or Co-Managed Offerings
--------------------------------------------------------------------------
Calendar Year Number Of Issues Amount Of Offering
- ------------- ------------------------ ---------------------------------------
Corporate Municipal Corporate Municipal
--------- --------- -------------- --------------
1994 24 227 $3,764,956,000 $5,779,156,000
1995 22 165 958,377,000 4,112,580,000
1996 33 258 3,808,000,000 5,555,638,000
1997 76 224 8,453,000,000 7,208,000,000
1998 45 223 8,090,054,000 8,381,696,000
Underwriting Participations
---------------------------------------------------------------------------
Calendar Year Number Of Issues Amount Of Participation
- ------------- ------------------------ ---------------------------------------
Corporate Municipal Corporate Municipal
--------- --------- -------------- --------------
1994 411 309 $ 776,258,000 $1,187,236,000
1995 354 232 675,257,000 627,973,000
1996 427 246 1,313,233,000 587,548,000
1997 298 198 1,380,000,000 936,668,000
1998 153 237 827,443,000 1,476,674,000
Underwriting involves both economic and regulatory risks. An
underwriter may incur losses if it is unable to resell the securities it is
committed to purchase, or if it is forced to liquidate its commitments at less
than the agreed purchase price. In addition, an underwriter is subject to
substantial potential liability for material misstatements or omissions in
prospectuses and other communications with respect to underwritten offerings.
See "Item 3. Legal Proceedings." Furthermore, because underwriting commitments
require a charge against net capital,
8
the Company's broker-dealer subsidiaries could find it necessary to limit their
underwriting participations to remain in compliance with regulatory net capital
requirements. See "Net Capital Requirements."
Other Investment Banking Activities
The Company's investment banking activities also include
private debt and equity placements and initiation and advice with respect to
merger and acquisition transactions, as well as provision of financial advisory
services to corporate and municipal clients.
At March 31, 1999, the Company had 102 professionals engaged
in investment banking activities, including 80 in corporate finance and 22 in
municipal finance.
MERCHANT BANKING
Legg Mason Merchant Banking, Inc. manages private equity
funds sponsored by the Company. As of March 31, 1999, Legg Mason Merchant
Banking, Inc. managed approximately $25 million of invested capital for Legg
Mason Capital Partners, L.P., a private equity fund raised by the Company in
September 1996.
OTHER BUSINESS SEGMENT
The Other businesses are principally the Company's real estate
business, conducted through Legg Mason Real Estate Services, Inc., and
unallocated corporate revenues and expenses.
MORTGAGE BANKING AND REAL ESTATE SERVICES
Legg Mason Real Estate Services, Inc. ("LMRES") is engaged in
the commercial mortgage banking business. On April 1, 1999, Legg Mason Dorman &
Wilson, Inc. was merged into LMRES. The firm originates, structures, places and
services commercial mortgages on income-producing properties for insurance
companies, pension funds and other investors. LMRES is also engaged in the
business of managing commercial mortgage portfolios on behalf of pension funds,
with a major portion of this business consisting of management services provided
to four public pension funds. In addition, LMRES provides real estate consulting
services, specializing in sports arena and facility feasibility, analysis and
financing, as well as in providing corporate real estate services and equity
sales. LMRES' headquarters are located in Philadelphia, Pennsylvania, and it has
offices located in the Mid-Atlantic and Southeastern regions of the United
States.
As of March 31, 1998 and 1999, prior to the merger of LMRES
and Legg Mason Dorman & Wilson, Inc., the commercial mortgage servicing
portfolio of LMRES was $4.6 billion and $4.6 billion, respectively, and of Legg
Mason Dorman & Wilson was $4.9 billion and $4.3 billion, respectively.
RESEARCH
The Company employs approximately 40 analysts who develop
investment recommendations and market information with respect to companies and
industries. Legg Mason Wood Walker's research generally focuses on the
identification of securities of financially sound, well-managed companies that
appear to be undervalued in relation to their long-term earning power or the
value of underlying assets. Legg Mason refers to this investment strategy as the
"Value Approach" to investing. Legg Mason Wood Walker's research also covers
certain other companies and industries. Howard Weil's analysts concentrate on
the oil and gas exploration, pipeline and service industries. The Company's
research services are supplemented by research services purchased from outside
firms.
The Company's clients do not pay for research services
directly, although the Company is often compensated for its research services by
institutional clients through the direction of brokerage transactions to the
Company for execution. The Company believes that its research activities are
extremely important in attracting and retaining institutional and individual
brokerage clients.
9
ADMINISTRATION
Administrative and operations personnel are responsible for
the processing of securities transactions; receipt, identification and delivery
of funds and securities; internal financial controls; office services; custody
of customers' securities and the handling of margin accounts. At March 31, 1999,
the Company had approximately 340 full-time employees performing such functions.
There is considerable fluctuation during any year and from
year to year in the volume of transactions the Company must process. The Company
records transactions and posts its books on a daily basis. Operations personnel
monitor day-to-day operations to determine compliance with applicable laws,
rules and regulations. Failure to keep current and accurate books and records
can render the Company liable to disciplinary action by governmental and
self-regulatory authorities, as well as to claims by its clients.
Legg Mason Wood Walker executes and clears securities
transactions as a member of the NYSE and various regional exchanges, and a
participant in both The Depository Trust Company and National Securities
Clearing Corporation. Legg Mason Wood Walker also provides clearing services to
affiliated and unaffiliated broker-dealers.
During the past several years the Company has increased its
staff and expenditures on technology, especially as it relates to expanding its
client support and building new business opportunities using the Internet.
The Company believes that its internal controls and safeguards
are adequate, although fraud and misconduct by customers and employees and the
possibility of theft of securities are risks inherent in the securities
industry. As required by the NYSE and certain other authorities, the Company
carries a fidelity bond covering loss or theft of securities as well as forgery
of checks and drafts and embezzlement and misplacement of securities. See "Item
7. Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources -- Year 2000 Processing Issue"
regarding the potential impact of "Year 2000" issues.
EMPLOYEES
At March 31, 1999, the Company had approximately 4,350
employees. None of the Company's employees is covered by a collective bargaining
agreement. The Company considers its relations with its employees to be
satisfactory. However, competition for experienced financial services personnel,
especially financial advisors and investment management professionals, is keen
and from time to time the Company may experience a loss of valuable personnel.
The Company recognizes the importance of hiring and training
financial advisors. The Company trains new financial advisors who are required
to take examinations given by the NYSE, the NASD and various states in order to
be registered and qualified, and maintains ongoing training for financial
advisors.
COMPETITION
The Company is engaged in an extremely competitive business.
Its competition includes, with respect to one or more aspects of its business,
numerous national, regional and local broker-dealer and investment advisory
firms, and commercial banks and thrift institutions. Many of these organizations
have substantially greater personnel and financial resources than the Company.
Discount brokerage firms oriented to the retail market, including firms
affiliated with banks and mutual fund organizations and on-line brokerage firms,
are devoting substantial funds to advertising and direct solicitation of
customers in order to increase their share of commission dollars and other
securities-related income. In many instances, the Company is competing directly
with such organizations. The Company also competes for investment funds with
banks, insurance companies and investment companies. The principal competitive
factors relating to the Company's business are the quality of advice and
services provided to investors and the price of those services.
10
Competition in the Company's business periodically has been
affected by significant developments in the securities industry. See "Factors
Affecting the Company and the Securities Industry -- Industry Changes and
Competitive Factors."
REGULATION
The securities industry in the United States is subject to
extensive regulation under both 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 has been delegated to self-regulatory authorities,
principally the NASD and the securities exchanges. These self-regulatory
organizations conduct periodic examinations of member broker-dealers in
accordance with rules they have adopted and amended from time to time, subject
to approval by the SEC. Securities firms are also subject to regulation by state
securities commissions in those states in which they do business. In addition,
securities firms are subject to regulation by various foreign governments,
securities exchanges, central banks and regulatory bodies, particularly in those
countries where they have established an office.
Broker-dealers are subject to regulations that cover all
aspects of the securities business, including sales methods, trading practices
among broker-dealers, uses and safekeeping of customers' funds and securities,
capital structure and financial soundness of securities firms, recordkeeping and
the conduct of directors, officers and employees. Additional legislation,
changes in rules promulgated by the SEC and self-regulatory authorities, or
changes in the interpretation or enforcement of existing laws and rules, may
directly affect the mode of operation and profitability of broker-dealers. The
SEC, self-regulatory authorities and state securities commissions may conduct
administrative proceedings that can result in censure, fine, suspension or
expulsion of a broker-dealer, its officers or employees. Such administrative
proceedings, whether or not resulting in adverse findings, can require
substantial expenditures and can have an adverse impact on the reputation of a
broker-dealer. The principal purpose of regulation and discipline of
broker-dealers is the protection of customers and the securities markets, rather
than protection of creditors and stockholders of the regulated entity.
The Company's investment advisory subsidiaries and the
Company-sponsored mutual funds are also subject to extensive federal regulation
by the SEC. The investment advisory subsidiaries of the Company are registered
as investment advisers with the SEC. The investment advisory subsidiaries are
also required to make notice filings in certain states. Virtually all aspects of
the investment advisory business are subject to various federal and state laws
and regulations. These laws and regulations are primarily intended to benefit
the investment advisory clients and generally grant supervisory agencies and
bodies broad administrative powers, including the power to limit or restrict an
investment adviser from carrying on its investment advisory business in the
event that it fails to comply with such laws and regulations. Possible sanctions
which may be imposed for such failure include the suspension of individual
employees, limitations on the investment advisory subsidiary engaging in the
investment advisory business for specified periods of time, the revocation of
registrations, other censures and fines.
The Company's broker-dealer subsidiaries are required by
federal law to belong to the SIPC. When the SIPC fund falls below a certain
amount, members are required to pay annual assessments of up to 1% of adjusted
gross revenues. As a result of adequate fund levels, the Company's broker-dealer
subsidiaries each were required to pay the minimum annual assessment of $150 in
fiscal 1999. The SIPC fund provides protection for securities held in customer
accounts up to $500,000 per customer, with a limitation of $100,000 on claims
for cash balances. The Company purchases insurance that provides additional
protection for securities of up to $24,500,000 per customer.
NET CAPITAL REQUIREMENTS
Every registered broker-dealer doing business with the public
is subject to the Uniform Net Capital Rule ("Rule 15c3-1") promulgated by the
SEC. Rule 15c3-1, which is designed to measure the financial soundness and
liquidity of broker-dealers, specifies minimum net capital requirements. Since
the Company is not itself a registered broker-dealer, it is not directly subject
to Rule 15c3-1. However, its broker-dealer subsidiaries are subject to Rule
15c3-1, and a provision of Rule 15c3-1 requires that a broker-dealer notify the
SEC prior to the withdrawal of
11
equity capital by a parent company if the withdrawal would exceed the greater of
$500,000 or 30 percent of the broker-dealer's excess net capital.
Rule 15c3-1 provides that a broker-dealer doing business with
the public shall not permit its aggregate indebtedness to exceed 15 times its
net capital (the "primary method") or, alternatively, that it not permit its net
capital to be less than 2% of its aggregate debit items (primarily receivables
from customers and broker-dealers) computed in accordance with Rule 15c3-1. As
of March 31, 1999, the Company's broker-dealer subsidiaries had aggregate net
capital of $206.0 million, which exceeded the minimum net capital requirements
by $186.5 million.
Under NYSE Rule 326, Legg Mason Wood Walker as a member
organization that carries customer accounts, would be required to reduce its
business activities if its net capital, as defined, was less than 4% of
aggregate debit items, as defined, and would be precluded from expanding its
business if its net capital was less than 5% of aggregate debit items.
Compliance with applicable net capital rules could limit
operations of the Company's broker-dealer subsidiaries, particularly operations
such as underwriting and trading activities that require use of significant
amounts of capital. A significant operating loss or an extraordinary charge
against net capital could adversely affect the ability of the broker-dealers to
expand or even maintain their present levels of business. See Note 16 of Notes
to Consolidated Financial Statements in Item 8 of this Report.
OUTSTANDING SUBORDINATED LIABILITIES
Legg Mason Wood Walker has incurred subordinated liabilities
("Subordinated Liabilities") which it is permitted to treat as capital for the
purposes of the Uniform Net Capital Rule and NYSE Rules 325 and 326. The
Subordinated Liabilities instruments issued by Legg Mason Wood Walker provide
that such liabilities shall be subordinated in right of payment to the prior
payment in full, or provision for such payment, of all obligations to all other
present and future creditors of Legg Mason Wood Walker (except for other
Subordinated Liabilities similarly subordinated). At March 31, 1999, Legg Mason
Wood Walker had $35.0 million of Subordinated Liabilities outstanding, due to
Legg Mason, Inc. The Subordinated Liabilities may, with the prior written
consent of the NYSE, be prepaid in whole or in part at any time after such
Subordinated Liabilities have been outstanding for more than one year. Legg
Mason Wood Walker may not pay or permit the payment or withdrawal of any
Subordinated Liability if, after giving effect to such payment or withdrawal,
its net capital would be less than 5% (6% in the case of the Subordinated
Liability due to Legg Mason, Inc.) of aggregate debit items. See Note 16 of
Notes to Consolidated Financial Statements in Item 8 of this Report.
FACTORS AFFECTING THE COMPANY AND THE SECURITIES INDUSTRY
The securities industry is characterized by frequent change,
the effects of which have been difficult to predict. In addition to an evolving
regulatory environment, the industry has been subject to radical changes in
pricing structure, alternating periods of contraction and expansion and intense
competition from within and outside the industry.
Fluctuating Securities Volume and Prices
The securities industry is subject to substantial fluctuations
in volume and price levels of securities transactions. These fluctuations can
occur on a daily basis as well as over longer periods as a result of national
and international economic and political events, and broad trends in business
and finance, as well as interest rate movements. Reduced volume and prices
generally result in lower brokerage and investment banking revenues, as well as
losses from trading as principal and from underwriting. Profitability is
adversely affected in periods of reduced volume because fixed costs remain
relatively unchanged. To the extent that purchases of securities are permitted
to be made on margin, securities firms also are subject to risks inherent in
extending credit, especially during periods of rapidly declining markets, in
that a market decline could reduce collateral value below the amount of a
customer's indebtedness. In the past, heavy trading volume has caused clearance
and processing problems for
12
many securities firms, and this could occur in the future. In addition, there is
risk of loss from errors that can occur in the execution and settlement process.
See "Administration."
Industry Changes and Competitive Factors
Considerable consolidation has occurred in the securities
industry as numerous securities firms have either been acquired by other
securities firms or ceased operations, in many cases resulting in firms with
greater financial resources than firms such as the Company. In addition, a
number of heavily capitalized companies not previously engaged in the securities
business have made investments in and acquired securities firms. Increasing
competitive pressures in the securities industry require regional securities
firms to offer to their customers many of the financial services that are
provided by much larger securities firms that have substantially greater
resources than the Company. A sizable number of new investment advisory firms
and mutual funds have been established in recent years, increasing competition
in that area of the Company's activities.
An increasing number of firms, including on-line brokerage
firms and affiliates of banks and mutual fund organizations, that offer discount
brokerage services to retail customers have been established in recent years.
These firms generally effect transactions at substantially lower commission
rates on an "execution only" basis, including through the Internet, without
offering other services such as investment and financial advice and research
that are provided by "full-service" brokerage firms such as the Company.
Some of these discount brokerage firms have increased the range of services that
they offer. Continued increases in the number of discount brokerage firms and
services provided by such firms may adversely affect the Company.
Furthermore, certain full-service brokerage firms have begun
to provide certain discount services, including on-line trading over the
Internet. In response to the substantial recent growth in the availability of,
and investor demand for, on-line securities trading, the Company intends to
offer its clients the ability to execute certain securities transactions
on-line during fiscal year 2000. The growing demand for and availability of
on-line securities trading, including the Company's intended provision of
on-line trading services at competitive prices, may have an adverse effect on
the Company's retail business.
Certain institutions, notably commercial banks and thrift
institutions, have become a competitive factor in the securities industry by
offering certain investment banking and corporate and individual financial
services traditionally provided only by securities firms. The Federal Reserve
Board has approved applications of major commercial banks to underwrite and deal
in certain types of securities that such banks had not been permitted to
underwrite and deal in previously, subject to limitations on the resulting
underwriting volume and market share. Commercial banks, generally, are expanding
their securities activities, as well as their activities relating to the
provision of financial services, and are deriving more revenue from such
activities. In addition, legislation proposing repeal of statutes that limit the
securities, insurance and other non-banking activities of any company that
controls an insured bank came closer to passage last year than any financial
modernization bill to date and resolved certain issues that had long stood as
obstacles to the progress of prior modernization bills. Continued expansion of
the type and extent of competitive services that banks and other institutions
offer or further repeal or modification of administrative or legislative
barriers may adversely affect securities firms such as the Company that are
heavily oriented to individual retail customers.
Regulation
The business of the Company and its subsidiaries in the
securities industry is subject to regulation by various regulatory authorities
that are charged with protecting the interests of broker-dealers' and investment
advisers' customers. See "Regulation."
Effect of Net Capital Requirements
The SEC and the NYSE have stringent rules with respect to the
net capital requirements of securities firms. A significant operating loss or
extraordinary charge against net capital may adversely affect the ability of the
13
Company's broker-dealer subsidiaries to expand or even maintain their present
levels of business. See "Net Capital Requirements."
Litigation
Many aspects of the Company's business involve substantial
risks of liability. In the normal course of business, the Company's subsidiaries
have been named as defendants or co-defendants in lawsuits seeking substantial
damages. There has been an increased incidence of litigation in the securities
industry in recent years, including customer claims as well as class action
suits seeking substantial damages. See "Item 3. Legal Proceedings."
Item 2. PROPERTIES.
The Company currently leases all of its office space. The
Company's headquarters, Baltimore sales office and operations functions are
located in an office building in which the Company is the major tenant,
currently occupying approximately 344,000 square feet. The initial term of the
lease will expire in 2009 and annual base rent is approximately $7.3 million.
The lease has two renewal options of eight years each.
Information concerning the location of the Company's sales
offices is contained in Item 1 of this Report. See Note 9 of Notes to
Consolidated Financial Statements in Item 8 of this Report.
Item 3. LEGAL PROCEEDINGS.
In November 1998, the United States District Court for the
Southern District of New York approved a settlement in the litigation captioned
IN RE: NASDAQ MARKET-MAKERS ANTITRUST LITIGATION in which Legg Mason Wood
Walker together with other defendants in the litigation have agreed to pay an
aggregate $1.027 billion to the plaintiffs in such litigation. Legg Mason Wood
Walker's share of the total settlement amount was approximately $2.8 million.
In January 1999, the SEC issued an order accepting Legg Mason
Wood Walker's offer of settlement to certain related public administrative
proceedings, which imposed sanctions on Legg Mason Wood Walker, including a
$425,000 civil penalty, in connection with Legg Mason Wood Walker's activities
as a market-maker in certain securities quoted on The Nasdaq Stock Market.
These two settlements terminated Legg Mason Wood Walker's
involvement in and liability for the IN RE: NASDAQ MARKET-MAKERS ANTITRUST
LITIGATION and related SEC investigation.
In addition to the matters described above, the Company's
subsidiaries have been named as defendants or co-defendants in various other
lawsuits alleging substantial damages. Some of these proceedings relate to
public offerings of securities in which one or more subsidiaries of the Company
participated as a member of the underwriting syndicate. The Company is also
aware of litigation against certain underwriters of offerings in which one or
more subsidiaries of the Company was a participant, but where the subsidiary is
not now a defendant. In these latter cases, it is possible that a subsidiary may
be called upon to contribute to settlements or judgments. While the ultimate
resolution of pending litigation cannot be predicted with certainty, in the
opinion of management, after consultation with legal counsel, pending litigation
will not have a material adverse effect on the consolidated financial statements
of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 4A. EXECUTIVE OFFICERS OF THE COMPANY.
Information (not included in the Company's definitive proxy
statement for the 1999 Annual Meeting of Stockholders) regarding certain
executive officers of the Company is as follows:
14
F. Barry Bilson, age 46, was elected Senior Vice President of
the Company in October 1998. Mr. Bilson was Vice President-Finance of the
Company from June 1984 through October 1998, and he served as Controller of the
Company from October 1983 until September 1988, and as Controller of Legg Mason
Wood Walker from April 1981 to September 1988. Mr. Bilson has served in various
financial management capacities since joining the Company in 1981, and presently
has responsibility for business development projects and proprietary mutual fund
accounting. Mr. Bilson is a certified public accountant.
Robert G. Donovan, age 54, was elected an Executive Vice
President of the Company in January 1998 and of Legg Mason Wood Walker in
February 1998. He became a Senior Vice President of Legg Mason Wood Walker in
1990. Mr. Donovan has responsibility for the securities brokerage operations
function of Legg Mason Wood Walker.
Robert A. Frank, age 49, became Executive Vice President of
the Company and Executive Vice President, Director of Research and Co-head of
the Capital Markets Committee of Legg Mason Wood Walker in August 1996. From
1975 until he joined the Company, he was employed by Alex. Brown Incorporated in
various capacities, including as a Managing Director and Head of the Real Estate
Securities Research Group. Mr. Frank is a former Governor of the National
Association of Real Estate Investment Trusts, past president of the Real Estate
Analyst Group of New York, a Fellow of the Financial Analysts Federation and a
trustee of the Mid-Atlantic Realty Trust.
Theodore S. Kaplan, age 56, became Senior Counsel of the
Company in November 1998 and became Senior Vice President of the Company in
April 1993. He served as General Counsel of the Company from April 1993 until
November 1998.
Robert F. Price, age 51, became Senior Vice President and
General Counsel of the Company and Legg Mason Wood Walker in November 1998. From
September 1991 through August 1997, Mr. Price was Secretary and General Counsel
of Alex. Brown Incorporated. From September 1997 until October 1998, Mr. Price
was a Managing Director of BT Alex. Brown Incorporated, a wholly owned
subsidiary of Bankers Trust Corporation.
Timothy C. Scheve, age 41, has been Executive Vice President
of the Company and of Legg Mason Wood Walker since January 1998 and was
Treasurer of the Company from January 1992 to April 1999 and of Legg Mason Wood
Walker from August 1992 to January 1999. He became a Vice President of the
Company in July 1993 and a Senior Vice President of Legg Mason Wood Walker in
August 1994. Mr. Scheve has served in various financial and administrative
capacities since joining the Company in 1984, and presently has primary
responsibility for the Company's administrative functions.
Andrew M. Silton, age 45, became a Senior Vice President of
the Company in May 1998. He has various responsibilities in connection with the
Company's investment management activities. From January 1996 until December
1997, Mr. Silton was the President of Trade Street Investment Associates, a
registered investment adviser. From April 1994 until December 1997, he was a
Senior Vice President of NationsBank Corporation responsible for oversight of
asset management and trust operations and, from May 1993 until April 1994, he
was the President of Cooperative Ventures, a financial services consulting firm.
Elisabeth N. Spector, age 51, became a Senior Vice President
of the Company and Legg Mason Wood Walker in January 1994. She has general
responsibilities in business and financial strategy. From November 1989 until
she joined the Company, Ms. Spector was employed by the Resolution Trust
Corporation, where, among other things, she served as the initial Director of
the RTC's Capital Markets Division.
15
Edward A. Taber III, age 55, became an Executive Vice
President of the Company in September 1992 and a Senior Executive Vice President
in July 1995. He has overall responsibility for the Company's investment
management activities. Mr. Taber is a Director of the Legg Mason Value Trust,
Inc., the Legg Mason Total Return Trust, Inc., the Legg Mason Special Investment
Trust, Inc. and LM Institutional Fund Advisors I, Inc., Chairman and President
of LM Institutional Fund Advisors II, Inc., a trustee of the Legg Mason Tax-Free
Income Fund and the Legg Mason Cash Reserve Trust, President of the Legg Mason
Income Trust, Inc., President and a director of the Legg Mason Global Trust,
Inc. and the Legg Mason Investors Trust, Inc.
16
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Shares of Legg Mason, Inc. common stock are listed and traded
on the New York Stock Exchange (symbol LM). As of March 31, 1999, there were
2,151 shareholders of record of the Company's common stock. Information with
respect to the Company's dividends and stock prices is as follows:
Quarter ended*
- --------------------------------------------------------------------------------------------------------
Mar. 31 Dec. 31 Sept. 30 June 30
- --------------------------------------------------------------------------------------------------------
FISCAL 1999
Cash dividend per share $.065 $.065 $.065 $.055
Stock price range:
High 35.875 31.563 31.344 32.281
Low 26.438 17.313 20.156 26.813
FISCAL 1998
Cash dividend per share $.055 $.055 $.055 $.049
Stock price range:
High 31.938 28.156 27.000 20.250
Low 23.375 22.469 19.531 15.750
- --------------------------------------------------------------------------------------------------------
*Adjusted to reflect the 2-for-1 stock split paid September 1998.
17
Item 6. SELECTED FINANCIAL DATA*
(Dollars in thousands except per share amounts)
Years ended March 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
Revenues $1,046,006 $ 889,060 $ 664,601 $ 533,343 $ 404,234
Expenses 897,231 760,681 568,391 468,792 375,959
- ------------------------------------------------------------------------------------------------------------
Earnings before income taxes 148,775 128,379 96,210 64,551 28,275
Income taxes 59,441 52,258 39,018 26,270 11,673
- ------------------------------------------------------------------------------------------------------------
Net earnings $ 89,334 $ 76,121 $ 57,192 $ 38,281 $ 16,602
- ------------------------------------------------------------------------------------------------------------
PER COMMON SHARE**
Basic earnings $ 1.64 $ 1.40 $ 1.12 $ .86 $ .40
Diluted earnings $ 1.55 $ 1.31 $ 1.02 $ .73 $ .36
Dividends declared $ .250 $ .214 $ .191 $ .176 $ .161
Book value $ 10.08 $ 9.08 $ 7.85 $ 6.55 $ 5.64
Average shares outstanding:
Basic 54,336,821 54,430,958 51,138,256 44,314,062 41,090,006
Diluted 57,656,632 58,006,668 55,985,412 54,785,496 53,509,876
- ------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION
Total assets $3,473,687 $ 2,832,329 $1,886,736 $1,320,820 $ 829,538
Senior notes $ 99,676 $ 99,628 $ 99,581 $ 99,534 --
Subordinated liabilities -- -- -- $ 68,000 $ 102,487
Total stockholders' equity $ 554,177 $ 500,095 $ 423,039 $ 302,189 $ 233,061
============================================================================================================
* Restated to reflect all pooling of interests transactions.
** Adjusted to reflect all stock splits.
18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
BUSINESS DESCRIPTION
Legg Mason, Inc. and its subsidiaries (the "Company") are principally engaged in
providing investment advisory, securities brokerage, investment banking, and
commercial mortgage banking services to individuals, institutions, corporations
and municipalities. The Company's profitability is sensitive to a variety of
factors including the volume of trading in securities, the volatility and
general level of market prices, and the demand for investment banking and
mortgage banking services.
In fiscal 1999, U.S. equity markets achieved record trading volume and price
levels, principally because of continuing economic growth, stable interest
rates, gains in corporate earnings and modest inflation. As a result, the
Company achieved a fourth consecutive year of record revenues and net earnings,
attributable to growth in its investment advisory and securities brokerage
businesses.
Total assets under management for institutions, Company-sponsored mutual
funds and private accounts managed by the Company's subsidiaries were $89
billion at March 31, 1999, up 25% from $71 billion a year earlier. Earnings from
investment advisory services tend to be more stable than those from securities
brokerage and investment banking activities because they are less affected by
changes in securities market conditions. Revenues from investment advisory
activities represented 37% of the Company's total revenues in fiscal 1999.
The Company's investment advisory activities and their contribution to
operating results have grown significantly, through both internal growth and
acquisition, over the past ten years. During fiscal 1998, the Company acquired
Brandywine Asset Management, Inc. ("Brandywine"), as described in Note 2 of
Notes to Consolidated Financial Statements. Brandywine, acquired in January
1998, manages approximately $6.9 billion* for institutional clients and high net
worth individuals.
During fiscal 1996, the Company acquired Bartlett & Co. ("Bartlett") and
Lehman Brothers Global Asset Management Limited, since renamed Western Asset
Global Management Limited ("Western Asset Global"). Bartlett, acquired in
January 1996, manages approximately $2.9 billion* for high net worth
individuals, family groups and institutions. Western Asset Global, acquired in
February 1996, manages assets of approximately $3.3 billion,* invested
principally in international fixed-income securities.
* At March 31, 1999, excluding assets managed in Legg Mason Funds.
Net interest income continued to be a stable, growing source of earnings,
primarily as a result of significant growth in retail brokerage margin loan and
credit account balances.
Results of any individual period should not be considered representative of
future profitability. Many of the Company's activities have fixed operating
costs which do not decline with reduced levels of volume. While the Company
attempts to reduce costs, particularly during periods of low volume, it does
not, as a general rule, attempt to do so through personnel reductions.
Accordingly, sustained periods of unfavorable market conditions may adversely
affect profitability.
The Company operates within four business segments: Investment Advisory;
Private Client; Capital Markets and Other. Operations contained within each
business segment and each segment's financial information for the most recent
fiscal years are summarized below:
INVESTMENT ADVISORY
(in millions)
Years ended March 31,
----------------------------------
1999 1998 1997
---------------------------------------------------------------------------
Revenues $ 266.7 $ 215.2 $ 162.4
Pre-tax earnings $ 79.0 $ 53.7 $ 40.4
Businesses contained within the Investment Advisory segment primarily provide
investment advisory services to Company-sponsored mutual funds and management of
assets for institutional and individual clients through the Company's asset
management subsidiaries.
PRIVATE CLIENT
(in millions)
Years ended March 31,
----------------------------------
1999 1998 1997
---------------------------------------------------------------------------
Revenues $ 610.5 $ 513.6 $ 380.9
Pre-tax earnings $ 67.0 $ 53.3 $ 44.5
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 profit
from customers' margin loan and credit account balances is included in this
segment.
19
CAPITAL MARKETS
(in millions)
Years ended March 31,
----------------------------------
1999 1998 1997
---------------------------------------------------------------------------
Revenues $ 131.0 $ 128.1 $ 92.3
Pre-tax earnings $ 12.0 $ 20.4 $ 10.2
The Capital Markets segment includes the Company's equity and fixed-income
capital markets businesses, including origination, institutional sales and
trading.
OTHER
(in millions)
Years ended March 31,
-----------------------------------
1999 1998 1997
----------------------------------------------------------------------------
Revenues $ 37.8 $ 32.2 $ 29.0
Pre-tax earnings $ (9.2) $ 1.0 $ 1.1
The Other business segment primarily includes the Company's real estate
service businesses and unallocated corporate revenues and expenses. In 1999,
pre-tax earnings include a non-cash increase in deferred compensation expense of
$10.4 million related to a change in accounting treatment for a non-qualified
deferred compensation stock plan and related compensation arrangements. See Note
14 of Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, items in the
Consolidated Statements of Earnings as percentages of total revenues and the
increase (decrease) by item as a percentage of the amount for the previous
period:
Percentage of Total Revenues Period to Period Change
---------------------------------------------------------------------
Years ended March 31, 1999 1998
------------------------------------- Compared Compared
1999 1998 1997 to 1998 to 1997
- ----------------------------------------------------------------------------------------------------------------------------
Revenues
Investment advisory and related fees 37.3% 33.3% 31.3% 32.0% 42.0%
Commissions 26.7 27.1 28.6 15.7 27.0
Principal transactions 9.0 9.8 11.0 8.5 18.5
Investment banking 7.3 10.9 10.8 (21.6) 34.8
Interest 15.3 14.3 12.7 25.9 51.3
Other 4.4 4.6 5.6 12.6 10.7
----- ----- -----
100.0 100.0 100.0 17.7 33.8
----- ----- -----
Expenses
Compensation and benefits 55.9 57.5 57.6 14.4 33.6
Occupancy and equipment rental 6.2 6.4 6.6 13.3 29.6
Communications 4.6 4.8 4.7 12.3 37.5
Floor brokerage and clearing fees 0.6 0.6 0.9 22.2 (7.6)
Interest 9.1 8.3 6.5 28.8 70.0
Non-cash deferred compensation 1.0 -- -- NM --
Other 8.4 8.0 9.2 24.9 15.1
----- ----- -----
85.8 85.6 85.5 18.0 33.8
----- ----- -----
Earnings Before Income Taxes 14.2 14.4 14.5 15.9 33.4
Income taxes 5.7 5.8 5.9 13.7 33.9
----- ----- -----
Net Earnings 8.5% 8.6% 8.6% 17.4% 33.1%
===== ===== =====
- ----------------------------------------------------------------------------------------------------------------------------
NM-Not meaningful
20
FISCAL 1999 AS COMPARED TO FISCAL 1998
In fiscal 1999, revenues, net earnings and earnings per share reached record
levels and were substantially higher than in the prior fiscal year. Revenues
were $1.05 billion, an increase of 18% from revenues of $889.1 million in fiscal
1998. Net earnings were $89.3 million, up 17% from net earnings in the prior
fiscal year. Basic earnings per share increased by 17% to $1.64 from $1.40.
Diluted earnings per share increased 18% to $1.55 from $1.31.
In accordance with Emerging Issues Task Force ("EITF") 97-14, results for
fiscal 1999 include a non-cash increase in deferred compensation expense of
$10.4 million related to a change in accounting treatment for a non-qualified
deferred compensation stock plan and related compensation arrangements. See Note
14 of Notes to Consolidated Financial Statements.
REVENUES
INVESTMENT ADVISORY AND RELATED FEES
Investment advisory and related fees increased 32% to $390.2 million as a result
of growth in assets under management in Company-sponsored mutual funds,
fixed-income investment advisory accounts and fee-based brokerage accounts.
INVESTMENT ADVISORY REVENUES AND
ASSETS UNDER MANAGEMENT
Bar chart appears here depicting the growth of assets under management and
investment advisory and related fee revenues for the last five fiscal years
Investment
Advisory Assets
and Related Under
Fee Revenues Management
(in millions, "M") (in billions, "B")
------------------ ------------------
1995 $117.7M $24.6B
1996 $162.1M $35.4B
1997 $208.2M $43.8B
1998 $295.6M $71.0B
1999 $390.2M $88.9B
COMMISSIONS
Commission revenues rose 16% to $279.1 million in fiscal 1999, primarily as a
result of increases in securities transaction volume.
PRINCIPAL TRANSACTIONS
Revenues from principal transactions increased 8% to $94.1 million, principally
as a result of increases in fixed-income sales and equity trading operations.
INVESTMENT BANKING
Investment banking revenues declined 22% to $76.1 million, primarily as a result
of decreased public offerings of equity securities, particularly co-managed
public offerings of real estate investment trusts.
INTEREST REVENUE AND EXPENSE
(millions of dollars)
Bar chart appears here depicting interest revenue and interest expense for the
last five fiscal years
Interest Expense Interest Revenue
---------------- ----------------
1995 $17.2 $ 39.7
1996 26.2 57.1
1997 43.4 84.1
1998 73.7 127.3
1999 94.9 160.3
INTEREST REVENUE AND EXPENSE
Interest revenue increased 26% to $160.3 million as a result of increased firm
investments, predominantly funds segregated for regulatory purposes and customer
margin loan account balances.
Interest expense increased 29% to $94.9 million, primarily due to larger
interest-bearing customer credit balances.
As a result of significantly higher levels of interest-bearing customer
credit balances, the Company's net interest margin declined to 40.8% in fiscal
1999 from 42.1% in fiscal 1998.
The Company's net interest profit increased 22% to $65.4 million in fiscal
1999 from $53.6 million in fiscal 1998.
OTHER REVENUES
Other revenues rose 13% to $46.1 million, primarily as a result of proceeds from
a key man life insurance policy and an increase in remarketing fees and loan
originations at the Company's commercial mortgage banking subsidiaries.
EXPENSES
COMPENSATION AND BENEFITS
Compensation and benefits increased 14% to $584.8 million as a result of higher
sales compensation on increased revenues and higher fixed compensation costs,
primarily attributable to an increased number of employees.
A substantial part of compensation expense fluctuates in proportion to the
level of business activity. Other compensation costs, primarily salaries and
benefits, are fixed and may not decline with reduced levels of volume.
Therefore, profitability may be adversely affected by sustained periods of
unfavorable market conditions or slow revenue growth in acquired businesses or
new product areas.
21
OCCUPANCY AND EQUIPMENT RENTAL
Occupancy and equipment rental increased 13% to $64.3 million as a result of
continued investments in technology, a full year of expenses related to the
Company's new corporate headquarters and additional and expanded branch office
locations.
COMMUNICATIONS
Communications expense increased 12% to $48.0 million, due to higher business
volume which gave rise to increased costs for telephone usage, quote services,
printed materials and postage.
FLOOR BROKERAGE AND CLEARING FEES
Floor brokerage and clearing fees increased 22% to $6.7 million, reflecting
higher securities transaction volume.
NON-CASH DEFERRED COMPENSATION
In fiscal 1999, in accordance with EITF 97-14, the Company incurred a non-cash
deferred compensation charge of $10.4 million related to a change in accounting
treatment for a non-qualified deferred compensation stock plan and related
compensation arrangements. See Note 14 of Notes to Consolidated Financial
Statements.
OTHER EXPENSES
Other expenses increased 25% to $88.2 million, attributable to increased loss,
error and litigation charges, and higher promotional expenses.
INCOME TAXES
Income taxes rose 14% to $59.4 million in fiscal 1999 as a result of increased
pre-tax earnings. The Company's effective tax rate was 40.0% in fiscal 1999 as
compared to 40.7% in the prior year.
FISCAL 1998 AS COMPARED TO FISCAL 1997
REVENUES
INVESTMENT ADVISORY AND RELATED FEES
Investment advisory and related fees increased 42% to $295.6 million as a result
of growth in assets under management in Company-sponsored mutual funds, the
Company's fixed-income investment advisory subsidiary and fee-based brokerage
accounts.
COMMISSIONS
Commission revenues rose 27% to $241.3 million in fiscal 1998 because of
increases in sales of listed and over-the-counter securities, non-affiliated
mutual funds and variable annuities. During fiscal 1998, commission revenues
benefited from an active and rising equity market.
PRINCIPAL TRANSACTIONS
Revenues from principal transactions increased 19% to $86.7 million, principally
because of increased sales of fixed-income and over-the-counter securities,
coupled with a reduction in losses on proprietary positions in energy-related
equity securities. In fiscal 1998, sales of over-the-counter securities
benefited from the favorable equity market.
INVESTMENT BANKING
Investment banking revenues rose 35% to $97.1 million, primarily as a result of
increased corporate finance activities, particularly co-managed public offerings
of real estate investment trusts.
INTEREST REVENUE AND EXPENSE
Interest revenue increased 51% to $127.3 million because of larger firm
investments, predominantly funds segregated for regulatory purposes and customer
margin account and conduit stock loan balances.
Interest expense increased 70% to $73.7 million because of larger
interest-bearing customer credit and conduit stock loan balances.
As a result of significantly higher levels of interest-bearing customer
credit balances, the Company's net interest margin fell to 42.1% in fiscal 1998
from 48.5% in fiscal 1997.
OTHER REVENUES
Other revenues rose 11% to $41.0 million as a result of an increase in loan
origination fees at the Company's commercial mortgage banking subsidiaries.
EXPENSES
COMPENSATION AND BENEFITS
Compensation and benefits increased 34% to $511.4 million in fiscal 1998,
reflecting higher sales and profitability-based compensation and personnel
additions in sales, product and support areas.
OCCUPANCY AND EQUIPMENT RENTAL
Occupancy and equipment rental increased 30% to $56.7 million because of higher
depreciation expense from continued investments in technology and additional
costs related to the Company's relocation of its corporate headquarters,
completed in February 1998.
COMMUNICATIONS
Communications expense increased 38% to $42.7 million as a result of expansion
of the Company's data network and higher business volume which gave rise to
increased costs for printed materials, quote services, postage and telephone
usage.
FLOOR BROKERAGE AND CLEARING FEES
Despite increased trading volume, floor brokerage and clearing fees declined 8%
to $5.5 million, reflecting lower execution costs from more efficient order
routing.
OTHER EXPENSES
Other expenses increased 15% to $70.6 million, attributable to higher
promotional and litigation-related expenses.
INCOME TAXES
Income taxes rose 34% to $52.3 million, principally because of increased pre-tax
earnings. The Company's effective tax rate was 40.7% in fiscal 1998 and 40.6% in
fiscal 1997.
22
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, Senior Notes, bank lines of credit, and other
payables.
During the year ended March 31, 1999, cash and cash equivalents increased
$1.9 million. Cash flows from financing activities provided $31.6 million,
attributable to increases in short-term borrowings, offset in part by dividends
paid to common stockholders. Investing activities provided $29.5 million as a
result of reduced investments in resale agreements and net sales and maturities
of investment securities, partially offset by purchases of equipment and
leasehold improvements. Operating activities utilized $59.2 million, principally
as a result of higher levels of segregated cash and proprietary securities
inventory positions, offset in part by increased net customer payables and net
earnings, adjusted for depreciation and amortization and non-cash deferred
compensation.
The Company has outstanding $100 million principal amount of 6.5% Senior
Notes due February 15, 2006. The proceeds of these notes are being used for
general corporate purposes. The Company has available for offering an additional
$50 million of debt or convertible debt securities pursuant to a shelf
registration filed in January 1996.
The Company's broker-dealer subsidiaries are subject to the requirements of
the Securities and Exchange Commission's Uniform Net Capital Rule which is
designed to measure the general financial soundness and liquidity of
broker-dealers. At March 31, 1999, the brokerage subsidiaries had aggregate net
capital of $206.0 million, which exceeded minimum net capital requirements by
$186.5 million. The amount of the broker-dealers' net assets that may be
distributed is subject to restrictions under applicable net capital rules.
The principal sources of the Company's funds are its investment advisory and
broker-dealer subsidiaries. The Company has a revolving bank line of credit in
the amount of $50 million, none of which is currently outstanding, and the
Company's subsidiaries have lines of credit, aggregating $261.5 million,
pursuant to which they may borrow on a short-term demand basis at varying rates
based upon the Federal Funds rate. Management believes that funds available from
operations and its lines of credit are sufficient to meet its present and
reasonably foreseeable capital needs, although the Company may augment its
capital funds for continued expansion by internal growth and acquisition.
The Company borrows and lends securities in the normal course of business to
facilitate the settlement of its customer and proprietary transactions. In
addition, the Company engages in conduit securities borrowing and lending
activities in which it acts as an agent to facilitate settlement for other
institutions. In both firm and conduit transactions, the Company deposits or
receives cash, generally equal to 102% of the market value of securities
exchanged, and monitors the adequacy of collateral levels on a daily basis.
RISK MANAGEMENT
In 1997, the Securities and Exchange Commission issued risk management
disclosure requirements designed to assist investors in assessing market risks
and how those risks are managed. 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
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. At March 31, 1999, the
Company's securities inventories comprised of debt and preferred equity
securities owned and securities sold, but not yet purchased were approximately
$140 million and $10 million, respectively. The weighted average interest rates
in these inventories (excluding the preferred equities) were 6.1% and 5.0%,
respectively. Additionally, the Company held, as investments, debt securities,
principally U.S. Treasury securities, aggregating approximately $10 million,
with average maturities of less than one year and a weighted average interest
rate of 5.9%. The Company has performed an evaluation of its potential interest
rate risk and management is of the opinion that the exposure to interest rate
risk would not be material to its financial position.
The Company also has outstanding $100 million principal amount of Senior
Notes maturing in February 2006 which bear interest at 6.5%. The fair value of
the Senior Notes, estimated using current market prices, was $100,837 and
$98,958 at March 31, 1999 and 1998, respectively.
23
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. At
March 31, 1999, the balances of the Company's equity securities positions,
excluding preferred equities, owned and sold, but not yet purchased were
approximately $5 million and $2 million, respectively. The Company also has
investments in equity securities, primarily seed money investments in
Company-sponsored mutual funds with a carrying value of $7.2 million at March
31, 1999. In the opinion of management, the potential exposure to equity price
risk would not be material to the Company's financial position.
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 does not trade or have positions in
complex derivative financial instruments and owned approximately $.4 million of
non-investment grade debt securities at March 31, 1999. For an additional
discussion of this risk, see Note 15 of Notes to Consolidated Financial
Statements.
EFFECTS OF INFLATION
The Company's assets are not significantly affected by inflation because they
are primarily monetary, consisting of cash, resale agreements, securities and
receivables. However, the rate of inflation affects various expenses, including
employee compensation, occupancy, and communications, which may not be readily
recoverable in charges for services provided by the Company.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
Statement No. 133 establishes standards for accounting and reporting for
derivative instruments and hedging activities. In May 1999, the FASB issued an
exposure draft to delay the effective date for all fiscal quarters for all
fiscal years beginning after June 15, 2000. The impact of adopting Statement No.
133 will not be material to the Company's consolidated financial statements.
YEAR 2000 PROCESSING ISSUE
The Year 2000 issue affects the ability of computer systems to correctly process
dates after December 31, 1999. The Company has completed the inventory and
assessment phases of its Year 2000 project plan through an evaluation of its
internal and third party software, as well as its service providers' computer
systems, to determine their ability to accurately process in the next
millennium. The Company has also assessed the Year 2000 status of its
non-information technology systems and equipment which may contain embedded
hardware or software.
Having identified and assessed those computer systems, processes and
equipment that require modification, the Company has substantially completed the
remediation and testing phases of its project plan. The Company has completed
the remediation and testing of its critical internal applications systems. In
addition to internal testing, the Company actively participated in testing among
securities brokerage firms, securities exchanges, clearing organizations, and
other vendors.
In November 1997, the Company converted its securities brokerage processing
system to a vendor that is the principal service provider of this type to the
securities brokerage industry. The vendor has confirmed to the Company that it
has substantially completed the necessary coding modifications and that its
testing plan is on schedule with expected completion during the second quarter
of 1999. The Company has received similar confirmation for its proprietary
mutual funds from the vendors that are the principal service providers to the
mutual fund industry.
The Company is also continuing to communicate with its remaining vendors and
other third parties, including its landlords and utility suppliers, to determine
the likely extent to which the Company may be affected by third parties' Year
2000 plans and target dates. The Company expects its critical third party
vendors to demonstrate or provide assurances of their Year 2000 compliance by
the end of the second quarter of 1999.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. While the Company does not have a current expectation of any
material loss as a result of the Year 2000 issue, there can be no assurance that
the Company's internal systems or the systems of third parties on which the
Company relies will be remediated on a timely basis, or that a failure to
remediate by another party, or a remediation or conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company. The Company has developed contingency plans in the event that third
parties fail to achieve their Year 2000 plans and target dates. However, there
can be no assurance that any such contingency plans will fully mitigate the
effects of any such failure.
24
Based on information currently available, including information provided by
third party vendors, the Company expects its aggregate expenditures for its Year
2000 project plan to be approximately $3.1 million, of which an estimated $1.6
million has been incurred as of March 31, 1999. A significant portion of these
costs will not be incremental costs to the Company, but rather will represent
the redeployment of existing information technology and operations resources,
primarily to test the remediation efforts of the Company's third party vendors.
The Company expects to fund all Year 2000 related costs through operating cash
flows and a reallocation of the Company's overall information technology
spending. In accordance with generally accepted accounting principles, Year 2000
expenditures will be expensed as incurred. The costs of the Company's Year 2000
project and the dates on which the Company plans to complete the Year 2000
modifications are based on management's best current estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party compliance plans and other
factors. However, there can be no assurance that these estimates will prove
correct and actual results could differ materially from those plans.
FORWARD-LOOKING STATEMENTS
Information or statements provided by or on behalf of the Company from time to
time, including those within this Fiscal 1999 Annual Report, may contain certain
"forward-looking information," including information relating to anticipated
growth in revenues or earnings per share, anticipated changes in its businesses
or in the amount of client assets under management, anticipated expense levels,
and expectations regarding financial market conditions. The Company cautions
readers that any forward-looking information provided by or on behalf of the
Company is not a guarantee of future performance. Actual results may differ
materially from those in forward-looking information as a result of various
factors, including but not limited to those discussed below. Further, such
forward-looking statements speak only as of the date on which such statements
are made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
In addition to those factors discussed above with respect to the Year 2000
processing issue, the Company's future revenues may fluctuate due to other
factors such as: the volume of trading in securities; the volatility and general
level of market prices; the total value and composition of assets under
management; the relative investment performance of Company-sponsored mutual
funds as compared to competing offerings and market indices; sentiment and
investor confidence; the ability of the Company to maintain investment
management and administrative fees at current levels; competitive conditions in
each of the Company's business segments and the demand for investment banking
and mortgage banking services.
The Company's future operating results are also dependent upon the level of
operating expenses, which are subject to fluctuation for the following or other
reasons: variations in the level of compensation expense incurred by the Company
as a result of changes in the number of total employees, competitive factors, or
other reasons; expenses and capital costs, including depreciation, amortization
and other non-cash charges incurred by the Company to maintain its
administrative infrastructure, including costs incurred with respect to
readiness for Year 2000 processing; unanticipated costs that may be incurred by
the Company from time to time to protect client goodwill; and third-party
noncompliance in Year 2000 processing.
The Company's business is also subject to substantial governmental
regulation, and changes in legal, regulatory, accounting, tax, and compliance
requirements may have a substantial effect on the Company's business and results
of operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition - Liquidity and Capital Resources - Risk
Management" for disclosure about market risk.
25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders, Legg Mason, Inc.
In our opinion, the accompanying consolidated statements of financial condition
of Legg Mason, Inc. and Subsidiaries (the "Company") and the related
consolidated statements of earnings, changes in stockholders' equity and cash
flows present fairly, in all material respects, the consolidated financial
position of Legg Mason, Inc. and Subsidiaries at March 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended March 31, 1999, in conformity with generally
accepted accounting principles. 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 of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Baltimore, Maryland
June 2, 1999
26
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands except per share amounts)
Years ended March 31,
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
REVENUES
Investment advisory and related fees $ 390,216 $ 295,645 $ 208,243
Commissions 279,136 241,284 189,980
Principal transactions 94,105 86,748 73,181
Investment banking 76,118 97,138 72,062
Interest 160,292 127,268 84,129
Other 46,139 40,977 37,006
- ----------------------------------------------------------------------------------------------------------
1,046,006 889,060 664,601
- ----------------------------------------------------------------------------------------------------------
EXPENSES
Compensation and benefits 584,830 511,413 382,909
Occupancy and equipment rental 64,289 56,740 43,793
Communications 47,963 42,726 31,067
Floor brokerage and clearing fees 6,677 5,464 5,912
Interest 94,910 73,706 43,364
Non-cash deferred compensation 10,352 -- --
Other 88,210 70,632 61,346
- ----------------------------------------------------------------------------------------------------------
897,231 760,681 568,391
- ----------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 148,775 128,379 96,210
Income taxes 59,441 52,258 39,018
- ----------------------------------------------------------------------------------------------------------
NET EARNINGS $ 89,334 $ 76,121 $ 57,192
==========================================================================================================
EARNINGS PER COMMON SHARE
Basic $ 1.64 $ 1.40 $ 1.12
Diluted $ 1.55 $ 1.31 $ 1.02
==========================================================================================================
See notes to consolidated financial statements.
27
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
March 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 208,142 $ 206,245
Cash and securities segregated for regulatory purposes 1,374,255 921,606
Resale agreements 141,016 175,623
Receivable from customers 921,267 713,391
Securities borrowed 308,719 448,453
Securities inventory, at market value 143,998 81,457
Investment securities, at market value 17,230 30,853
Equipment and leasehold improvements, net 55,807 51,991
Intangible assets, net 56,127 61,304
Other 247,126 141,406
- ----------------------------------------------------------------------------------------------------------
$ 3,473,687 $ 2,832,329
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Payable to customers $ 2,170,588 $ 1,562,997
Payable to brokers and dealers 10,430 5,284
Securities loaned 311,818 453,030
Short-term borrowings 49,262 13,880
Securities sold, but not yet purchased, at market value 11,822 14,132
Accrued compensation 115,480 97,912
Deferred compensation trust 48,986 --
Other 101,448 85,371
Senior notes 99,676 99,628
- ----------------------------------------------------------------------------------------------------------
2,919,510 2,332,234
- ----------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
- ----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $.10; authorized 100,000,000 shares;
issued 56,376,253 shares in 1999 and 27,524,880 in 1998 5,638 2,753
Additional paid-in capital 215,387 203,133
Deferred compensation and employee note receivable (5,362) --
Employee stock trust (18,475) --
Appreciation of employee stock trust, net (11,470) --
Retained earnings 368,632 293,263
Accumulated other comprehensive income, net (173) 946
- ----------------------------------------------------------------------------------------------------------
554,177 500,095
- ----------------------------------------------------------------------------------------------------------
$ 3,473,687 $ 2,832,329
==========================================================================================================
See notes to consolidated financial statements.
28
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands except share amounts)
Deferred Appreciation
Compensation of Accumulated
Common Stock Additional and Employee Employee Other
------------------- Paid-in Employee Note Stock Stock Retained Comprehensive
Shares Amount Capital Receivable Trust Trust, net Earnings Income, net
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1996 17,957,649 $ 1,796 $ 122,067 -- -- -- $178,016 $ 310
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 253,428 25 4,951
Conversion of subordinated
debentures 2,634,515 264 66,906
Dividends declared
($.191 per share)* (8,939)
Adjustments of pooled entity 120 408
Comprehensive income:
Net earnings 57,192
Unrealized holding loss
on investment securities
(net of taxes of $23) (77)
Comprehensive income
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1997 20,845,592 $ 2,085 $ 194,044 -- -- -- $226,677 $ 233
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 524,061 52 9,725
4-for-3 stock split 6,155,227 616 (636)
Dividends declared
($.214 per share)* (10,847)
Adjustments to conform
fiscal year of pooled entity 920
Adjustments of pooled entity 392
Comprehensive income:
Net earnings 76,121
Unrealized holding gain on
investment securities
(net of taxes of ($496)) 713
Comprehensive income
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1998 27,524,880 $ 2,753 $ 203,133 -- -- -- $293,263 $ 946
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 843,472 84 9,424
2-for-1 stock split 27,807,901 2,781 (2,781)
Dividends declared
($.25 per share)* (13,965)
Employee stock transactions 200,000 20 5,611 $(5,362) $(18,475) $(11,470)
Comprehensive income:
Net earnings 89,334
Unrealized holding loss
on investment securities
(net of taxes of $671) (1,119)
Comprehensive income
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1999 56,376,253 $ 5,638 $ 215,387 $(5,362) $(18,475) $(11,470) $368,632 $ (173)
===============================================================================================================================
Total
Stockholders'
Equity
- -----------------------------------------------
BALANCE MARCH 31, 1996 $ 302,189
- -----------------------------------------------
Issuance of common stock 4,976
Conversion of subordinated
debentures 67,170
Dividends declared
($.191 per share)* (8,939)
Adjustments of pooled entity 528
Comprehensive income:
Net earnings
Unrealized holding loss
on investment securities
(net of taxes of $23)
Comprehensive income 57,115
- -----------------------------------------------
BALANCE MARCH 31, 1997 $ 423,039
- -----------------------------------------------
Issuance of common stock 9,777
4-for-3 stock split (20)
Dividends declared
($.214 per share)* (10,847)
Adjustments to conform
fiscal year of pooled entity 920
Adjustments of pooled entity 3