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COVER
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
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1996
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File No. 1-8529
LEGG MASON, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1200960
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
111 South Calvert Street 21202
Baltimore, Maryland (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (410) 539-0000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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 20, 1996, the aggregate market value of the
registrant's common stock held by non-affiliates was $446,742,355.
As of May 20, 1996, the number of shares outstanding of the
registrant's common stock was 15,402,627.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement dated
June 14, 1996 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 securities brokerage and trading,
investment management of individual and institutional accounts
and Company-sponsored mutual funds, investment banking for
corporations and municipalities, commercial mortgage banking and
provision of other financial services.
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.
Investment advisory subsidiaries of the Company, and
their respective assets under management as of March 31, 1996,
include Legg Mason Fund Adviser, Inc., which serves as investment
adviser to or manager of Company-sponsored mutual funds, with
assets of approximately $5.6 billion; Western Asset Management
Company, which manages fixed-income assets for institutional
accounts, with approximately $17.8 billion under management;
Batterymarch Financial Management, Inc., which manages emerging
markets, international and U.S. equity portfolios for
institutional clients, with approximately $4.0 billion under
management; Legg Mason Capital Management, Inc., which serves as
investment adviser to individual and institutional accounts, with
approximately $820 million under management; Gray, Seifert & Co.,
Inc., which serves as investment adviser to wealthy individual,
family group, endowment and foundation accounts, with
approximately $840 million under management; The Fairfield Group,
Inc., which serves as investment adviser to mutual funds (with
assets of approximately $260 million) structured to meet the
investment needs of banks and bank trust departments; Bartlett &
Co., which serves as investment adviser to high net worth
individuals and institutions, with approximately $2.2 billion
under management; and Western Asset Global Management Limited,
which manages international fixed-income securities and
currencies, with approximately $2.7 billion under management.
The Company's principal real estate finance subsidi-
aries are Legg Mason Real Estate Services, Inc. (formerly named
Latimer & Buck, Inc.) and Dorman & Wilson, Inc., which are
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primarily engaged in commercial mortgage banking and commercial
loan servicing.
In the fiscal year ended March 31, 1996, the Company's
total revenues were derived approximately 48% from individual
investor brokerage accounts, including interest on margin
accounts, 6% from institutional investor brokerage accounts, 28%
from investment advisory services, and the balance from
transactions as principal with other dealers, investment banking,
commercial mortgage banking and other activities.
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 broker-dealer, investment
management 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.
Recent Acquisitions
On January 2, 1996, the Company issued 1,324,091 shares
of its common stock to acquire Bartlett & Co. ("Bartlett"), an
investment management firm located in Cincinnati that manages
equity, fixed income, and balanced accounts for high net worth
individuals and institutions. The acquisition was accounted for
as a pooling of interests. Accordingly, all financial data
contained in this Report has been restated to include the
accounts of Bartlett for all periods presented.
On February 13, 1996, the Company acquired Lehman
Brothers Global Asset Management Limited (since renamed Western
Asset Global Management Limited), an investment management firm
located in London that specializes in international fixed-income
and currency management. The acquisition was accounted for under
the purchase method of accounting.
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
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registered as futures commission merchants with the Commodity
Futures Trading Commission. In addition, Legg Mason Wood Walker
is a member of the Philadelphia, Pacific and Chicago Stock
Exchanges.
Brokerage Offices
The following table reflects, as of March 31, 1996,
certain information with respect to the Company's securities
brokerage offices.
Number of
Investment Number of
Location Executives Offices
United States:
Maryland 242 16
Pennsylvania 167 19
Virginia 92 9
Louisiana 85 9
North Carolina 61 7
Massachusetts 44 2
Texas 40 4
Ohio 38 3
District of Columbia 33 1
Florida 27 7
New Jersey 26 4
Alabama 24 3
New York 22 2
Connecticut 17 3
West Virginia 16 2
Delaware 15 2
Mississippi 14 3
Maine 11 1
Tennessee 9 1
South Carolina 6 1
Rhode Island 5 1
Illinois 2 1
United Kingdom:
London 3 1
France:
Paris 1 1
TOTAL 1,000 103
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Revenues by Source
The following table sets forth certain information
regarding the revenues of the Company by source.
Years Ended March 31,
1994 1995 1996
(Dollars in thousands)
Amount Percent Amount Percent Amount Percent
Commissions
Listed $ 68,583 16.5% $ 60,356 15.5% $ 79,976 15.5%
Over-the-Counter 30,706 7.4 25,414 6.5 36,211 7.0
Mutual Funds 31,367 7.5 23,315 6.0 35,276 6.8
Insurance & Annuities 10,660 2.6 11,621 3.0 14,409 2.8
Options & Commodities 2,459 0.6 2,270 0.6 3,309 0.7
Total 143,775 34.6 122,976 31.6 169,181 32.8
Principal Transactions(1)
Customer Related:
Government & Agency 16,235 3.9 12,986 3.3 12,406 2.4
Municipal 13,173 3.2 17,901 4.6 14,845 2.9
Corporate Debt 2,855 0.7 5,989 1.5 8,817 1.7
Equities 17,969 4.3 18,467 4.8 24,112 4.7
50,232 12.1 55,343 14.2 60,180 11.7
Dealer Related:
Government & Agency 714 0.2 903 0.2 1,171 0.2
Municipal (585) (0.1) (75) - (205) -
Corporate Debt 45 - 515 0.2 398 0.1
Equities 3,543 0.8 2,784 0.7 4,326 0.8
3,717 0.9 4,127 1.1 5,690 1.1
Total 53,949 13.0 59,470 15.3 65,870 12.8
Investment Advisory &
Related Fees 79,958 19.2 102,518 26.4 144,790 28.0
Investment Banking(2)
Corporate 60,838 14.6 27,078 7.0 36,495 7.1
Municipal 18,445 4.4 7,575 1.9 6,833 1.3
Total 79,283 19.0 34,653 8.9 43,328 8.4
Interest Income 30,332 7.3 39,697 10.2 57,098 11.1
Other(3) 28,639 6.9 29,751 7.6 35,776 6.9
Total Revenues $415,936 100.0% $389,065 100.0% $516,043 100.0%
(1) 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.
(2) Principally selling concessions from underwriting participations and
fees from managed and co-managed offerings.
(3) Includes revenues from mortgage servicing and loan originations (1994:
$14,908; 1995: $14,603; 1996: $19,192).
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Retail Securities Business
For the fiscal years ended March 31, 1994, 1995 and
1996, revenues derived from securities transactions for
individual investors (excluding interest on margin accounts)
constituted approximately 83%, 87% and 88%, respectively, of
total revenues from securities transactions and 48%, 44% and 42%,
respectively, of the Company's total revenues. Management
believes that such services will continue to be the Company's
primary source of revenues in the foreseeable future, although
the percentage of total revenues may decrease primarily as a
result of increases in investment advisory 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. 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
several major distributors that offer mutual fund shares through
broker-dealers. In addition, the Company sells shares of
Company-sponsored mutual funds. See "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 brokers' call money rate
(the interest rate on bank loans to brokers collateralized by
securities) plus an additional amount that varies depending upon
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the size of the customer's debit balance and level of account
activity. For the fiscal years ended March 31, 1994, 1995 and
1996, interest income derived from these sources constituted
approximately 3%, 5% and 5%, respectively, of the Company's total
revenues. 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) and equity capital are the primary
sources 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 reinvestment at a
future date. In fiscal 1996, Legg Mason Wood Walker paid
interest on approximately 74% of customer free credit balances.
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, 1994,
1995 and 1996, revenues derived from securities transactions for
institutional investors constituted approximately 17%, 13% and
12%, respectively, of total revenues from securities transactions
and 9%, 6% and 6%, respectively, of the Company's total revenues.
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.
As of March 31, 1996, 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 29 traders involved in
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trading corporate equity and debt securities, 10 in trading
municipal securities, and 12 in trading government securities.
The Company's market-making activities are also
conducted with other dealers through a network of direct wires,
and with institutional and individual customers of its branch
office system. 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, generally as a member of underwriting
syndicates managed by others. 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
1991 23 215 $3,792,939,000 $ 4,813,803,000
1992 62 314 7,361,066,000 10,091,755,000
1993 81 340 9,949,500,000 15,715,724,000
1994 24 227 3,764,956,000 5,779,156,000
1995 22 165 958,377,000 4,112,580,000
Underwriting Participations
Calendar Year Number of Issues Amount of Participation
Corporate Municipal Corporate Municipal
1991 380 313 $ 595,406,000 $ 1,654,210,000
1992 500 362 1,139,104,000 1,845,151,000
1993 598 458 1,396,410,000 6,017,729,000
1994 411 309 776,258,000 1,187,236,000
1995 354 232 675,257,000 627,973,000
8
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,
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.
The Company sells interests in both private and public
limited partnership investments and in the past has originated
real estate securities partnership offerings, although activities
in this area have not been significant for several years. In
self-originated offerings, subsidiaries of the Company serve as
general partners of limited partnerships sponsored by the
Company, which may subject the Company to the potential
liabilities that can arise as a result of such service.
At March 31, 1996, the Company had 70 professionals
engaged in investment banking activities, including 35 in
municipal finance and 35 in corporate finance.
Company-Sponsored Mutual Funds
The Company, through various subsidiaries, 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, 1995 and 1996,
the aggregate net assets of all of these proprietary funds were
approximately $4.7 billion and $7.5 billion, respectively.
Approximately 43% of this increase resulted from the Company's
acquisition of Bartlett & Co. and Western Asset Global Management
Limited in the fourth quarter of fiscal 1996.
For the fiscal years ended March 31, 1994, 1995 and
1996, the Company received approximately $16.8 million, $21.0
million and $26.0 million, respectively, in asset-based sales
charges from its sponsored mutual funds.
9
Investment Advisory Services
Legg Mason Fund Adviser, Inc. serves as investment
adviser to or manager of various Company-sponsored mutual funds.
Western Asset Management Company specializes in the
management of fixed-income assets for institutional clients. At
March 31, 1995 and 1996, Western had approximately $12.5 billion
and $17.8 billion, respectively, under management (not including
assets in Company-sponsored mutual funds for which it serves as
investment adviser).
Batterymarch Financial Management, Inc., acquired in
January 1995, manages emerging markets, international, and U.S.
equity portfolios for institutional clients. At March 31, 1995
and 1996, Batterymarch managed assets with a value of
approximately $4.9 billion and $4.0 billion, respectively.
Gray, Seifert & Co., Inc., manages securities
portfolios for wealthy individuals and family groups, endowments,
and foundations. At March 31, 1995 and 1996, Gray Seifert
managed assets with a value of approximately $680 million and
$840 million, respectively.
Bartlett & Co., acquired in January 1996, manages
securities portfolios for high net worth individuals, family
groups and institutions. At March 31,1996, Bartlett managed
assets with a value of approximately $2.2 billion.
Western Asset Global Management Limited, acquired in
February 1996, manages international fixed-income securities and
currencies for institutions worldwide. At March 31, 1996,
Western Asset Global managed assets with a value of approximately
$2.7 billion.
The Company has revenue sharing agreements with
Western, Batterymarch, Gray Seifert and Bartlett and certain of
their key officers pursuant to which a specified percentage of
the subsidiary's revenues is distributed to Legg Mason, Inc., and
the balance of the revenues is retained by the subsidiary to pay
its operating expenses, including salaries and bonuses, with
specific expense and compensation allocations being determined by
the subsidiary's management.
Legg Mason Capital Management, Inc. manages securities
portfolios of individual and institutional clients. At March 31,
1995 and 1996, this subsidiary managed assets with values of
approximately $740 million and $820 million, respectively,
including approximately $55 million and $125 million,
respectively, of the Company's funds invested in short-term
securities (not including assets in Company-sponsored mutual
funds for which it serves as investment adviser).
10
The Fairfield Group, Inc., offers several investment
vehicles structured to meet the specialized investment needs of
banks and bank trust departments. These include the Navigator
taxable and tax-free money market funds, with combined assets of
approximately $310 million and $260 million at March 31, 1995 and
1996, respectively, and Navigator REPO/LINE, a service which
invested approximately $1.3 billion and $1.1 billion at March 31,
1995 and 1996, respectively, of short-term cash in repurchase
agreements collateralized by U.S. government and government
agency securities.
The Company's advisory activities also include
wrap-fee programs in which the Company's customer pays a single
asset-based fee that 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.
Mortgage Banking and Real Estate Services
Legg Mason Real Estate Services, Inc. ("LMRES") and
Dorman & Wilson, Inc. are engaged in the commercial mortgage
banking business. These firms originate, structure, place and
service 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 two
state pension funds. LMRES' headquarters are located in
Philadelphia, Pennsylvania, and it has offices located in the
Mid-Atlantic and Southeastern regions of the United States.
Dorman & Wilson is headquartered in White Plains, New York, and
has offices in New York and New Jersey.
As of March 31, 1995 and 1996, the combined commercial
mortgage servicing portfolios of LMRES and Dorman & Wilson
totaled approximately $10.8 and $10.0 billion, respectively.
Legg Mason Realty Group, Inc., with offices in
Baltimore, Washington, D.C. and Philadelphia, provides market
feasibility, consulting and appraisal services regarding
residential, retail, commercial and industrial real estate to a
diverse clientele.
Insurance Brokerage and Financial Planning
Approximately 825 of the Company's investment
executives 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.
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Other Services
At March 31, 1996, the Company served as a non-bank
custodian for approximately 109,000 IRA's, 2,800 Keogh Plans, and
11,200 Simplified Employee Pension Plans.
The Company effects the purchase and sale of options
and commodities contracts on behalf of clients.
In March 1993, the Company established the Legg Mason
Trust Company, a state chartered, non-depository bank, to provide
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.
Research
The Company employs 26 analysts who develop investment
recommendations and market information with respect to companies
and industries. Legg Mason Wood Walker's research emphasizes 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. 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 consultants.
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 individual and
institutional brokerage and investment advisory clients.
Operations
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,
1996, the Company had approximately 265 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. During the fiscal years ended March 31, 1994, 1995 and
1996, the Company processed approximately 2,146,000, 2,056,000
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and 2,586,000 securities transactions, respectively. 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.
Legg Mason Wood Walker executes and clears all of its
own securities transactions as a member of the NYSE and various
regional exchanges, clearing corporations and depositories.
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. The bond provides total coverage of
$30,000,000 (subject to a $1,000,000 deductible per claim).
Employees
At March 31, 1996, the Company had approximately 3,200
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 investment executives 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 investment executives. The Company trains new
investment executives 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
investment executives.
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, are devoting substantial funds to advertising and
direct solicitation of customers in order to increase their share
13
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.
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.
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 and state regulation by the SEC and state securities
commissions.
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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. The
Company's broker-dealer subsidiaries paid an annual assessment in
the amount of .0007% of their adjusted gross revenues in fiscal
1996. 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. The Rule, 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 the Uniform Net Capital Rule. However, its broker-dealer
subsidiaries are subject to the Rule, and a provision of the Rule
requires that a broker-dealer notify the SEC prior to the
withdrawal of 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 such Rule. As of March 31, 1996, the Company's
broker-dealer subsidiaries had aggregate net capital of $102.4
million, which exceeded the minimum net capital requirements by
$92.9 million.
In computing net capital under the Rule, various
adjustments are made to net worth with a view to excluding assets
not readily convertible into cash and to provide a conservative
statement of other assets, such as a firm's position in
securities. To that end, a deduction is made against the market
value of securities to reflect the possibility of a market
decline prior to their disposition. For every dollar that net
capital is reduced, by means of such deductions or otherwise (for
example, through operating losses or capital distributions), the
maximum aggregate debit items which a firm may carry is reduced.
Thus, net capital rules, which are unique to the securities
industry, impose financial restrictions upon the Company's
business that are more severe than those imposed on other types
of businesses.
15
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.
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, 1996, Legg Mason Wood
Walker had a $5.0 million Subordinated Liability outstanding, due
to Legg Mason, Inc. The Subordinated Liability may, with the
prior written consent of the NYSE, be prepaid in whole or in part
at any time after such Subordinated Liability has 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 15 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.
16
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. 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 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 "Operations."
Industry Changes and Competitive Factors
Considerable consolidation has occurred in the
securities industry as numerous securities firms have either
ceased operations or been acquired by other securities firms, in
many cases resulting in firms with greater financial resources
than firms such as the Company. In addition, a number of
substantial 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 sizeable 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.
Fixed minimum commissions for securities transactions
were eliminated in 1975, resulting in substantial discounts of
commissions earned from institutional customers and in the
establishment of an increasing number of firms, including
affiliates of banks and mutual fund organizations, that offer
discount brokerage services to retail customers. These firms
generally effect transactions at lower commission rates on an
"execution only" basis, without offering other services such as
investment advice and research that are provided by "full-
- -service" brokerage firms such as the Company. In addition, some
discount brokerage firms have increased the range of services
that they offer. Continued increases in the number of discount
17
brokerage firms and services provided by such firms may adversely
affect the Company.
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. Also, major corporations
have acquired large securities firms. While it presently is not
possible to predict the type and extent of competitive services
that banks and other institutions ultimately may offer or the
extent to which administrative or legislative barriers will be
repealed or modified, to the extent that such services are
offered on a large scale, securities firms such as the Company
that are heavily oriented to individual retail customers may be
adversely affected.
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' 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 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.
18
Item 2. Properties.
The Company leases a substantial portion of its office
space. The Company's headquarters are located in an office
building in which the Company is the major tenant. The Company
currently occupies approximately 93,200 square feet in that
building for a term expiring in February 1998. Annual base rent
for the current leased space is approximately $2.2 million.
The Company's administrative and operations personnel
are located in an office building owned by the Company. The
building, located in Baltimore, consists of a total of 155,000
square feet, of which approximately 107,400 square feet is
occupied by the Company and 47,600 square feet is leased to
unrelated tenants.
Information concerning 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.
Nasdaq Market-Makers Antitrust Litigation
Legg Mason Wood Walker and approximately thirty other
broker-dealer firms have been named as defendants in a number of
purported class actions filed in various federal courts alleging
violation of federal antitrust laws. The first of these actions
was filed in May 1994, and in October 1994 the actions were
consolidated in the United States District Court for the Southern
District of New York under the caption In re Nasdaq Market-Makers
Antitrust Litigation. The consolidated complaint alleges that
the defendants violated the antitrust laws by conspiring to
raise, fix and maintain the "spreads" on certain securities
traded on Nasdaq by refusing to quote bids and asks in so-called
"odd-eighths." The actions purport to be brought on behalf of
all persons who purchased or sold these securities on Nasdaq
during the approximately five year period preceding commencement
of the litigation. The plaintiffs seek treble damages in an
unspecified amount, injunctive relief, and attorneys' fees and
costs. In August 1995, a motion to dismiss was granted based on
failure of the complaint to identify specific securities that
were the subject of the alleged violations, with leave for
plaintiffs to amend the complaint. On August 23, 1995, an
amended complaint was filed identifying specific securities.
Following the commencement of the antitrust
litigation, the Antitrust Division of the United States Department
of Justice and the Securities and Exchange Commission commenced
investigations relating to the allegations in the litigation.
Legg Mason Wood Walker, together with other broker-dealer firms,
19
has received requests for information from both government
agencies.
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 1996 Annual Meeting of Stockholders)
regarding certain executive officers of the Company is as
follows:
F. Barry Bilson, age 43, was elected Vice
President-Finance of the Company in June 1984. 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. From December 1978 to March 1981, he was Assistant
Controller of the Coatings Division of Dutch Boy, Inc. Mr. Bilson
is a certified public accountant.
Theodore S. Kaplan, age 53, became Senior Vice
President and General Counsel of the Company in April 1993. From
1970 until he joined the Company, he was engaged in the private
practice of law with the firm of Weinberg and Green. Prior to
1970, Mr. Kaplan served as an attorney in the Office of the
General Counsel and Division of Corporation Finance of the
Securities and Exchange Commission.
Timothy C. Scheve, age 38, has been Treasurer of the
Company and of Legg Mason Wood Walker since January 1992. He
became a Vice President of the Company in August 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. Mr. Scheve was a
20
management consultant with Price Waterhouse & Co. prior to
joining the Company.
Elisabeth N. Spector, age 48, 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. From 1975 to November 1989 she
was an investment banker with Merrill Lynch & Co., Inc.
Edward A. Taber III, age 52, became an Executive Vice
President of the Company in September 1992 and a Senior Executive
Vice President in July 1995. He is responsible for supervising
the Company's investment management activities. From 1973 until
he joined the Company, Mr. Taber held various positions with T.
Rowe Price Associates, Inc., an investment management firm, last
serving as Director of that firm's taxable fixed income division.
Prior to 1973, Mr. Taber served as the Treasurer and Chief
Financial Officer of the Federal Home Loan Bank of Boston. 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., a trustee of the Legg Mason Tax-Free Income Fund and
the Legg Mason Cash Reserve Trust, President and a director of
the Legg Mason Income Trust, Inc., the Legg Mason Global Trust,
Inc., and the Legg Mason Investors Trust, Inc., and Vice
President of the Worldwide Value Fund, Inc.
21
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, 1996, there were 1,480 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
1996
Cash dividend per share $ .12 $ .12 $ .12 $ .11
Stock price range:
High 31.125 31.375 30.625 28.625
Low 26.500 27.375 26.500 23.125
1995
Cash dividend per share $ .11 $ .11 $ .11 $ .10
Stock price range:
High 23.750 22.000 22.875 22.000
Low 20.625 19.750 18.500 18.125
22
Item 6. Selected Financial Data.*
(Dollars in thousands except per share amounts)
Years ended March 31,
1996 1995 1994 1993 1992
OPERATING RESULTS
Revenues $ 516,043 $389,065 $415,936 $353,523 $309,670
Expenses 452,189 361,362 356,313 304,487 274,572
Earnings before income taxes 63,854 27,703 59,623 49,036 35,098
Income taxes 25,987 11,436 23,326 18,800 13,931
Net earnings $ 37,867 $ 16,267 $ 36,297 $ 30,236 $ 21,167
PER COMMON SHARE**
Primary earnings $ 2.48 $ 1.17 $ 2.70 $ 2.34 $ 1.67
Fully diluted earnings $ 2.15 $ 1.05 $ 2.24 $ 2.15 $ 1.55
Dividends declared $ .47 $ .43 $ .38 $ .312 $ .28
Book value $ 19.43 $ 16.98 $ 16.52 $ 14.36 $ 12.23
Average shares outstanding:
Primary 15,273,113 13,853,330 13,433,911 12,898,109 12,710,239
Fully diluted 18,533,089 18,177,937 17,462,191 14,600,341 14,413,362
FINANCIAL CONDITION
Total assets $1,314,500 $825,082 $819,984 $649,373 $591,563
Senior notes $ 99,534 --- --- --- ---
Subordinated liabilities $ 68,000 $102,487 $102,487 $ 34,597 $ 35,020
Total stockholders' equity $ 298,906 $230,457 $215,676 $180,510 $151,486
* Restated due to pooling of interests transaction.
**Adjusted to reflect the 5-for-4 stock split paid September 1993.
23
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition.
Legg Mason, Inc. and its subsidiaries (the "Company")
are principally engaged in providing securities brokerage,
investment advisory, 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.
During the fiscal year ended March 31, 1996, the
Company benefited from favorable conditions in the U.S.
securities markets. U.S. equity markets achieved record trading
volumes and price levels, principally because of rising corporate
profits, declining interest rates and low inflation. As a result
of the favorable environment and healthy revenue gains in each of
the Company's business areas-securities brokerage, investment
advisory services and investment and mortgage banking-the Company
achieved record earnings in fiscal 1996. It is uncertain if the
favorable conditions experienced in fiscal 1996 will continue in
fiscal 1997, or longer.
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 1996, the Company acquired Bartlett & Co.
("Bartlett") and Lehman Brothers Global Asset Management Limited,
since renamed Western Asset Global Management Limited ("Western
Asset Global"), as described in Note 2 of Notes to Consolidated
Financial Statements. Bartlett, acquired in January 1996, manages
approximately $2.2 billion for high net worth individuals, family
groups and institutions. Western Asset Global, acquired in
February 1996, manages assets of approximately $2.7 billion,
invested principally in international fixed-income securities and
currencies. With these two additions, assets under management for
institutions, Company-sponsored mutual funds and private accounts
managed by the Company's subsidiaries were $35.4 billion at March
31, 1996, up 44% from $24.6 billion a year earlier and from $1.2
billion ten years ago. 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.
The Company's financial statements for all periods
presented have been restated to include the results of Bartlett,
acquired on a pooling of interests basis in January 1996.
Results of any individual period should not be
considered representative of future profitability. Many of the
24
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.
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
1996 1995
Years Ended March 31, Compared Compared
1996 1995 1994 to 1995 to 1994
REVENUES
Commissions 32.8% 31.6% 34.6% 37.6% (14.5)%
Principal transactions 12.8 15.3 13.0 10.8 10.2
Investment advisory and
related fees 28.0 26.4 19.2 41.2 28.2
Investment banking 8.4 8.9 19.0 25.0 (56.3)
Interest 11.1 10.2 7.3 43.8 30.9
Other 6.9 7.6 6.9 20.3 3.9
100.0 100.0 100.0 32.6 (6.5)
EXPENSES
Compensation and benefits 58.0 59.3 58.4 30.0 (5.0)
Occupancy and equipment rental 7.1 7.9 6.7 18.0 10.2
Communications 5.4 6.8 5.7 5.9 12.9
Floor brokerage and clearing fees 1.0 1.4 1.5 (7.4) (12.3)
Interest 5.1 4.4 3.7 51.9 11.4
Other 11.0 13.1 9.7 12.0 25.8
87.6 92.9 85.7 25.1 1.4
EARNINGS BEFORE INCOME TAXES 12.4 7.1 14.3 130.5 (53.5)
Income taxes 5.1 2.9 5.6 127.2 (51.0)
NET EARNINGS 7.3% 4.2% 8.7% 132.8% (55.2)%
In fiscal 1996, revenues and net earnings reached
record levels and were substantially higher than the prior
fiscal year. Primary and fully diluted earnings per share,
although not records, also rose significantly from year-earlier
amounts. Revenues were $516.0 million, a 33% increase from
revenues of $389.1 million in fiscal 1995. Net earnings were
$37.9 million, up 133% from net earnings of $16.3 million in the
prior fiscal year. Primary earnings per share increased 112% to
$2.48 from $1.17. Fully diluted earnings per share were $2.15, a
105% increase from $1.05 in fiscal 1995. Fiscal year 1996
25
includes a full year's results of Batterymarch Financial
Management ("Batterymarch"), an investment advisory firm that
manages international, emerging market, and U.S. equity
portfolios for institutional clients, acquired in January 1995.
During fiscal 1995, interest rate levels rose sharply,
adversely impacting the Company's investment banking and
securities brokerage revenues. In contrast, fiscal 1994 results
were, prior to fiscal 1996, the most successful in the Company's
history and were achieved in a very favorable corporate and
municipal finance environment.
Revenues derived from securities transactions for
individual investors constituted approximately 50% of the
Company's total revenues in fiscal 1996, and the Company believes
this will continue to be the largest single source of its
revenues in the foreseeable future.
Revenues
Commissions
Commission revenues rose 38% to $169.2 million in
fiscal 1996, principally as a result of increases in sales of
listed securities, non-affiliated mutual funds and
over-the-counter securities. During fiscal 1996, commission
revenues benefited from an active and rising stock market,
attributable in part to increased corporate profits and declining
interest rates.
In fiscal 1995, commission revenues fell 14% to $123.0
million from levels in fiscal 1994, because of lower sales of
non-affiliated mutual funds and listed and over-the-counter
securities. Commission revenues were adversely affected by rising
interest rates and investor caution, particularly on the part of
individual investors.
Principal Transactions
Revenues from principal transactions increased 11% to
$65.9 million, principally as a result of increased sales of
over-the-counter stocks and corporate debt securities and higher
trading profits on firm proprietary positions, partially offset
by a decline in sales of municipal securities. Sales and trading
profits of over-the-counter securities were impacted by favorable
equity securities markets. Sales of corporate debt securities
reflect a full year's results from the Company's expansion of its
taxable fixed-income marketing capability during the prior fiscal
year.
In fiscal 1995, principal transactions rose 10% to
$59.5 million, principally because of increased sales of
26
municipal and corporate debt securities, offset in part by lower
sales of mortgage-backed securities. Higher sales of municipal
securities in the secondary markets substantially offset sharp
declines in municipal new issue volume.
Investment Advisory and Related Fees
Investment advisory and related fees increased 41% to
$144.8 million, as a result of fees earned by Batterymarch,
coupled with growth in assets under management in
Company-sponsored mutual funds and in the Company's fixed-income
investment advisory subsidiary. Excluding fees earned by
Batterymarch, investment advisory and related fees rose 26% in
fiscal 1996.
In fiscal 1995, investment advisory and related fees
rose 28% to $102.5 million, principally because of the addition
of fees earned by Batterymarch and Gray, Seifert & Co. ("Gray
Seifert"), growth in assets under management in Company-sponsored
mutual funds and the Company's fixed-income advisory subsidiary.
The graph here depicts the growth in Assets Under Management
and Investment Advisory and Related Fees Revenue for the five fiscal
periods ended March 31, 1996.
1992 1993 1994 1995 1996
Assets Under Management
(in millions) $10,873 $13,069 $16,653 $24,561 $35,355
Investment Advisory
and Related Fees
(in thousands) $56,059 $64,361 $79,958 $102,518 $144,790
Investment Banking
Investment banking revenues rose 25% to $43.3 million,
principally as a result of increased fees from private placement
and financial advisory engagements. Gains in fees from corporate
stock offerings were substantially offset by a decline in the
number and size of co-managed offerings of real estate investment
trusts.
27
In fiscal 1995, investment banking revenues declined
56% to $34.7 million from record levels achieved in the prior
fiscal year as significantly higher interest rates led to
industry-wide declines in corporate and municipal securities
offerings.
Other
Other revenues rose 20% to $35.8 million, principally
as a result of increased loan origination fees at the Company's
commercial mortgage banking subsidiaries.
In fiscal 1995, other revenues increased 4% to $29.8
million, primarily because of increased account maintenance fees
and rental income from an office building purchased in fiscal
1995, partially offset by a gain on the sale of an exchange seat
in the prior fiscal year.
Expenses
Compensation and Benefits
Compensation and benefits increased 30% to $299.6
million, reflecting higher sales and profitability-based
compensation and personnel additions as a result of increased
business activity. Additionally, the current year includes the
expenses of Batterymarch.
In fiscal 1995, compensation and benefits fell 5% to
$230.5 million as lower commission and profitability-based
compensation was partially offset by personnel additions in
certain product and support areas and in twelve new branch office
locations.
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.
Occupancy and Equipment Rental
Occupancy and equipment rental increased 18% to $36.4
million because of increased rent and depreciation expense
related to new branch office locations and expanded product
areas, higher transaction volume processed by the Company's data
processing service bureau and the addition of expenses of
Batterymarch.
28
In fiscal 1995, occupancy and equipment rental rose 10%
to $30.9 million because of the inclusion of expenses of
Batterymarch and Gray Seifert and higher depreciation and data
processing expenses related to branch office and product area
expansion.
Communications
Communication costs increased 6% to $28.1 million,
principally because of increased quote service costs and the
addition of expenses of Batterymarch.
In fiscal 1995, communication costs rose 13% to $26.5
million as a result of higher quote service expenses in branch
offices and product areas, and higher printing and paper
expenses.
Floor Brokerage and Clearing Fees
Despite increased trading volume, floor brokerage and
clearing fees fell 7% to $5.1 million, reflecting lower execution
expenses from more efficient order routing and execution
capabilities.
In fiscal 1995, floor brokerage and clearing fees fell
12% to $5.5 million, reflecting a decline in securities
transaction volume.
Other
Other expense increased 12% to $56.9 million,
attributable to the addition of Batterymarch, including
amortization of related intangible assets, which reduces net
earnings but not operating cash flows. In addition, fiscal 1996
includes expenses related to the acquisition of Bartlett offset
by lower litigation-related expenses.
In fiscal 1995, other expense rose 26% to $50.8 million
because of increased litigation-related expenses (including a
$2.0 million charge for the settlement of a class action
lawsuit), the inclusion of expenses of Batterymarch and Gray
Seifert subsequent to their acquisition and higher promotional
and programming expense.
Interest Revenue and Expense
Interest revenue increased 44% to $57.1 million because
of higher interest earned on customer margin accounts, conduit
stock loan balances and firm investments due to larger account
balance levels and higher average interest rates. Interest
expense increased 52% to $26.2 million because of higher
29
interest paid on larger customer credit and conduit stock loan
balances and higher average interest rates.
In fiscal 1995, interest revenue increased 31% to $39.7
million, primarily as a result of higher interest rates earned on
substantially larger customer margin account balances and stock
loan conduit activity, offset in part by a reduction in interest
earned on proprietary securities positions. Interest expense
increased 11% to $17.2 million because of higher interest rates
paid on customer credit and conduit stock loan balances, offset
in part by a decline in interest paid on short-term borrowings.
As a result of higher levels of conduit stock loan
activity, the Company's net interest margin declined to 54.2% in
fiscal 1996 from 56.6% in fiscal 1995.
The graph here depicts Interest Revenue and Interest Expense for
the five fiscal periods ended March 31, 1996.
1992 1993 1994 1995 1996
Interest Revenue
(in thousands) $26,062 $24,321 $30,332 $39,697 $57,098
Interest Expense
(in thousands) $13,658 $11,990 $15,468 $17,237 $26,177
Income Taxes
Income taxes rose 127% to $26.0 million, principally
because of an increase in pre-tax earnings. The Company's
effective tax rate declined to 40.7% from 41.3% as a result of
lower effective state income tax rates.
In fiscal 1995, income taxes fell 51% to $11.4 million
because of lower pre-tax earnings. The Company's effective tax
rate increased to 41.3% from 39.1% as a result of federal tax law
changes and higher effective state income tax rates.
30
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 free credit balances, equity
capital, senior notes payable, subordinated borrowings, bank
lines of credit and other payables.
During the year ended March 31, 1996, cash and cash
equivalents increased $29.3 million. Cash flows from financing
activities provided $103.3 million, primarily as a result of the
issuance of $100 million principal amount of senior notes. Cash
flows from operating activities of $49.9 million were
attributable to fiscal 1996 net earnings, adjusted for
depreciation and amortization. The Company invested cash of
$123.9 million, provided from financing and operating activities,
in investment securities, resale agreements and equipment.
In February 1996, the Company issued $100 million of
6.50% Senior Notes due February 15, 2006. The proceeds of the
offering 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.
In July 1995, the Company called for redemption the
$34.5 million aggregate principal amount outstanding of its 7%
Convertible Subordinated Debentures due June 15, 2011 (the
"Debentures"). Substantially all holders converted their
Debentures into common stock.
During fiscal 1995, the Company acquired the assets of
Batterymarch Financial Management, utilizing $54.1 million in
cash. See Note 2 of Notes to Consolidated Financial Statements
regarding a future payment that may be required in the business
combination.
The Company's broker-dealer subsidiaries are subject to
the requirements of the SEC's net capital rule which is designed
to measure the general financial soundness and liquidity of
broker-dealers. At March 31, 1996, the brokerage subsidiaries had
aggregate net capital of $102.4 million, which exceeded minimum
net capital requirements by $92.9 million.
31
The graph here depicts Regulatory Net Capital Requirements
Required Net Capital at 3/31/96 $ 9,524
Excess Net Capital at 3/31/96 $ 92,870
Total Net Capital at 3/31/96 $102,394
The principal sources of the Company's funds are its
investment advisory and broker-dealer subsidiaries. The amount of
the broker-dealers' net assets that may be distributed is subject
to restrictions under applicable net capital rules. In addition
to the $50 million available under a shelf registration, the
Company has a revolving bank line of credit in the amount of $50
million, none of which is currently outstanding. The Company's
subsidiaries have bank lines of credit, aggregating $272.3
million, typically subject to termination at either party's
discretion, pursuant to which they may borrow on a short-term
demand basis generally at prevailing broker call rates.
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.
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.
32
RECENT ACCOUNTING DEVELOPMENTS
During fiscal 1996, the Financial Accounting Standards
Board issued Statement No. 122, "Accounting for Mortgage
Servicing Rights" and Statement No. 123, "Accounting for
Stock-Based Compensation," both effective for fiscal years
beginning after December 15, 1995.
The impact of adopting Statement No. 122 in fiscal 1997
will not be material to the Company's financial position or
results of operations.
The Company will adopt Statement No. 123 in fiscal
1997, but has not yet made a determination as to whether it will
adopt the compensation or disclosure provisions of that
statement.
33
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders, Legg Mason, Inc.
We have audited the accompanying consolidated
statements of financial condition of Legg Mason, Inc. and
Subsidiaries as of March 31, 1996 and 1995, and the related
consolidated statements of earnings, changes in stockholders'
equity and cash flows for each of the three years in the period
ended March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards 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 amount and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Legg Mason, Inc. and Subsidiaries as of
March 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended March 31, 1996, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
May 1, 1996
34
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands except per share amounts)
Years ended March 31,
1996 1995 1994
Revenues
Commissions $169,181 $122,976 $143,775
Principal transactions 65,870 59,470 53,949
Investment advisory and related fees 144,790 102,518 79,958
Investment banking 43,328 34,653 79,283
Interest 57,098 39,697 30,332
Other 35,776 29,751 28,639
516,043 389,065 415,936
Expenses
Compensation and benefits 299,562 230,483 242,713
Occupancy and equipment rental 36,403 30,855 28,008
Communications 28,081 26,519 23,497
Floor brokerage and clearing fees 5,063 5,467 6,232
Interest 26,177 17,237 15,468
Other 56,903 50,801 40,395
452,189 361,362 356,313
Earnings Before Income Taxes 63,854 27,703 59,623
Income taxes 25,987 11,436 23,326
Net Earnings $ 37,867 $ 16,267 $ 36,297
Earnings per Common Share
Primary $ 2.48 $ 1.17 $ 2.70
Fully diluted $ 2.15 $ 1.05 $ 2.24
See notes to consolidated financial statements.
35
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
March 31,
1996 1995
ASSETS
Cash and cash equivalents $ 89,378 $ 60,097
Cash and securities segregated
for regulatory purposes 168,859 31,028
Resale agreements 108,413 63,960
Receivable from customers 398,375 310,083
Securities borrowed 196,569 120,402
Securities owned, at market value 84,219 51,890
Investment securities, at market value 83,497 19,975
Property and equipment, net 33,339 26,645
Intangible assets 67,370 72,463
Other 84,481 68,539
$1,314,500 $825,082
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Payable to customers $ 564,698 $322,635
Payable to brokers and dealers 3,854 3,929
Securities loaned 170,829 104,304
Short-term borrowings 6,800 805
Securities sold, but not yet purchased,
at market value 10,693 6,362
Accrued compensation 41,168 15,866
Other 50,018 38,237
Senior notes 99,534 -
947,594 492,138
COMMITMENTS AND CONTINGENCIES
SUBORDINATED LIABILITIES 68,000 102,487
STOCKHOLDERS' EQUITY
Common stock, par value $.10; authorized
20,000,000 shares; issued 15,383,493
shares in 1996 and 13,574,138 in 1995 1,538 1,357
Additional paid-in capital 120,960 83,328
Retained earnings 176,098 145,414
Net unrealized appreciation on
investment securities 310 358
298,906 230,457
$1,314,500 $825,082
See notes to consolidated financial statements.
36
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands except per share amounts)
Net Unrealized
Appreciation
Additional on Total
Common Stock Paid-in Retained Investment Stockholders'
Shares Amount Capital Earnings Securities Equity
BALANCE MARCH 31, 1993,
as previously reported 8,998,555 $ 900 $ 73,498 $102,530 $176,928
Adjustments for pooling
of interests 1,324,091 133 3,337 112 3,582
Balance March 31, 1993,
restated 10,322,646 $1,033 $ 76,835 $102,642 --- $180,510
Issuance of common stock 410,828 41 2,312 104 2,457
5-for-4 stock split 2,325,190 232 (239) (7)
Dividends declared
($.38 per share)* (4,418) (4,418)
Tax benefit of pooled
entity 678 678
Pro forma tax provision
of pooled entity 159 159
Pooled entity
recapitalization 400 (400) ---
Net earnings 36,297 36,297
BALANCE MARCH 31, 1994 13,058,664 $1,306 $ 79,986 $134,384 --- $215,676
Issuance of common stock 522,974 52 3,482 3,534
Repurchase of common stock (7,500) (1) (140) (141)
Dividends declared
($.43 per share) (5,243) (5,243)
Net unrealized gain on
investment securities $358 358
Pro forma tax provision of
pooled entity 6 6
Net earnings 16,267 16,267
BALANCE MARCH 31, 1995 13,574,138 $1,357 $ 83,328 $145,414 $358 $230,457
Issuance of common stock 227,187 23 3,864 3,887
Conversion of
subordinated debentures 1,582,168 158 33,768 33,926
Dividends declared
($.47 per share) (6,557) (6,557)
Net unrealized loss
on investment securities (48) (48)
Pro forma tax provision
of pooled entity (626) (626)
Net earnings 37,867 37,867
BALANCE MARCH 31, 1996 15,383,493 $1,538 $120,960 $176,098 $310 $298,906
*Adjusted to reflect the 5-for-4 stock split paid September 1993.
See notes to consolidated financial statements.
37
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended March 31,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 37,867 $16,267 $ 36,297
Noncash items included in earnings:
Depreciation and amortization 14,245 10,745 8,729
Pro forma tax provision of pooled entity (626) 6 159
Gain on sale of exchange seat (600)
Deferred income taxes (2,978) (913) (224)
48,508 26,105 44,361
(Increase) decrease in assets excluding acquisitions:
Cash and securities segregated for regulatory purposes (137,831) 96,472 (20,933)
Receivable from customers (88,292) (54,805) (41,688)
Securities borrowed (76,167) (24,372) (81,874)
Securities owned (32,329) 5,727 51,480
Other (16,433) 8,322 (9,886)
Increase (decrease) in liabilities excluding acquisitions:
Payable to customers 242,063 21,627 30,802
Payable to brokers and dealers (75) (6,700) (4,068)
Securities loaned 66,525 (3,761) 97,225
Securities sold, but not yet purchased 4,331 (2,151) 1,875
Accrued compensation 25,302 215 137
Other 14,290 (3,921) 5,990
CASH PROVIDED BY OPERATING ACTIVITIES 49,892 62,758 73,421
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Property and equipment (12,777) (13,888) (8,603)
Intangible assets (389) (554) (2,539)
Acquisitions, net of cash acquired (2,674) (53,808)
Net (increase) decrease in resale agreements (44,453) 33,990 (24,149)
Purchases of investment securities (86,534) (29,320) (118,183)
Proceeds from sales and maturities of investment securities 22,933 39,114 92,886
Proceeds from sale of exchange seat 650
CASH USED FOR INVESTING ACTIVITIES (123,894) (24,466) (59,938)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 5,995 (15,691) (43,753)
Net decrease in repurchase agreements (20,416)
Issuance (repayment) of subordinated liabilities (69) 67,900
Issuance of senior notes 99,528
Issuance of common stock 3,887 2,228 2,329
Repurchase of common stock (141)
Dividends paid (6,058) (5,068) (4,145)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 103,283 (18,672) 1,915
NET INCREASE IN CASH AND CASH EQUIVALENTS 29,281 19,620 15,398
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 60,097 40,477 25,079
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 89,378 $60,097 $ 40,477
See notes to consolidated financial statements.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
Legg Mason, Inc. ("Parent") and its wholly-owned
subsidiaries (collectively, the "Company") are principally
engaged in providing securities brokerage, investment advisory,
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.
The consolidated financial statements include the
accounts of the Parent and its wholly-owned subsidiaries. All
material intercompany balances and transactions have been
eliminated. The consolidated financial statements have been
restated to reflect the business combination (as discussed in
Note 2) accounted for as a pooling of interests. Where
appropriate, prior years' financial statements have been
reclassified to conform with the 1996 presentation.
The consolidated financial statements are prepared in
accordance with generally accepted accounting principles which
require management to make assumptions and estimates that affect
the amounts and disclosures presented. Actual amounts could
differ from those estimates.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with
original maturities of less than 90 days, other than those held
for sale in the ordinary course of business.
Resale Agreements
The Company invests in short-term resale agreements
collateralized by U.S. government and agency securities. The
market value of the underlying collateral as determined daily,
plus accrued interest thereon, must exceed the face amount of the
transaction. It is the Company's policy to have such underlying
collateral deposited in the Company's accounts at its custodian
banks. Resale agreements are carried at the amounts at which the
securities will be subsequently resold as specified in the
agreements, plus accrued interest.
39
Securities
Securities transactions are recorded on a settlement
date basis which does not differ materially from a trade date
basis. Commission revenues and related expenses for unsettled
transactions are recorded on a trade date basis. Securities owned
by the Company's broker-dealer subsidiaries, both for trading and
investing, are valued at market and resulting unrealized gains
and losses are reflected in earnings. Investment securities of
the Parent and its non-broker-dealer subsidiaries held as
available-for-sale are valued at market and resulting unrealized
gains and losses are reflected in stockholders' equity.
Depreciation and Amortization
Property and equipment are reported at cost, net of
accumulated depreciation and amortization of $38,180 and $34,372
at March 31, 1996 and 1995, respectively.
Depreciation and amortization are determined by use of
the straight line method over the estimated useful life of the
asset or the remaining life of the lease. Maintenance and repair
costs are expensed as incurred.
Intangible Assets
Intangible assets consist principally of goodwill,
asset management and mortgage servicing contracts, attributable
to business combinations. Intangibles are amortized using
straight line and accelerated methods over periods ranging from
three to forty years. Accumulated amortization at March 31, 1996
and 1995 was $49,196 and $41,794, respectively.
The Company periodically reviews its accounting for
goodwill and other intangible assets, considering such factors as
historical profitability and projected operating cash flows, to
determine that the assets are realizable and the amortization
periods are appropriate.
Fair Value of Financial Instruments
At March 31, 1996 and 1995, financial instruments are
carried at fair value or amounts which approximate fair value.
Investment Advisory and Related Fees
The Company earns investment advisory fees on assets in
accounts managed by its subsidiaries, distribution fees on assets
in Company-sponsored equity and bond mutual funds and asset-based
fees on various types of single fee brokerage accounts.
40
Earnings Per Share
Primary earnings per share are computed by dividing net
earnings by the weighted average number of shares outstanding and
dilutive common stock equivalents. The Company's common stock
equivalents are shares of common stock issuable under various
stock option plans.
Fully diluted earnings per share assumes both the
exercise of dilutive common stock equivalents and conversion of
subordinated debentures.
The weighted average number of shares is as follows:
Years ended March 31,
1996 1995 1994
Primary 15,273,113 13,853,330 13,433,911
Fully diluted 18,533,089 18,177,937 17,462,191
2. Business Combinations
On January 2, 1996, the Company issued 1,324,091 shares
of its common stock to acquire Bartlett & Co. ("Bartlett"), an
investment management firm that manages equity, fixed income, and
balanced accounts for high net worth individuals and
institutions.
The acquisition was accounted for as a pooling of
interests. Accordingly, the consolidated financial statements
have been restated to include the accounts of Bartlett for all
periods presented. Bartlett's pre-acquisition operating results
include pro forma income tax provisions of $(626) for the nine
months ended December 31, 1995 and $6 and $159, for the years
ended March 31, 1995 and 1994, respectively. The provisions, not
applicable to Bartlett in its status as a Subchapter S
Corporation, were included to provide comparability with the
Company's historical operating results.
Financial information for the periods prior to the
business combination is summarized below:
(Unaudited)
Nine months ended
December 31, Years ended March 31,
1995 1995 1994
Revenues:
Legg Mason $353,702 $371,591 $397,534
Bartlett 14,553 17,474 18,402
Combined $368,255 $389,065 $415,936
Net earnings:
Legg Mason $ 26,218 $ 16,258 $ 36,048
Bartlett (844) 9 249
Combined $ 25,374 $ 16,267 $ 36,297
Combined earnings per share:
Primary $ 1.69 $ 1.17 $ 2.70
Fully diluted $ 1.46 $ 1.05 $ 2.24
41
On February 13, 1996, the Company acquired Lehman
Brothers Global Asset Management Limited, an investment
management firm that specializes in international fixed-income
and currency management. The acquisition, which was not material
to the Company's results of operations and financial position,
was accounted for under the purchase method of
accounting.Accordingly, the results of operations have been
included from the date of acquisition.
On January 5, 1995, the Company acquired the assets of
Batterymarch Financial Management ("Batterymarch"), an investment
advisory firm that manages equity portfolios for institutional
clients. The Company paid $54,141 cash at closing. An additional
payment, due in early 1998 and based on Batterymarch's
achievement of specified revenue levels for calendar 1997, could
increase the total consideration to a maximum of $120,000. If the
amount of the 1998 payment exceeds $40,000, the Company may pay
all or any portion of the excess in the form of shares of the
Company's common stock. The acquisition was accounted for under
the purchase method of accounting; accordingly, the total
purchase price was allocated to the net assets acquired,
principally goodwill and asset management contracts, based on
estimated fair market values. The results of operations have been
included in the consolidated financial statements from the date
of acquisition.
3. Receivable from and Payable to Customers
Receivable from and payable to customers represent
balances arising from cash and margin transactions. Securities
owned by customers are held as collateral for the receivable
balances. Included in payable to customers are free credit
balances of approximately $463,477 as of March 31, 1996, and
$271,289 as of March 31, 1995. The Company pays interest on
certain customer free credit balances held for reinvestment
purposes.
4. Securities, at Market
Securities positions consist of the following at
March 31:
Securities owned
1996 1995
U.S. government and federal agencies $17,735 $11,779
State and municipal bonds 29,586 27,205
Corporate debt and equity 36,898 12,906
$84,219 $51,890
Securities sold,
but not yet purchased
1996 1995
U.S. government and federal agencies $ 2,638 $ 1,122
State and municipal bonds 259 251
Corporate debt and equity 7,796 4,989
$10,693 $ 6,362
42
5. Investment Securities
The Company's investment securities, including the type
and maturity range for available-for-sale securities, are as
follows:
at March 31, 1996
Cost/ Gross Gross Fair
amortized unrealized unrealized market
cost gains losses value
Non-broker-dealer:
Corporate debt:
within one year $13,916 $ (2) $13,914
one to five years 6,024 (55) 5,969
U.S. governments:
within one year 53,892 (7) 53,885
one to five years 2,501 (17) 2,484
Other securities:
one to five years 211 $ 20 (9) 222
equities 3,733 590 (4) 4,319
$80,277 $610 $(94) $80,793
Broker-dealer 2,704
$83,497
at March 31, 1995
Cost/ Gross Gross Fair
amortized unrealized unrealized market
cost gains losses value
Non-broker-dealer:
Corporate debt:
within one year $ 2,006 $ (18) $ 1,988
one to five years 7,107 (193) 6,914
U.S. governments:
within one year 4,003 (54) 3,949
one to five years 2,502 (91) 2,411
Other securities:
one to five years 1,359 $ 17 (38) 1,338
equities 110 990 (16) 1,084
$17,087 $1,007 $(410) $17,684
Broker-dealer 2,291
$19,975
The proceeds of debt securities held as
available-for-sale which matured during fiscal 1996 and 1995 were
$22,546 and $33,382, respectively. The proceeds of debt
securities held as available-for-sale which were sold during
fiscal 1995 were $2,500, with a gross realized loss of $124.
6. Short-Term Borrowings
Short-term borrowings consist of loans from banks
totalling $6,800 and $805, at March 31, 1996 and 1995,
respectively. The Company's subsidiaries have secured and
43
unsecured bank lines of credit totalling $272,300, which are
generally subject to termination at either party's discretion. At
March 31, 1996, the subsidiaries had $3,800 outstanding under an
unsecured agreement which bears interest at 5.6%. At March 31,
1995, $805 was outstanding at a rate of 7.75% and was
collateralized by securities with a market value of $4,456.
Together with certain subsidiaries, the Parent has
jointly entered into revolving credit agreements which permit it
to borrow up to $60,000, repayable within 30 days. At March 31,
1996, the Company had $3,000 outstanding under these agreements
which bear interest at 6.07% and was collateralized by a security
with a market value of $5,600.
In addition, the Parent has a revolving credit
agreement which permits it to borrow up to $50,000 (none of which
is currently outstanding), repayable generally over four years,
at floating rates. Under the terms of the agreement, the Company
is required, among other things, to maintain consolidated net
worth plus subordinated liabilities of not less than $271,329
plus 50% of consolidated annual net earnings subsequent to March
31, 1996.
Interest payments were $25,543 in 1996, $17,307 in 1995
and $13,057 in 1994.
7. Senior Notes
In February 1996, the Company issued $100 million
principal amount of senior notes due February 15, 2006, which
bear interest at 6.5%. The notes were sold at a discount to yield
6.57%. 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.
8. Subordinated Liabilities
The Company's subordinated liabilities at March 31,
1996 and 1995 are as follows:
1996 1995
5.25% Convertible subordinated debentures due May 1, 2003 $68,000 $ 68,000
7% Convertible subordinated debentures due June 15, 2011 -- 34,487
$68,000 $102,487
The 5.25% debentures are convertible at any time prior to
maturity into common stock of the Company at a per share
conversion price of $25.80, subject to adjustment in certain
events.
The Company may redeem the 5.25% debentures prior to
maturity, in whole or in part, subject to certain conditions, at
44
103.28% of the principal on May 1, 1996 and thereafter at prices
declining annually to 100% on or after May 1, 2001.
During fiscal 1996, the Company called for redemption
the $34,487 aggregate principal amount outstanding of its 7%
Convertible Subordinated Debentures. Substantially all holders
converted their 7% debentures into 45.96 shares of common stock
for each one thousand dollars of principal amount of the
debentures (based on the conversion price of $21.76 per share of
common stock), with cash paid in lieu of fractional shares.
9. Commitments and Contingencies
The Company leases office facilities and equipment
under non-cancellable operating leases which expire on varying
dates through 2011. Certain leases provide for renewal options
and contain escalation clauses providing for increased rentals.
As of March 31, 1996, the minimum annual aggregate rentals are as
follows:
1997 $16,755
1998 13,273
1999 9,786
2000 7,538
2001 5,100
Thereafter 14,210
$66,662
Total rental expense, including cancellable equipment
leases, was $26,503, $24,285 and $28,418 for 1996, 1995 and 1994,
respectively.
The Company leased office space from a partnership in
which the Company and some of its officers, stockholders and
directors had a combined controlling interest through July 1994,
at which time the Company acquired the property for $5,000. Rent
expense includes payments of $240 in 1995 and $811 in 1994 to the
aforementioned partnership.
The Company enters into when-issued and underwriting
commitments. Had the open transactions relating to these
commitments as of March 31, 1996 been closed, the effect on the
consolidated financial statements of the Company would not have
been material. The Company and its subsidiaries have been named
as defendants in various legal actions arising primarily from
securities and investment banking activities, including certain
class actions which primarily allege violations of securities
laws and seek unspecified damages which could be substantial.
While the ultimate resolution of these actions cannot be
currently determined, in the opinion of management, after
consultation with legal counsel, the actions will be resolved
with no material adverse effect on the consolidated financial
statements of the Company.
45
Fiscal 1995 earnings include a charge of $2,000 ($950
after tax) relating to the settlement of class action litigation
arising from taxable municipal bond offerings underwritten in
1986 by one of the Company's subsidiaries.
10. Employee Benefits
The Company, through its subsidiaries, maintains
various defined contribution plans covering substantially all
employees. Discretionary contributions charged to operations
amounted to $7,742, $3,679 and $7,490 in 1996, 1995 and 1994,
respectively. In addition, employees can make voluntary
contributions under certain plans.
11. Income Taxes
The Company and its subsidiaries file a consolidated
federal income tax return. The provision for income taxes
consists of:
1996 1995 1994
Federal $20,809 $ 8,826 $19,137
State and local 5,178 2,610 4,189
$25,987 $11,436 $23,326
Current $28,965 $12,349 $23,550
Deferred (2,978) (913) (224)
$25,987 $11,436 $23,326
A reconciliation of the difference between the
effective income tax rate and the statutory federal income tax
rate follows:
1996 1995 1994
Taxes at statutory rates 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax benefit 5.3 6.1 4.6
Tax-exempt interest income, net (0.8) (1.9) (0.8)
Other, net 1.2 2.1 0.3
Effective income tax rates 40.7% 41.3% 39.1%
Components of the Company's deferred tax assets and
liabilities are as follows:
1996 1995
Deferred tax assets:
Accrued compensation and benefits $ 8,213 $ 4,759
Accrued expenses 3,027 2,845
Operating loss carryforwards 1,177 1,369
Amortization of
leasehold improvements 1,261 998
Other 1,818 1,769
Valuation allowance (1,435) (1,501)
$14,061 $10,239
Deferred tax liabilities:
Depreciation $ 1,695 $ 1,309
Deferred income 859 841
Other 928 488
$ 3,482 $ 2,638
46
At March 31, 1996 and 1995, the deferred tax valuation
allowance was primarily for benefits related to net operating
losses which expire from 2002 to 2011.
Income tax payments were $24,792 in 1996, $12,047 in
1995 and $26,114 in 1994.
12. Capital Stock
At March 31, 1996, the authorized numbers of common and
preferred shares were 20,000,000 and 4,000,000, respectively, of
which 2,635,658 common shares were reserved for issuance upon
conversion of the Company's convertible subordinated debentures.
In addition, at March 31, 1996 and 1995, there were 1,931,189 and
2,157,456 shares of common stock reserved for issuance under the
Company's stock option plans.
On September 24, 1993, the Company paid a 5-for-4 stock
split to shareholders of record on September 8, 1993. All
references in the consolidated financial statements to the number
of common shares and per share amounts have been adjusted
retroactively to reflect the 5-for-4 stock split, except for the
number of issued common shares presented in the consolidated
financial statements.
13. Stock Plans
Options under the Company's employee stock option plans
have been granted at prices not less than 100% of the fair market
value of the shares on the date of grant. Except for the fiscal
1996 option grants, options are generally exercisable in
cumulative 20% increments over five years and expire within ten
years from the date of grant. The options granted in fiscal 1996
are exercisable in 25% increments over four years and expire five
years from the date of grant. Transactions under the plans during
the three years ending March 31, 1996 are summarized below:
Number of shares
Options outstanding at
March 31, 1993 (679,888 exercisable) 1,139,324
Granted 214,025
Exercised (117,683)
Per share option price: $5.82-$18.28
Cancelled (16,405)
Options outstanding at
March 31, 1994 (691,499 exercisable) 1,219,261
Granted 407,307
Exercised (73,269)
Per share option price: $6.11-$17.40
Cancelled (22,905)
Options outstanding at
March 31, 1995 (763,163 exercisable) 1,530,394
Granted 416,800
Exercised (213,892)
Per share option price: $8.22-$24.75
Cancelled (23,560)
Options outstanding at
March 31, 1996 (743,678 exercisable) 1,709,742
Per share option price: $10.00-$29.69
47
The Company has also adopted the "Legg Mason 1988
Non-Employee Director Option Plan." Options granted under the
plan are immediately exercisable at a price equal to the fair
market value of the shares on the date of grant. Options issuable
under the plan, limited to 175,000 shares in aggregate, have a
term of not more than ten years from the date of grant. At March
31, 1996, options on 87,000 shares have been granted, of which
80,000 are currently outstanding. The Company makes no charge to
income with respect to its stock option plans.
The Company has an Employee Stock Purchase Plan
covering substantially all employees. Shares of common stock are
purchased in the open market on behalf of participating
employees, subject to a 1,625,000 total share limit under the
plan. Purchases are made through payroll deductions with the
Company matching 5% of the employees' contributions. Charges to
earnings were not significant with respect to this plan.
14. Off-Balance Sheet Risk and Concentration of Credit
In the normal course of business, the Company executes,
settles and finances customer and proprietary securities
transactions. These activities expose the Company to off-balance
sheet risk in the event that customers or other parties fail to
satisfy their obligations.
In accordance with industry practice, securities
transactions are recorded on settlement date, generally three
business days after trade date. Should a customer or broker fail
to deliver cash or securities as agreed, the Company may be
required to purchase or sell securities at unfavorable market
prices.
The Company extends credit to customers, collateralized
by cash and securities, and subject to regulatory and internal
requirements. Customer margin transactions include sales of
securities not yet purchased, option contracts and commodity
futures contracts. The Company continually monitors margin
requirements and requests customers to deposit additional
collateral or reduce positions when necessary. Such transactions
expose the Company to risk in the event that margin requirements
are insufficient to fully cover customer losses.
The Company borrows and lends securities to finance
transactions and facilitate the settlement process, utilizing
both firm proprietary positions and customer margin securities
held as collateral. 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
48
daily basis. The Company periodically borrows from banks on a
collateralized basis utilizing firm and customer margin
securities in compliance with Securities and Exchange Commission
rules. Should the counterparty fail to return customer securities
pledged, the Company is subject to the risk of acquiring the
securities at prevailing market prices in order to satisfy its
customer obligations. The Company sells securities it does not
currently own, and is obligated to subsequently purchase such
securities at prevailing market prices. The Company is exposed to
risk of loss if securities prices increase prior to closing the
transactions.
15. Regulatory Requirements
The Company's broker-dealer subsidiaries are subject to
the Securities and Exchange Commission's Uniform Net Capital
Rule. The rule provides that equity capital may not be withdrawn
or cash dividends paid if resulting net capital would fall below
specified levels. As of March 31, 1996, the broker-dealer
subsidiaries had aggregate net capital, as defined, of $102,394
which exceeded required net capital by $92,870.
The Company's principal broker-dealer subsidiary must
maintain a separate account for the exclusive benefit of
customers in accordance with Securities and Exchange Commission
Rule 15c3-3, as determined by periodic computations. The rule
allows the broker-dealer to maintain the required amounts in cash
or qualified securities.
16. Business Segment Information
The Company, through its subsidiaries, operates
predominantly in a single business segment - the securities
industry. Within this segment, the Company is primarily engaged
in securities brokerage, investment advisory and investment
banking activities.
49
QUARTERLY FINANCIAL DATA*
(Dollars in thousands except per share amounts)
(Unaudited)
Quarter ended
1996 Mar. 31 Dec. 31 Sept. 30 June 30
Revenues $147,788 $127,549 $124,709 $115,997
Expenses 126,801 113,566 109,083 102,739
Earnings before income taxes 20,987 13,983 15,626 13,258
Income taxes 8,494 5,666 6,395 5,432
Net earnings $ 12,493 $ 8,317 $ 9,231 $ 7,826
Earnings per share:
Primary $ .78 $ .52 $ .61 $ .55
Fully diluted $ .70 $ .47 $ .52 $ .46
1995 Mar. 31 Dec. 31 Sept. 30 June 30
Revenues $104,763 $ 97,326 $ 92,708 $ 94,268
Expenses 97,748 90,340 87,353 85,921
Earnings before income taxes 7,015 6,986 5,355 8,347
Income taxes 2,991 2,854 2,251 3,340
Net earnings $ 4,024 $ 4,132 $ 3,104 $ 5,007
Earnings per share:
Primary $ .29 $ .30 $ .22 $ .37
Fully diluted $ .26 $ .27 $ .21 $ .32
* Restated due to pooling of interests transaction.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is contained
under the caption "Election of Directors" on pages 1 through 4 of
the Company's definitive proxy statement for the 1996 Annual
Meeting of Stockholders and the caption "Compliance With Section
16(a) of the Securities Exchange Act of 1934" on page 17 of such
proxy statement. Such information is incorporated herein by
reference to the proxy statement. See Part I, Item 4A of this
Report for information regarding certain executive officers of
the Company.
Item 11. Executive Compensation.
The information required by this item is contained
under the caption "Executive Compensation" on pages 6 and 7 of
the Company's definitive proxy statement for the 1996 Annual
Meeting of Stockholders. Such information is incorporated herein
by reference to the proxy statement.
50
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by this item is contained
under the caption "Security Ownership of Management and Principal
Stockholders" on page 6 of the Company's definitive proxy
statement for the 1996 Annual Meeting of Stockholders. Such
information is incorporated herein by reference to the proxy
statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is contained
under the caption "Certain Transactions" on page 10 of the
Company's definitive proxy statement for the 1996 Annual Meeting
of Stockholders. Such information is incorporated herein by
reference to the proxy statement.
51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) Documents filed as a part of the report:
1. The following consolidated financial statements are
included in Item 8 of this Report:
Page Number in
this Report
Report of Independent
Accountants 33
Consolidated Statements
of Earnings 34
Consolidated Statements
of Financial Condition 35
Consolidated Statements of
Changes in Stockholders'
Equity 36
Consolidated Statements
of Cash Flows 37
Notes to Consolidated
Financial Statements 38-48
2. Financial Statement Schedules (included on pages
S-1 to S-5 of this Report):
Report of Independent Accountants on
Financial Statement Schedules
Schedule I - Condensed Financial Statement
of Registrant
All other schedules to the consolidated financial
statements for which provision is made in the accounting
regulations of the Securities and Exchange Commission
are not applicable or are not required and therefore
have been omitted.
3. Exhibits
3.1 - Articles of Incorporation of the
Company, as amended (incorporated by
52
reference to Form 10-Q for the
quarter ended June 30, 1988)
3.2 - By-laws of the Company as
amended and restated April 25,
1988 (incorporated by reference
to the Company's Annual Report
on Form 10-K for the year ended
March 31, 1988)
4 - The Company hereby agrees,
pursuant to Item 601(b)(4)(iii)
(A) of Regulation S-K, to
furnish to the Commission upon
request a copy of each
instrument with respect to the
rights of holders of long-term
debt of the Company or its
subsidiaries.
10.1.1- Lease dated September 11, 1987
between Baltimore Center
Associates Limited Partnership
and Legg Mason Tower, Inc. with
respect to the Company's
premises at 111 South Calvert
Street, Baltimore, Maryland
(incorporated by reference to
Form 10-Q for the quarter ended
September 30, 1987)
10.1.2- First Amendment of Agreement of
Lease dated August 1, 1988 with
respect to lease dated September 11,
1987 (incorporated by reference
to the Company's Annual Report
on Form 10-K for the year ended
March 31, 1989)
10.1.3- Second Amendment of Agreement
of Lease dated December 19,
1988 with respect to lease
dated September 11, 1987
(incorporated by reference to
the Company's Annual Report on
Form 10-K for the year ended
March 31, 1989)
10.1.4- Third Amendment of Agreement of
Lease dated as of October 1,
1990 with respect to lease
dated September 11, 1987
(incorporated by reference to
the Company's Annual Report on
Form 10-K for the year ended
March 31, 1991)
10.1.5- Fourth Amendment of Agreement
of Lease dated August 3, 1992
with
53
respect to lease dated
September 11, 1987
(incorporated by reference to
the Company's Annual Report on
Form 10-K for the year ended
March 31, 1993)
10.2 - Legg Mason, Inc. 1981 Incentive
Stock Option Plan, as amended
through June 2, 1988
(incorporated by reference to
the Company's Annual Report on
Form 10-K for the year ended
March 31, 1988)*
10.3 - Legg Mason, Inc. 1988
Non-Employee Director Stock
Option Plan (incorporated
by reference to the Company's
Annual Report on Form 10-K
for the year ended March 31,
1993)*
10.4 - Legg Mason Wood Walker,
Incorporated Deferred
Compensation/Phantom Stock
Plan (incorporated by reference
to Registration No. 33-28609 on
Form S-8)*
10.5.1- Legg Mason, Inc. 1991 Omnibus
Long-Term Compensation Plan
(incorporated by reference to
Exhibit A to the definitive
proxy statement for the
Company's 1991 Annual Meeting
of Stockholders)*
10.5.2- Form of Option Agreement under
Legg Mason, Inc. 1991 Omnibus
Long-Term Compensation Plan
(incorporated by reference to
the Company's Annual Report on
Form 10-K for the year ended
March 31, 1993)*
10.6 - Legg Mason, Inc. Executive
Incentive Compensation Plan
(incorporated by reference to
Appendix A to the definitive
proxy statement for the
Company's 1995 Annual Meeting
of Stockholders)*
10.7.1- Legg Mason, Inc. 1996 Equity
Incentive Plan (incorporated
by reference to Appendix A to
the definitive proxy statement
for the Company's 1996 Annual
Meeting of Stockholders)*
54
10.7.2- Form of Option Agreement under
Legg Mason, Inc. 1996 Equity
Incentive Plan, filed herewith*
11 - Statement regarding computation
of per share earnings, filed
herewith
21 - Subsidiaries of the Company,
filed herewith
23 - Consent of independent
accountants, filed herewith
27 - Financial Data Schedule
*These exhibits are management contracts or compensatory
plans or arrangements.
(b) An 8-K Report was filed February 12, 1996 reporting
under Items 5 and 7.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LEGG MASON, INC.
By: /s/ Raymond A. Mason
Raymond A. Mason, Chairman
of the Board, President and
Chief Executive Officer
Date: June 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Raymond A. Mason Chairman of the Board, June 28, 1996
Raymond A. Mason President and Chief
Executive Officer
(Principal Executive
Officer)
/s/ F. Barry Bilson Vice President-Finance June 28, 1996
F. Barry Bilson (Principal Financial
and Accounting Officer)
/s/ John F. Curley, Jr. Director June 28, 1996
John F. Curley, Jr.
/s/ James W. Brinkley Director June 28, 1996
James W. Brinkley
/s/ Edmund J. Cashman, Jr. Director June 28, 1996
Edmund J. Cashman, Jr.
/s/ Charles A. Bacigalupo Director June 28, 1996
Charles A. Bacigalupo
56
/s/ Harry M. Ford, Jr. Director June 28, 1996
Harry M. Ford, Jr.
/s/ Nicholas J. St. George Director June 28, 1996
Nicholas J. St. George
/s/ Richard J. Himelfarb Director June 28, 1996
Richard J. Himelfarb
/s/ James E. Ukrop Director June 28, 1996
James E. Ukrop
/s/ John B. Levert, Jr. Director June 28, 1996
John B. Levert, Jr.
/s/ Harold L. Adams Director June 28, 1996
Harold L. Adams
/s/ John E. Koerner, III Director June 28, 1996
John E. Koerner, III
/s/ Roger W. Schipke Director June 28, 1996
Roger W. Schipke
/s/ W. Curtis Livingston Director June 28, 1996
W. Curtis Livingston
/s/ Edward I. O'Brien Director June 28, 1996
Edward I. O'Brien
/s/ Peter F. O'Malley Director June 28, 1996
Peter F. O'Malley
/s/ Margaret DeB.Tutwiler Director June 28, 1996
Margaret DeB. Tutwiler
/s/ William Wirth Director June 28, 1996
William Wirth