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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-8529
______________________
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)
100 Light 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 16, 2000, the aggregate market value of the registrant's common
stock held by non-affiliates was $2,335,711,000.
As of May 16, 2000, the number of shares outstanding of the registrant's
common stock was 58,847,530.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement dated June 15, 2000
are incorporated by reference into Part III.
Part I
Item 1. Business.
- ------ ---------
General
- -------
Legg Mason, Inc. is a holding company which, through its subsidiaries, is
principally engaged in providing asset management, securities brokerage,
investment banking and related financial services to individuals,
institutions, corporations and municipalities.
The Company's principal asset management subsidiaries are Legg Mason Fund
Adviser, Inc., which serves as investment advisor to or manager of Company-
sponsored mutual funds; Western Asset Management Company and Western Asset
Management Company Limited (formerly known as Western Asset Global Management
Limited), which manage fixed-income assets for institutional clients;
Batterymarch Financial Management, Inc., which manages U.S., international and
emerging markets equity portfolios for institutional clients; Legg Mason
Capital Management, Inc., which manages equity and fixed-income portfolios
primarily for institutional accounts; Brandywine Asset Management, Inc., which
primarily manages equity portfolios for institutional and high net worth
individual clients; Bartlett & Co., which manages equity, balanced and fixed-
income portfolios for high net worth individuals and institutional clients;
LeggMason Investors Holdings plc (formerly Johnson Fry Holdings PLC), which
primarily manages equity retail funds in the United Kingdom; Gray, Seifert &
Co., Inc., which primarily manages equity portfolios for wealthy individual,
family group, endowment and foundation clients; and Berkshire Asset
Management, Inc., which manages equity and fixed-income portfolios for high
net worth individuals and family groups. In addition to Legg Mason Fund
Adviser, all of the above firms also serve as investment advisor to Company-
sponsored mutual funds and/or other Company-sponsored investment products. On
March 9, 2000, the Company signed an agreement to acquire all of the
outstanding securities of Perigee Inc., a manager for pension plans and mutual
funds in Canada. This transaction was completed on May 26, 2000.
As of March 31, 2000, the Company's asset management subsidiaries had
approximately $112 billion of assets under management, of which approximately
40% were equity assets and approximately 60% were fixed-income assets.
The Company's principal broker-dealer subsidiary is Legg Mason Wood Walker,
Incorporated ("Legg Mason Wood Walker"), a full service broker-dealer and
investment banking firm operating primarily in the Eastern and Southern regions
of the United States. Subsequent to March 31, 2000, the Company merged the
operations of another broker-dealer subsidiary, Howard, Weil, Labouisse,
Freidrichs Incorporated, into Legg Mason Wood Walker.
The Company's real estate finance subsidiary is Legg Mason Real Estate
Services, Inc., which is primarily engaged in commercial mortgage banking
involving loan placement, loan servicing and supervision of investors'
mortgage portfolios, discretionary and non-discretionary management of
commercial real estate-related assets for institutional investors and real
estate development advisory services
See "Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition - Business Description" for the net revenues and pre-
tax earnings of each of the Company's business segments.
The Company was incorporated in Maryland in 1981 to serve as a holding
company for Legg Mason Wood Walker and other subsidiaries. The predecessor
company to Legg Mason Wood Walker was formed in 1970 under the name Legg Mason
& Co., Inc. to combine the operations of Legg & Co., a Maryland-based broker-
dealer formed in 1899, and Mason & Company, Inc., a Virginia-based broker-
dealer formed in 1962. The Company's subsequent growth has occurred through
internal expansion as well as through its acquisitions of asset management,
broker-dealer and commercial mortgage banking firms.
Unless the context otherwise requires, all references in this Report to the
Company include Legg Mason, Inc. and its predecessors and subsidiaries.
Registrations and Exchange Memberships
- --------------------------------------
Legg Mason Wood Walker is registered as a broker-dealer with the Securities
and Exchange Commission ("SEC"), is a member 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 is registered as a futures commission merchant with
the Commodity Futures Trading Commission. In addition, Legg Mason Wood Walker
is a member of the Philadelphia, Pacific, Cincinnati, Boston and Chicago stock
exchanges.
2
Brokerage Offices
- -----------------
The following table reflects, as of March 31, 2000, certain information
with respect to the Company's securities brokerage offices.
Number of
Financial Number of
Location Advisors Offices
-------- --------- ---------
United States:
Maryland 320 17
Pennsylvania 193 22
Virginia 120 13
Louisiana 100 10
North Carolina 82 10
Florida 77 11
Massachusetts 60 3
Ohio 48 6
Texas 40 4
New York 40 4
District of Columbia 37 1
New Jersey 34 5
Alabama 23 4
South Carolina 23 5
West Virginia 19 2
Mississippi 18 3
Maine 16 1
Connecticut 15 3
Delaware 8 1
Tennessee 7 1
Illinois 7 1
Rhode Island 6 1
California 4 1
United Kingdom:
London 6 1
Switzerland:
Geneva 7 1
----- ---
Total 1,310 131
===== ===
3
Revenues by Source
- ------------------
The following table sets forth certain information regarding the revenues of
the Company by source.
LEGG MASON, INC. AND SUBSIDIARIES (1)
Years Ended March 31,
--------------------------------------------------------------------------------------------------
1998 1999 2000
---- ---- ----
(Dollars in thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Investment Advisory and
Related Fees $ 295,645 36.3% $ 390,216 41.0% $ 534,896 43.3%
Commissions
Listed and Over-the-
Counter 164,022 20.1 187,560 19.7 229,930 18.6
Mutual Funds 48,687 6.0 57,586 6.1 82,949 6.7
Insurance and Annuities 22,613 2.8 26,172 2.8 40,247 3.3
Options and Commodities 5,962 0.7 7,818 0.7 9,761 0.8
--------- ------ --------- ------ ---------- ------
Total 241,284 29.6 279,136 29.3 362,887 29.4
Principal Transactions (2)
Customer Related:
Government and Agency 15,405 1.9 17,631 1.9 16,783 1.4
Municipal 17,102 2.1 22,387 2.4 39,244 3.2
Corporate Debt 11,301 1.4 15,580 1.6 21,157 1.7
Equities 34,179 4.2 26,976 2.8 36,183 2.9
--------- ------ --------- ------ ---------- ------
77,987 9.6 82,574 8.7 113,367 9.2
Dealer Related:
Government and Agency 2,312 0.3 2,575 0.2 2,327 0.2
Municipal 1,159 0.1 816 0.1 932 0.1
Corporate Debt 1,035 0.1 1,645 0.2 405 0.0
Equities 4,255 0.5 6,495 0.7 9,236 0.7
--------- ------ --------- ------ ---------- ------
8,761 1.0 11,531 1.2 12,900 1.0
--------- ------ --------- ------ ---------- ------
Total 86,748 10.6 94,105 9.9 126,267 10.2
Investment Banking (3)
Corporate 90,123 11.0 66,640 7.0 60,792 4.9
Municipal 7,015 0.9 9,478 1.0 8,113 0.7
--------- ------ --------- ------ ---------- ------
Total 97,138 11.9 76,118 8.0 68,905 5.6
Interest Income 127,268 15.6 160,292 16.9 222,901 18.0
Other Sources (4) 40,977 5.0 46,139 4.9 54,948 4.4
--------- ------ --------- ------ ---------- ------
Total Revenues 889,060 109.0 1,046,006 110.0 1,370,804 110.9
Interest Expense 73,706 9.0 94,910 10.0 134,322 10.9
--------- ------ --------- ------ ---------- ------
Net Revenues $ 815,354 100.0% $ 951,096 100.0% $1,236,482 100.0%
========= ====== ========= ====== ========== ======
(1) All financial information has been restated for the acquisition, on a
pooling of interests basis, of Brandywine Asset Management, Inc. on January
16, 1998.
(2) Principal transactions (securities transactions in which the Company buys
for or sells from its own inventory) are classified as "Customer Related"
when such transactions are effected with a customer of the Company (whether
an individual or institutional investor) and as "Dealer Related" when such
transactions are effected with another dealer.
(3) Principally selling concessions from underwriting participations and fees
from managed and co-managed offerings.
(4) Includes revenues from commercial mortgage servicing and commercial loan
originations (1998: $21,475; 1999: $22,618; 2000: $20,491).
4
Asset Management Business Segment
- ---------------------------------
The Asset Management business segment provides investment advisory
services to Company-sponsored mutual funds and asset management for
institutional and individual clients.
Company-Sponsored Mutual Funds
------------------------------
Through various subsidiaries, the Company sponsors and serves as
investment advisor and distributor for domestic and international equity, fixed-
income and money market mutual funds and offshore investment funds. As of March
31, 1999 and 2000, the aggregate net assets of all of these proprietary funds
were approximately $20.8 billion and $25.4 billion, respectively.
For the fiscal years ended March 31, 1998, 1999 and 2000, the Company
received approximately $66.5 million, $102.7 million and $158.8 million,
respectively, in asset-based sales charges from its proprietary mutual funds and
offshore investment funds.
Asset Management Services
-------------------------
Legg Mason Fund Adviser, Inc. serves as investment advisor to or
manager of various Company-sponsored mutual funds. In addition, all of the
firms described in the following paragraphs also serve as investment advisor to
Company-sponsored mutual funds and/or other Company-sponsored investment
products. The amounts indicated as assets under management by those firms
include the assets in such funds and/or products.
Western Asset Management Company manages fixed-income assets for
institutional clients. At March 31, 1999 and 2000, Western managed assets with
a value of approximately $49.2 billion and $58.9 billion, respectively.
Western Asset Management Company Limited manages international fixed-
income assets for institutional clients. At March 31, 1999 and 2000, Western
Asset Management Company Limited managed assets with a value of approximately
$3.3 billion and $4.3 billion, respectively.
Batterymarch Financial Management, Inc. manages U.S., international
and emerging markets equity portfolios for institutional clients. At March 31,
1999 and 2000, Batterymarch managed assets with a value of approximately $4.5
billion and $6.8 billion, respectively.
Legg Mason Capital Management, Inc. manages equity and fixed-income
portfolios primarily for institutional clients. At March 31, 1999 and 2000, this
subsidiary managed assets with a value of approximately $4.3 billion and $6.6
billion, respectively. Subsequent to March 31, 2000, the fixed-income
portfolios, management team and fund advisory contracts of Legg Mason Capital
Management were transferred to Legg Mason Trust, fsb.
Brandywine Asset Management, Inc. primarily manages equity portfolios
for institutional and high net worth individual clients. At March 31, 1999 and
2000, Brandywine managed assets with a value of approximately $7.0 billion and
$6.5 billion, respectively.
Bartlett & Co. manages equity, balanced and fixed-income portfolios for
high net worth individuals and institutional clients. At March 31, 1999 and
2000, Bartlett managed assets with a value of approximately $3.0 billion and
$2.7 billion, respectively.
LeggMason Investors Holdings plc (formerly Johnson Fry Holdings PLC),
which was acquired in December 1999, primarily manages equity retail funds in
the United Kingdom. At March 31, 2000, LeggMason Investors managed assets with
a value of approximately $1.6 billion.
5
Gray, Seifert & Co., Inc. primarily manages equity portfolios for
wealthy individuals and family groups, endowments and foundations. At March 31,
1999 and 2000, Gray Seifert managed assets with a value of approximately $1.2
billion and $1.1 billion, respectively.
Berkshire Asset Management, Inc., which was acquired in September 1999,
manages equity and fixed-income portfolios for high net worth individuals and
family groups. At March 31, 2000, Berkshire managed assets with a value of
approximately $600 million.
The Company has revenue sharing agreements with Legg Mason Fund
Adviser, Western Asset Management Company, Brandywine, Bartlett, Gray Seifert
and Berkshire and/or certain of their key officers pursuant to which a specified
percentage of the subsidiary's revenues is required to be distributed to Legg
Mason, Inc., and the balance of the revenues is retained to pay operating
expenses, including salaries and bonuses, with specific expense and compensation
allocations being determined by the subsidiary's management.
On March 9, 2000, the Company agreed to acquire all of the outstanding
securities of Perigee Inc., a manager for pension plans and mutual funds in
Canada. The acquisition was completed on May 26, 2000. At March 31, 2000,
Perigee managed assets with a value of approximately $14.5 billion.
In September 1999, the Company entered into a joint venture with
Bingham Dana LLP, a Boston-based law firm, to acquire a 50% interest in its
trust administration business. At March 31, 2000, this joint venture, Bingham
Legg Advisers LLC, managed assets with a value of approximately $1.5 billion.
In addition, in June 1999, the Company entered into a 50% joint venture with one
of its employees that manages a newly created equity mutual fund.
Other Services
--------------
Legg Mason Trust, fsb, a federally chartered unitary thrift institution
with authority to exercise trust powers, provides services as a trustee for
trusts established by the Company's individual and employee benefit plan
clients. The Company provides brokerage and asset management services for a
significant portion of the assets held in Legg Mason Trust's accounts. Legg
Mason Trust, fsb was established in September 1999 and the state chartered Legg
Mason Trust Company, which had been established by the Company in 1993, was
merged into it on that date.
Private Client Business Segment
- -------------------------------
The Private Client business segment consists principally of the
operations of Legg Mason Wood Walker and distributes a wide range of financial
products through its branch distribution network, including equity and fixed-
income securities, proprietary and non-affiliated mutual funds and annuities.
Retail Securities Business
--------------------------
For the fiscal years ended March 31, 1998, 1999 and 2000, revenues
derived from securities transactions for individual investors (excluding
interest on margin accounts) constituted approximately 83%, 82% and 80%,
respectively, of total revenues from securities transactions and 37%, 33% and
32%, respectively, of the Company's net revenues. Management believes that such
services will continue to be a significant source of revenues in the foreseeable
future, although the percentage of net revenues may continue to decrease
primarily as a result of increases in asset management 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 commission is charged on a transaction-by-transaction basis. This single
fee covers all execution and advisory services, including advisory services
provided by the Company's asset management affiliates and selected independent
advisory firms. The Company also provides asset allocation and advisor
performance and selection consultation services. When OTC transactions are
executed by the Company as a dealer, the Company
6
receives, in lieu of commissions, mark-ups or mark-downs that are included in
the "Revenues by Source" table as customer-related principal transactions. The
Company has dealer-sales agreements with major distributors that offer mutual
fund shares through broker-dealers. In addition, the Company sells shares of
Company-sponsored mutual funds through its retail sales network. See "Asset
Management Business Segment -- Company-Sponsored Mutual Funds."
Margin Accounts, Interest Income and Free Credit Balances
---------------------------------------------------------
Customers' securities transactions are effected on either a cash or a
margin basis. In a margin account, the customer pays less than the full cost of
the securities purchased and the broker-dealer makes a loan for the balance of
the purchase price secured by the securities purchased or other securities owned
by the customer. The amount of the loan is subject to the margin regulations
(Regulation T) of the Board of Governors of the Federal Reserve System, NYSE
margin requirements and the Company's internal policies, which in some instances
are more stringent than Regulation T or NYSE requirements. In permitting a
customer to purchase securities on margin, the Company is subject to the risk
that a market decline could reduce the value of its collateral below the amount
of the customer's indebtedness and that the customer might be unable otherwise
to repay the indebtedness.
Interest is charged on amounts borrowed by customers (debit balances)
to finance their margin transactions. The rate of interest charged to customers
is the prime rate plus or minus an additional amount that varies depending upon
the amount of the customer's average debit balance. Interest income derived from
these sources constituted approximately 6%, 6% and 7% of the Company's net
revenues for the fiscal years ended March 31, 1998, 1999 and 2000, respectively.
Interest is also earned on securities owned by the Company and on operating and
segregated cash balances.
Free credit balances (excess funds held by customers in their brokerage
accounts) is the principal source of funds used to finance customers' margin
account borrowings. Legg Mason Wood Walker pays interest on certain free credit
balances in customers' accounts when the customer has indicated that the funds
will be used for reinvestment at a future date. In fiscal 2000, Legg Mason Wood
Walker paid interest on approximately 90% of customer free credit balances.
Insurance Brokerage and Financial Planning
------------------------------------------
Substantially all of the Company's financial advisors are licensed to
sell insurance. Legg Mason Financial Services, Inc., a wholly owned subsidiary
of the Company, acts as general agent for several life insurance companies and
sells fixed and variable annuities and insurance. The Company also offers
comprehensive financial planning services to individuals. See "Revenues by
Source" for information regarding revenues generated by insurance brokerage
activities.
Other Services
--------------
At March 31, 2000, the Company served as a non-bank custodian for
approximately 332,000 IRA's, 28,000 Simplified Employee Pension Plans and 15,000
Qualified Plans.
Capital Markets Business Segment
- --------------------------------
The Capital Markets business segment, which is conducted through Legg
Mason Wood Walker, consists of the Company's equity and fixed-income
institutional sales and trading, syndicate, corporate and public finance
activities.
Institutional Business
----------------------
The Company is engaged in executing securities transactions for
institutional investors such as banks, mutual funds, insurance companies and
pension and profit-sharing plans. Such investors normally purchase
7
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 providing
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, 1998, 1999
and 2000, revenues derived from securities transactions for institutional
investors constituted approximately 17%, 18% and 20%, respectively, of total
revenues from securities transactions and 8%, 7% and 8% of the Company's net
revenues.
Principal Transactions
----------------------
The Company makes primary markets in equity securities that are traded
on the Nasdaq Stock Market. The Company is also an active market maker and
distributor of municipal bonds, particularly bonds issued by municipalities
located in the Mid-Atlantic and Southern regions.
As of March 31, 2000, the Company made markets in equity securities of
approximately 270 corporations, including corporations for which the Company has
acted as a managing or co-managing underwriter. The Company has 54 traders
involved in trading corporate equity and debt securities, 12 in trading
municipal securities, 7 in trading government securities and 5 in trading
mortgage-backed securities.
The Company's market-making activities are also conducted with other
dealers, and with institutional and individual customers of its branch office
system. Mark ups and mark downs from market-making activities are allocated to
the Private Client business segment when the transaction involves an individual
client. In making markets in equity and debt securities, the Company maintains
positions in such securities to service its customers and accordingly exposes
its own capital to the risk of fluctuations in market value. While the Company
seeks to avoid substantial market risk, and may engage in hedging transactions
to minimize risk, it does, nonetheless, realize profits and losses from market
fluctuations. Trading profits (or losses) depend upon the skills of the
employees engaged in market making, the amount of capital allocated to positions
in securities and the general level of activity and trend of prices in the
securities markets.
Investment Banking
------------------
Corporate and Municipal Finance
The Company participates as an underwriter in public offerings of
corporate debt and equity issues as well as municipal securities. The Company
also serves as manager or co-manager of corporate equity and municipal
offerings, generally involving issuers located in the Mid-Atlantic and Mid-South
regions.
8
The following tables set forth, for the periods indicated, (i) the
total number and dollar amount of corporate stock, corporate 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
--------- --------- -------------- ---------------
1995 22 165 $ 958,377,000 $ 4,112,580,000
1996 33 258 3,808,000,000 5,555,638,000
1997 76 224 8,453,000,000 7,208,000,000
1998 45 223 8,090,054,000 8,381,696,000
1999 40 158 5,270,873,000 10,167,029,000
Underwriting Participations
------------------------------------------------------------------
Calendar Year Number of Issues Amount of Participation
- ------------- ------------------------- -----------------------------------
Corporate Municipal Corporate Municipal
--------- --------- -------------- ---------------
1995 354 232 $ 675,257,000 $ 627,973,000
1996 427 246 1,313,233,000 587,548,000
1997 298 198 1,380,000,000 936,668,000
1998 153 237 827,443,000 1,476,674,000
1999 206 159 697,336,000 1,118,887,000
Underwriting involves both economic and regulatory risks. An
underwriter may incur losses if it is unable to resell the securities it is
committed to purchase, or if it is forced to liquidate its commitments at less
than the agreed purchase price. In addition, an underwriter is subject to
substantial potential liability for material misstatements or omissions in
prospectuses and other communications with respect to underwritten offerings.
See "Item 3. Legal Proceedings." Furthermore, because underwriting commitments
require a charge against net capital, the Company's broker-dealer subsidiaries
could find it necessary to limit their underwriting participations to remain in
compliance with regulatory net capital requirements. See "Net Capital
Requirements."
Other Investment Banking Activities
The Company's investment banking activities also include private debt
and equity placements and initiation and advice with respect to merger and
acquisition transactions, as well as provision of financial advisory services to
corporate and municipal clients.
At March 31, 2000, the Company had 108 professionals engaged in
investment banking activities, including 87 in corporate finance and 21 in
municipal finance.
Merchant Banking
----------------
Legg Mason Merchant Banking, Inc. manages private equity funds
sponsored by the Company. As of March 31, 2000, Legg Mason Merchant Banking,
Inc. managed Legg Mason Capital Partners, L.P., a private equity fund raised by
the Company in September 1996 which has commitments for approximately $41
million in capital, and Legg Mason Capital Partners II, L.P., a private equity
fund raised in February 2000 which has commitments for approximately $90 million
in capital.
9
Other Business Segment
- ----------------------
The Other businesses are principally the Company's real estate
business, conducted through Legg Mason Real Estate Services, Inc., and
unallocated corporate revenues and expenses.
Mortgage Banking and Real Estate Services
-----------------------------------------
Legg Mason Real Estate Services, Inc. ("LMRES") is engaged in the
commercial mortgage banking business. The firm originates, structures, places
and services commercial mortgages on income-producing properties for insurance
companies, pension funds and other investors. LMRES is also engaged in the
business of discretionary and non-discretionary management of commercial real
estate-related assets for institutional clients. In addition, LMRES provides
real estate consulting services, specializing in sports arena and facility
feasibility, analysis and financing, as well as in providing corporate real
estate services and equity sales. LMRES' headquarters are located in
Philadelphia, Pennsylvania, and it has offices located in the Mid-Atlantic and
Southeastern regions of the United States.
As of March 31, 1999 and 2000, the commercial mortgage servicing
portfolio of LMRES was $8.9 billion and $9.4 billion, respectively.
Research
- --------
The Company employs approximately 40 analysts who develop investment
recommendations and market information with respect to companies and industries.
Legg Mason Wood Walker's research has focused on the identification of
securities of financially sound, well-managed companies that appear to be
undervalued in relation to their long-term earning power or the value of
underlying assets. The Company's equity research focuses on companies in
certain business sectors, including companies in the biotechnology, consumer
services, financial services, industrial, real estate investment trust,
technology and telecommunications sectors. The Company's research services are
supplemented by research services purchased from outside firms.
The Company's clients do not pay for research services directly,
although the Company is often compensated for its research services by
institutional clients through the direction of brokerage transactions to the
Company for execution. The Company believes that its research activities are
extremely important in attracting and retaining institutional and individual
brokerage clients.
Administration
- --------------
Administrative and operations personnel are responsible for the
processing of securities transactions; receipt, identification and delivery of
funds and securities; internal financial controls; office services; custody of
customers' securities; and the handling of margin accounts. At March 31, 2000,
the Company had approximately 325 full-time employees performing such functions.
There is considerable fluctuation during any year and from year to
year in the volume of transactions the Company must process. The Company
records transactions and posts its books on a daily basis. Operations personnel
monitor day-to-day operations to determine compliance with applicable laws,
rules and regulations. Failure to keep current and accurate books and records
can render the Company liable to disciplinary action by governmental and self-
regulatory authorities, as well as to claims by its clients.
Legg Mason Wood Walker executes and clears securities transactions as
a member of the NYSE and various regional exchanges, and is a participant in
both The Depository Trust Company and National Securities Clearing Corporation.
Legg Mason Wood Walker also provides clearing services to affiliated and
unaffiliated broker-dealers.
10
During the past several years, the Company has increased its staff and
expenditures on technology, particularly as it relates to expanding its client
support and building new business opportunities using the Internet.
The Company believes that its internal controls and safeguards are
adequate, although fraud and misconduct by customers and employees and the
possibility of theft of securities are risks inherent in the securities
industry. As required by the NYSE and certain other authorities, the Company
carries a fidelity bond covering loss or theft of securities as well as forgery
of checks and drafts and embezzlement and misplacement of securities.
Employees
- ---------
At March 31, 2000, the Company had approximately 4,820 employees.
None of the Company's employees is covered by a collective bargaining agreement.
The Company considers its relations with its employees to be satisfactory.
However, competition for experienced financial services personnel, especially
financial advisors and investment management professionals, is keen and from
time to time the Company may experience a loss of valuable personnel.
The Company recognizes the importance of hiring and training financial
advisors. The Company trains new financial advisors who are required to take
examinations given by the NYSE, the NASD and various states in order to be
registered and qualified, and maintains ongoing training for financial advisors.
Competition
- -----------
The Company is engaged in an extremely competitive business. Its
competition includes, with respect to one or more aspects of its business,
numerous national, regional and local broker-dealer and asset management firms,
and commercial banks and thrift institutions. Many of these organizations have
substantially more personnel and greater financial resources than the Company.
Discount brokerage firms oriented to the retail market, including firms
affiliated with banks and mutual fund organizations and on-line brokerage firms,
are devoting substantial funds to advertising and direct solicitation of
customers in order to increase their share of commission dollars and other
securities-related income. In many instances, the Company is competing directly
with such organizations. The Company also competes for investment funds with
banks, insurance companies and investment companies. The principal competitive
factors relating to the Company's business are the quality of advice and
services provided to investors and the price of those services.
Competition in the Company's business periodically has been affected
by significant developments in the securities industry. See "Factors Affecting
the Company and the Securities Industry -- Industry Changes and Competitive
Factors."
Regulation
- ----------
The securities industry in the United States is subject to extensive
regulation under both Federal and state laws. The SEC is the Federal agency
charged with administration of the Federal securities laws. Much of the
regulation of broker-dealers has been delegated to self-regulatory authorities,
principally the NASD and the securities exchanges. These self-regulatory
organizations conduct periodic examinations of member broker-dealers in
accordance with rules they have adopted and amended from time to time, subject
to approval by the SEC. Securities firms are also subject to regulation by
state securities commissions in those states in which they do business. In
addition, securities firms are subject to regulation by various foreign
governments, securities exchanges, central banks and regulatory bodies,
particularly in those countries where they have established an office.
Broker-dealers are subject to regulations that cover all aspects of
the securities business, including sales methods, trading practices among
broker-dealers, uses and safekeeping of customers' funds and securities, capital
structure and financial soundness of securities firms, recordkeeping and the
conduct of directors, officers and employees. Additional legislation, changes
in rules promulgated by the SEC and self-regulatory authorities, or
11
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 asset management subsidiaries and the Company-sponsored
mutual funds are also subject to extensive federal regulation by the SEC. The
asset management subsidiaries of the Company are registered as investment
advisers with the SEC. The asset management subsidiaries are also required to
make notice filings in certain states. Virtually all aspects of the asset
management business are subject to various federal and state laws and
regulations. These laws and regulations are primarily intended to benefit the
asset management clients and generally grant supervisory agencies and bodies
broad administrative powers, including the power to limit or restrict an
investment advisor from carrying on its asset management business in the event
that it fails to comply with such laws and regulations. Possible sanctions
which may be imposed for such failure include the suspension of individual
employees, limitations on the asset management subsidiary engaging in the asset
management business for specified periods of time, the revocation of
registrations, other censures and fines.
The Company's broker-dealer subsidiaries are required by federal law
to belong to the SIPC. When the SIPC fund falls below a certain amount, members
are required to pay annual assessments of up to 1% of adjusted gross revenues.
As a result of adequate fund levels, each of the Company's broker-dealer
subsidiaries was required to pay the minimum annual assessment of $150 in fiscal
2000. 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 a bond that provides additional
protection for securities of up to $24,500,000 per customer.
Net Capital Requirements
- ------------------------
Every registered broker-dealer doing business with the public is
subject to the Uniform Net Capital Rule ("Rule 15c3-1") promulgated by the SEC.
Rule 15c3-1, which is designed to measure the financial soundness and liquidity
of broker-dealers, specifies minimum net capital requirements. Since the
Company is not itself a registered broker-dealer, it is not directly subject to
Rule 15c3-1. However, its broker-dealer subsidiaries are subject to Rule 15c3-
1, and a provision of Rule 15c3-1 requires that a broker-dealer notify the SEC
prior to the withdrawal of equity capital by a parent company if the withdrawal
would exceed the greater of $500,000 or 30 percent of the broker-dealer's excess
net capital.
Rule 15c3-1 provides that a broker-dealer doing business with the
public shall not permit its aggregate indebtedness to exceed 15 times its net
capital (the "primary method") or, alternatively, that it not permit its net
capital to be less than 2% of its aggregate debit items (primarily receivables
from customers and broker-dealers) computed in accordance with Rule 15c3-1. As
of March 31, 2000, the Company's broker-dealer subsidiaries had aggregate net
capital of $263 million, which exceeded the minimum net capital requirements by
$233 million.
Under NYSE Rule 326, Legg Mason Wood Walker as a member organization
that carries customer accounts, would be required to reduce its business
activities if its net capital, as defined, was less than 4% of aggregate debit
items, as defined, and would be precluded from expanding its business if its net
capital was less than 5% of aggregate debit items.
Compliance with applicable net capital rules could limit operations of
the Company's broker-dealer subsidiaries, particularly operations such as
underwriting and trading activities that require use of significant amounts of
capital. A significant operating loss or an extraordinary charge against net
capital could adversely affect the ability of the broker-dealers to expand or
even maintain their present levels of business. See Note 15 of Notes to
Consolidated Financial Statements in Item 8 of this Report.
12
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, 2000, Legg Mason
Wood Walker had $35 million of Subordinated Liabilities outstanding, due to Legg
Mason, Inc. The Subordinated Liabilities may, with the prior written consent of
the NYSE, be prepaid in whole or in part at any time after such Subordinated
Liabilities have been outstanding for more than one year. Legg Mason Wood
Walker may not pay or permit the payment or withdrawal of any Subordinated
Liability if, after giving effect to such payment or withdrawal, its net capital
would be less than 5% (6% in the case of the Subordinated Liability due to Legg
Mason, Inc.) of aggregate debit items. See Note 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. As used in this section, the
terms "we," "us" and "our" refer to Legg Mason, Inc. and its subsidiaries.
Fluctuating Securities Volume and Prices
----------------------------------------
There are substantial fluctuations in volume and price levels of
securities transactions in the securities industry. These fluctuations can occur
on a daily basis and over longer periods as a result of national and
international economic and political events, and broad trends in business and
finance, as well as interest rate movements. Reduced volume and prices generally
result in lower brokerage and investment banking revenues and losses from
trading as principal and from underwriting. In periods of reduced volume,
profitability is adversely affected 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. These risks are particularly high during periods of rapidly declining
markets because 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 securities firms, and this could occur in
the future. In addition, securities firms face risk of loss from errors that can
occur in the execution and settlement process. See "Administration."
Industry Changes and Competitive Factors
----------------------------------------
The securities industry has had considerable consolidation as numerous
securities firms have either been acquired by other securities firms or ceased
operations. In many cases, this has resulted in firms with greater financial
resources than firms such as the Company. In addition, a number of heavily
capitalized companies that were 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 us. A sizable number of new asset management firms and mutual
funds have been established in recent years, increasing competition in that area
of our activities.
An increasing number of firms that offer discount brokerage services
to retail customers have been established in recent years. Included in these
firms are on-line brokerage firms and affiliates of banks and mutual fund
organizations. These firms generally effect transactions at substantially lower
commission rates on an "execution only" basis, including through the Internet,
without offering other services like investment and financial advice and
research that are provided by "full-service" brokerage firms such as us. Some of
these discount
13
brokerage firms have increased the range of services that they offer. Continued
increases in the number of discount brokerage firms and services provided by
these firms may adversely affect us.
In addition, some full-service brokerage firms have begun to provide
to customers discount services, including on-line trading over the Internet. In
response to the substantial recent growth in the availability of, and investor
demand for, on-line securities trading, we began to offer our clients the
ability to execute certain securities transactions on-line during fiscal year
2000. Our retail business may be adversely affected by the growing demand for
and availability of on-line securities trading, including our provision of on-
line trading services at competitive prices.
Certain institutions, notably commercial banks and thrift
institutions, have become a competitive factor in the securities industry by
offering investment banking and corporate and individual financial services
traditionally provided only by securities firms. The Federal Reserve Board has
approved, subject to certain limitations on underwriting volume and market
share, applications of major commercial banks to deal in and underwrite certain
types of securities that previously such banks had not been permitted to deal in
and underwrite. Commercial banks, generally, are expanding their securities
activities and their activities relating to the provision of financial
services, and are deriving more revenue from these activities. In addition, in
November 1999, legislation was passed that effectively repealed certain laws
that separated commercial banking, investment banking and insurance activities.
This legislation allows commercial banks, securities firms and insurance firms
to affiliate, which may accelerate consolidation and lead to increasing
competition in markets traditionally dominated by investment banks and retail
securities firms. Continued expansion of the type and extent of competitive
services that banks and other institutions offer or further repeal or
modification of administrative or legislative barriers may adversely affect
securities firms such as us that are heavily oriented to individual
retail customers.
Regulation
----------
Our business in the securities industry is subject to regulation by
various regulatory authorities that are charged with protecting the interests of
broker-dealers' and investment advisers' customers. See "Regulation."
Effect of Net Capital Requirements
----------------------------------
The SEC and the NYSE have stringent rules with respect to the net
capital requirements of securities firms. A significant operating loss or
extraordinary charge against net capital may adversely affect the ability of our
broker-dealer subsidiaries to expand or even maintain their present levels of
business. See "Net Capital Requirements."
Litigation
----------
Many aspects of our business involve substantial risks of liability.
In the normal course of business, our subsidiaries have been named as defendants
or co-defendants in lawsuits seeking substantial damages. We are also involved
from time to time in governmental and self-regulatory agency investigations and
proceedings. There has been an increased incidence of litigation in the
securities industry in recent years, including customer claims as well as class
action suits seeking substantial damages. See "Item 3. Legal Proceedings."
Item 2. Properties.
- ------ ----------
The Company currently leases all of its office space. The Company's
headquarters, Baltimore sales office and operations functions are located in an
office building in which the Company is the major tenant, currently occupying
approximately 359,000 square feet. The initial term of the lease will expire in
2009 and annual base rent is approximately $7.8 million. The lease has two
renewal options of eight years each.
Information concerning the location of the Company's sales offices is
contained in Item 1 of this Report. See Note 8 of Notes to Consolidated
Financial Statements in Item 8 of this Report.
14
Item 3. Legal Proceedings.
- ------ -----------------
The Company's subsidiaries have been named as defendants or co-
defendants in various lawsuits alleging substantial damages and have been
involved in certain governmental and self-regulatory agency investigations and
proceedings. 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
and other matters 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 condition of the
Company. However, if during any period a potential adverse contingency should
become probable, the results of operations in that period could be materially
affected.
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 2000 Annual Meeting of Stockholders) regarding certain executive
officers of the Company is as follows:
F. Barry Bilson, age 47, was elected Senior Vice President of the
Company in October 1998. Mr. Bilson was Vice President-Finance of the Company
from June 1984 through October 1998, and he served as Controller of the Company
from October 1983 until September 1988, and as Controller of Legg Mason Wood
Walker from April 1981 to September 1988. Mr. Bilson has served in various
financial management capacities since joining the Company in 1981, and presently
has responsibility for business development projects and proprietary mutual fund
accounting. Mr. Bilson is a certified public accountant.
Robert G. Donovan, age 55, was elected an Executive Vice President of
the Company in January 1998 and of Legg Mason Wood Walker in February 1998. He
became a Senior Vice President of Legg Mason Wood Walker in 1990. Mr. Donovan
has responsibility for the securities brokerage operations function of Legg
Mason Wood Walker.
Robert F. Price, age 52, became Senior Vice President and General
Counsel of the Company and Legg Mason Wood Walker in November 1998. From
September 1991 through August 1997, Mr. Price was Secretary and General Counsel
of Alex. Brown Incorporated. From September 1997 until October 1998, Mr. Price
was a Managing Director of BT Alex. Brown Incorporated, a wholly owned
subsidiary of Bankers Trust Corporation.
Timothy C. Scheve, age 42, has been Executive Vice President of the
Company and of Legg Mason Wood Walker since January 1998 and was Treasurer of
the Company from January 1992 to April 1999 and of Legg Mason Wood Walker from
August 1992 to January 1999. He became a Vice President of the Company in July
1993 and a Senior Vice President of Legg Mason Wood Walker in August 1994. Mr.
Scheve has served in various financial and administrative capacities since
joining the Company in 1984, and presently has primary responsibility for the
Company's administrative functions.
Thomas L. Souders, age 53, became Senior Vice President and Treasurer
of the Company on October 26, 1999 and became Senior Vice President and Chief
Financial Officer of Legg Mason Wood Walker on September 10, 1999. From August
1998 until September 1999, he was engaged in private investment activities. From
April 1986 until July 1998, he was the Chief Financial Officer of Wheat First
Butcher Singer, Inc., a financial services company. Mr. Souders is the Chief
Financial Officer of the Company.
15
Elisabeth N. Spector, age 52, 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.
Edward A. Taber III, age 56, became an Executive Vice President of the
Company in September 1992 and a Senior Executive Vice President in July 1995.
He has overall responsibility for the Company's investment management
activities. Mr. Taber is a Director or trustee of nine funds and President of
five funds within the Legg Mason mutual funds complex.
16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ----------------------------------------------------------------------
Shares of Legg Mason, Inc. common stock are listed and traded on the
New York Stock Exchange (symbol LM). As of March 31, 2000, there were 2,202
shareholders of record of the Company's common stock. Information with respect
to the Company's dividends and stock prices is as follows:
Quarter ended*
------------------------------------------------------------------------
Mar. 31 Dec. 31 Sept. 30 June 30
------------------------------------------------------------------------
Fiscal 2000
Cash dividend per share $ .08 $ .08 $ .08 $ .065
Stock price range:
High 51.250 41.750 40.938 42.875
Low 30.688 30.625 32.563 31.063
Fiscal 1999
Cash dividend per share $ .065 $ .065 $ .065 $ .055
Stock price range:
High 35.875 31.563 31.344 32.281
Low 26.438 17.313 20.156 26.813
------------------------------------------------------------------------
*Adjusted to reflect the 2-for-1 stock split paid September 1998.
17
ITEM 6. SELECTED FINANCIAL DATA(1)
(Dollars in thousands except per share amounts)
Years ended March 31,
2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Operating Results
Total revenues $ 1,370,804 $ 1,046,006 $ 889,060 $ 664,601 $ 533,343
Interest expense 134,322 94,910 73,706 43,364 26,187
- ---------------------------------------------------------------------------------------------------------------------------
Net revenues 1,236,482 951,096 815,354 621,237 507,156
Non-interest expenses 997,341 802,321 686,975 525,027 442,605
- ---------------------------------------------------------------------------------------------------------------------------
Earnings before income tax provision 239,141 148,775 128,379 96,210 64,551
Income tax provision 96,616 59,441 52,258 39,018 26,270
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings $ 142,525 $ 89,334 $ 76,121 $ 57,192 $ 38,281
- ---------------------------------------------------------------------------------------------------------------------------
Per Common Share Data(2)
Earnings per share:
Basic $ 2.51 $ 1.64 $ 1.40 $ 1.12 $ .86
Diluted 2.33 1.55 1.31 1.02 .73
Weighted average shares outstanding (in thousands):
Basic 56,688 54,337 54,431 51,138 44,314
Diluted 60,787 57,657 58,007 55,985 54,785
Dividends declared $ .305 $ .250 $ .214 $ .191 $ .176
Book value 12.83 10.08 9.08 7.85 6.55
- ---------------------------------------------------------------------------------------------------------------------------
Financial Condition
Total assets $ 4,785,053 $ 3,473,687 $ 2,832,329 $ 1,886,736 $1,320,820
Senior notes 99,723 99,676 99,628 99,581 99,534
Notes payable of finance subsidiaries(3) 239,268 -- -- -- --
Subordinated liabilities -- -- -- -- 68,000
Total stockholders' equity 751,929 554,177 500,095 423,039 302,189
- ---------------------------------------------------------------------------------------------------------------------------
Financial Ratios
Profit margin:(4)
Pre-tax 19.3% 15.6% 15.7% 15.5% 12.7%
After tax 11.5 9.4 9.3 9.2 7.5
Return on average assets:
Pre-tax 5.9 4.8 5.4 5.9 6.0
After tax 3.5 2.9 3.2 3.5 3.6
Return on average stockholders' equity:
Pre-tax 36.6 28.3 27.9 26.1 23.9
After tax 21.8 17.0 16.5 15.5 14.2
- ---------------------------------------------------------------------------------------------------------------------------
Other Company Data
Total employees 4,820 4,350 3,950 3,440 3,200
Financial advisors 1,310 1,240 1,160 1,060 1,000
Brokerage offices 131 128 115 109 103
===========================================================================================================================
(1)Restated to reflect all pooling of interests transactions.
(2)Adjusted to reflect all stock splits.
(3)Non-recourse, secured fixed-rate notes of Johnson Fry finance subsidiaries,
the proceeds of which are invested in financial instruments with similar
maturities. See Note 2 of Notes to Consolidated Financial Statements.
(4)Calculated based on net revenues.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Business Description
Legg Mason, Inc. ("Parent") and its wholly owned subsidiaries (collectively, the
"Company") are principally engaged in providing asset management, securities
brokerage, investment banking and related financial 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 securities prices, and the demand for
investment banking and mortgage banking services.
In fiscal 2000, U.S. equity markets experienced record trading volume and
price levels, principally because of continuing economic growth, gains in
corporate earnings and modest inflation. As a result, the Company achieved a
fifth consecutive year of record net revenues and net earnings, attributable to
growth in its asset management and private client businesses. Total assets under
management for institutions, Company-sponsored mutual funds and private accounts
managed by the Company's subsidiaries were $112 billion at March 31, 2000, up
26% from $89 billion a year earlier. Earnings from asset management services
tend to be more stable than those from private client and capital markets
activities because they are affected less by changes in securities market
conditions. Revenues from asset management activities, which are included in
both the asset management and private client segments, represented 43% of the
Company's net revenues in fiscal 2000.
The Company's asset management activities and their contribution to operating
results have grown significantly through both internal growth and acquisition
over the past ten years. During this past fiscal year, the Company acquired
Berkshire Asset Management, Inc. ("Berkshire") and Johnson Fry Holdings PLC
("Johnson Fry") and entered into a joint venture with Bingham Dana LLP. During
fiscal 1998, the Company acquired Brandywine Asset Management, Inc.
("Brandywine"). See Note 2 of Notes to Consolidated Financial Statements for
additional information regarding these acquisitions. Berkshire manages assets of
approximately $600 million, Johnson Fry manages approximately $1.6 billion and
Brandywine manages approximately $6.5 billion* for institutional clients and
high net worth individuals.
Net interest income continued to be a stable, growing source of earnings,
primarily as a result of significant growth in retail brokerage margin loan and
customer credit balances and larger firm investment balances.
Results of any individual period should not be considered representative of
future profitability. Many of the Company's activities have fixed operating
costs that 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 affect
profitability adversely.
The Company operates within four business segments: Asset Management, Private
Client, Capital Markets and Other. Operations contained within each business
segment and each segment's financial information for the last three fiscal years
are summarized below:
Asset Management
(in millions)
Years ended March 31,
----------------------------------
2000 1999 1998
- ------------------------------------------------------------
Net revenues............ $ 349.2 $ 264.8 $ 213.1
Pre-tax earnings........ 114.3 79.3 53.4
Businesses contained within the Asset Management segment primarily provide
asset management services to Company-sponsored mutual funds and management of
assets for institutional and individual clients through the Company's asset
management subsidiaries.
Private Client
(in millions)
Years ended March 31,
-----------------------------------
2000 1999 1998
- -------------------------------------------------------------
Net revenues............ $ 689.5 $ 520.3 $ 444.5
Pre-tax earnings........ 110.8 67.2 53.6
Private Client distributes a wide range of financial products through its
branch distribution network, including equity and fixed-income securities,
proprietary and non-affiliated mutual funds and annuities. Net interest profit
from customers' margin loan and credit balances is included in this segment.
* At March 31, 2000, excluding assets managed in Legg Mason Funds.
19
Capital Markets
(in millions)
Years ended March 31,
-----------------------------------
2000 1999 1998
- -------------------------------------------------------------
Net revenues............ $ 160.6 $ 130.3 $ 126.4
Pre-tax earnings........ 8.9 12.0 20.4
The Capital Markets segment includes the Company's equity and fixed-income
capital markets businesses, including originations, institutional sales and
trading. This segment also includes realized and unrealized gains and losses on
merchant banking activities and warrants acquired in connection with investment
banking activities.
Other
(in millions)
Years ended March 31,
-----------------------------------
2000 1999 1998
- -------------------------------------------------------------
Net revenues............. $ 37.2 $35.7 $ 31.4
Pre-tax earnings......... 5.1 (9.7) 1.0
The Other business segment primarily includes the Company's real estate
service business and unallocated corporate revenues and expenses. In 1999,
pre-tax earnings included a non-cash deferred compensation expense of $10.4
million related to a change in accounting treatment for a non-qualified deferred
compensation stock plan. See Note 13 of Notes to Consolidated Financial
Statements.
Results of Operations
The following table sets forth, for the periods indicated, items in the
Consolidated Statements of Earnings as percentages of net revenues and the
increase (decrease) by item as percentages of the amount for the previous
period:
Percentage of Net Revenues Period to Period Change
----------------------------------- -------------------------
Years ended March 31, 2000 1999
----------------------------------- Compared Compared
2000 1999 1998 to 1999 to 1998
- ---------------------------------------------------------------------------------------------------------------------------
Revenues
Investment advisory and related fees.............. 43.3% 41.0% 36.3% 37.1% 32.0%
Commissions....................................... 29.4 29.3 29.6 30.0 15.7
Principal transactions............................ 10.2 9.9 10.6 34.2 8.5
Investment banking................................ 5.6 8.0 11.9 (9.5) (21.6)
Interest.......................................... 18.0 16.9 15.6 39.1 25.9
Other............................................. 4.4 4.9 5.0 19.1 12.6
----- ----- -----
Total revenues.................................. 110.9 110.0 109.0 31.1 17.7
Interest expense.................................. 10.9 10.0 9.0 41.5 28.8
----- ----- -----
Net revenues.................................... 100.0 100.0 100.0 30.0 16.6
----- ----- -----
Non-Interest Expenses
Compensation and benefits......................... 60.2 61.5 62.7 27.2 14.4
Occupancy and equipment rental.................... 6.5 6.8 7.0 25.4 13.3
Communications.................................... 4.4 5.0 5.2 13.5 12.3
Floor brokerage and clearing fees................. 0.6 0.7 0.7 17.2 22.2
Non-cash deferred compensation.................... (0.1) 1.1 -- NM NM
Other............................................. 9.1 9.3 8.7 26.6 24.9
----- ----- -----
Total non-interest expenses..................... 80.7 84.4 84.3 24.3 16.8
----- ----- -----
Earnings Before Income Tax Provision................. 19.3 15.6 15.7 60.7 15.9
Income tax provision.............................. 7.8 6.2 6.4 62.5 13.7
----- ----- -----
Net Earnings......................................... 11.5% 9.4% 9.3% 59.5% 17.4%
===== ===== =====
- ---------------------------------------------------------------------------------------------------------------------------
NM-Not meaningful
20
FISCAL 2000 COMPARED WITH FISCAL 1999
In fiscal 2000, revenues, net earnings and earnings per share reached record
levels and were substantially higher than in the prior fiscal year. Net revenues
increased 30% to $1.2 billion. Total revenues were $1.4 billion, an increase of
31% from revenues of $1.0 billion in fiscal 1999. Net earnings were $142.5
million, up 60% from net earnings in the prior fiscal year. Basic earnings per
share increased 53% to $2.51 from $1.64. Diluted earnings per share increased
50% to $2.33 from $1.55.
In accordance with Emerging Issues Task Force ("EITF") 97-14, results for
fiscal 2000 and fiscal 1999 include a non-cash deferred compensation credit of
$1.1 million and a non-cash expense of $10.4 million, respectively, related to a
change in accounting treatment for a non-qualified deferred compensation stock
plan and related compensation arrangements. See Note 13 of Notes to Consolidated
Financial Statements.
Revenues
Investment Advisory and Related Fees
Investment advisory and related fees increased 37% to $534.9 million as a result
of growth in assets under management in Company-sponsored mutual funds,
fee-based brokerage accounts and fixed-income investment advisory accounts.
Investment Advisory Revenues and
Assets Under Management
[GRAPH APPEARS HERE]
Investment Advisory
and Related Fee Assets Under
Revenues Management
(in millions, "M") (in billions, "B")
1996 $162.1 $ 35.4
1997 $208.2 $ 43.8
1998 $295.6 $ 71.0
1999 $390.2 $ 88.9
2000 $534.9 $111.8
Commissions
Commission revenues rose 30% to $362.9 million in fiscal 2000, primarily as a
result of increases in listed and over-the-counter securities transactions and
increases in sales of non-affiliated mutual funds and annuity products.
Principal Transactions
Revenues from principal transactions increased 34% to $126.3 million,
principally as a result of increases in sales and trading revenues from equity
and fixed-income securities.
Investment Banking
Investment banking revenues declined 9% to $68.9 million, primarily as a result
of a decline in corporate banking advisory fees.
Interest Revenue and Expense
(millions of dollars)
[GRAPH APPEARS HERE]
Interest Expense Interest Revenue
1996 $ 26,187 $ 57,125
1997 $ 43,364 $ 84,129
1998 $ 73,706 $127,268
1999 $ 94,910 $160,292
2000 $134,322 $222,901
Interest Revenue and Expense
Interest revenue increased 39% to $222.9 million as a result of increased firm
investments, predominantly funds segregated for regulatory purposes, customer
margin loan balances and stock borrow balances.
Interest expense increased 42% to $134.3 million, primarily due to larger
interest-bearing customer credit balances and stock loan balances.
As a result of significantly higher levels of stock borrow and stock loan
balances, the Company's net interest margin declined to 39.7% in fiscal 2000
from 40.8% in fiscal 1999.
The Company's net interest profit increased 35% to $88.6 million in fiscal
2000 from $65.4 million in fiscal 1999.
21
Other Revenues
Other revenues rose 19% to $54.9 million, primarily as a result of an unrealized
gain on warrants acquired in connection with a private placement for a company
which went public in the fourth quarter, a gain on the sale of a merchant
banking investment and revenue recorded from capitalizing mortgage servicing
assets on loans originated in fiscal 2000 as required by the Financial
Accounting Standards Board ("FASB") Statement No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities."
Expenses
Compensation and Benefits
Compensation and benefits increased 27% to $743.9 million as a result of higher
sales and incentive compensation on increased revenues and profits and higher
fixed compensation costs, primarily attributable to an increase in the number of
employees.
A substantial part of compensation expense fluctuates in proportion to the
level of business activity. Other compensation costs, primarily salaries and
benefits, are fixed and may not decline with reduced levels of volume.
Therefore, profitability may be affected adversely 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 25% to $80.6 million as a result of
increased costs of acquired companies, additional and expanded branch office
locations and continued investments in technology.
Communications
Communications expense increased 14% to $54.4 million, due to higher business
volume, which gave rise to increased costs for quote services, printed
materials, postage and telephone usage.
Floor Brokerage and Clearing Fees
Floor brokerage and clearing fees increased 17% to $7.8 million, reflecting
higher securities transaction volume.
Non-Cash Deferred Compensation
In fiscal 2000 and fiscal 1999, in accordance with EITF 97-14, the Company
recorded a non-cash deferred compensation credit of $1.1 million and a non-cash
deferred compensation charge of $10.4 million, respectively, related to a change
in accounting treatment for a non-qualified deferred compensation stock plan and
related compensation arrangements. See Note 13 of Notes to Consolidated
Financial Statements.
Other Expenses
Other expenses increased 27% to $111.7 million. This increase is primarily
attributable to the addition of expenses of Johnson Fry, increased intangible
amortization expense related to acquired companies and higher loss, error and
litigation charges.
Income Tax Provision
The income tax provision rose 63% to $96.6 million in fiscal 2000 as a result of
increased pre-tax earnings. The Company's effective tax rate increased to 40.4%
in fiscal 2000 compared with 40.0% in the prior year.
FISCAL 1999 COMPARED WITH FISCAL 1998
In fiscal 1999, revenues, net earnings and earnings per share reached
then-record levels and were substantially higher than in the prior fiscal year.
Net revenues were $951.1 million, an increase of 17% over the prior year. Total
revenues were $1.0 billion, an increase of 18% from revenues of $889.1 million
in fiscal 1998. Net earnings were $89.3 million, up 17% from net earnings in the
prior fiscal year. Basic earnings per share increased by 17% to $1.64 from
$1.40. Diluted earnings per share increased 18% to $1.55 from $1.31.
Revenues
Investment Advisory and Related Fees
Investment advisory and related fees increased 32% to $390.2 million as a result
of growth in assets under management in Company-sponsored mutual funds,
fixed-income investment advisory accounts and fee-based brokerage accounts.
Commissions
Commission revenues rose 16% to $279.1 million in fiscal 1999, primarily as a
result of increases in securities transaction volume.
Principal Transactions
Revenues from principal transactions increased 8% to $94.1 million, principally
as a result of increases in fixed-income sales and equity trading operations.
Investment Banking
Investment banking revenues declined 22% to $76.1 million, primarily as a result
of decreased public offerings of equity securities, particularly co-managed
public offerings of real estate investment trusts.
Interest Revenue and Expense
Interest revenue increased 26% to $160.3 million as a result of increased firm
investments, predominantly funds segregated for regulatory purposes, and
customer margin loan balances.
22
Interest expense increased 29% to $94.9 million, primarily due to larger
interest-bearing customer credit balances.
As a result of significantly higher levels of interest-bearing customer
credit balances, the Company's net interest margin declined to 40.8% in fiscal
1999 from 42.1% in fiscal 1998.
The Company's net interest profit increased 22% to $65.4 million in fiscal
1999 from $53.6 million in fiscal 1998.
Other Revenues
Other revenues rose 13% to $46.1 million, primarily as a result of proceeds from
a key man life insurance policy and an increase in remarketing fees and loan
originations at the Company's commercial mortgage banking subsidiaries.
Expenses
Compensation and Benefits
Compensation and benefits increased 14% to $584.8 million as a result of higher
sales compensation on increased revenues and higher fixed compensation costs,
primarily attributable to an increased number of employees.
Occupancy and Equipment Rental
Occupancy and equipment rental increased 13% to $64.3 million as a result of
continued investments in technology, a full year of expenses related to the
Company's new corporate headquarters and additional and expanded branch office
locations.
Communications
Communications expense increased 12% to $48.0 million, due to higher business
volume which gave rise to increased costs for telephone usage, quote services,
printed materials and postage.
Floor Brokerage and Clearing Fees
Floor brokerage and clearing fees increased 22% to $6.7 million, reflecting
higher securities transaction volume.
Non-Cash Deferred Compensation
In fiscal 1999, in accordance with EITF 97-14, the Company incurred a non-cash
deferred compensation charge of $10.4 million related to a change in accounting
treatment for a non-qualified deferred compensation stock plan and related
compensation arrangements.
Other Expenses
Other expenses increased 25% to $88.2 million, attributable to increased loss,
error and litigation charges and higher promotional expenses.
Income Tax Provision
The income tax provision rose 14% to $59.4 million in fiscal 1999 as a result of
increased pre-tax earnings. The Company's effective tax rate was 40.0% in fiscal
1999 compared with 40.7% in the prior year.
Liquidity and Capital Resources
The Company's total assets increased to $4.8 billion at March 31, 2000 from $3.5
billion at March 31, 1999 primarily reflecting higher customer receivables and
securities borrowed. The Company's assets consist primarily of cash and cash
equivalents, collateralized short-term receivables and securities. The
collateralized receivables consist primarily of margin loans, securities
purchased under agreements to resell and securities borrowed, all of which are
secured by U.S. government and agency securities and corporate debt and equity
securities. The highly liquid nature of the Company's assets provides the
Company with flexibility in financing and managing its business.
For the year ended March 31, 2000, cash and cash equivalents increased $0.9
million. Cash flows from operating activities provided $164.7 million, primarily
attributable to net earnings, adjusted for non-cash charges. Funds provided by
operations were the primary source of funds used for investing activities. These
investing activities include payments of $87.6 million for the acquisitions of
Berkshire, Johnson Fry and a 50% interest in a joint venture. See Note 2 of
Notes to Consolidated Financial Statements for a description of these
acquisitions. Other investing activities include $23.1 million in capital
expenditures for enhancements in technology, expansion at the Company's
headquarters and additional branch offices that opened in fiscal 2000. In
addition, an increase in securities purchased under agreements to resell
utilized $29.6 million in cash and cash equivalents.
The primary objective of the Company's capital structure and funding
practices is to ensure that the capital base can appropriately support the
Company's business strategies as well as the regulatory capital requirements of
its subsidiaries and provide needed liquidity at all times.
The Company emphasizes diversification of funding sources and seeks to
minimize exposure to refinancing risk. The Company's assets are funded by
payables to customers, securities loaned, bank loans, long-term debt and equity.
The Company obtains short-term financing primarily on a secured basis. The
secured financing is obtained through the use of securities lending agreements
and secured bank loans, which are primarily collateralized by U.S. government
and agency securities and corporate debt and equity securities. Short-term
funding is generally obtained at rates related to federal funds, LIBOR and money
market rates. The Company maintains uncommitted credit facilities from several
banks and financial institutions. Uncommitted facilities consist of credit lines
that the Company has been advised are available but for which no contractual
lending obligations exist.
23
The Company has a committed, unsecured revolving credit facility of $50
million that matures on June 30, 2000. The facility has restrictive covenants
that require, among other things, the Company to maintain specified levels of
net worth. There were no borrowings outstanding under the facility at March 31,
2000.
The Company is in the process of obtaining a $100 million committed,
unsecured revolving credit facility to become effective when the current
facility expires.
The Company has outstanding $100 million of senior notes due February 15,
2006, which bear interest at 6.5%. The notes were originally issued at a
discount to yield 6.57%. At March 31, 2000, the Company had $50 million
available for the issuance of additional debt or convertible debt securities
pursuant to a shelf registration statement. The Company expects a $450 million
shelf registration statement filed with the Securities and Exchange Commission
for the issuance of debt or convertible debt securities to become effective in
fiscal 2001. The shelf filings permit the Company to register securities in
advance and then sell them when financing needs arise or market conditions are
favorable. The Company intends to use the shelf for general corporate purposes
including the expansion and diversification of its asset management and private
client businesses. As described in Note 17 of Notes to Consolidated Financial
Statements, the Company has completed the acquisition of Perigee Inc., a
Canadian money manager. Under the terms of the agreement, the Company issued
approximately 5.2 million exchangeable shares which are the economic equivalent
of the Company's common shares.
The Company's broker-dealer subsidiaries are subject to the requirements of
the Securities and Exchange Commission's Uniform Net Capital Rule, which is
designed to measure the general financial soundness and liquidity of
broker-dealers. At March 31, 2000, the brokerage subsidiaries had aggregate net
capital of $262.7 million, which exceeded minimum net capital requirements by
$233.0 million. The amount of the broker-dealers' net assets that may be
distributed is subject to restrictions under applicable net capital rules.
The Company's overall capital and funding needs are continually reviewed to
ensure that its capital base can support the estimated needs of its businesses.
The Company continues to explore potential acquisition opportunities as a means
of expanding its businesses. Such opportunities may involve acquisitions that
are material in size and may require the raising of additional capital.
Risk Management
Risk is an inherent part of the Company's business and activities. The extent to
which the Company properly and effectively identifies, assesses, monitors and
manages each of the various types of risk involved in its activities is critical
to its soundness and profitability. The Company seeks to identify, assess,
monitor and manage the following principal risks involved in the Company's
business activities: funding, market, credit, operational and legal.
Risk management at the Company is a multi-faceted process that requires
communication, judgment and knowledge of financial products and markets. The
Company's senior management takes an active role in the risk management process
and requires specific administrative and business functions to assist in the
identification, assessment and control of various risks. The Company's risk
management policies, procedures and methodologies are evolutionary in nature and
are subject to ongoing review and modification. Funding risk is discussed in the
"Liquidity and Capital Resources" section of "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
Market Risk
The potential for changes in the value of the Company's financial instruments
owned is referred to as "market risk." The Company's market risk generally
represents the risk of loss that may result from a change in the value of a
financial instrument as a result of fluctuations in interest rates, credit
spreads, equity prices and the correlation among them, along with the level of
volatility. Interest rate risks result primarily from exposure to changes in the
yield curve, the volatility of interest rates, mortgage prepayments and credit
spreads. Equity price risks result from exposure to changes in prices and
volatilities of individual equities, equity baskets and equity indices.
The Company makes dealer markets in equity and debt securities. As such, to
facilitate customer order flow, the Company may be required to own equity and
debt securities in its trading and inventory accounts. The Company hedges its
exposure to market risk by managing its net long or short position. For example,
the Company may hedge a municipal portfolio by taking an offsetting position in
a related futures contract. Position limits in trading and inventory accounts
are established and monitored on an ongoing basis. Each day, consolidated
position and exposure reports are prepared and distributed to various levels of
Company management, which enable management to monitor inventory levels and
results of the trading groups. The Company also monitors inventory aging,
pricing, concentration and securities ratings.
24
In accordance with the Securities and Exchange Commission's risk disclosure
requirements, the following table categorizes the Company's market risk
sensitive financial instruments.
Financial Instruments with Market Risk at March 31, 2000
Years to Maturity
----------------------------------------------------------------------
1 or less 1 to 5 5 to 10 Over 10 Total
- ---------------------------------------------------------------------------------------------------------------------------
Fair Value
U.S. government and agencies..................... $ 94,859 $(5,364) $ (4,649) $ 6,617 $ 91,463
Corporate debt................................... 1,888 3,111 8,454 2,481 15,934
State and municipal bonds........................ 17,880 9,847 6,745 20,912 55,384
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities.......................... 114,627 7,594 10,550 30,010 162,781
Equity & other securities........................ -- -- -- 20,482 20,482
- ---------------------------------------------------------------------------------------------------------------------------
Total.......................................... $114,627 $ 7,594 $ 10,550 $ 50,492 $ 183,263
===========================================================================================================================
Weighted Average Yield
U.S. government and agencies..................... 5.34% 5.41% 6.25% 7.05%
Corporate debt................................... 5.93 6.85 7.08 7.79
State and municipal bonds........................ 4.62 4.61 4.92 5.15
- ---------------------------------------------------------------------------------------------------------------------------
The table includes net long and short fair values, which is consistent with
the way risk exposure is managed. See Notes 4 and 5 of Notes to Consolidated
Financial Statements for the related gross long and short fair values of
financial instruments owned and investments. The table also includes $90.3
million in treasury securities segregated for regulatory purposes.
The purpose of the Johnson Fry finance subsidiaries (see Note 2 of Notes to
Consolidated Financial Statements) is to raise funds by issuing secured
fixed-rate loan securities and to use the proceeds to invest in a portfolio of
bonds issued by various financial institutions which are not generally available
to the public in tranches small enough for the retail investor. The $241.6
million in Investments of finance subsidiaries and the $239.3 million in Notes
payable of finance subsidiaries are directly related and have offsetting risk
characteristics and do not represent a material market risk to the Company.
Additionally, claims of the note holders are limited to the assets of the
finance subsidiaries, which limits the Company's exposure to default risk on the
investments.
In addition to the financial instruments included in the table, the Company
has $100 million senior notes payable that mature in 2006 and bear a fixed
coupon of 6.5%. The notes were issued at a discount to yield 6.57%.
Exposure to foreign currency and commodity market risk is not material.
Credit Risk
Credit risk represents the loss that the Company would incur if a counterparty
or issuer of securities or other instruments held by the Company fails to
perform its contractual obligations to the Company. Credit risk related to
various investing and financing activities is reduced by the industry practice
of obtaining and maintaining collateral.
Credit exposure associated with the Company's private client business
consists primarily of customer margin accounts, which are monitored daily. The
Company monitors exposure to industry sectors and individual securities and
performs sensitivity analysis on a regular basis in connection with its margin
lending activities. The Company adjusts its margin requirements if it believes
its risk exposure is not appropriate based on market conditions.
Operational Risk
Operational risk refers generally to the risk of loss resulting from the
Company's operations, including, but not limited to, improper or unauthorized
execution and processing of transactions, deficiencies in the Company's
operating systems and inadequacies or breaches in the Company's control process.
The Company operates different businesses in diverse markets and is reliant on
the ability of its employees and systems to process high numbers of
transactions. In the event of a breakdown or improper operation of systems or
improper action by employees, the Company could suffer financial loss,
regulatory sanctions and damage to its reputation. In order to mitigate and
control operational risk, the Company has developed and continues to enhance
specific policies and procedures that are designed to identify and manage
operational risk at appropriate levels. For example, the Company has procedures
that require that all transactions are accurately recorded and properly
reflected in the
25
Company's books and records and are confirmed on a timely basis; that position
valuations are subject to periodic independent review procedures and that
collateral and adequate documentation are obtained from counterparties in
appropriate circumstances. Disaster recovery plans exist for critical systems,
and redundancies are built into the systems as deemed appropriate. The Company
also uses periodic self-assessments and internal audit reviews as a further
check on operational risk.
Legal Risk
Legal risk includes the risk of non-compliance with applicable legal and
regulatory requirements. The Company is generally subject to extensive
regulation in the different jurisdictions in which it conducts its business. The
Company has various procedures addressing issues, such as regulatory capital
requirements, sales and trading practices, use of and safekeeping of customer
funds, credit granting, collection activities, money-laundering and record
keeping.
Effects of Inflation
The Company's assets are not significantly affected by inflation because they
are primarily monetary, consisting of cash, securities purchased under
agreements to resell, securities and receivables. However, the rate of inflation
affects various expenses, including employee compensation, occupancy and
communications, which may not be readily recoverable in charges for services
provided by the Company.
Recent Accounting Developments
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 133 establishes standards for
accounting and reporting for derivative instruments and hedging activities. In
June 1999, the FASB issued Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133" which delayed the effective date for all fiscal quarters for
fiscal years beginning after June 15, 2000. The impact of adopting Statement No.
133 is not expected to be material to the Company's consolidated financial
statements.
Year 2000 Processing Issue
During fiscal 2000, the Company spent approximately $1.9 million to ensure that
its internal information and non-information technology systems and service
providers' systems were prepared to process in the Year 2000. The total cost of
Year 2000-related planning, testing and upgrades or replacements of hardware and
software was approximately $3.5 million. The Company experienced no significant
disruptions to its internal systems because of the change in year from 1999 to
2000.
Forward-Looking Statements
Information or statements provided by or on behalf of the Company from time to
time, including those within this report on Form 10-K, may contain certain
"forward-looking information," including information relating to anticipated
growth in revenues or earnings per share, anticipated changes in its businesses
or in the amount of client assets under management, anticipated expense levels
and expectations regarding financial market conditions. The Company cautions
readers that any forward-looking information provided by or on behalf of the
Company is not a guarantee of future performance. Actual results may differ
materially from those in forward-looking information as a result of various
factors, including but not limited to those discussed below. Further, such
forward-looking statements speak only as of the date on which such statements
are made, and the Company undertakes no obligations to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.
The Company's future revenues may fluctuate due to numerous factors, such as:
the volume of trading in securities; the volatility and general level of market
prices; the total value and composition of assets under management; the relative
investment performance of Company-sponsored mutual funds compared with competing
offerings and market indices; sentiment and investor confidence; the ability of
the Company to maintain investment management and administrative fees at current
levels; competitive conditions in each of the Company's business segments; the
demand for investment banking and mortgage banking services; and the effects of
acquisitions.
The Company's future operating results are also dependent upon the level of
operating expenses, which are subject to fluctuation for the following or other
reasons: variations in the level of compensation expense incurred by the Company
as a result of changes in the number of total employees, competitive factors, or
other reasons; variations in expenses and capital costs, including depreciation,
amortization and other non-cash charges incurred by the Company to maintain its
administrative infrastructure; unanticipated costs that may be incurred by the
Company from time to time to protect client goodwill or in connection with
litigation; and the effects of acquisitions.
The Company's business is also subject to substantial governmental
regulation, and changes in legal, regulatory, accounting, tax and compliance
requirements may have a substantial effect on the Company's business and results
of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
See "Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition--Liquidity and Capital Resources--Risk Management" for
disclosure about market risk.
26
ITEM8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
To the Board of Directors
and Stockholders of Legg Mason, Inc.
In our opinion, the accompanying consolidated statements of financial condition
of Legg Mason, Inc. and Subsidiaries (the "Company") and the related
consolidated statements of earnings, changes in stockholders' equity and cash
flows present fairly, in all material respects, the consolidated financial
position of Legg Mason, Inc. and Subsidiaries at March 31, 2000 and 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended March 31, 2000, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Baltimore, Maryland
May 4, 2000, except for
Note 17, as to which
the date is May 26, 2000
27
Consolidated Statements of Earnings
(Dollars in thousands except per share amounts)
Years ended March 31,
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Revenues
Investment advisory and related fees $ 534,896 $ 390,216 $ 295,645
Commissions 362,887 279,136 241,284
Principal transactions 126,267 94,105 86,748
Investment banking 68,905 76,118 97,138
Interest 222,901 160,292 127,268
Other 54,948 46,139 40,977
- ----------------------------------------------------------------------------------------------------------
Total revenues 1,370,804 1,046,006 889,060
Interest expense 134,322 94,910 73,706
- ----------------------------------------------------------------------------------------------------------
Net revenues 1,236,482 951,096 815,354
- ----------------------------------------------------------------------------------------------------------
Non-Interest Expenses
Compensation and benefits 743,867 584,830 511,413
Occupancy and equipment rental 80,602 64,289 56,740
Communications 54,440 47,963 42,726
Floor brokerage and clearing fees 7,828 6,677 5,464
Non-cash deferred compensation (1,063) 10,352 --
Other 111,667 88,210 70,632
- ----------------------------------------------------------------------------------------------------------
Total non-interest expenses 997,341 802,321 686,975
- ----------------------------------------------------------------------------------------------------------
Earnings Before Income Tax Provision 239,141 148,775 128,379
Income tax provision 96,616 59,441 52,258
- ----------------------------------------------------------------------------------------------------------
Net Earnings $ 142,525 $ 89,334 $ 76,121
==========================================================================================================
Earnings per Common Share
Basic $ 2.51 $ 1.64 $ 1.40
Diluted 2.33 1.55 1.31
==========================================================================================================
See notes to consolidated financial statements.
28
Consolidated Statements of Financial Condition
(Dollars in thousands)
March 31,
2000 1999
- ----------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 209,038 $ 208,142
Cash and securities segregated for regulatory purposes 1,419,021 1,374,255
Securities purchased under agreements to resell 170,643 141,016
Receivables:
Customers 1,417,596 921,267
Brokers, dealers and clearing organizations 163,263 111,526
Others 71,564 40,944
Securities borrowed 671,252 308,719
Financial instruments owned, at fair value 102,907 143,998
Investment securities, at fair value 17,765 17,230
Investments of finance subsidiaries 241,639 --
Equipment and leasehold improvements, net 60,548 55,807
Intangible assets, net 130,573 56,127
Other 109,244 94,656
- ----------------------------------------------------------------------------------------------------------
$ 4,785,053 $ 3,473,687
==========================================================================================================
Liabilities and Stockholders' Equity
Liabilities
Payables:
Customers $ 2,633,542 $ 2,170,588
Brokers and dealers 15,245 10,430
Securities loaned 688,331 311,818
Short-term borrowings 23,290 49,262
Financial instruments sold, but not yet purchased, at fair value 27,713 11,822
Accrued compensation 144,521 115,480
Deferred compensation trust -- 48,986
Other 161,491 101,448
Notes payable of finance subsidiaries 239,268 --
Senior notes 99,723 99,676
- ----------------------------------------------------------------------------------------------------------
4,033,124 2,919,510
- ----------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 8)
- ----------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, par value $.10; authorized 100,000,000 shares;
issued 58,599,058 shares in 2000 and 56,376,253 shares in 1999 5,860 5,638
Additional paid-in capital 271,687 215,387
Deferred compensation and employee note receivable (19,003) (5,362)
Employee stock trust (50,699) (18,475)
Deferred compensation employee stock trust 50,699 (11,470)
Retained earnings 493,652 368,632
Accumulated other comprehensive loss, net (267) (173)
- ----------------------------------------------------------------------------------------------------------
751,929 554,177
- ----------------------------------------------------------------------------------------------------------
$ 4,785,053 $ 3,473,687
==========================================================================================================
See notes to consolidated financial statements.
29
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands except share amounts)
Deferred Deferred Accumulated
Compensation Compensation Other
Common Stock Additional and Employee Employee Comprehensive Total
-------------------- Paid-in Employee Note Stock Stock Retained Income(Loss), Stockholders'
Shares Amount Capital Receivable Trust Trust Earnings net Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 20,845,592 $2,085 $194,044 $ -- $ -- $ -- $226,677 $ 233 $ 423,039
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued for:
Stock option exercises 463,298 46 6,355 -- -- -- -- -- 6,401
Deferred compensation trust 60,763 6 3,370 -- -- -- -- -- 3,376
4-for-3 stock split 6,155,227 616 (636) -- -- -- -- -- (20)
Dividends declared
($.214 per share)* -- -- -- -- -- -- (10,847) -- (10,847)
Adjustment to conform
fiscal year of pooled entity -- -- -- -- -- -- 920 -- 920
Adjustments of pooled entity -- -- -- -- -- -- 392 -- 392
Comprehensive income:
Net earnings -- -- -- -- -- -- 76,121 --
Unrealized holding gain
on investment securities
(net of taxes of ($402)) -- -- -- -- -- -- -- 854
Reclassification adjustment
for gains included in
net income -- -- -- -- -- -- -- (141)
Comprehensive income -- -- -- -- -- -- -- -- 76,834
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 27,524,880 $2,753 $203,133 $ -- $ -- $ -- $293,263 $ 946 $ 500,095
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued for:
Stock option exercises 703,382 70 3,368 -- -- -- -- -- 3,438
Deferred compensation trust 105,651 11 5,131 -- (17,550) (11,470) -- -- (23,878)
Deferred compensation 234,439 23 6,536 (5,362) (925) -- -- -- 272
2-for-1 stock split 27,807,901 2,781 (2,781) -- -- -- -- -- --
Dividends declared
($.25 per share)* -- -- -- -- -- -- (13,965) -- (13,965)
Comprehensive income:
Net earnings -- -- -- -- -- -- 89,334 --
Unrealized holding loss
on investment securities
(net of taxes of $671) -- -- -- -- -- -- -- (1,119)
Comprehensive income -- -- -- -- -- -- -- -- 88,215
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 56,376,253 $5,638 $215,387 $ (5,362) $(18,475) $(11,470) $368,632 $ (173) $ 554,177
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued for:
Stock option exercises 1,300,757 130 17,440 -- -- -- -- -- 17,570
Deferred compensation trust 208,506 21 13,411 -- (7,239) 37,700 -- -- 43,893
Deferred compensation 713,542 71 25,449 (13,641) (24,985) 24,469 -- -- 11,363
Dividends declared
($.305 per share) -- -- -- -- -- -- (17,505) -- (17,505)
Comprehensive income:
Net earnings -- -- -- -- -- -- 142,525 --
Unrealized holding gain
on investment securities
(net of taxes of $152) -- -- -- -- -- -- -- 714
Reclassification adjustment
for losses included in
net income -- -- -- -- -- -- -- 42
Foreign currency translation
adjustment -- -- -- -- -- -- -- (850)
Comprehensive income -- -- -- -- -- -- -- -- 142,431
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 58,599,058 $5,860 $271,687 $(19,003) $(50,699) $ 50,699 $493,652 $ (267) $ 751,929
====================================================================================================================================
* Adjusted to reflect all stock splits.
See notes to consolidated financial statements.
30
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended March 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net earnings $ 142,525 $ 89,334 $ 76,121
Non-cash items included in earnings:
Depreciation and amortization 29,320 21,297 21,986
Deferred compensation 6,131 17,812 3,394
Adjustments of pooled entity -- -- 1,058
Adjustment to conform fiscal year of pooled entity -- -- 920
Deferred income taxes (5,207) (6,296) (7,712)
(Increase) decrease in assets excluding acquisitions:
Cash and securities segregated for regulatory purposes (44,766) (452,649) (479,301)
Receivables from customers (496,329) (207,876) (179,373)
Other receivables (82,357) (66,617) (24,100)
Securities borrowed (362,533) 139,734 (184,841)
Financial instruments owned 41,091 (62,541) (2,595)
Other 4,484 (23,023) 7,842
Increase (decrease) in liabilities excluding acquisitions:
Payable to customers 462,954 607,591 602,351
Payable to brokers and dealers 4,815 5,146 (1,828)
Securities loaned 376,513 (141,212) 202,226
Financial instruments sold, but not yet purchased 15,891 (2,310) 1,625
Accrued compensation 34,629 17,568 37,480
Deferred compensation trust -- 1,028 --
Other 37,525 3,809 22,830
- ---------------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used for) Operating Activities 164,686 (59,205) 98,083
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Payments for:
Equipment and leasehold improvements (23,103) (19,138) (31,687)
Intangible assets (2,780) (655) (5,587)
Acquisitions, net of cash acquired (87,637) -- --
Net (increase) decrease in securities purchased under agreements to resell (29,627) 34,607 (42,823)
Purchases of investment securities (52,384) (36,677) (149,745)
Proceeds from sales and maturities of investment securities 54,104 51,395 187,256
- ---------------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used for) Investing Activities (141,427) 29,532 (42,586)
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase (decrease) in short-term borrowings (25,972) 35,382 (20)
Repayment of notes payable of finance subsidiaries (678) -- --
Issuance of common stock 20,780 9,508 9,777
Dividends paid (16,493) (13,320) (10,197)
- ---------------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used for) Financing Activities (22,363) 31,570 (440)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 896 1,897 55,057
Cash and Cash Equivalents at Beginning of Year 208,142 206,245 151,188
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 209,038 $ 208,142 $206,245
===========================================================================================================================
Supplementary Disclosure
Cash paid for:
Income taxes $ 88,973 $ 70,452 $ 56,019
Interest 127,163 94,610 73,406
See notes to consolidated financial statements.
31
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 asset management, securities
brokerage, investment banking and related financial services to individuals,
institutions, corporations and municipalities.
The consolidated financial statements include the accounts of the Parent and
its wholly owned subsidiaries. All material intercompany balances and
transactions have been eliminated. Where appropriate, prior years' financial
statements have been reclassified to conform to the current year 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 reported in the financial
statements and accompanying notes. Actual amounts could differ from those
estimates.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of 90
days or less, other than those held for sale in the ordinary course of business.
Securities Purchased Under Agreements to Resell
The Company invests in short-term securities purchased under agreements to
resell collateralized by U.S. government and agency securities. Securities
purchased under agreements to resell are accounted for as collateralized
financings. It is the policy of the Company to obtain possession of collateral
with a fair value in excess of the principal amount loaned. Collateral is valued
daily, and the Company may require counterparties to deposit additional
collateral when appropriate. Securities purchased under agreements to resell are
carried at the amounts at which the securities will be subsequently resold as
specified in the respective agreements, plus accrued interest.
Securities Transactions
Customer securities transactions are recorded on a settlement date basis, with
related commission revenues and expenses recorded on a trade date basis.
Financial Instruments Owned
Financial instruments used in the Company's trading activities are recorded on a
trade date basis and carried at fair value with unrealized gains and losses
reflected in earnings. The fair values are generally based on listed market
prices or dealer price quotations for similar instruments.
Equity securities purchased or received in connection with private equity and
other activities are carried at their original cost. The carrying value of such
equity securities is marked to market when changes in underlying fair values are
readily ascertainable, generally as evidenced by listed market prices or
transactions which directly affect the value of such equity securities. Downward
adjustments relating to such equity securities are made in the event that the
Company determines that the eventual net realizable value is less than the
quoted value.
Securities Lending
Securities borrowed and loaned are accounted for as collateralized financings
and recorded at the amount of cash collateral advanced or received. Securities
borrowed transactions require the Company to deposit cash or other collateral
with the lender. The Company generally receives collateral in the form of cash
for securities loaned. The fee received or paid by the Company is recorded as
interest revenue or expense. The Company monitors the fair value of securities
borrowed and loaned on a daily basis, with additional collateral obtained or
refunded, as necessary.
Investments
The Company holds debt and equity investments which are classified as
available-for-sale and held-to-maturity. Debt and equity securities classified
as available-for-sale are reported at fair value and resulting unrealized gains
and losses are reflected in stockholders' equity and comprehensive income.
Debt securities held by the Company's finance subsidiaries, for which there
is positive intent and ability to hold to maturity, are classified as
held-to-maturity. These investments are recorded at amortized cost and
amortization of discount or premium is included in current period earnings.
Depreciation and Amortization
Equipment and leasehold improvements are reported at cost, net of accumulated
depreciation and amortization of $65,788 and $58,910 at March 31, 2000 and 1999,
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.
32
Intangible Assets
Intangible assets consist principally of goodwill and asset management and
mortgage servicing contracts attributable to business combinations and are
reported at cost net of accumulated amortization. The Company capitalizes costs
incurred in acquiring mortgage servicing rights through loan origination
activities in accordance with Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." Intangibles are amortized using
straight-line and accelerated methods principally over periods not exceeding
twenty years. Accumulated amortization at March 31, 2000 and 1999 was $48,517
and $43,914, 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
that the amortization periods are appropriate.
Fair Value of Financial Instruments
At March 31, 2000 and 1999, substantially all financial instruments are carried
at fair value or amounts which approximate fair value. The fair value of the
senior notes, estimated using current market prices, was $93,150 and $100,837 at
March 31, 2000 and 1999, respectively.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries that are denominated in non-U.S.
dollar functional currencies are translated at exchange rates at the statement
of financial condition date. Revenues and expenses are translated at average
exchange rates during the year. The gains or losses resulting from translating
foreign currency financial statements are reported in stockholders' equity and
comprehensive income. Gains or losses resulting from foreign currency
transactions are included in earnings.
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 mutual funds and
asset-based fees on various types of single-fee brokerage accounts. Revenues
from investment advisory and related activities are recognized over the period
in which services are performed.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" as permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company's stock-based compensation plans include stock
options, restricted awards, stock bonus awards, stock purchase plans and
deferred compensation payable in stock.
In accordance with APB No. 25, compensation expense is not recognized for
stock options that have no intrinsic value on the date of grant. The pro forma
effects of SFAS No. 123 on net income and earnings per share are presented in
Note 12.
Earnings Per Share
Basic earnings per common share ("EPS") is calculated by dividing net earnings
by the weighted-average number of common shares outstanding. Diluted EPS is
similar to basic EPS, but adjusts for the effect of potential common shares.
The following table presents the computations of basic and diluted EPS:
Years ended March 31,
(shares in thousands) 2000 1999 1998
- ------------------------------------------------------------------
Weighted-average common
shares outstanding............ 56,688 54,337 54,431
Potential common shares:
Employee stock options........ 3,794 3,272 3,528
Shares related to
deferred compensation........ 257 -- --
Shares issuable upon
conversion of
debentures................... 48 48 48
- ------------------------------------------------------------------
Total weighted-average
diluted common shares......... 60,787 57,657 58,007
- ------------------------------------------------------------------
Net earnings.................... $ 142,525 $ 89,334 $ 76,121
Adjustment related to
deferred compensation,
net of tax.................... (638) -- --
Interest expense on
convertible debentures,
net of tax.................... 18 18 18
- ------------------------------------------------------------------
Net earnings applicable to
diluted common shares......... $ 141,905 $ 89,352 $ 76,139
- ------------------------------------------------------------------
Basic EPS....................... $ 2.51 $ 1.64 $ 1.40
Diluted EPS..................... 2.33 1.55 1.31
- ------------------------------------------------------------------
33
At March 31, 2000 and 1999, options to purchase 57,000 and 2,718,200 shares,
respectively, were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average price of the
common shares for the period. In addition, at March 31, 2000 and 1999, 69,405
and 1,423,619 shares, respectively, held in an employee stock trust were
antidilutive and therefore excluded from the computation of diluted earnings per
share.
2. Business Combinations
In December 1999, the Company completed the acquisition of Johnson Fry Holdings
PLC ("Johnson Fry"), a London-based retail fund management company.
The acquisition was accounted for as a purchase. Accordingly, the net assets
and results of operations are included in the Company's consolidated financial
statements from the date of acquisition. The total purchase price was
approximately $72,000, including $67,000 of cash and $5,000 in liabilities. The
excess of the purchase price over the tangible net assets acquired of $63,978 is
being amortized on a straight-line basis over 20 years.
Johnson Fry has two wholly owned finance subsidiaries. The purpose of the
finance companies is to raise funds by issuing secured fixed-rate loan
securities, with a minimum maturity of five years, and to use the proceeds to
invest in a portfolio of bonds issued by various financial institutions which
are not generally available to the public in tranches small enough for the
retail investor. See Notes 5 and 7.
On September 30, 1999, the Company entered into a joint venture with Bingham
Dana LLP, a Boston-based law firm, to acquire a 50% interest in its trust
administration business for $10,000. The investment in this joint venture is
being accounted for under the equity method.
On September 2, 1999, the Company acquired the assets of Berkshire Asset
Management, Inc. ("Berkshire") for $18,000. Berkshire provides investment
management services for predominantly domestic equity and fixed-income accounts
for high net worth individuals and institutions. The acquisition was accounted
for as a purchase. Accordingly, the net assets and results of operations are
included in the Company's consolidated financial statements from the date of
acquisition. The excess of the purchase price over the tangible net assets
acquired of $17,745 is being amortized on a straight-line basis over 12 years.
The following unaudited pro forma consolidated results are presented as
though the acquisitions of Johnson Fry and Berkshire had occurred as of the
beginning of each period presented, adjusted for amortization of the excess of
cost over the net tangible assets acquired.
Years ended March 31,
2000 1999
- ----------------------------------------------------------
Net revenues.................. $ 1,254,175 $ 984,301
Net earnings.................. 130,557 83,440
Earnings per common share:
Basic...................... $ 2.30 $ 1.54
Diluted.................... 2.15 1.45
- ----------------------------------------------------------
The Company acquired Brandywine Asset Management, Inc. ("Brandywine") in
January 1998. Brandywine provides investment management services for
institutions and high net worth individuals.
The Company issued 5,148,312 shares of its common stock to acquire Brandywine
in a transaction accounted for as a pooling of interests. Accordingly, all years
presented include the results of Brandywine. In order to conform to the
Company's fiscal year, Brandywine's operating profit of $920 for the quarter
ended March 31, 1997 was reflected as an adjustment to retained earnings. The
acquisition was not material to the Company's financial statements.
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 $2,438,020 and $2,069,350 as of March 31, 2000, and
1999, respectively. The Company pays interest on certain customer free credit
balances held for investment purposes.
34
4. Financial Instruments, at Fair Value
Securities positions consist of the following at March 31:
Financial instruments
owned
2000 1999
- ------------------------------------------------------------
U.S. government and
agencies.................... $ 9,136 $ 70,991
Corporate debt................. 22,839 18,764
State and municipal bonds...... 55,529 38,906
Equities and other............. 15,403 15,337
- ------------------------------------------------------------
$ 102,907 $ 143,998
- ------------------------------------------------------------
Financial instruments sold,
but not yet purchased
2000 1999
- ------------------------------------------------------------
U.S. government and
agencies.................... $ 17,894 $ 8,688
Corporate debt................. 8,017 1,031
State and municipal bonds...... 145 567
Equities and other............. 1,657 1,536
- ------------------------------------------------------------
$ 27,713 $ 11,822
- ------------------------------------------------------------
5. Investments
The Company has two categories of investments: Investment securities and
Investments of finance subsidiaries. These investments are classified as
available-for-sale and held-to-maturity as described in Note 1.
Investment securities consist of highly liquid debt and equity securities.
Investments of finance subsidiaries consist of bonds issued by various financial
institutions.
Investments as of March 31, 2000 and 1999 are as follows:
- -----------------------------------------------------------
2000 1999
- -----------------------------------------------------------
Investment securities:
Available-for-sale............... $ 12,982 $ 5,972
Non-qualifying (1)............... 4,783 11,258
- -----------------------------------------------------------
$ 17,765 $ 17,230
- -----------------------------------------------------------
Investments of finance subsidiaries:
Available-for-sale............... $ 102,585 $ --
Held-to-maturity................. 139,054 --
- -----------------------------------------------------------
$ 241,639 $ --
- -----------------------------------------------------------
(1) Non-qualifying for SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," purposes.
Information regarding the Company's investments, categorized by maturity date,
is as follows:
- ---------------------------------------------------------------------------------------------------------------------------
March 31, 2000 March 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Cost/ Gross Gross Cost/ Gross Gross
amortized unrealized unrealized Fair amortized unrealized unrealized Fair
cost gains losses value cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------------
Available-for-sale:
Corporate debt:
Within one year $ 232 $ -- $ -- $ 232 $ -- $ -- $ -- $ --
U.S. governments:
Within one year 490 -- (1) 489 1,351 4 -- 1,355
One to five years 940 -- (10) 930 252 -- -- 252
Five to ten years 323 2 -- 325 -- -- -- --
Over ten years 4,123 -- (8) 4,115 -- -- -- --
Other debt:
One to five years 880 -- -- 880 -- -- -- --
Five to ten years 102,649 127 (191) 102,585 -- -- -- --
Equities 5,172 1,025 (186) 6,011 4,425 937 (997) 4,365
- ---------------------------------------------------------------------------------------------------------------------------
$ 114,809 $ 1,154 $ (396) $ 115,567 $6,028 $ 941 $ (997) $5,972
Held-to-maturity:
Other debt:
One to five years $ 139,054 $ -- $ (285) $ 138,769 $ -- $ -- $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------------
35
The proceeds and gross realized gains and losses from the sales and maturities
of available-for-sale investments are as follows:
Years ended March 31,
2000 1999 1998
- -----------------------------------------------------------
Proceeds................ $ 54,104 $ 51,395 $ 187,256
Gross realized gains.... 423 -- 260
Gross realized losses... (493) -- (25)
- -----------------------------------------------------------
6. Short-Term Borrowings
The Company obtains short-term financing primarily on a secured basis. The
secured financing is obtained through the use of securities lending agreements
and secured bank loans, which are primarily collateralized by U.S. government
and agency securities and corporate debt and equity securities. The Company had
outstanding loan balances of $23,290 and $49,262 at March 31, 2000 and 1999,
respectively. The Company's weighted average interest rates were 6.32% and
6.25%, respectively.
The Company has a committed, unsecured revolving credit facility of $50,000
that matures on June 30, 2000. The facility has restrictive covenants that
require, among other things, the Company to maintain specified levels of net
worth. There were no borrowings outstanding under the facility at March 31, 2000
and 1999. The Company has maintained compliance with the applicable covenants
for this facility at all times.
7. Long-Term Debt
The Company has outstanding $100,000 of senior notes due February 15, 2006 which
bear interest at 6.5%. The notes were issued at a discount to yield 6.57%. At
March 31, 2000, the Company had $50,000 available for the issuance of additional
debt or convertible debt securities pursuant to a shelf registration.
As described in Note 2, the Company's finance subsidiaries issued a series of
secured, fixed-rate notes with a minimum maturity of five years. These
obligations become due beginning August 2000 through March 2003 at interest
rates ranging from 6.3% to 7.0%. Notes outstanding at March 31, 2000, based on
their contractual terms, mature as follows:
- -----------------------------------------------------------
2001.......................................... $ 114,739
2002.......................................... 29,731
2003.......................................... 112,657
- -----------------------------------------------------------
$ 257,127
- -----------------------------------------------------------
8. Commitments and Contingencies
The Company leases office facilities and equipment under non-cancelable
operating leases and also has multi-year agreements for data processing and
other services. These leases and service agreements expire on varying dates
through 2013. Certain leases provide for renewal options and contain escalation
clauses providing for increased rentals. As of March 31, 2000, the minimum
annual aggregate rentals and service commitments are as follows:
- -----------------------------------------------------------
2001.......................................... $ 50,837
2002.......................................... 44,599
2003.......................................... 35,607
2004.......................................... 27,253
2005.......................................... 22,907
Thereafter.................................... 67,153
- -----------------------------------------------------------
$ 248,356
- -----------------------------------------------------------
Total rental expense under all operating leases and service contracts was
$51,512, $42,818, and $37,908 for 2000, 1999, and 1998, respectively.
The Company enters into when-issued and underwriting commitments. Had the
open transactions relating to these commitments as of March 31, 2000 been
closed, the effect on the consolidated financial statements of the Company would
not have been material.
The Company has been named as a defendant 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, and has been involved in certain
governmental and self regulatory agency investigations and proceedings. While
the ultimate resolution of these matters cannot be currently determined, in the
opinion of management, after consultation with legal counsel, the matters will
be resolved with no material adverse effect on the consolidated financial
condition of the Company. However, if during any period a potential adverse
contingency should become probable, the results of operations in that period
could be materially affected.
9. Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return.
The provision for income taxes consists of:
- ----------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------
Federal................. $ 81,499 $49,515 $ 43,162
State and local......... 15,117 9,926 9,096
- ----------------------------------------------------------
$ 96,616 $59,441 $ 52,258
- ----------------------------------------------------------
Current................. $ 101,823 $65,737 $ 59,970
Deferred................ (5,207) (6,296) (7,712)
- ----------------------------------------------------------
$ 96,616 $59,441 $ 52,258
- ----------------------------------------------------------
36
A reconciliation of the difference between the statutory federal income tax
rate and the effective income tax rate follows:
- -----------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------
Taxes at statutory rates..... $ 83,699 $ 52,071 $ 44,933
State income taxes, net of
federal income tax
benefit.................... 9,985 6,307 5,912
Tax-exempt interest
income, net................ (403) (665) (630)
Life insurance proceeds...... -- (1,050) --
Goodwill amortization........ 1,326 483 142
Foreign losses............... 1,417 1,265 1,014
Other, net................... 592 1,030 887
- -----------------------------------------------------------
$ 96,616 $ 59,441 $ 52,258
- -----------------------------------------------------------
Components of the Company's deferred tax assets and liabilities, included in
other assets and liabilities, are as follows:
- -----------------------------------------------------------
2000 1999
- -----------------------------------------------------------
Deferred tax assets:
Accrued compensation
and benefits...................... $ 32,221 $ 32,905
Accrued expenses................... 5,537 5,751
Operating loss carryforwards....... 3,697 548
Amortization of leasehold
improvements...................... 1,479 1,691
Other.............................. 3,452 2,052
Valuation allowance................ (3,656) (477)
- -----------------------------------------------------------
$ 42,730 $ 42,470
- -----------------------------------------------------------
Deferred tax liabilities:
Depreciation....................... $ 2,720 $ 4,785
Deferred expenses.................. 1,479 600
Deferred income.................... 3,941 1,225
Other.............................. 1,379 195
- -----------------------------------------------------------
$ 9,519 $ 6,805
- -----------------------------------------------------------
At March 31, 2000 and 1999, the deferred tax valuation allowance was
primarily for benefits related to net operating losses. These net operating
losses have two components, domestic (state) and foreign. The state net
operating losses expire between 2004 and 2019. The foreign net operating losses
will continue until utilized and otherwise have no expiration date.
10. Employee Benefits
The Company, through its subsidiaries, maintains various defined contribution
plans covering substantially all employees. In addition to discretionary
contributions, the Company matches 50% of employee 401(k) contributions up to 6%
of employee compensation with a maximum of two thousand five hundred dollars per
year. Contributions charged to operations amounted to $29,478, $18,693 and
$17,155 in 2000, 1999 and 1998, respectively. In addition, employees can make
voluntary contributions under certain plans.
11. Capital Stock
At March 31, 2000, the authorized numbers of common and preferred shares were
100 million and 4 million, respectively. In addition, at March 31, 2000 and
1999, there were approximately 15.1 million and 11.5 million shares of common
stock, respectively, reserved for issuance under the Company's stock option
plans and 5.2 million shares reserved in connection with the Perigee Inc.
("Perigee") transaction (See Note 17). Dividends declared but not paid at March
31, 2000, 1999 and 1998 were $4,676, $3,660 and $3,025, respectively.
The Company effected a 2-for-1 stock split and a 4-for-3 stock split in
fiscal 1999 and 1998, respectively. All references in consolidated financial
statements to the number of common shares and per share amounts have been
adjusted retroactively to reflect the stock splits, except for the number of
issued common shares presented in the consolidated financial statements.
12. Stock Plans
At March 31, 2000, 13.0 million shares were authorized to be issued under the
Company's employee stock plans. Options under the Company's employee stock plans
have been granted at prices not less than 100% of the fair value. Options are
generally exercisable in 20% or 25% increments over 4 to 5 years and expire
within 5 to 10 years from the date of grant.
37
Stock option transactions under the plans during the three years ended March
31, 2000 are summarized below:
- -----------------------------------------------------------
Weighted-
average
Number of exercise
shares price
- -----------------------------------------------------------
Options outstanding
at March 31, 1997............... 5,486,616 $ 7.95
Granted............................ 1,368,042 20.54
Exercised.......................... (976,826) 6.65
Canceled........................... (116,472) 11.22
- -----------------------------------------------------------
Options outstanding
at March 31, 1998............... 5,761,360 $ 11.09
Granted............................ 2,734,332 29.95
Exercised.......................... (982,668) 7.14
Canceled........................... (139,889) 17.55
- -----------------------------------------------------------
Options outstanding
at March 31, 1999............... 7,373,135 $ 18.49
Granted............................ 1,613,600 35.84
Exercised.......................... (1,349,288) 10.75
Canceled........................... (193,002) 27.02
- -----------------------------------------------------------
Options outstanding
at March 31, 2000............... 7,444,445 $23.43
- -----------------------------------------------------------
The following information summarizes the Company's stock options outstanding
at March 31, 2000:
- -----------------------------------------------------------
Weighted- Weighted-
Option average average
Exercise shares exercise remaining life
price range outstanding price (in years)
- -----------------------------------------------------------
$ 1.23-$ 9.99...... 1,246,326 $ 6.68 3.1
10.00- 19.99...... 1,316,645 13.02 1.8
20.00- 29.99...... 2,004,322 26.21 6.6
30.00- 40.53...... 2,877,152 33.52 6.9
- -----------------------------------------------------------
At March 31, 2000, 1999 and 1998, options were exercisable on 2,790,652,
2,679,080 and 2,464,746 shares, respectively, and the weighted-average exercise
prices were $14.54, $10.38 and $6.89, respectively.
The following information summarizes the Company's stock options exercisable
at March 31, 2000:
- -----------------------------------------------------------
Weighted-
Option average
Exercise shares exercise
price range exercisable price
- -----------------------------------------------------------
$ 1.23-$ 9.99................. 1,198,524 $ 6.62
10.00- 19.99................. 688,200 11.47
20.00- 29.99................. 691,393 26.36
30.00- 40.53................. 212,535 30.74
- -----------------------------------------------------------
During fiscal 1999, the Company granted 80,000 restricted shares of common
stock at a fair value of $28.16 per share. The restricted shares, granted under
the Company's employee stock plans, vest in 25% increments over four years.
Compensation expense is being recognized over the four-year vesting period. The
restricted stock award was a non-cash transaction. Additionally, during fiscal
1999, the Company entered into a stock purchase and related loan transaction in
which an officer purchased 120,000 shares of common stock valued at $3,379. In
fiscal 2000, the Company recognized $674 in compensation expense for grants made
under the Company's stock plans. Pro forma results based on the fair value
method prescribed in Statement No. 123 are as follows:
- ------------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------
Net earnings
As reported.......... $ 142,525 $ 89,334 $ 76,121
Pro forma............ 136,003 84,833 73,225
Earnings per share
As reported:
Basic.............. $ 2.51 $ 1.64 $ 1.40
Diluted............ 2.33 1.55 1.31
Pro forma:
Basic.............. $ 2.40 $ 1.56 $ 1.35
Diluted............ 2.23 1.47 1.26
- ------------------------------------------------------------
The weighted-average fair value of stock options granted in fiscal 2000, 1999
and 1998 using an option-pricing model, was $13.00, $9.27 and $5.50 per option
share, respectively. The following weighted-average assumptions were used in the
model for grants in fiscal 2000, 1999 and 1998, respectively: expected dividend
yield of 1.10%, 1.34% and 1.55%; risk-free interest rate of 6.02%, 5.40% and
6.06%; expected volatility of 27.68%, 23.46% and 21.99%; and expected lives of
6.03 years, 6.37 years and 4.90 years.
Pro forma compensation expense associated with option grants is recognized
over the vesting period. The initial impact of applying SFAS No. 123 is not
representative of the potential impact on pro forma net earnings for future
years, which will include compensation expense related to vesting of fiscal 1996
and subsequent grants.
38
The Company has also adopted the "Legg Mason, Inc., Stock Option Plan For
Non-Employee Directors." Options granted under the plan are immediately
exercisable at a price equal to the fair value of the shares on the date of
grant. Options issuable under the plan, limited to 1.1 million shares in
aggregate, have a term of not more than ten years from the date of grant. At
March 31, 2000, options on 435,920 shares were granted, of which 352,610 are
currently outstanding.
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 4,333,334 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.
13. Deferred Compensation Employee Stock Trust
In July 1998, the Emerging Issues Task Force ("EITF") reached a consensus on
EITF Issue 97-14, "Accounting for Deferred Compensation Arrangements Where
Amounts Earned Are Held in a Rabbi Trust and Invested." Under EITF 97-14, assets
of the Trust must be consolidated with those of the employer, and the value of
the employer's stock held in the rabbi trust must be classified in stockholders'
equity and generally accounted for in a manner similar to treasury stock. In
certain situations, the corresponding deferred compensation liability must be
recorded at the fair value of the shares held in the rabbi trust and the changes
in the fair value of the deferred compensation liability after September 30,
1998 must be recognized in earnings. The Company adopted EITF 97-14 to account
for its Deferred Compensation Employee Stock Trust Plan ("Plan") effective
September 30, 1998.
During fiscal 2000, the Company recorded a non-cash credit of $1,063. This
credit represents the change in the fair value of the stock held in trust from
April 1, 1999 to June 2, 1999.
During fiscal 1999, the Company recorded a non-cash charge to earnings of
$10,352. This charge represents the change in the fair value of the stock held
in trust from September 30, 1998 through March 31, 1999.
On June 2, 1999, the Company amended the Plan to limit distributions of Plan
assets to shares of the Company's common stock. In accordance with the
provisions of EITF 97-14, changes in the value of the stock held by the Plan
subsequent to June 2, 1999 no longer affect the Company's earnings. In addition,
as a result of the Plan amendment, the obligation previously recorded as a
deferred compensation liability has been reclassified to stockholders' equity.
Accordingly, the Trust shares (2,345,667 at March 31, 2000) and the
corresponding liability are presented as components of stockholders' equity at
March 31, 2000.
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.
Securities transactions generally settle 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, subject to regulatory and internal requirements. Customer margin
transactions include purchases of securities, sales of securities not yet
purchased and option 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 invests in short-term securities purchased under agreements to
resell collateralized by U.S. government and agency securities. The Company
generally takes possession of securities purchased under these agreements. Such
transactions expose the Company to risk in the event the counterparty does not
repurchase the securities and the value of the collateral held is less than the
underlying receivable. The Company monitors the value of the collateral daily
and requests additional collateral when necessary. 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 to facilitate settlement for other institutions. In both firm
and conduit transactions, the Company deposits or receives cash generally equal
to 102% of the fair value of the securities exchanged and monitors the adequacy
of collateral levels on a daily basis. 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.
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.
39
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, 2000, the broker-dealer
subsidiaries had aggregate net capital, as defined, of $262,674, which exceeded
required net capital by $232,969.
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 provides financial services through four business segments: Asset
Management, Private Client, Capital Markets and Other. Segment results include
all direct revenues and expenses of the operating units in each segment and
allocations of indirect expenses based on specific methodologies.
Asset Management provides investment advisory services to Company-sponsored
mutual funds and asset management for institutional and individual clients.
Private Client distributes a wide range of financial products through its
branch distribution network, including equity and fixed-income securities,
proprietary and non-affiliated mutual funds and annuities. Net interest profit
from customers' margin loan and credit balances is included in this segment.
Capital Markets consists of the Company's equity and fixed-income
institutional sales and trading, syndicate, corporate and public finance
activities. Sales credits associated with underwritten offerings are reported in
Private Client when sold through retail distribution channels and in Capital
Markets when sold through institutional distribution channels. This segment also
includes realized and unrealized gains and losses on merchant banking activities
and warrants acquired in connection with investment banking activities.
Other businesses are principally the Company's real estate business and
unallocated corporate revenues and expenses. In fiscal 2000, pre-tax earnings
include a non-cash deferred compensation credit of $1,063. In fiscal 1999,
pre-tax earnings include a non-cash deferred compensation charge of $10,352. See
Note 13.
Business segment financial results are as follows:
- -----------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------
Net revenues:
Asset Management..... $ 349,200 $ 264,769 $ 213,145
Private Client....... 689,524 520,308 444,486
Capital Markets...... 160,598 130,330 126,365
Other................ 37,160 35,689 31,358
- -----------------------------------------------------------
$ 1,236,482 $ 951,096 $ 815,354
- -----------------------------------------------------------
Earnings before income
tax provision:
Asset Management..... $ 114,368 $ 79,286 $ 53,394
Private Client....... 110,769 67,198 53,611
Capital Markets...... 8,897 12,040 20,345
Other................ 5,107 (9,749) 1,029
- -----------------------------------------------------------
$ 239,141 $ 148,775 $ 128,379
- -----------------------------------------------------------
The Company's revenues and earnings presented above are substantially derived
from domestic operations. Results of international operations are not
significant. The Company does not report asset information by business segment.
17. Subsequent Event
On May 26, 2000, the Company completed the acquisition of Perigee, one of
Canada's leading institutional investment managers. Under the terms of the
agreement, each outstanding share of Perigee was exchanged for 0.387 of an
exchangeable share of Legg Mason Canada Holdings, a subsidiary of the Company.
These exchangeable shares are the economic equivalent of common shares of the
Company and may be exchanged for those shares on a one-for-one basis at any
time. The Company issued approximately 5.2 million exchangeable shares in this
transaction.
The acquisition will be accounted for as a pooling of interests. Presented
below are the unaudited pro forma combined net revenues and net earnings for the
years ended March 31, 2000 and 1999, respectively, as though the acquisition had
been completed at the beginning of each period presented.
Years ended March 31,
2000 1999
- ----------------------------------------------------------
Net revenues.................... $ 1,265,199 $ 975,700
Net earnings.................... 150,413 93,274
Earnings per common share:
Basic........................ $ 2.43 $ 1.57
Diluted...................... 2.28 1.48
- ----------------------------------------------------------
40
Quarterly Financial Data
(Dollars in thousands except per share amounts)
(Unaudited)
Quarter ended
- ----------------------------------------------------------------------------------------------------------
2000 Mar. 31 Dec. 31 Sept. 30 June 30
- ----------------------------------------------------------------------------------------------------------
Revenues $ 411,858 $ 342,729 $ 301,611 $ 314,606
Interest expense 41,221 36,565 28,873 27,663
- ----------------------------------------------------------------------------------------------------------
Net revenues 370,637 306,164 272,738 286,943
- ----------------------------------------------------------------------------------------------------------
Non-interest expenses 289,750 250,481 225,543 231,567
- ----------------------------------------------------------------------------------------------------------
Earnings before income tax provision 80,887 55,683 47,195 55,376
Income tax provision 32,846 22,341 18,871 22,558
- ----------------------------------------------------------------------------------------------------------
Net earnings $ 48,041 $ 33,342 $ 28,324 $ 32,818
==========================================================================================================
Earnings per share:
Basic $ .83 $ .58 $ .50 $ .59
Diluted .78 .55 .47 .54
Cash dividend per share .08 .08 .08 .065
Stock price range:
High 51-1/4 41-3/4 40-15/16 42-7/8
Low 30-11/16 30-5/8 32-9/16 31-1/16
Quarter ended*
- ----------------------------------------------------------------------------------------------------------
1999 Mar. 31 Dec. 31 Sept. 30 June 30
- ----------------------------------------------------------------------------------------------------------
Revenues $ 289,146 $ 260,514 $ 247,603 $ 248,743
Interest expense 23,981 23,324 23,377 24,228
- ----------------------------------------------------------------------------------------------------------
Net revenues 265,165 237,190 224,226 224,515
- ----------------------------------------------------------------------------------------------------------
Non-interest expenses 225,206 206,226 187,313 183,576
- ----------------------------------------------------------------------------------------------------------
Earnings before income tax provision 39,959 30,964 36,913 40,939
Income tax provision 15,168 12,629 15,069 16,575
- ----------------------------------------------------------------------------------------------------------
Net earnings $ 24,791 $ 18,335 $ 21,844 $ 24,364
==========================================================================================================
Earnings per share:
Basic $ .45 $ .34 $ .39 $ .44
Diluted .43 .32 .37 .41
Cash dividend per share .065 .065 .065 .055
Stock price range:
High 35-7/8 31-9/16 31-11/32 32-9/32
Low 26-7/16 17-5/16 20-5/32 26-13/16
- ----------------------------------------------------------------------------------------------------------
* Adjusted to reflect all stock splits.
41
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 3 of the Company's definitive proxy
statement for the 2000 Annual Meeting of Stockholders and the caption
"Compliance With Section 16(a) of the Securities Exchange Act of 1934" on page
16 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
"Compensation of Directors" on page 4 of the Company's definitive proxy
statement for the 2000 Annual Meeting of Stockholders and the caption "Executive
Compensation" on pages 7 and 8 of the Company's definitive proxy statement for
the 2000 Annual Meeting of Stockholders. Such information is incorporated
herein by reference to the proxy statement.
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 pages 5 and 6
of the Company's definitive proxy statement for the 2000 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 13 of the Company's definitive proxy statement
for the 2000 Annual Meeting of Stockholders. Such information is incorporated
herein by reference to the proxy statement.
42
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 27
Consolidated Statements of Earnings 28
Consolidated Statements of Financial
Condition 29
Consolidated Statements of Changes in
Stockholders' Equity 30
Consolidated Statements of Cash Flows 31
Notes to Consolidated Financial
Statements 32-40
2. Financial Statement Schedules (included on pages S-1 to S-6 of this
Report):
Report of Independent Accountants on Financial Statement Schedules
Schedule I - Condensed Financial Statements 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 reference to Form 10-Q for the quarter ended
September 30, 1996)
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 SK, 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 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)*
43
10.2 Legg Mason, Inc. 1998 Stock Option Plan For Non-Employee
Directors, (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended March 31, 1998)*
10.3 Form of Option Agreement under Legg Mason, Inc. 1998 Stock
Option Plan for Non-Employee Directors (incorporated by
reference to Form 10-Q for the quarter ended June 30, 1998)*
10.4 Legg Mason Wood Walker, Incorporated Deferred
Compensation/Phantom Stock Plan (June 1999 Amending
Restatement), (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended March 31, 1999)*
10.5 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)*
10.6 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)*
10.7 Legg Mason, Inc. Executive Incentive Compensation Plan
(incorporated by reference to Appendix A to the definitive
proxy statement for the Company's 2000 Annual Meeting of
Stockholders)*
10.8 Legg Mason, Inc. 1996 Equity Incentive Plan (incorporated
by reference to Registration Statement No. 333-08721 on
Form S-8)*
10.9 Form of Option Agreement under Legg Mason, Inc. 1996 Equity
Incentive Plan (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended March 31, 1996)*
10.10 Form of Non-Qualified Stock Option Agreement under Legg Mason,
Inc. 1996 Equity Incentive Plan (incorporated by reference to
Form 10-Q for the quarter ended September 30, 1996)*
10.11 Executive Convertible Debenture Purchase and Loan Agreement
between Legg Mason, Inc. and an Executive Officer of Legg
Mason, Inc., dated as of August 29, 1996 (incorporated by
reference to Form 10-Q for the quarter ended December 31,
1996)*
10.12 Legg Mason, Inc. Executive Convertible Subordinated
Debenture Due August 29, 2000 issued to an Executive Officer
of Legg Mason, Inc. (incorporated by reference to Form 10-Q
for the quarter ended December 31, 1996)*
10.13 Promissory Note of Executive Officer of Legg Mason, Inc.,
dated as of August 29, 1996 (incorporated by reference to Form
10-Q for the quarter ended December 31, 1996)*
10.14 Pledge Agreement by and between an Executive Officer of Legg
Mason, Inc. as Pledgor, and Legg Mason, Inc. as Pledgee, dated
as of August 29, 1996 (incorporated by reference to Form 10-Q
for the quarter ended December 31, 1996)*
44
10.15 Executive Stock Purchase and Loan Agreement between Legg
Mason, Inc. and an Executive Officer of Legg Mason, Inc.,
dated as of December 8, 1998 (incorporated by reference to
Form 10-Q for the quarter ended December 31, 1998)*
10.16 Restricted Stock Agreement between Legg Mason, Inc. and an
Executive Officer of Legg Mason, Inc., dated as of December 8,
1998 (incorporated by reference to Form 10-Q for the quarter
ended December 31, 1998)*
10.17 Promissory Note of Executive Officer of Legg Mason, Inc.,
dated as December 8, 1998 (incorporated by reference to Form
10-Q for the quarter ended December 31, 1998)*
10.18 Pledge Agreement by and between Legg Mason, Inc. and an
Executive Officer of Legg Mason, Inc., dated as of December 8,
1998 (incorporated by reference to Form 10-Q for the quarter
ended December 31, 1998)*
21. Subsidiaries of the Company, filed herewith
23. Consent of independent accountants, filed herewith
27. Financial data schedule, filed herewith
_______________
*These exhibits are management contracts or compensatory plans or
arrangements.
(b) An 8-K Report was filed on March 10, 2000 reporting under Item 5.
45
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, 2000
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, 2000
- -------------------------- President and Chief
Raymond A. Mason Executive Officer
(Principal Executive Officer)
/s/ Thomas L. Souders Senior Vice President June 28, 2000
- -------------------------- and Treasurer
Thomas L. Souders (Principal Financial and
Accounting Officer)
/s/ James W. Brinkley Director June 28, 2000
- --------------------------
James W. Brinkley
/s/ Edmund J. Cashman, Jr. Director June 28, 2000
- --------------------------
Edmund J. Cashman, Jr.
/s/ Charles A. Bacigalupo Director June 28, 2000
- --------------------------
Charles A. Bacigalupo
/s/ Harry M. Ford, Jr. Director June 28, 2000
- --------------------------
Harry M. Ford, Jr.
46
/s/ Nicholas J. St. George Director June 28, 2000
- --------------------------
Nicholas J. St. George
/s/ Richard J. Himelfarb Director June 28, 2000
- --------------------------
Richard J. Himelfarb
/s/ James E. Ukrop Director June 28, 2000
- --------------------------
James E. Ukrop
/s/ Harold L. Adams Director June 28, 2000
- --------------------------
Harold L. Adams
/s/ John E. Koerner, III Director June 28, 2000
- --------------------------
John E. Koerner, III
/s/ Roger W. Schipke Director June 28, 2000
- --------------------------
Roger W. Schipke
/s/ W. Curtis Livingston Director June 28, 2000
- --------------------------
W. Curtis Livingston
/s/ Edward I. O'Brien Director June 28, 2000
- --------------------------
Edward I. O'Brien
/s/ Peter F. O'Malley Director June 28, 2000
- --------------------------
Peter F. O'Malley
/s/ Margaret DeB. Tutwiler Director June 28, 2000
- --------------------------
Margaret DeB. Tutwiler
/s/ William Wirth Director June 28, 2000
- --------------------------
William Wirth
47
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
Our report on the consolidated financial statements of Legg Mason, Inc. and
Subsidiaries is included on page 27 in this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedules listed in the index on page 43 of this form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ PRICEWATERHOUSECOOPERS LLP
Baltimore, Maryland
May 4, 2000, except for
Note 4, as to which the
date is May 26, 2000
S-1
Schedule I
LEGG MASON, INC.
(Parent Company Only)
STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
March 31,
------------------------------------
1999 2000
------------ ------------
ASSETS
Cash and cash equivalents $ 77,161 $ 45,188
Securities purchased under agreements to resell 73,016 110,643
Investment securities, at fair value 4,070 1,272
Investments in and advances
to subsidiaries 496,759 685,276
Other 15,758 21,343
---------- ----------
$ 666,764 $ 863,722
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Dividends payable $ 3,660 $ 4,676
Other 9,251 7,394
Senior notes 99,676 99,723
---------- ----------
112,587 111,793
Stockholders' equity
Common stock, par value $.10;
authorized 100,000,000 shares;
issued 56,376,253 in 1999
and 58,599,058 in 2000 5,638 5,860
Additional paid-in capital 215,387 271,687
Deferred compensation and employee note
receivable (5,362) (19,003)
Employee stock trust (18,475) (50,699)
Deferred compensation employee stock trust (11,470) 50,699
Retained earnings 368,632 493,652
Accumulated other comprehensive loss, net (173) (267)
---------- ----------
554,177 751,929
---------- ----------
$ 666,764 $ 863,722
========== ==========
See notes to financial statements.
S-2
Schedule I
LEGG MASON, INC.
(Parent Company Only)
STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Dollars in thousands)
Years Ended March 31,
----------------------------------------------
1998 1999 2000
------------ ------------ ------------
Revenues
Interest income $ 14,962 $ 14,916 $ 16,012
Equity in earnings of unconsolidated
subsidiaries - - 678
Other 249 1,200 353
--------- --------- ----------
15,211 16,116 17,043
Expenses
Interest expense 7,781 7,671 7,357
Operating expenses 2,788 9,110 3,644
--------- --------- ----------
10,569 16,781 11,001
Earnings before income tax provision
and equity in net earnings of
subsidiaries 4,642 (665) 6,042
Federal and state income tax provision 1,859 (1,493) 958
--------- --------- ----------
Earnings before equity in net
earnings of subsidiaries 2,783 828 5,084
Equity in net earnings of
subsidiaries 73,338 88,506 137,441
--------- --------- ----------
Net earnings $ 76,121 $ 89,334 $ 142,525
--------- --------- ----------
Other comprehensive income:
Unrealized holding gains (losses) on
investment securities 1,256 (1,790) 866
Reclassification adjustment for losses
(gains) included in net income (141) - 42
Foreign currency translation adjustment - - (850)
Income tax provision related to other
comprehensive income (402) 671 (152)
--------- --------- ----------
Other comprehensive income 713 (1,119) (94)
Comprehensive income $ 76,834 $ 88,215 $ 142,431
========= ========= ==========
See notes to financial statements.
S-3
Schedule I
LEGG MASON, INC.
(Parent Company Only)
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended March 31,
-------------------------------------------------
1998 1999 2000
----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 76,121 $ 89,334 $ 142,525
Equity in earnings of subsidiaries (73,338) (88,506) (137,441)
Depreciation and amortization - 269 985
(Increase) decrease in assets excluding
acquisitions (1,264) (11,710) 4,439
Increase (decrease) in liabilities excluding
acquisitions 2,231 6,035 (2,703)
---------- --------- ----------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 3,750 (4,578) 7,805
---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in securities purchased under agreements to resell 31,178 (30,393) (37,627)
Purchase of investment securities (127,737) (25,544) (3,772)
Proceeds from sales and maturities of investment securities 171,339 31,521 7,038
Investments in and advances to subsidiaries (21,354) 14,653 77,933
Acquisitions, net of cash acquired - - (87,637)
---------- --------- ----------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 53,426 (9,763) (44,065)
---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 9,777 9,508 20,780
Dividends paid (10,197) (13,320) (16,493)
---------- --------- ----------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (420) (3,812) 4,287
---------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 56,756 (18,153) (31,973)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 38,558 95,314 77,161
---------- --------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 95,314 $ 77,161 $ 45,188
========== ========= ==========
Interest payments were $7,481 in 1998, $7,371 in 1999 and $6,832 in 2000.
No income tax payments were made in 1998, 1999 and 2000.
See notes to financial statements.
S-4
LEGG MASON, INC.
(Parent Company Only)
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
1. Basis of Presentation
---------------------
The Parent Company Only financial statements include the accounts of Legg
Mason, Inc. In addition, all the assets and liabilities of its wholly-owned
subsidiaries are presented in Investments in and advances to subsidiaries.
The Notes to the Consolidated Financial Statements of Legg Mason, Inc. and
Subsidiaries included in Item 8 of this Report include disclosures with respect
to the Parent Company Only.
2. Transactions with Affiliates
----------------------------
Parent Company interest income for 1998, 1999 and 2000 includes $3,993,
$3,367 and $2,876, respectively, arising from a promissory note between the
Parent Company and an asset management subsidiary of the Company. The note,
$28,519 at March 31, 1999 and $31,146 at March 31, 2000, is included in
Investments in and advances to subsidiaries.
In addition, interest income for 1998, 1999 and 2000 includes $1,576,
$2,865 and $2,526, respectively, principally arising from senior subordinated
loans to a broker-dealer subsidiary of the Company. The indebtedness, $35,000
at March 31, 1999 and 2000, is included in Investments in and advances to
subsidiaries.
During 2000 the Company issued notes in the amount of $25,551 to a
subsidiary of the Company. The notes are included in Investments in and
advances to subsidiaries.
All income tax payments are made by Legg Mason Wood Walker, Inc., a wholly-
owned subsidiary.
3. Deferred Compensation Employee Stock Trust
------------------------------------------
In July 1998, the Emerging Issues Task Force ("EITF") reached a consensus
on EITF Issue 97-14, "Accounting for Deferred Compensation Arrangements Where
Amounts Earned Are Held in a Rabbi Trust and Invested" ("EITF 97-14"). Under
EITF 97-14, assets of the Trust must be consolidated with those of the employer,
and the value of the employer's stock held in the rabbi trust must be classified
in stockholders' equity and generally accounted for in a manner similar to
treasury stock. In certain situations, the corresponding deferred compensation
liability must be recorded at the fair value of the shares held in the rabbi
trust and the changes in the fair value of the deferred compensation liability
after September 30, 1998 must be recognized in earnings. A subsidiary of the
Company adopted EITF 97-14 to account for its Deferred Compensation Employee
Stock Trust Plan ("Plan") effective September 30, 1998.
During fiscal 2000, the subsidiary of the Company recorded a non-cash
credit of $1,063. This credit represents the change in the fair value of the
stock held in trust from April 1, 1999 to June 2, 1999.
During fiscal 1999, the subsidiary of the Company recorded a non-cash
charge to earnings of $10,352. This charge represents the change in the fair
value of the stock held in trust from September 30, 1998 through March 31, 1999.
On June 2, 1999, the subsidiary of the Company amended the Plan to limit
distributions of Plan assets to shares of the Company's common stock. In
accordance with the provisions of EITF 97-14, changes in the value of the stock
held by the Plan subsequent to June 2, 1999 no longer affect the Company's
earnings. In addition, as a result of the Plan amendment, the obligation
previously recorded as a deferred compensation liability has been reclassified
to stockholders' equity. Accordingly, the Trust shares (2,345,667 at March 31,
2000) and the corresponding liability are presented as components of
stockholders' equity at March 31, 2000.
S-5