FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
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 number: 0-26868
Lexington Global Asset Managers, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 22-3395036
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
PARK 80 WEST PLAZA TWO
SADDLE BROOK, NJ 07663
(Address of principal executive offices) (Zip code)
(201) 845-7300
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b)
of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The number of shares outstanding of the registrant's voting Common Stock and
the aggregate market value of such Common Stock held by non-affiliates on
February 28, 1997 was as follows:
Common Stock-$.01 Par Value Per Share
Authorized 15,000,000 Shares
5,487,887 Shares Issued and Outstanding
Aggregate Market Value $33,613,308
Document Incorporated by Reference.
Registrant's Proxy Statement for Annual Meeting of Stockholders to he held
May 15, 1997 is incorporated by reference into Part III of this Filing.
PART I
The statements contained in the Annual Report on Form 10-K ("Annual
Report") which are not historical facts, including, but not limited to,
statements found in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements that involve
a number of risks and uncertainties. The actual results of the future events
described in such forward-looking statements in this Annual Report could differ
materially from those stated in such forward-looking statements. Among the
factors that could cause actual results to differ materially are risks and
uncertainties set forth below under the heading Risk Factors and other risks and
uncertainties discussed in this Annual Report and set forth from time to time in
the registrant's other public reports and filings and public statements.
Item 1. Business
HISTORY AND BUSINESS OF LEXINGTON GLOBAL ASSET MANAGERS, INC.
Lexington Global Asset Managers, Inc. (the "Company") was incorporated in
Delaware in September 1995 as a holding company that offers, through its
subsidiaries, a variety of asset management and related services to retail
investors, institutions and high net worth individuals.
Prior to the spin-off of the Company on December 13, 1995 (the "Spin-off"),
the Company was a wholly-owned subsidiary of Piedmont Management Company Inc., a
Delaware corporation ("Piedmont"). Pursuant to the Spin-off, Piedmont
contributed to the Company all of its subsidiaries engaged in the asset
management business and distributed to each Piedmont stockholder one share of
Common Stock of the Company for each share of Piedmont common stock held by such
stockholder. The Spin-off resulted in 100% of the Common Stock of the Company
being distributed to Piedmont stockholders.
The Company manages portfolios of equity, balanced, fixed income,
mortgage-backed and money market investments, which portfolios are designed to
meet a broad range of investment objectives.
At December 31, 1996 total assets under management amounted to $3.2
billion, with $1.8 billion in mutual funds, $1.0 billion in institutional
accounts and $0.4 billion in private client accounts. The Company's client base
consists of approximately 160,000 mutual fund shareholder accounts,
approximately 20 institutional accounts, and approximately 550 private client
accounts. The tables below set forth the Company's total assets under management
in each of its three major markets at the dates indicated and the Company's
total assets under management by type of investment.
<TABLE>
Asset Composition By Market (1)
(Dollars in Thousands)
December 31,
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Mutual $1,795,927 $1,517,260 $1,501,668 $1,309,267 $754,720
Funds...........................
Institutional.............................. 1,047,244 1,134,080 1,472,122 1,549,777 1,460,009
Private 360,226 428,434 421,204 460,756 456,841
Clients........................
------------------------------------------------------------------------
$3,203,397 $3,079,774 $3,394,994 $3,319,800 $2,671,570
Total..................................
========================================================================
</TABLE>
<TABLE>
Asset Composition By Type of Investment
(Dollars in Thousands)
December 31,
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Domestic Equity...................... $1,329,087 $1,172,710 $1,096,988 $1,274,390 $1,178,722
Foreign 807,962 699,842 696,882 578,008 165,243
Equity.........................
------------------------------------------------------------------------
Subtotal 2,137,049 1,872,552 1,793,870 1,852,398 1,343,965
(2)........................
Precious Metals (3).................. 201,295 273,411 347,023 277,573 88,805
Fixed 668,841 712,830 976,104 977,396 965,422
Income..........................
Money Market Funds............... 196,212 220,981 277,997 212,433 273,378
------------------------------------------------------------------------
$3,203,397 $3,079,774 $3,394,994 $3,319,800 $2,671,570
Total..................................
========================================================================
- -------------
(1) Included in the institutional assets under management are invested assets
of members of the Richardson Family (defined below, see "Risk
Factors---Substantial Stockholders"), principal stockholders of the
Company, and certain other related persons, which assets at December 31,
1996 were valued at approximately $696 million. The fees charged for the
management of such assets are based upon standard fee schedules and are
comparable with the fees charged to unaffiliated accounts.
(2) Excludes precious metal equities.
(3) Precious Metals includes precious metals and precious metal equities.
</TABLE>
The following illustrates the structure of the Company as of December 31,
1996.
Lexington Global Asset Managers,Inc.
Lexington Management Corporation (100%)
Lexington Funds Distributor,Inc. (100%)
Market Systems Research Advisors, Inc. ( 65%)
Market Systems Research, Inc. (100% owned
by Market Systems Reseach Advisors, Inc.)
Piedmont Asset Advisors, Inc. ( 51%)
The subsidiaries of the Company can be divided into its core business
(Lexington Management Corporation ("LMC") and Lexington Funds Distributor, Inc.
("LFD"), the "Core Business"), which business generates most of the Company's
revenues and profits, and its other subsidiaries, which generate the remainder
of the Company's revenues and profits. On September 30, 1996, the Company sold
four of these other subsidiaries, LCM Financial Services Inc. ("LFSI"),
Lexington Capital Management Associates, Inc. ("LCMA"), Lexington Plan
Administrators ("LPA"), and LCMI Insurance Services ("LCMII") to Berkeley (USA)
Holdings Limited, a company formed by the CEO of these subsidiaries and the U.S.
unit of London Pacific Group Limited. The Company recorded a one-time gain of
$0.5 million on the sale. On December 31, 1996, another subsidiary, Lexington
Capital Management Inc. ("LCM") was merged into LMC.
The revenues of the Company consist primarily of management fees based on
the value of assets under management and commissions associated with the direct
sales of mutual fund products.
The tables below set forth the Company's assets under management in and
revenues from each of these two segments:
<TABLE>
Assets Under Management
(Dollars in Thousands)
December 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
LMC and LFD(1)..................... $2,720,094 $2,556,750 $2,874,412 $2,751,602 $2,131,705
Other Subsidiaries(2).............. 483,303 523,024 520,582 568,198 539,865
------------------------------------------------------------------------
$3,203,397 $3,079,774 $3,394,994 $3,319,800 $2,671,570
Total.................................
========================================================================
</TABLE>
<TABLE>
Revenues
(Dollars in Thousands)
December 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
LMC and LFD(1)...................... $14,384 $14,178 $14,796 $10,549 $8,702
Other Subsidiaries(2)............... 6,427 7,108 7,883 7,521 7,431
------------------------------------------------------------------------
$20,811 $21,286 $22,679 $18,070 $16,133
Total..................................
========================================================================
(1) Lexington Management Corporation and Lexington Funds Distributor, Inc.
(2) These subsidiaries include Lexington Capital Management, Inc., LCM
Financial Services, Inc., Lexington Capital Management Associates, Inc.,
Lexington Plan Administrators, Inc., Market Systems Research Advisors, Inc.,
Market Systems Research, Inc. and Piedmont Asset Advisors L.L.C.. LCM was merged
into LMC on December 31, 1996. LFSI, LCMA, and LPA were divested on September
30, 1996.
</TABLE>
Primary Markets and Strategy for Growth Markets
The Company's business strategy is targeted at three large market segments:
Mutual Funds--The Company, through its subsidiaries, markets,
promotes, and distributes the Lexington family of 18 mutual funds (the
"Lexington Funds") providing a variety of investment choices for the retail
investor, financial planner and intermediary, and the defined benefit and
defined contribution marketplace, including the rapidly growing 401(k)
market. In addition, the Company, through its subsidiaries, acts as a
subadvisor and /or administrator to four mutual funds
Institutional Market--The institutional market for investment
management services includes corporate, government and multi-employee (Taft
Hartley) pension plans, charitable endowments and foundations, insurance
company general accounts and defined contribution and 401(k) plans.
Lexington has secured both domestic and international assignments,
utilizing investments in domestic and foreign equity securities, precious
metal equities, fixed income and its family of mutual funds.
Private Clients--The Company offers equity, fixed income and balanced
fund alternatives, tailored to the individual investment objectives of its
private clients.
In each of these areas, management's overall objective is to execute
specific business strategies (see following discussions) to profitably maximize
assets under management and provide clients with investment performance that
meets their objectives.
The Company derives its revenues primarily from fees for its investment
advisory services provided to retail investors, institutions and private
clients.
Mutual Funds
Background. The mutual fund industry has expanded rapidly in the last seven
years. According to the Investment Company Institute, the trade association for
investment companies, total assets of U.S. mutual funds have increased from $982
billion at December 31, 1989 to $3.5 trillion at December 31, 1996, an average
growth rate of approximately 20% per year.
In the mutual fund industry, mutual funds may be sold to investors with a
sales charge or a commission (a "load" fund) or without a sales charge or a
commission (a "no-load" fund). Of the eighteen Lexington Funds, sixteen are
no-load funds and two are load funds. In addition, all four of the funds to
which the Company acts as a subadvisor and/or administrator are load funds.
Mutual funds may also be either closed-end or open-end. Generally, closed-end
funds raise money from stockholders only once, unlike an open-end fund which
issues and redeems shares of the fund on a continuous basis. In addition, unlike
open-end mutual funds, closed-end funds do not stand ready to redeem their
shares at net asset value. Instead, stockholders wishing to sell their shares
must do so by trading them on a national securities exchange or in the
over-the-counter market, at a price determined by the market, which may be
higher or lower than the fund's net asset value.
All of the Company's mutual funds are open-end funds.
The mutual fund industry is highly competitive and is currently
characterized by a high degree of fragmentation and a large and rapidly
increasing number of product offerings. The Company believes that the mutual
fund industry is becoming similar to the consumer products business, where
marketing strategies, product development, business development, sales expertise
and servicing are increasingly important.
Investment Products and Services. The Company has developed the Lexington
family of 18 mutual funds which are managed, marketed and distributed under the
Lexington name through Lexington Management Corporation and Lexington Funds
Distributor, Inc. The Lexington Funds are designed to provide a variety of
investment options for retail investors, financial planners and intermediaries,
and for the defined benefit and defined contribution marketplace, including the
401(k) market. These funds have been selected for inclusion in various no fee
transaction broker programs, such as the Charles Schwab Mutual Fund OneSource(R)
program.
Each of the Company's global/international equity funds may invest their
assets in any country approved by the fund's Board of Directors provided such
assets are custodied with an eligible custodian under Rule 17f-5 of the
Investment Company Act of 1940, as amended. Currently, Chase Manhattan Bank is
acting as master custodian of assets for each of the Lexington Funds.
Except for the Lexington Strategic Investments Fund, Inc., which has a
significant portion of its assets under management invested in South Africa, the
Lexington Goldfund, Inc., which has a significant portion of its assets under
management invested in Australia, Canada and South Africa, the Lexington Crosby
Small Cap Asia Growth Fund, which has a significant portion of its assets under
management invested in Asia, and the Lexington Troika Dialog Russia Fund, which
has a significant portion of its assets under management invested in Russia, the
Company believes that, in general, the assets under management in its
global/international and precious metal equities funds are invested in a
geographically diversified manner.
The Company, through its subsidiaries, offers subadvisory and/or
administration services to other mutual funds. Such services, which are
currently used by four unaffiliated mutual funds with total assets under
management of $292.1 million at December 31, 1996, include investment management
and mutual fund administration services. Mutual fund administration services
provided by the Company are principally in the areas of accounting, pricing,
compliance and marketing support.
Strategy. The Company's current strategies in the mutual fund market are
to: (i) identify emerging trends in order to develop new investment products;
(ii) strengthen the "brand name" awareness of the Lexington Funds both at the
broker-dealer level and the retail investor level; (iii) broaden its efforts to
offer subadvisory and administration services to other mutual funds; (iv) expand
into other distribution channels; and, (v) evaluate and pursue acquisition
opportunities.
The Company believes that with focused market research efforts it can
identify demographic and industry trends relevant to the growth of the mutual
fund business and thereby develop products to meet emerging needs and
opportunities. For example, the Company launched the Lexington Global Fund, Inc.
in March 1987 after the Company's research indicated that international
investing was an emerging investment trend which offered the potential for
reduced risk and higher expected returns through global diversification.
Furthermore, the company believes that its smaller relative size in the mutual
fund industry provides it with a competitive advantage by enabling the Company
to capitalize upon trends more quickly than its competitors. As another example,
in 1991, the Company launched the Lexington Worldwide Emerging Markets Fund,
Inc. in four months which enabled it to capitalize upon the approximately 400%
growth in that market in 1993. The Lexington Worldwide Emerging Markets Fund,
Inc. is currently Lexington's second largest mutual fund.
To achieve greater "brand name" awareness, the Company has used media
relations consultants to assist in building relationships with the media. The
Company's portfolio managers, analysts and management have appeared in national
print publications as well as on television and radio. This program, combined
with the Company's internal promotion staff that communicates directly with
financial planners, is designed to enhance the "brand name" awareness of
Lexington and its investment products.
The Company continuously markets to insurance companies, financial
planners, consultants, bank trust departments and other financial intermediaries
to sell its subadvisory and fund administration services and secure new
distribution channels for its investment products.
The Company utilizes a formalized screening and valuation process to
identify potential acquisition candidates or strategic partners in order to
expand its business. In addition to the Company's management contacts in the
mutual fund and investment management industry, an outside consultant has been
used in the past to complement management's efforts in this area.
Management believes that the integration of financial products with
targeted services will also allow it to better pursue opportunities in various
markets. For example, the Company has developed funds for the specific purpose
of funding variable annuity and variable life insurance policies issued by
insurance companies. Currently, two such funds are being sold by six insurance
companies and the Company provides subadvisory services for two additional
insurance company funds.
Institutional Market
Background. The market for institutional clients includes corporate,
government and multi-employee (Taft Hartley) pension plans, charitable
endowments and foundations, insurance company general accounts, and defined
contribution and 401(k) plans. According to the 1996 Money Market Directory of
Pension Funds (including 401(k)), the institutional market represented over $3.5
trillion in total assets under management, including defined benefit plan
assets, endowments and foundations.
The institutional market is extremely competitive with long lead times
between initial contact and acquisition of an account. Institutional investors
increasingly rely upon a competitive review process when selecting investment
advisory firms. The process often includes the assistance of independent
investment consultants, who analyze, rank and recommend advisors as well as
conduct searches for advisors on behalf of clients. Consultants typically
classify firms according to their investment style and place heavy emphasis upon
a demonstrated record of investment performance within a particular style. These
consultants often control access to prospective clients.
Investment Products and Services. The products the Company offers to the
institutional market include investments in domestic and foreign equity
securities, precious metal equities, fixed income securities and a family of
mutual funds to be utilized in a client's pension, defined contribution or
401(k) plan.
The Company, through its subsidiaries, acts as subadvisor under several
variable annuity contracts and variable life insurance policies, including
contracts and policies with Security Benefit Life Insurance Company and London
Pacific Life & Annuity Company. The Company also makes certain of its mutual
funds available to selected insurance companies as funding vehicles for variable
annuity contracts and variable life insurance policies, including Aetna
Insurance Company of America, SafeCo Life Insurance Company, Kemper Investors
Life Insurance Company, Transamerica Occidental Life Insurance Company,
Great-West Life & Annuity Insurance Company, and Fortis Benefits Insurance
Company.
Strategy. The Company's strategy in the institutional market is to target
specialized segments such as: (i) Taft Hartley and charitable foundations and
endowments, (ii) public retirement accounts, (iii) insurance company general
accounts and, (iv) broker wrap accounts. In addition, the Company has formed
joint management arrangements with other investment advisory companies which
offer specialized products or services.
By targeting specialized segments, management believes that it can market
directly to these segments and leverage upon the integrated financial products
and services that it offers. The Company believes the strategy will allow better
penetration of the institutional market.
The Company believes that the 401(k) market is of key interest. According
to Pensions and Investments, assets in the 401(k) market, where investment
decisions are made by the individual, will surpass the assets in the private
pension system. The 401(k) market, according to Bernstein Research, is expected
to grow at an average annual rate of 15% over the next four years. The Company
is targeting the 401(k) market as a key growth market by participating in
administrative alliances and various discount broker programs which target the
defined contribution and 401(k) market.
The Company has formed joint management arrangements with investment
advisory firms to expand investment product offerings. The Company develops
investment products in consultation with these firms which usually have a
specialization in evaluating and investing in specific market segments such as
convertible securities, specific geographic regions and global fixed income.
These products are subsequently distributed utilizing Lexington's distribution
channels and are jointly managed by the Company and the investment advisory
firm. These joint management arrangements are subject to the approval of the
shareholders of the fund utilizing these services and the annual approval of the
Board of Directors of the fund. Firms with which the Company has developed joint
management arrangements include Ariston Capital Management Corporation
(convertible securities), Crosby Asset Management (US), Inc. (Asia), MFR
Advisors, Inc. (Maria Fiorini Ramirez) (global fixed income), Capital
Technology, Inc. (small cap), and, Troika Dialog Asset Management, ZAO (Russia).
Each of these firms is a registered investment advisor.
The Lexington Crosby Small Cap Asia Growth Fund has a joint management
arrangement with Crosby Asset Management (US), Inc., a wholly-owned subsidiary
of the Crosby group. The Crosby group is an independent merchant bank in Asia
founded in 1984 which provides a variety of financial services including
investment management, stock brokerage, research, and corporate finance. The
Crosby group, headquartered in Hong Kong, employs over 500 people in Asia and
has 18 offices in 11 countries throughout the region, as well as in New York and
London.
The Lexington Ramirez Global Income Fund has a joint management arrangement
with MFR Advisors, Inc., a subsidiary of Maria Fiorini Ramirez Inc. MFR
Advisors, Inc. was established in 1992 by the economist Maria Fiorini Ramirez to
provide global economic consulting, investment advisory and broker-dealer
services.
The Lexington Convertible Securities Fund has a joint management
arrangement with Ariston Capital Management Corporation, a corporation
established in 1977. Ariston Capital Management Corporation's president, Richard
B. Russell, has over 20 years of experience in conducting research in the use of
convertible securities and market forecasting in portfolio management.
The Lexington SmallCap Value Fund, Inc. has a joint management arrangement
with Capital Technology, Inc., which has been managing small cap stock
portfolios since 1977. Management utilizes computer-based technology in
combination with analytical research to identify companies for the portfolio.
The Lexington Troika Dialog Russia Fund, Inc. has a joint management
arrangement with Troika Dialog Asset Management, ZAO, a Russian Closed Joint
Stock Company, established in 1991. Troika Dialog Asset Management, a pioneer in
the development of Russia's securities markets, is the largest brokerage firm in
Russia.
Private Clients
Background. With the changing demographics of the United States, the aging
of the "baby boomer" generation and the accumulation of assets in retirement
accounts, the private client sector is a growing segment of the investment
advisory industry. The Company believes that the principal needs for private
clients are investment advice and asset management services because these
clients, as they near retirement, have a large amount of accumulated assets and
require sophisticated estate planning advice. According to a September 1996
Bernstein Research report, there are approximately 2.0 million households in the
United States that have discretionary assets exceeding $1 million. This
represents approximately 2.0% of all U.S. households and total assets for this
market segment exceed $4.4 trillion.
Investment Products and Services. The Company offers equity, fixed income
and balanced fund investment options to its high net worth clients through
portfolios which are tailored to the client's individual investment objectives.
The average account size of the Company's private clients is $655,000. With
approximately 550 private clients, the Company's clients are generally heads of
households in their mid-40s to 60s with a high proportion of their wealth in
liquid assts.
Strategy. The Company's strategies in the private client sector are to: (i)
integrate the products and services offered to these clients by the Company's
various subsidiaries, (ii) design an integrated set of financial products and
services to meet the financial service needs of these individuals and (iii)
excel in customer service through utilization of the most current and
sophisticated investment planning, management and reporting techniques.
The Company offers products and services to its private clients through
LMC's private client group. Currently, marketing of investment products and
services to high net worth prospects is primarily conducted by LMC through
direct sales and referral sales by retail stockbrokers, CPAs and lawyer
networks.
LMC and LFD
LMC and LFD, both located in Saddle Brook, New Jersey, form the core
business of the Company generating approximately 69% of revenues in 1996. LMC
and its predecessors have been active in the investment management business
since 1938. LMC provides products and services for institutional clients
including corporate, government and Taft Hartley pension plans, charitable
endowments and foundations, insurance company general and separate accounts and
defined contribution and 401(k) plans. The Company's private client business is
also conducted primarily through LMC. LMC targets accounts in this market with
up to $5 million to invest, which accounts typically include wealthy individuals
and smaller institutional accounts, including foundations, not-for-profit
corporations, pension plans and employee benefit plans.
LMC and LFD are responsible for managing, servicing, marketing and
distributing the Lexington Funds to financial intermediaries and the retail
market. The Lexington Funds are designed to provide a variety of investment
options for retail investors, financial planners and intermediaries, and for the
defined benefit and defined contribution marketplace, including the 401(k)
market. The Lexington Funds include money market, equity and fixed income funds.
The geographical orientation of the Lexington Funds range from domestic to
international to global.
Certain funds specialize in specific industries or sectors, such as
precious metals and natural resources, but most are broadly diversified.
Currently, the Lexington Funds have approximately 160,000 shareholders. Of the
eighteen Lexington Funds, two are load funds and sixteen are no-load funds.
Investment advisory services, as well as management research and statistical
services, are provided to each fund by LMC and LFD. As compensation for such
services, the mutual funds pay a fee which is based upon average net assets
under management. These fees are limited by certain statutory limitations on
fund expenses.
LMC also acts as a sub-advisor and/or administrator to four open-end mutual
funds, all of which are load funds.
The following table sets forth the assets for each of the five years ended
December 31, 1996 of each of the Lexington Funds and for each fund to which LMC
and LFD provides subadvisory and/or administration services.
<TABLE>
Fund Assets (1)
(Dollars in Thousands)
December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Domestic Equity*
Lexington Growth & Income Fund $200,231 $138,840 $124,292 $134,494 $125,934
Lexington Corporate Leaders Trust Fund 384,990 247,560 152,990 142,798 104,428
Lexington Natural Resources Trust 37,896 16,962 13,620 5,272 1,921
Lexington Technical Strategy Fund, Inc. (2) 0 0 0 0 6,511
Lexington SmallCap Value Fund, Inc. 8,056 0 0 0 0
-----------------------------------------------------------------------
Total Domestic Equity $631,173 $403,362 $290,902 $282,564 $238,794
-----------------------------------------------------------------------
Fixed Income*
Lexington Money Market Trust $97,680 $88,961 $110,811 $94,790 $111,394
Lexington Short-Intermediate Government Securities
Fund, Inc. (3) 0 0 5,799 7,718 12,021
Lexington GNMA Income Fund, Inc. 133,660 130,735 132,362 149,951 132,031
Lexington Ramirez Global Income Fund (4) 28,992 10,754 10,578 14,573 13,127
Lexington Tax Free Money Fund, Inc. 26,528 28,203 37,531 41,187 45,799
Lexington Convertible Securities Fund 11,208 11,634 8,021 8,317 7,180
SBL Fund Series K (5) (6) (7) 11,755 5,684 0 0 0
Security Income Fund-Global Aggressive Bond
Series (5) (6) (7) 4,915 4,409 0 0 0
-----------------------------------------------------------------------
Total Fixed Income $314,738 $280,380 $305,102 $316,536 $321,552
-----------------------------------------------------------------------
Global/International Equity*
Lexington Worldwide Emerging Markets Fund, Inc. (8) $256,532 $260,423 $288,511 $227,464 $30,031
Lexington Global Fund, Inc. 37,216 53,635 67,353 87,044 50,410
Lexington Emerging Markets Fund, Inc. 21,581 7,840 4,598 0 0
Lexington International Fund, Inc. 18,891 17,855 17,811 0 0
Lexington Crosby Small Cap Asia Growth Fund 25,246 8,900 0 0 0
SBL Fund Series D (5) (6) (7) 246,908 177,935 147,028 97,863 25,128
Parkstone Advantage International Discovery
Fund (7) (10) 0 11,649 9,501 6,325 0
Security Equity Fund-Global Series (5) (6) (7) 28,543 21,870 23,839 13,898 0
Lexington Troika Dialog Russia Fund (9) 13,804 0 0 0 0
-----------------------------------------------------------------------
Total Global/International Equity $648,721 $560,107 $558,641 $432,594 $105,569
-----------------------------------------------------------------------
Precious Metal Equity*
Lexington Goldfund, Inc. $109,215 $136,361 $158,846 $159,483 $71,828
Lexington Strategic Investments Fund, Inc. (7) 43,702 76,280 138,164 84,465 8,615
Lexington Strategic Silver Fund, Inc. (7) 48,378 60,770 50,013 33,625 8,362
-----------------------------------------------------------------------
Total Precious Metal Equity $201,295 $273,411 $347,023 $277,573 $88,805
-----------------------------------------------------------------------
Total Funds $1,795,927 $1,517,260 $1,501,668 $1,309,267 $754,720
=======================================================================
- ----------------------------------------------------------
(1) Each of the funds listed are open-end funds. Unless otherwise
indicated, each of the funds is a no-load fund.
(2) Fund liquidated in May 1993.
(3) Fund liquidated in December 1995.
(4) Fund changed objective from tax-exempt bond fund to global income fund
on January 3, 1995.
(5) Fund sponsored by Security Benefit Life Insurance Company.
(6) Fund to which the Company, through its subsidiaries, provides
subadvisory and administration services.
(7) Load fund.
(8) Fund changed objective from growth fund to emerging markets growth fund
in June 1991.
(9) Fund commenced operations in June 1996.
(10) Fund to which the Company, through its subsidiaries, provides
administration services. Administration services to Parkstone Advantage
International Discovery Fund were terminated June 1996.
* Of each of the Company's four market segments, Domestic Equity, Fixed
Income, Global/International Equity and Precious Metal Equity, invested
assets held by the Richardson Family constituted 32.0%, 20.3%, 13.8% and
0%, respectively, of the total assets under management with respect to
such segment.
</TABLE>
Other Subsidiaries
During the year, the Company had 7 subsidiaries in addition to LMC and LFD,
which were principally located in Gold River, California and New York, New York.
On September 30, 1996, the Company sold four of the California subsidiaries:
Lexington Capital Management Associates, Inc. ("LCMA"), LCM Financial Services
Inc. ("LFSI"), Lexington Plan Administrators ("LPA"), and LCMI Insurance
Services ("LCMII"), to a company formed by the CEO of the subsidiaries and the
U.S. unit of London Pacific Group Limited, Berkeley (USA) Holdings Limited. On
December 31, 1996, Lexington Capital Management ("LCM") was merged into LMC. At
December 31, 1996, the Company had 2 subsidiaries in addition to LMC and LFD:
Market Systems Research Advisors, Inc. ("MSR") and Piedmont Asset Advisors
L.L.C. ("PAA").
MSR, MSRI--New York, New York.
MSR provides professional portfolio management services to investors
through the use of proprietary quantitative price momentum stock selectivity
models. MSR offers investment advisory services to accounts within the Lexington
organization and to other clients. MSR publishes a monthly research report
through a subsidiary company, Market Systems Research, Inc. ("MSRI"), which is
marketed to other investment advisory companies. MSR is owned 65% by the Company
and 35% by Frank A.
Peluso, a principal employee who also serves as President and a Director of the
Company.
PAA--New York, New York.
The Company owns 51% of PAA, an entity formed in 1994 which served as a
general partner of a limited investment partnership engaged in the asset
management business. (PAA's activities in the limited partnership were
terminated in the third quarter of 1996.) The remainder of PAA is owned by
R.V.Consultants, Inc. a company which is owned by Messrs. Stuart S. Richardson,
Robert M. DeMichele and Richard M. Hisey, all of whom are principal employees of
the Company.
Marketing and Distribution
Traditionally, load mutual funds were principally sold by registered
representatives of broker-dealers, who received sales commissions as
compensation for fund sales. No-load mutual funds were sold directly to the
investing public without the assistance of a registered representative and
therefore no sales commission was imposed on the purchase.
The Company's products and services are marketed and distributed through a
variety of captive and non-captive distribution channels which are listed below.
The approximate percentage of assets under management distributed through each
of the Company's distribution channels listed below is provided in the
parenthetical immediately prior to the description of such distribution channel.
(48%) The Lexington Family of No Load Mutual Funds are sold through
direct sales and marketing efforts utilizing print, radio and television
advertising.
(29%) The Company also has shareholder servicing arrangements with
discount brokers, including Charles Schwab Mutual Fund OneSource(R) , Fidelity
Funds Network(R), Jack White & Company No Transaction Fee Mutual Fund Service,
Waterhouse Mutual Fund Connection and First Trust Corporation. The Company also
has a number of its funds included in strategic alliances and "wrap" programs,
which will offer greater distribution opportunities in the future. At December
31, 1996, approximately $533 million, or 29%, of LMC's total mutual fund assets
have been generated through these named shareholder servicing arrangements.
Under these shareholder servicing arrangements, the discount broker, which
sells, markets and distributes many mutual funds other than the Lexington Funds
is paid a fee for recordkeeping, shareholder communications and other services
provided by the discount broker to investors purchasing shares of the Lexington
Funds through the discount broker's programs. This fee is typically based on the
average daily value of the investments in each Lexington Fund made by the
discount broker on behalf of investors participating in the discount broker's
program. While the Company has no reason to believe that such shareholder
servicing arrangements will be terminated, no assurances can be given that these
arrangements will continue or that they will continue to generate a substantial
portion of the Company's total mutual fund assets. The loss of any one or more
of these shareholder servicing arrangements may materially adversely affect the
Company's results of operations. The Company's ability to gain and maintain
access to these distribution channels is largely dependent on the investment
performance of the Company's products, the development of new investment
products, marketing and pricing strategies that serve the needs of investors and
discount brokers and the level of service provided by the Company. Although the
Company historically has been successful in these aspects of its business, there
can be no assurance that the Company can continue to maintain such access for
its products.
(5%) The Lexington Strategic Funds, which are precious metal stock
funds, as well as funds sponsored by Security Benefit Life Insurance Company are
sold with a sales charge through broker-dealers and directly by LFD.
(18%) The Lexington Funds are also sold through banks and insurance
companies.
Although the Company does not control all of its distribution channels, the
Company believes that the use of multiple distribution channels, including
competing non-captive distribution channels, stabilizes and increases the
distribution of its products.
Regulation
LMC and MSR are registered as investment advisors under the Investment
Advisers Act of 1940, as amended (the "Advisory Act"), and all applicable state
securities laws. LFD is registered as a broker/dealer under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and all applicable state
securities laws. Accordingly, this company is subject to regulation by the
Securities and Exchange Commission (the "SEC") and state securities commissions
and is required to furnish periodic reports and to observe restrictions on
certain activities. Each Lexington Fund is registered with the SEC under the
Investment Company Act of 1940, as amended (the "1940 Act"), and is qualified
for sale throughout the United States. The 1940 Act imposes restrictions on
certain transactions between the Lexington Funds and LMC.
All aspects of the Company's business are subject to the laws and
regulations of the countries and states in which Lexington, its subsidiaries and
affiliates conduct business. These laws and regulations are primarily intended
to benefit clients and shareholders and, in some instances may impose minimum
capital requirements. These laws and regulations generally grant supervisory
agencies broad administrative powers, including the power to limit or restrict
Lexington's business and impose sanctions, to suspend individual employees, to
limit the Company from engaging in business for specific periods, to revoke
LMC's registration as an investment advisor and LFD's registration as a
broker-dealer and to censure and levy fines. Applicable United States Federal
laws also include the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the Securities Act of 1933, as amended (the "Securities
Act").
Competition
The asset management business is highly competitive. The Company competes
with a large number of other domestic and foreign asset management firms,
commercial banks, insurance companies, broker-dealers and others, although as a
practical matter the Company typically competes with other firms offering
comparable investment services and objectives. In December 1996, there were
approximately 9,800 asset management firms nationwide that compete in some or
all of the Company's markets. According to The Money Market, Directory of
Pension Funds and their Investment Managers, the Company ranked among the top
400 largest of investment counsel firms, as measured by total assets under
management at December 1996. As a result, some of the financial services
companies with which the Company competes have substantially greater resources
and assets under management than the Company and offer a wider variety of
products and services.
The Company believes factors which affect its competition for clients
include investment performance records, the range of products offered, the
abilities and reputations of its portfolio managers, management fees and the
development of new investment strategies and marketing, although the importance
of these factors can vary depending on the type of asset management service
involved. Client service is also an important competitive factor. The Company's
ability to increase or retain client assets could be adversely affected if
client accounts underperform the market or if portfolio managers leave the
Company. The ability of the Company to compete with other asset management firms
is also dependent, in part, on the relative attractiveness of its investment
philosophies and strategies under prevailing market conditions. There are
relatively few barriers to entry by new asset management firms which could
increase competitive pressure in the industry.
Selection of advisors by investors often is subject to a competitive review
process relying heavily upon historical performance.
A large number of mutual funds are sold to the public by asset management
firms, broker-dealers, insurance companies and banks in competition with the
Company's mutual funds. Many competitors apply substantial resources to
advertising and marketing their mutual funds which may adversely affect the
ability of the Company's mutual funds to attract new clients and to retain
assets under management.
Personnel
At December 31, 1996, the Company employed approximately 96 people.
Approximately 91, 1, 1, and 3 were located in Saddle Brook, New Jersey; Gold
River, California; Dallas, Texas; and New York, New York, respectively. None of
the Company's employees are represented by a labor union and the Company
believes that its relations with its employees are good.
RISK FACTORS
Dependence upon Performance Record
The market for providing investment management services is highly
competitive with investors generally favoring investment advisors with a
sustained successful investment performance record. The performance record of
the Company may be affected by factors over which the Company has little or no
control, including general economic conditions, other factors influencing the
capital markets, the net sales of mutual fund shares generally, and interest
rate fluctuations.
Concentration of Distribution Channels and Reliance on Certain Distributors
While the Company over time has used a variety of distribution channels,
currently a substantial percentage of the Company's investment product sales are
through non-captive distribution channels, including no transaction fee
programs. Such non-captive distribution channels generally offer competing
internally and externally sponsored or managed investment products and access to
these distribution channels is limited. The Company's ability to gain and
maintain access to these distribution channels is largely dependent on the
investment performance of the Company's products, the development of new
investment products, marketing and pricing strategies that serve the needs of
investors and the non-captive distribution channels and the level of service
provided by the Company. Although the Company historically has been successful
in these aspects of its business, there can be no assurance that the Company can
continue to maintain such access for its products.
As of December 31, 1996, approximately $533 million, or 29% , of the
Company's total mutual fund assets have been generated through shareholder
servicing arrangements with five discount brokers; Charles Schwab Mutual Fund
OneSource(R) , Fidelity Funds Network(R), Jack White & Company No Transaction
Fee Mutual Fund Service, Waterhouse Mutual Fund Connection, and First Trust
Corporation. While the Company has no reason to believe that such shareholder
servicing arrangements will be terminated, no assurances can be given that these
arrangements will continue or that they will continue to generate a substantial
portion of the Company's total mutual fund assets under management. The loss of
any one or more of these arrangements could materially adversely affect the
Company's results of operations.
Changes in Market Conditions; Retention of Assets Under Management
The Company derives the major portion of its revenues from asset management
contracts with clients. Under these contracts, the asset management fee paid to
the Company is typically based on the market value from time to time of assets
under management. Accordingly, fluctuations in securities prices could
materially adversely affect the Company's results of operations.
In addition, institutional asset management contracts are generally
terminable upon 30 days' notice. Mutual fund and unit trust investors may
generally withdraw their funds at any time without prior notice. Institutional
clients may elect to terminate their relationship with the Company, or reduce
the aggregate amount of assets under management, and individual clients may
elect to close their accounts or redeem their shares in the Company's mutual
funds or unit trusts, or shift their funds to other types of accounts with
different rate structures, for any of a number of reasons, including investment
conditions or changes in prevailing interest rates or financial market
conditions. Fees vary with the aggregate amount of assets under management by
the Company and with the type of asset being managed, with higher fees earned on
actively managed equity and balanced accounts and lower fees earned on fixed
income and stable return accounts.
Global/International and Precious Metal Equity Mutual Fund Holdings
At December 31, 1996, approximately $1.0 billion, or 31.5%, of the
Company's total assets under management were invested in global/international
and precious metal equities. Many foreign markets, especially emerging markets
and markets where precious metals are mined, may be characterized by volatile
economic, political and social conditions. Many of these countries have also
experienced significant exchange rate fluctuations between the local currencies
and the U.S. dollar which may subject the U.S. dollar value of the Company's
assets under management in global/international and precious metal equities to
currency translation risk, which could materially adversely affect the Company's
results of operations. The markets in such countries may also be less liquid and
less efficient than domestic markets. While the Company believes international
investing offers the potential for reduced risk and higher expected returns
through global diversification, fluctuations in foreign markets may have a
material adverse effect on the value of the assets under management in the
Company's global/international and precious metal equities.
Except for the Lexington Strategic Investments Fund, Inc., which has a
significant portion of its assets under management invested in South Africa, the
Lexington Goldfund, Inc., which has a significant portion of its assets under
management invested in Australia, Canada and South Africa, the Lexington Crosby
Small Cap Asia Growth Fund, which has a significant portion of its assets under
management invested in Asia, and the Lexington Troika Dialog Russia Fund, Inc.,
which has a significant portion of its assets under management invested in
Russia, the Company believes that in general, the assets under management in its
global/international and precious metal equities funds are invested in a
geographically diversified manner.
Competition
The asset management business is highly competitive. The Company competes
with a large number of other domestic and foreign asset management firms,
commercial banks, insurance companies, broker-dealers and others, although as a
practical matter the Company typically competes with other firms offering
comparable investment services and objectives. Many of the financial services
companies with which the Company competes have substantially greater resources
and assets under management than the Company and offer a wider variety of
products and services.
The Company believes factors which affect its competition for clients
include investment performance records, the range of products offered, the
abilities and reputations of its portfolio managers, management fees and the
development of new investment strategies and marketing, although the importance
of these factors can vary depending on the type of asset management service
involved. Client service is also an important competitive factor. The Company's
ability to increase or retain client assets could be adversely affected if
client accounts underperform the market or if portfolio managers leave the
Company. The ability of the Company to compete with other asset management firms
is also dependent, in part, on the relative attractiveness of its investment
philosophies and strategies under prevailing market conditions. There are
relatively few barriers to entry by new asset management firms which could
increase competitive pressure in the industry.
Reliance on Key Personnel
The Company's business is managed by key executive officers, the loss of
whom could have a material adverse effect on the Company. The Company believes
that its continued success will depend in large part on its ability to attract
and retain highly skilled and qualified personnel. In the event that any
officers or directors of the Company cease to be associated with the Company,
the Company will seek to find a qualified person or persons to fill their
positions with the Company. There can, however, be no assurance that such
individuals could be engaged by the Company.
Dividends and Dividend Policy
The decision whether to apply legally available funds to the payment of
dividends on the Common Stock will be made by the Board of Directors from time
to time in the exercise of its business judgment, taking into account, among
other things, the Company's results of operations and financial condition and
any then existing or proposed commitments for the use by the Company of
available funds.
On March 7, 1997, the Company announced a share repurchase program of up to
750,000 shares. Repurchases will be made from time to time in the open market or
through privately negotiated transactions at market prices. The stock repurchase
plan approved on March 6, 1997 has a term of three years.
In addition, the Company may in the future issue debt securities or
preferred stock or enter into loan or other agreements that restrict the payment
of dividends on and repurchases of the Company's capital stock.
Substantial Stockholders
Descendants of Lunsford Richardson, Sr., their spouses, trusts, a
corporation in which they have interests and charitable organizations
established by such descendants (the "Richardson Family") some of whom are
directors of the Company, beneficially own shares of Common Stock representing
over 50% of the voting power of all the Company's outstanding voting securities.
Accordingly, the Richardson Family has the ability to elect a majority of the
Board of Directors and, in general, exert significant influence over the outcome
of any other matters submitted to the Company's stockholders for approval,
including mergers, consolidations or the sale of all or substantially all of the
Company's assets, and to prevent or cause a change in control of the Company.
At December 31, 1996 the Company also managed approximately $696 million in
invested assets of the Richardson Family and certain other related persons which
represent approximately 21.7% of the Company's total assets under management at
such date. The fees charged for the management of such assets are based upon
standard fee schedules and are comparable with the fees charged to unaffiliated
accounts. While the Company believes that it will continue to manage these
assets, no assurance can be given with respect to the continued management of
these assets. The loss of such assets would materially adversely affect the
Company's results of operations.
Item 2. Properties
Neither the Company nor its subsidiaries and majority owned companies own
real estate. The principal offices of the Company and its subsidiaries are
leased from unaffiliated third parties, which leases expire at various dates up
until the year 2003. The Company and its subsidiaries LMC and LFD are located in
Saddle Brook, New Jersey, occupying approximately 28,000 square feet of office
space at an annual rental of approximately $578,000 under a lease expiring in
2003.
MSR leases approximately 2,100 square feet of office space in New York, New
York, at an annual rental rate of approximately $42,000 under a lease expiring
in 1999.
Substantially all of the leases referred to above provide for the payment
of tax, escalation, maintenance, insurance and certain other operating expenses
applicable to the leased premises.
In addition to the above leases, the Company leases equipment on a
long-term or month-to-month basis, which rental expense was $152,630 in 1996.
Additional information concerning leases is provided in Note 6 of the Notes
to Consolidated Financial Statements, and such information is incorporated in
this item by reference.
Item 3. Legal Proceedings
As part of the normal course of its operations, the Company and certain of
its subsidiaries and majority owned companies are named as defendants in various
legal actions seeking monetary damages. Management does not expect any material
adverse judgments to be rendered against the Company or its subsidiaries as a
result of pending legal actions.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Date of Meeting: May 17, 1996 Annual Meeting of Stockholders
(b) Matters voted on and number of affirmative/negative votes:
1. Election of Directors:
Peter L. Richardson, Stuart S. Richardson, Carl H. Tiedemann, Marion A.
Woodbury
For All Directors: 5,037,624 Withheld Authority: 5,039
2. Ratification of the selection of Coopers & Lybrand L.L.P. as the
independent auditors for the current calendar year.
Votes: For Against Abstain
5,041,393 720 550
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock is traded in the NASDAQ National Market System
under the symbol LGAM. The quarterly range of prices of the Company's Common
Stock as reported by the NASDAQ National Market System, from the inception of
trading on December 13, 1995 to December 31, 1996 was:
1996 1995
---- ----
High Low High Low
First . . . . . . . . . . . $4.906 $3.625 N/A N/A
Second . . . . . . . . . . 6.50 4.375 N/A N/A
Third . . . . . . . . . . 5.50 4.25 N/A N/A
Fourth . . . . . . . . . . 7.313 5.00 $5.00 $4.625
On March 7, 1997, the Company announced a share repurchase program of up
to 750,000 shares. Repurchases will be made from time to time in the open market
or through privately negotiated transactions at market prices. The stock
repurchase plan approved on March 6, 1997 has a term of three years. The payment
of any dividends will depend, among other things, upon the Company's earnings,
assets and general financial condition, and upon other relevant factors.
As of December 31, 1996, there were 671 holders of record of Common Stock.
Item 6. Selected Financial Data
<TABLE>
Year Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(000'0 omitted except per share data)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Results of Operations:
Total revenue $20,811 $21,286 $22,680 $18,070 $16,133
Total expenses 17,684 18,965 17,576 15,963 14,524
Provision for taxes 1,270 700 2,059 977 862
Net income 2,475 1,579 2,990 1,145 731
Per Share Data:
Earnings per share $0.45 $0.29 $0.55 0.21 $0.13
Financial Position:
Total assets $16,078 $14,774 $13,646 $10,867 $10,750
Total liabi 5,911 6,994 16,201 15,012 14,526
Total stockholders' equity (deficit) 9,822 7,347 (2,908) (4,346) (3,990)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The consolidated net income in 1996 was $2.5 million, $0.45 per share,
compared to net income of $1.6 million, $0.29 per share in 1995. Included in the
1996 results is a one-time pre-tax gain of $0.5 million ($0.09 per share) from
the sale of four of the Company's West Coast subsidiaries. On September 30,
1996, the Company sold four of the California subsidiaries: LCMA, LFSI, LPA, and
LCMII, to a company formed by the CEO of the subsidiaries and the U.S. unit of
London Pacific Group Limited, Berkeley (USA) Holdings Limited. On December 31,
1996, LCM was merged into LMC. Included in the 1995 results were reorganization
costs of $2.2 million associated with the Company's Spin-off from Piedmont
Management Company. On a per share basis, these costs amounted to $0.40 for the
year.
A further discussion and analysis of results of operations follows.
1996 Compared with 1995
Total revenues of $20.8 million are 2.4% less than the $21.3 million
recorded in 1995.
The revenue decrease primarily reflected the sale of four of the Company's West
Coast subsidiaries on September 30, 1996. These subsidiaries would have
contributed approximately $1.5 million in additional revenue for the fourth
quarter. Partially offsetting the effect of the sale is a 9.5% increase in
mutual fund management fees. This reflects the strong mutual fund asset growth
at the Company's Core Business (LMC/LFD). This business delivered $14.4 million
in revenues in 1996 versus $14.2 million in 1995, reflecting the $300 million,
18.4% increase in mutual fund assets under management. Asset growth was
strongest in domestic equity (+$0.2 billion) and international equity ($0.1
billion), partially offset by precious metals which were down $0.1 billion. The
largest increase in mutual fund assets under management was in Lexington
Corporate Leaders Trust which increased by 56% or $137 million in assets under
management. In general, stronger investor demand and performance in a number of
the Lexington funds drove the increase in assets under management. Mutual fund
management fees increased from $9.8 million in 1995 to $10.7 million in 1996. In
particular, management fees associated with the Lexington Corporate Leaders
Trust Fund, SBL Fund Series D, and Lexington Growth & Income Fund, Inc. grew
significantly due to the asset increases noted above.
Other management fees experienced a $1.7 million decline from $9.1 million
in 1995 to $7.4 million. This income primarily reflects private client
management fees at the West Coast operations, which, as mentioned above, were
sold at the end of the third quarter and contributed $1.2 million in other
management fees in the fourth quarter of 1995. This revenue line also includes
LMC's institutional asset management fees which declined by $0.8 million from
1995 due to client terminations.
Commissions income of $1.7 million were even with 1995.
Other income of $0.7 million is $0.2 million above 1995, and is
attributable to higher investment income.
Expenses of $17.7 million decreased $1.3 million from $19.0 million in
1995. The Company's Core Business incurred total expenses of $10.9 million which
are $1.1 million below the $12.0 million for 1995, when the Company incurred
one-time reorganization expenses of $2.2 million due to the Spin-off. The
Company's other subsidiaries incurred expenses of $6.8 million for 1996 versus
$7.0 million for 1995.
Total salaries and other compensation increased $0.7 million to $11.2
million from $10.5 million as a result of : 1) the addition of investment and
other personnel; 2) higher commissions associated with increased revenues in the
Company's West Coast operations; and, 3) the fact that the prior year expenses
benefited from an employee benefit refund associated with a good experience
rating. Selling and promotional expenses of $1.2 million are down $0.7 million.
This is primarily due to the Company re-targeting its marketing efforts and
making greater use of public relations. Administrative and general expenses of
$5.2 million are $1.4 million lower than $6.6 million in 1995. The decrease
reflects $2.2 million in various professional fees incurred in 1995 associated
with the Spin-off and internal reorganization of the Company. Partially
offsetting the $2.2 million decline are the additional costs associated with the
Company's public reporting responsibilities.
The Company recorded a $0.5 million gain on the sale of LFSI, LPA, LCMA,
and LCMII which occurred on September 30, 1996.
Pre-tax income grew to $3.7 million in 1996 from $2.3 million in 1995, an
increase of 60.9% or $1.4 million. Provision for state and federal taxes
increased 88.7% from $0.7 million in 1995 to $1.3 million in 1996, due to higher
profits.
Overall, net income increased 56.3% from $1.6 million in 1995 to $2.5
million in 1996. Earnings per share were $0.45 in 1996 compared to $0.29 in
1995.
1995 Compared with 1994
Total revenues of $21.3 million for 1995 are 6.2% less than the $22.7
million recorded in 1994.
The Company's core business (consisting of LMC and LFD) delivered total
revenues of $14.2 million in 1995, which is $0.6 million below the $14.8 million
recorded in 1994. The Company's other subsidiaries generated total revenues of
$7.1 million in 1995, which is $0.8 million less than the $7.9 million figure
for 1994.
Net mutual fund management fees of $9.8 million are $0.3 million lower than
1994's $10.1 million reflecting lower average net assets in several
international and fixed income funds, which reflects higher returns and higher
investor interest in U.S. equity markets, which had a strong year. Mutual fund
commissions fell $0.4 million from $0.6 million in 1994 to $0.2 million in 1995
as a result of a lower level of load fund sales. Lexington's two load funds are
both precious metals products; precious metal products did not attract as much
investor interest in 1995 as they did in 1994.
Other management fees of $9.1 million are $0.6 million below 1994's $9.7
million. This income is primarily derived from the Company's other subsidiaries,
led by the California operations, which handles most of the Company's high net
worth business. The decline in revenues is due to a decline in billable assets
under management for the year which is primarily a function of account
terminations.
Commissions income of $1.7 million are $0.3 million below the comparable
1994 figure of $2.0 million. This revenue is generated primarily by the
Company's California brokerage and insurance operations and decreased with lower
levels of new business.
Other income of $0.5 million is $0.2 million above the $0.3 million
recorded in 1994. The increase is attributable to higher investment income and
mutual fund administration fees at the Company's Core Business.
Total expenses of $19.0 million are $1.4 million or 8.0% higher than the
$17.6 million in total expenses in 1994. The Company's Core Business incurred
total expenses of $12.0 million which are $2.0 million or 20.0% above the $10.0
million in expense for 1994 primarily as a result of the Company's
reorganization and Spin-off. The Company's other subsidiaries incurred $7.0
million in expenses for 1995, $0.6 million less than the year earlier expenses
of $7.6 million.
Total salaries and other compensation expenses are down $0.5 million from
$11.0 million in 1994 to $10.5 million in 1995, reflecting lower employee
benefits expenses and lower bonus accruals which are a result of lower revenues
and profits. Total selling and promotional expenses of $1.9 million are $0.1
million below the year earlier expense of $2.0 million. Lower advertising
expenditures account for most of the variance and reflect the lower sales of
precious metals, foreign equities, and fixed income securities compared with
U.S. equities. Administrative and general expenses of $6.6 million are $2.0
million higher than the comparable 1994 figure of $4.6 million. The increase
reflects $2.2 million in various professional fees associated with the Spin-off
and internal reorganization of the Company.
Pre-tax income of $2.3 million is down 54.9% or $2.8 million from $5.1
million recorded in 1994 due to the lower revenues and higher expenses.
Provision for state and federal taxes declined from $2.0 million in 1994 to $0.7
million in 1995 due to lower profits.
Overall, net income for 1995 decreased to $1.6 million from $3.0 million in
1994.
Effects of Inflation
The Company does not believe that inflation has had a significant impact on
the operations of the Company to date. The Company's assets consist primarily of
cash and investments which are monetary in nature. However, to the extent
inflation results in rising interest rates with the attendant adverse effects on
the securities markets and on the values of investments held in the Company's
accounts, inflation may adversely affect the Company's financial position and
results of operations. Inflation also may result in increased operating expenses
(primarily personnel-related costs) that may not be readily recoverable in the
fees charged by the Company.
Liquidity and Financial Condition
The Company's business typically does not require substantial capital
expenditures. The most significant investments are in technology, including
computer equipment and telephones.
Historically, the Company has been cash self-sufficient. Cash flows from
operations have ranged between $1.7 million and $4.5 million over the past three
years primarily as a result of the Company's net income.
Net cash from investing activities have ranged between inflows of $0.4
million and outflows of $0.8 million over the past three years. The primary
source of cash in 1996 was the September 30 sale of four of the California
subsidiaries. The primary use of cash over the recent past has been for
purchases of computer equipment. It is expected that future investing activities
will consist of more routine furniture and equipment purchases, purchases of
marketable securities and, potentially, further acquisitions. With the exception
of acquisitions, the routine investment activities are expected to result in
smaller cash outflows from the investing activities in the near future.
Cash flows from financing activities consistently have been negative over
the past three years. The most significant outflow was the payment of a regular
quarterly dividend to Piedmont, the Company's former parent which ended in 1995.
On March 7, 1997, the Company announced a 750,000 share repurchase program under
which the Company may repurchase its stock from time to time in the open market
or through privately negotiated transactions at market prices. The stock
repurchase plan approved on March 6, 1997 has a term of three years. The Company
may in the future issue debt securities or preferred stock or enter into loan or
other agreements that restrict the payment of dividends on and repurchase of the
Company's capital stock.
Historically, the Company has maintained a substantial amount of liquidity
for purposes of meeting regulatory requirements and potential business demands.
At December 31, 1996 the Company has $7.5 million of cash and cash equivalents.
Management believes the Company's cash resources, plus cash provided by
operations, are sufficient to meet the Company's foreseeable capital and
liquidity requirements. As a result of the holding company structure, the
Company's cash flows will depend primarily on dividends or other permissible
payments from its subsidiaries. The Company has no standby lines-of-credit or
other similar arrangements.
LFD, as a registered broker-dealer, has federal and state net capital
requirements at December 31, 1996 of $5,000. The aggregate net capital of LFD
was $0.3 million at December 31, 1996. LMC, MSR, and MSRI, as registered
investment advisors, must meet net capital requirements imposed at the Federal
and state levels.
Stockholders' equity on December 31, 1996 increased to $9.8 million from
$7.3 million a year earlier primarily as a result of the Company's net income.
Management believes that the Company's liquid assets and its net cash
provided by operations will enable it to meet any foreseeable cash requirements.
The Company's overall financial condition remains strong.
Item 8. Financial Statements
The following are included and filed under this item:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . 18
LEXINGTON GLOBAL ASSET MANAGERS, INC.
Consolidated Statements of Financial Condition--December 31, 1996 and 1995.. 19
Consolidated Statements of Operations--Years Ended December 31, 1996,
1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Consolidated Statements of Stockholders' Equity (Deficit)--Years Ended
December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . 21
Consolidated Statements of Cash Flows--Years Ended December 31, 1996,
1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Lexington Global Asset Managers, Inc. :
We have audited the consolidated statements of financial condition of
Lexington Global Asset Managers, Inc. and Subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, changes in
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lexington Global Asset Managers, Inc. and Subsidiaries as of December 31, 1996
and 1995, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
New York, New York
February 19, 1997
<TABLE>
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
1996 1995
---- ----
<S> <C> <C>
Assets:
Cash and cash equivalents:
Cash $1,631,249 $ 575,694
Money market accounts 5,898,575 5,039,323
----------------- ----------------
7,529,824 5,615,017
----------------- ----------------
Receivables:
Investment advisory and management fees 1,161,473 1,577,875
Due from funds and other 868,649 1,206,619
----------------- ----------------
2,030,122 2,784,494
----------------- ----------------
Marketable securities 1,205,350 932,282
Prepaid expenses 367,159 349,768
Prepaid taxes 11,900 42,365
Furniture, equipment and leasehold improvements (net of
accumulated depreciation and amortization) 1,347,324 1,434,802
Intangible assets (net of accumulated amortization) 210,875 252,387
Deferred income taxes 3,131,842 3,048,283
Other assets 243,120 314,203
----------------- ----------------
Total assets $ 16,077,516 $ 14,773,601
================= =============
Liabilities:
Accounts payable and other accrued expenses $ 1,027,123 $ 1,256,982
Accrued compensation 1,480,337 1,870,820
Accrued employee benefits 1,183,866 1,130,393
Capitalized lease obligations - 157,019
Deferred income 1,197,576 1,592,531
Federal income taxes payable 1,015,351 979,184
Other liabilities 6,681 7,515
----------------- ----------------
Total liabilities 5,910,934 6,994,444
----------------- ----------------
Minority interest 344,909 432,136
Stockholders' Equity:
Common stock, $.01 par value; 15,000,000 authorized shares;
5,487,887 issued and outstanding 54,879 54,879
Additional paid-in capital 21,501,517 21,501,517
Accumulated deficit (11,734,723) (14,209,375)
----------------- ----------------
Total stockholders' equity 9,821,673 7,347,021
----------------- ----------------
Total liabilities and stockholders' equity $ 16,077,516 $ 14,773,601
================= ================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<TABLE>
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Investment advisory:
Mutual fund management fees (including approximately)
$430,252 , $452,000 and
$496,000 from related parties) $ 10,723,805 $9,789,003 $ 10,092,248
Mutual fund commissions 215,656 175,434 592,507
Other management fees (including approximately
$2,102,000, $2,443,000 and
$2,619,000 from related parties) 7,395,337 9,107,863 9,674,799
Commissions income 1,734,411 1,692,261 1,989,766
Other income 742,092 521,556 330,273
----------------- --------------- ------------------
Total revenues 20,811,301 21,286,117 22,679,593
----------------- --------------- ------------------
Expenses:
Salaries and other compensation 11,241,242 10,492,925 11,032,675
Selling and promotional 1,231,927 1,893,083 1,989,949
Administrative and general 5,210,413 6,578,621 4,553,640
----------------- --------------- ------------------
Total expenses 17,683,582 18,964,629 17,576,264
----------------- --------------- ------------------
3,127,719 2,321,488 5,103,329
Gain on sale of subsidiaries 529,881 - -
Provision for income taxes
Current 1,353,734 1,285,843 2,228,543
Deferred (83,559) (586,027) (169,113)
----------------- --------------- ------------------
Total provision 1,270,175 699,816 2,059,430
----------------- --------------- ------------------
Income before minority interest 2,387,425 1,621,672 3,043,899
Minority interest (87,227) 43,015 53,629
----------------- --------------- ------------------
Net income $ 2,474,652 $ 1,578,657 $ 2,990,270
================= =============== ==================
Earnings per share (Note 7):
Net income per share $0.45 $0.29 $0.55
================= =============== ==================
Average shares outstanding during the period 5,487,887 5,487,887 5,487,887
================= =============== ==================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<TABLE>
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended December 31,
Common Stock Total
--------------------------
Shares Additional Accumulated Stockholders'
Issued Amounts Paid-In Capital Deficit Equity (Deficit)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 5,487,887 $54,879 $11,125,665 ($15,526,302) ($4,345,758)
Net income 2,990,270 2,990,270
Dividends (1,752,000) (1,752,000)
Capital contribution 200,000 200,000
----------- ---------- ---------------- ---------------- ---------------
Balance at December 31, 1994 5,487,887 54,879 11,325,665 (14,288,032) (2,907,488)
Net income 1,578,657 1,578,657
Dividends (1,500,000) (1,500,000)
Capital contributions 76,000 76,000
Conversion of debt to equity 10,099,852 10,099,852
----------- ---------- ---------------- ---------------- ---------------
Balance at December 31, 1995 5,487,887 54,879 21,501,517 (14,209,375) 7,347,021
Net income 2,474,652 2,474,652
----------- ---------- ---------------- ---------------- ---------------
Balance at December 31, 1996 5,487,887 $54,879 $21,501,517 ($11,734,723) $9,821,673
=========== ========== ================ ================ ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<TABLE>
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,474,652 $1,578,657 $ 2,990,270
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 425,974 429,807 378,719
Gain on sale of subsidiaries (529,881) - -
Loss on sale of marketable securities - 67,308 7,711
Unrealized (appreciation) depreciation on marketable
securities (104,567) (30,682) 51,747
Deferred income taxes (83,559) (586,027) (169,113)
Minority interest (87,227) 43,015 53,629
Change in assets and liabilities
Receivables 754,372 (779,783) 101,082
Prepaid expenses (17,391) (190,697) 40,979
Prepaid taxes 30,465 (4,969) 40,514
Accounts payable and accrued expenses (566,869) 1,092,218 721,606
Federal income taxes payable 36,167 445,799 533,385
Deferred income (394,955) (224,309) (143,493)
Other, net 48,823 (114,493) (124,618)
Net assets of subsidiaries sold (286,425) - -
------------------ ------------------ ------------
Net cash provided by operating activities 1,699,579 1,725,844 4,482,418
Cash flows from investing activities:
Purchases of furniture, equipment and leasehold
improvements
(425,803) (504,648) (728,291)
Purchases of intangibles (7,225) - -
Purchases of marketable securities (168,501) (349,792) (113,177)
Sales of marketable securities - 155,767 -
Sales of furniture and equipment 157,470 - -
Net proceeds from sale of subsidiaries 816,306 - -
------------------ ------------------ -----------
Net cash used in investing activities 372,247 (698,673) (841,468)
Cash flows from financing activities:
Proceeds from issuance of debt - - 125,000
Principal payments under capital lease obligations (157,019) (135,764) (135,034)
Dividends - (1,500,000) (1,752,000)
Capital contribution - 76,000 200,000
------------------ ------------------ -----------
Net cash used in financing activities (157,019) (1,559,764) (1,562,034)
Net increase (decrease) in cash and cash equivalents 1,914,807 (532,593) 2,078,916
Cash and cash equivalents, beginning of year 5,615,017 6,147,610 4,068,694
------------------ ------------------ -----------
Cash and cash equivalents, end of year $ 7,529,824 $ 5,615,017 $6,147,610
================== ================== ===========
Supplemental cash flow disclosure
Income taxes paid $1,665,849 $ 917,679 $1,486,374
Interest paid $108,530 $ 337,398
Supplemental schedule of non-cash investing activities
Conversion of debt to equity $ 10,099,852
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Lexington Global Asset Managers, Inc. (the "Company") serves as a holding
company for the following asset management subsidiaries (collectively referred
to as the "Subsidiaries"): Lexington Management Corporation (100% owned),
Lexington Funds Distributor Inc. (100% owned), MSR Advisors Inc. (65% owned) and
Piedmont Asset Advisors (51% owned). The Subsidiaries are engaged in the
management, distribution, and administrative services for the Lexington Family
of Funds ("Funds") and for its institutional and private clients. Lexington
Management Corporation ("LMC") and MSR Advisors Inc., ("MSR") are registered
investment advisors under the Investment Advisers Act of 1940 as amended. In
addition Lexington Funds Distributor ("LFD") is a registered broker/dealer under
the Securities Exchange Act of 1934, is a member of the National Association of
Securities Dealers, Inc. ("NASD"), and is therefore subject to various NASD
regulations, including net capital requirements.
On September 30, 1996, the Company sold four of its California
subsidiaries: Lexington Capital Management Associates, Inc. ("LCMA"), LCM
Financial Services Inc. ("LFSI"), Lexington Plan Administrators ("LPA"), and
LCMI Insurance Services ("LCMII"), to a company formed by the CEO of the
subsidiaries and the U.S. unit of London Pacific Group Limited, Berkeley (USA)
Holdings Limited. On December 31, 1996, Lexington Capital Management ("LCM") was
merged into LMC.
2. Basis of Presentation and Summary of Significant Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and the Subsidiaries. All material intercompany transactions and
accounts have been eliminated.
Revenue Recognition
Investment management and advisory fees are recorded as income for the
period in which the services are performed. Commissions related to security
transactions are accrued on the trade date.
Receivables
Included in 1995 other receivables is a note receivable from an employee of
one of the divested subsidiaries of approximately $195,000 which was forgiven in
1996.
Furniture, Equipment, and Leasehold Improvements
Furniture, equipment, and leasehold improvements are stated at cost.
Equipment and furniture are depreciated on a straight-line basis over their
estimated useful lives ranging from five to twelve years. Leasehold improvements
are amortized on a straight-line basis over the remaining lease term.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based
Compensation," effective for financial statements for fiscal years beginning
after December 15, 1995. SFAS 123 required the Company to adopt, at its
election, either 1) the provisions in SFAS 123 which require the recognition of
compensation expense employee stock-based compensation plans or 2) the
provisions in SFAS 123 which require the pro forma disclosure of net income and
earnings per share as if the recognition provisions of SFAS 123 had been
adopted. SFAS 123 explicitly provides that employers may continue to account for
their employee stock-based compensation plans using the accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). The company adopted the disclosure requirements of SFAS 123
effective January 1, 1996 and continues to account for its employee stock-based
compensation plans under APB 25. Accordingly, the adoption of SFAS 123 had no
impact on the Company's financial position or results of operations. Had
compensation cost for the Company's stock option program been recognized
based on the fair value at the grant date consistent with the recognition
provisions of SFAS 123, the impact on the Company's net income and earnings per
share would not have been material. However, since the options vest over four
years and additional awards could be made in future years, the effects of
applying SFAS 123 in 1996 are not likely to be representative of the effects on
reported net income and earnings per share for future years.
Employee and Retiree Benefit Plans
Certain subsidiaries sponsor various benefit plans including a 401(k)
savings plan and a defined benefit pension plan covering substantially all
employees.
The Subsidiaries also provide retired employees the option of continuing
health and life insurance benefits through various welfare benefit plans in
which the retiree shares in the cost.
See Note 9 for further information on these employee and retiree benefit
plans.
Income Taxes
The Company and its wholly owned subsidiaries are included in the
consolidated federal income tax return filed by the Company. For financial
statement purposes, federal income taxes are computed on a separate-return
basis. Deferred income tax assets and liabilities are computed for the
differences between the financial statement and tax bases of assets and
liabilities based on enacted tax laws and rates applicable to the periods in
which the differences are expected to reverse.
See Note 10 for further information.
3. Investments
Cash Equivalents
Cash equivalents consist of highly liquid investments. At December 31, 1996
and 1995 cash equivalents consist primarily of investments in Lexington Money
Market Trust, recorded at market value (which approximates cost).
Marketable securities
Marketable securities are carried at market value and, at December 31, 1996
consist of investments in eight of the Funds: Lexington Global Fund, Lexington
Natural Resources Trust, Lexington Ramirez Global Income Fund, Lexington
International Fund, Lexington Emerging Markets Fund, Lexington Crosby Small Cap
Asia Growth Fund, Lexington SmallCap Value Fund, and Lexington Troika Dialog
Russia Fund. The cost of these securities was $1,060,788. At December 31, 1995,
marketable securities consisted of investments in seven of the Funds: Lexington
Global Fund, Lexington Natural Resources Trust, Lexington Ramirez Global Income
Fund, Lexington International Fund, Lexington Emerging Markets Fund, Lexington
Crosby Small Cap Asia Growth Fund, and Lexington SmallCap Value Fund. The cost
of these securities was $892,288. The market value of these securities is
determined by multiplying the number of shares held in each Fund by its
respective net asset value as published daily in major newspapers.
Unrealized appreciation (depreciation) arises from the difference between
the cost and market value of investments and is recognized in operations
currently.
4. Regulatory Requirements
The broker/dealer subsidiary is subject to rules and regulations of the
Securities and Exchange Commission which require maintenance of minimum net
capital and reserve accounts. At December 31, 1996, the amount of net capital
required for the subsidiary pursuant to such rules and regulations was $5,000.
The net capital of the broker/dealer subsidiary which met all requirements
aggregated $300,565 at December 31, 1996.
5. Intangible Assets
Intangible assets include goodwill, which represents the excess of the
purchase price over the fair value of net assets acquired and is amortized on a
straight-line basis over forty years. The goodwill arising from the original
acquisition of the LMC business by Piedmont Management Company ("Piedmont") in
1969 has been recorded on the books of the Company.
Accumulated amortization of goodwill amounted to approximately $452,000 and
$436,000 at December 31, 1996 and 1995, respectively.
6. Commitments and Contingencies
The Subsidiaries lease administrative offices under noncancellable
operating leases.
The future minimum lease payments are follows:
1997.................................................$ 571,000
1998.................................................. 586,000
1999.................................................. 611,000
2000.................................................. 578,000
2001.................................................. 578,000
Later Years........................................... 964,000
-------
$3,888,000
==========
Rent expense was approximately $941,000 in 1996; $1,140,000 in 1995; and
$944,000 in 1994.
7. Common and Preferred Stock
On December 13, 1995, the Company was recapitalized by adoption of restated
articles of incorporation authorizing 15,000,000 shares of common stock.
Piedmont distributed all of the Company's outstanding common stock as a dividend
to the holders of Piedmont common stock, on a one for one basis for each
outstanding share of Piedmont common stock. The accompanying consolidated
financial statements of the Company have been retroactively reclassified to give
effect to the recapitalization.
The Company has 5,000,000 shares of preferred stock, $.01 par value
authorized; no shares are issued and outstanding.
8. Incentive Plan
The Company has reserved 750,000 shares of common stock for issuance to key
employees under the Long Term Incentive Plan established in 1995. The plan
provides for the granting of stock options, stock appreciation rights and other
stock based performance awards to employees. During 1995, 180,000 stock options
were granted, all at an exercise price of $4.75, the fair market value at date
of grant. No options were exercised or expired in 1996 and 1995; and 45,000 were
exercisable at December 31, 1996. No grants were made in 1996.
9. Employee and Retiree Benefit Plans
Effective with the December 13, 1995 Spin-off of 100% of the Common Stock of
the Company being distributed to Piedmont Management stockholders, LMC has
assumed the sponsorship of certain of Piedmont's employee benefit plans and
their related trusts and insurance contracts, and is solely responsible for all
liabilities and obligations under such plans. In addition, in exchange for
payment from Piedmont of approximately $740,000, LMC assumed certain of
Piedmont's obligations to provide continuing medical and dental coverage to
certain of Piedmont's and The Reinsurance Corporation of New York's ("RECO")
employees, and retirement and postretirement medical and life insurance to
former RECO employees.
Savings Plan
LMC's and MSR's employees participate in the 401(k) savings plan sponsored
by LMC. The savings plan provides for voluntary participant contributions which
may not exceed 10% of each participant's annual salary. Additionally, for each
participant's voluntary contribution not exceeding 6% of the participant's
annual salary, LMC and MSR contribute an amount equal to 50% of the individual
participant's contribution.
LMC's and MSR's contributions fully vest to employees at the end of five
years. The annual amounts contributed by LMC and MSR to the Plan were $114,409
in 1996; $88,395 in 1995; and $84,274 in 1994.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Employee and Retiree Benefit Plans (Continued)
Retirement Plan
LMC sponsors a defined benefit plan which is part of a master trust. The
funding policy for the plan is to annually contribute the statutory required
minimum amount as actuarially determined. The net periodic pension cost
determined under Statement of Financial Accounting Standards No. 87 was $127,464
in 1996; $141,770 in 1995; and $171,700 in 1994. The funded status and net
pension liability for the Master Trust is provided in the table below.
Years ended December 31,
1996 1995
Actuarial present value of benefit obligations:
Vested........................................... $4,851,900 $4,224,900
Non-vested.................................. 127,600 194,000
------- -------
Accumulated benefit obligation........ $4,979,500 $4,418,900
========== ==========
Projected benefit obligation................. 5,603,100 5,504,400
Plan assets at fair value................... 4,848,000 4,475,200
--------- ---------
Plan assets less than projected benefit obligation.. (755,100) (1,029,200)
Unrecognized prior service cost............... 60,600 66,400
Unrecognized net loss.......................... 191,300 422,700
Unrecognized net asset........................ (216,100) (252,600)
-------- --------
Net pension liability................... $ (719,300) $ (792,700)
=========== ========
The development of the foregoing projected benefit obligations was based
upon a discount rate of 7.5% in 1996 and 7.25% in 1995; a 6% average rate of
increase in employee compensation was used for each year. The expected long-term
rate of return on assets was 10%. Plan assets are invested primarily in bonds,
stocks, short-term securities and cash equivalents.
LMC also maintains non-qualified supplemental benefit plans for certain
employees. These plans replace the portion of benefits that exceed the
limitations established by the Internal Revenue Code for tax qualified benefit
plans. The amount charged to expense relating to these plans was approximately
$116,600 in 1996; $51,600 in 1995; and $37,200 in 1994.
Postretirement Employee Benefits
Certain of the Subsidiaries provide retired employees the option of life
and medical insurance benefits.
As of January 1, 1992, the provisions of Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," were adopted. The Company elected the prospective transition approach
and is amortizing the transaction obligation over a 20-year period.
Net periodic postretirement benefit costs for 1996 and 1995 included the
following components:
1996 1995
----- ----
Service Cost........................ $ 76,000 $ 47,000
Interest Cost........................ 96,000 53,000
Amortization of transition obligation over 20 years 29,000 27,000
--------- ---------
Net periodic postretirement benefit cost.... $201,000 $127,000
======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Employee and Retiree Benefit Plans (Continued)
The accumulated unfunded postretirement benefit obligation for the Company
is provided in the table below. The Company has accrued its estimated portion of
the unfunded postretirement benefit obligation (approximately $427,700 in 1996
and $282,000 in 1995).
Years ended December 31,
1996 1995
---- ----
Retirees............................. $ 735,000 $ 804,000
Eligible active participants......... 89,000 7,000
Other active participants............ 592,000 374,000
--------- ---------
Total................................ $1,416,000 $1,185,000
========== ==========
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.5% in 1996 and 7.25% in 1995. The assumed health care
cost trend rate was 7.5% in each year. If the assumptions used in developing the
health care cost trend rate in each of the last two years were increased by 1%,
the effect on the accumulated postretirement benefit obligation would not be
material.
10. Income Taxes
A reconciliation of income tax expense computed at the U.S. statutory rate
to the effective rate reflected in the consolidated financial statements
follows:
Years Ended December 31,
1996 1995 1994
---- ---- ----
Expected tax rate.......................... 34.00% 34.00% 34.00%
State and local taxes...................... 6.50 (3.50) 10.50
Other...................................... (5.78) .01 (4.10)
----- --- -----
Effective tax rate......................... 34.72% 30.51% 40.40%
====== ====== ======
The tax effects of temporary differences that give rise to the net deferred
tax assets at December 31, 1996 and 1995 are as follows:
1996 1995
---- ----
Deferred tax asset:
Net operating loss carryforwards... $2,203,641 $2,172,003
Deferred compensation.............. 565,587 452,217
Retirement and postretirement...... 500,880 365,763
Other.............................. 169,397
------- -------
Total deferred tax asset...... 3,270,108 3,159,380
--------- ---------
Deferred tax liability:
Deferred state taxes............... (93,302) (90,154)
Other.............................. (44,964) (20,943)
------- -------
Total deferred tax liability.. (138,266) (111,097)
-------- --------
Net deferred tax asset........ $3,131,842 $3,048,283
========== ==========
The Company believes it is more likely than not that the Company will
generate future taxable income to realize the benefits of the net deferred tax
asset. Accordingly, the Company has not provided a valuation allowance. The
amount ultimately realized, however, could be reduced if actual amounts of
future taxable income are reduced.
The Company has net operating loss carryforwards of approximately
$6,303,026 which are available to offset future taxable income which expire over
the period 1998 through 2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Debt
Prior to the Spin-off of the Company from Piedmont, $10,099,852 owed to
Piedmont and its subsidiary by certain subsidiaries of the Company were
converted from debt to equity of those subsidiaries.
As of December 31, 1996 there were no capitalized lease obligations. As of
December 31, 1995 amounts due on capitalized lease obligations were
approximately $157,000 due September 1999.
12. Subsequent Event (Unaudited)
On March 7, 1997, the Company announced a share repurchase program of up to
750,000 shares. Repurchases will be made from time to time in the open market or
through privately negotiated transactions at market prices. The stock repurchase
plan approved on March 6, 1997 has a term of three years.
13. Quarterly Financial Data (Unaudited)
<TABLE>
The unaudited quarterly financial data for 1996 and 1995 follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
------- ------- ------- -------
1996
- ----
Results of Operations:
Total revenues...................... $5,717,300 $5,606,059 $5,565,017 $ 3,922,925
Total expenses...................... 4,955,313 4,855,620 4,832,825 3,039,824
Provision for taxes................. 206,807 335,985 580,875 146,508
Net income ......................... 543,940 396,835 789,326 744,551
Net income per share................ $0.10 $0.07 $0.14 $0.14
Common stock price range:
High................................ $4.906 $6.50 $5.50 $7.313
Low................................. $3.625 $4.375 $4.25 $5.00
1995
- ----
Results of Operations:
Total revenues...................... $5,218,727 $5,347,927 $5,440,059 $5,279,403
Total expenses...................... 4,261,104 4,513,279 4,890,031 5,300,215
Provision for taxes................. 447,094 311,691 122,234 (181,203)
Net income.......................... 510,528 519,104 404,651 144,374
Net income per share................ $0.09 $0.10 $0.07 $0.03
Common stock price range:
High................................ N/A N/A N/A $5.00
Low................................. N/A N/A N/A $4.625
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
1. (a) Exhibits. (27) Financial Data Schedule for the twelve months ended
December 31, 1996.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company terminated its audit relationship with its former principal
accountant, Coopers & Lybrand L.L.P. ("C&L"), on March 6, 1997. On that same
day, KPMG Peat Marwick L.L.P. was engaged as principal accountant for the
Company.
C & L's report on the financial statements for the past two years did not
contain an adverse opinion or disclaimer of opinion, and was not qualified or
modified as to uncertainty, audit scope, or accounting principles.
The decision to change principal accountants was recommended by the Audit
Committee and approved by the Board of Directors of the Company.
During the Company's two most recent fiscal years and any subsequent
interim period preceding such termination, there were no disagreements with the
former accountant on any matter of accounting principles or practices, financial
statements disclosure, or auditing scope or procedure, which disagreement(s), if
not resolved to the satisfaction of the former accountant, would have caused it
to make reference to the subject matter of the disagreement(s) in connection
with its report.
There were no reportable events of the type described in Item 304 (a) (1)
(v) (A) through (D) of Regulation S-K.
PART III
Item 10. Directors and Executive Officers of the Registrant
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of December 31,
1996 with respect to the company's executive officers.
Principal Occupation or Employment Office(s)
Name Age Year Elected Executive Officer
Stuart S. Richardson 50 Chairman (1995)
Robert M. DeMichele 52 President and Chief Executive Officer (1995)
Richard M. Hisey 38 Executive Vice President and Chief Financial
Officer (1995)
Lawrence Kantor 49 Executive Vice President and General
Manager - Mutual Funds (1995)
Other information required under this item in contained in the Registrant's
1997 definitive proxy statement which will be filed with the Commission within
120 days after the close of the fiscal year and is herein incorporated by
reference.
Item 11. Executive Compensation
Information required under this item is contained in the Registrant's 1997
definitive proxy statement which will be filed with the Commission within 120
Days after the close of the fiscal year and is herein incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required under this item is contained in the Registrant's 1997
definitive proxy statement which will be filed with the Commission within 120
Days after the close of the fiscal year and is herein incorporated by reference.
Item 13. Certain Relationships and Related Transactions
Information required under this item is contained in the Registrant's 1997
definitive proxy statement which will be filed with the Commission within 120
Days after the close of the fiscal year and is herein incorporated by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following information is filed under this item:
(a) (1) Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries are included in Item 8: Consolidated Statements of Financial
Condition-December 31, 1996 and 1995; Consolidated Statements of
Operations-Years Ended December 31, 1996, 1995, 1994; Consolidated Statements of
Stockholders' Equity (Deficit)-Years Ended December 31, 1996, 1995, 1994;
Consolidated Statements of Cash Flows-Years Ended December 31, 1996, 1995, 1994;
Notes to Consolidated Financial Statements;
(a) (2) Schedules
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or are adequately explained in the
financial statements and, therefore, have been omitted.
Financial statements of interests of 50% or less, which are accounted for
by the equity method, have been omitted because they do not, considered in the
aggregate as a single subsidiary, constitute a significant subsidiary.
(a)(3) Exhibits
13.1 Registrant's Annual Report to Stockholders for the year ended December
31, 1996.
Exhibits specified by Item 601 of Regulation S-K, other than those listed above,
have been omitted since they are either not required or are not applicable.
(b) Report on Form 8-K
The Registrant filed a Form 8-K on March 12, 1997 reporting under Item 4,
changing Registrants certifying accountant, which is incorporated by reference.
(c) Schedules described in item 14A (2) are excluded from the Registrants Annual
Report to Stockholders.
(d) Items Incorporated by Reference
The Registrant's Definitive Proxy Statement for its 1997 Annual
Stockholders' meeting and its Annual Report to stockholders for the fiscal year
ended December 31, 1996 are incorporated by reference herein. The Proxy
Statement will be filed with the Commission within 120 days after the close of
the fiscal year, along with a copy of the Registrant's Annual Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized:
LEXINGTON GLOBAL ASSET MANAGERS, INC.
By /s/ Richard M. Hisey
Richard M. Hisey, Executive Vice President
(Chief Financial Officer)
Date March 27, 1997
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:
/s/Stuart Smith Richardson
Stuart Smith Richardson, Chairman Date March 27, 1997
of the Board of Directors
/s/Robert M. DeMichele
Robert M. DeMichele, President & Director Date March 27, 1997
(Chief Executive Officer)
/s/Richard M. Hisey
Richard M. Hisey, Executive Vice President Date March 27, 1997
(Principal Financial and Accounting Officer)
/s/ Sion A. Boney
Sion A. Boney, III, Director Date March 27, 1997
/s/Haynes G. Griffin
Haynes G. Griffin, Director Date March 27, 1997
/s/William R. Miller
William R. Miller, Director Date March 27, 1997
/s/L. Richardson Preyer
L. Richardson Preyer, Director Date March 27, 1997
/s/Lunsford Richardson, Jr.
Lunsford Richardson, Jr., Director Date March 27, 1997
/s/Peter L. Richardson
Peter L. Richardson, Director Date March 27, 1997
/s/Carl H. Tiedemann
Carl H. Tiedemann, Director Date March 27, 1997
/s/ Marion A. Woodbury
Marion A. Woodbury, Director Date March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
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<NAME> Lexington Global Asset Managers, Inc.
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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0
0
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