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LEXINGTON
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Global Asset Managers, Inc.
[GRAPHIC]
1998 ANNUAL REPORT
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LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
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ABOUT THE COMPANY
[GRAPHIC] LEXINGTON GLOBAL ASSET MANAGERS, INC. is a financial
services holding company established in September of 1995
and incorporated in the State of Delaware. Lexington is
publicly owned and its common stock trades under the
symbol LGAM on the NASDAQ National Market System.
Lexington offers, through its subsidiaries, a variety of
asset management and related services to retail
investors, institutions, and high net worth individuals.
The Company's principal subsidiaries include Lexington
Management Corporation and Lexington Funds Distributor,
Inc. which market, promote, and distribute the Lexington
family of mutual funds. As of December 31, 1998,
Lexington and its subsidiaries employed 92 persons.
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FINANCIAL HIGHLIGHTS
(Dollars in Thousands except per share data)
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OPERATING 1998 1997 1996
RESULTS --------------------------------------------------------------
<S> <C> <C> <C>
Total revenues.............. $19,437 $21,213 $21,824
Total expenses.............. 17,962 17,548 18,697
Provision for taxes......... 724 1,208 1,270
Net income.................. 714 2,397 2,475
Net income per share:
Basic.................... $0.14 $0.45 $0.45
Diluted.................. $0.14 $0.45 $0.45
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FINANCIAL Total assets $16,883 $ 17,433
POSITION Stockholders' equity $ 8,940 $ 10,090
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TABLE OF CONTENTS
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Letter to Stockholders................................ 3
Business Description.................................. 5
Financial Report...................................... 8
Corporate Directory................................... 35
Corporate and Stockholder Information................. 37
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LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
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TO OUR STOCKHOLDERS
April 8, 1999
While disappointed with our 1998 financial results, we feel that
Lexington made progress in a number of areas during 1998 which will
benefit 1999 and beyond. Consolidated net income in 1998 was $0.7
million or $0.14 per share, compared to net income of $2.4 million
or $0.45 per share in 1997, a decline of over 70 percent.
1998 RESULTS
There are three major factors that impacted our 1998 results.
First and foremost, the Company's 1998 results were adversely
impacted by the administrative contract on its private account
segment. The Company's costs under this contract increased by 90%
in 1998. This increase primarily reflects a benefit to the Company
in 1997 arising from the fact that no administrative fees were
charged in 1997 for those accounts which entered into or renewed
advisory agreements in the first nine months of 1996; i.e., prior
to September 30, 1996, the date of the reorganization of the
Company's private account business. Since the end of 1998, the
Company has successfully renegotiated this contract; payments for
administrative services under this new contract are substantially
less than under the old contract. We expect to begin realizing the
benefits of this new contract in the latter part of 1999.
The second major factor affecting your Company's results in 1998
was emerging markets. As you are aware, the Company has a
significant presence in these markets through the products it
manages. Products such as the Lexington Worldwide Emerging Markets
Fund and the Lexington Troika Dialog Russia Fund have done very
well for the Company in prior years. However, these markets in
general were poor performers in 1998 and our assets under
management in these products suffered accordingly. Assets under
management in our emerging markets and precious metals funds
declined by almost 50% in 1998 from the end of 1997. We have not
lost faith in these markets or products; on the contrary, we
consider these markets and products to be undervalued (but still
risky) and expect them to outperform over time.
The third major factor was that the Company's assets under
management dropped by over $300 million due to the termination in
the fourth quarter of a subadvisory relationship with an insurance
company.
1998 ACCOMPLISHMENTS
In 1998, Lexington made progress in a number of areas, a number of
which are not yet reflected in our financial results.
Our Lexington GNMA Fund continued its exceptional performance in
1998, drawing almost $100 million in positive cash flow and
receiving the top five-star overall rating from Morningstar, and
ranked as the number one GNMA fund by Lipper Inc. for the three
year period ended December 31, 1998. Also turning in superior
performance were the Lexington Growth and Income Fund, the
Lexington Global Corporate Leaders Fund, and the Lexington
International Fund with Growth and Income and Global Corporate
Leaders having a four-star overall ranking by Morningstar.
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We also made significant strides in our private account segment in
the past year. Lexington has been selected for inclusion in a
number of prominent private managed account wrap programs. Although
we have already seen a number of new accounts from this effort, we
expect this effort to produce substantially greater assets for
management in 1999 as more investors seek separate account
management by professional managers.
As noted above, we have just completed negotiating a new
administrative contract for our private account business. This
contract takes effect in the second half of 1999 at which point it
will have an immediate positive effect on that business.
1999 OUTLOOK
Despite some of the positive accomplishments noted above, we expect
1999 to be a particularly challenging year. The loss of an
insurance subadvisory relationship in the fourth quarter of 1998
will have its first full year impact in 1999. Although we have seen
some turnaround in emerging markets, we expect investor interest in
these markets and in precious metals to continue to be lukewarm as
long as the U.S. markets continue their strong performance.
Recognizing these obstacles, the Company will continue to
aggressively build its presence in all of its served markets. Given
our superior investment results, we are particularly excited about
our prospects in the wrap account arena. We hope to sign several
new contracts in this area in the first half of 1999. As separate
account management continues its explosive growth, Lexington is
particularly well positioned to capitalize on this opportunity.
Given the strength of our distribution channels in the mutual fund
business, we expect to substantially grow assets in those funds
with the superior performance results noted above. Our mutual fund
business has excellent brand name awareness and has achieved
extremely high visibility over the past few years. The fact that we
have a broad range of mutual funds means that we can continue to
grow even though our precious metals and emerging markets
categories are currently out of favor.
We believe that there are very few firms that are comparable in
size to Lexington that can offer the breadth of product and
investment skill that we possess. The cornerstone of our business
is our people and we believe that we have some of the best
employees in the industry, providing us with the foundation upon
which to grow and maximize shareholder value.
We thank you for your support and look forward to sharing our
future success with you.
Sincerely,
/s/ Stuart Richardson /s/ Robert M. DeMichele
Stuart Richardson Robert M. DeMichele
CHAIRMAN PRESIDENT AND CHIEF EXECUTIVE
OFFICER
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LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
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BUSINESS DESCRIPTION
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Lexington Global Asset Managers, Inc. (the "Company" or "Lexington") 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 private clients.
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.
("Piedmont"). Pursuant to the Spin-off, Piedmont contributed to the Company all
of its subsidiaries engaged in the asset management business.
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.
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INVESTMENT PROCESS
The investment process at Lexington begins and ends with the
client. The Company's investment philosophy is to preserve capital
and achieve a superior risk-adjusted rate of return on client
assets. This philosophy drives the investment process that includes
a focus on top-grade research, worldwide information sources and
excellent technological support. These elements are utilized by the
Investment Policy Committee which consists of a group of seasoned
investment professionals who meet on a monthly basis to review all
of the critical factors involved in managing clients' assets.
Lexington firmly believes that a global perspective adds value in
creating portfolios. Worldwide diversification can provide superior
risk-adjusted returns when compared with portfolios with more
narrow geographical orientations. Careful analysis of worldwide
liquidity, economic cycles and country fundamentals considered in a
broader geopolitical context can provide more consistent and
superior returns.
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PRIMARY MARKETS
The Company's business strategy is targeted at three large market
segments:
MUTUAL FUNDS
The mutual fund industry has expanded rapidly in the last several
years. According to the Investment Company Institute, the trade
association for investment companies, total assets of U.S. mutual
funds have increased from $810 billion at December 31, 1988 to $5.5
trillion at December 31, 1998, an average growth rate of
approximately 21% per year.
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.
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 sub-advisory and
administration services to other mutual funds; (iv) expand into
other distribution channels; and, (v) evaluate and pursue
acquisition opportunities.
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INSTITUTIONAL MARKET
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 1998 Money
Market Directory of Pension Funds (including 401(k) plans), the
institutional market represented over $5.9 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.
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.
PRIVATE CLIENT ACCOUNTS
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.
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.
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SUBSIDIARIES OF THE COMPANY
The subsidiaries of the Company can be divided into its core
business (Lexington Management Corporation and Lexington Funds
Distributor, Inc.), 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.
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LEXINGTON MANAGEMENT CORPORATION ("LMC")
LEXINGTON FUNDS DISTRIBUTOR, INC. ("LFD")
LMC and LFD, both located in Saddle Brook, New Jersey, are
responsible for managing, servicing, marketing and distributing the
Lexington family of 17 mutual 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 equity, balanced, fixed income,
mortgage-backed and money market 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 metal and natural
resources, but most are broadly diversified.
LMC serves the institutional investment needs of a diverse client
base which includes: corporate, public and Taft Hartley employee
benefit funds; endowments; charitable foundations; and individuals.
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.
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OTHER SUBSIDIARIES
At December 31, 1998, 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.
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. At this
point in time, PAA is an inactive company.
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FINANCIAL REPORT
[GRAPHIC]
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TABLE OF CONTENTS
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Five Year Summary of Financial Data............................. 9
Management's Discussion and Analysis............................ 10
Management's Report on Financial Information.................... 15
Consolidated Statements of Operations........................... 16
Consolidated Statements of Financial Condition.................. 17
Consolidated Statements of Changes in Stockholders' Equity...... 18
Consolidated Statements of Cash Flows........................... 19
Notes to Consolidated Financial Statements...................... 20
Independent Auditors' Report.................................... 34
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LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
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SELECTED FINANCIAL DATA
(000's omitted except per share data)
(Unaudited)
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RESULTS OF YEAR ENDED DECEMBER 31,
OPERATIONS: 1998 1997 1996 1995 1994
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Total revenues ......................... $19,437 $21,213 $21,824 $21,683 $22,982
Total expenses.......................... 17,962 17,548 18,697 19,361 17,878
Provision for taxes..................... 724 1,208 1,270 700 2,059
Net income.............................. 714 2,397 2,475 1,579 2,990
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PER SHARE Average shares outstanding.............. 4,994,048 5,322,172 5,487,887 5,487,887 5,487,887
DATA: Earnings per share:
Basic................................ $0.14 $0.45 $0.45 $0.29 $0.55
Diluted.............................. $0.14 $0.45 $0.45 $0.29 $0.55
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FINANCIAL Total assets............................ $16,883 $17,433 $16,078 $14,774 $13,646
POSITION: Total liabilities....................... 7,514 6,938 5,911 6,994 16,201
Total stockholders' equity (deficit).... 8,940 10,090 9,822 7,347 (2,908)
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ASSET COMPOSITION BY MARKET(1)
(Dollars in Thousands)
(Unaudited)
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ASSETS UNDER DECEMBER 31,
MANAGEMENT: 1998 1997 1996 1995 1994
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Mutual funds......................... $1,460,303 $1,896,293 $1,797,238 $1,517,260 $1,501,668
Institutional........................ 1,115,762 1,109,339 1,047,244 1,134,080 1,472,122
Private clients...................... 594,913 467,072 360,226 428,434 421,204
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Total................. $3,170,978 $3,472,704 $3,204,708 $3,079,774 $3,394,994
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ASSET COMPOSITION BY TYPE OF INVESTMENT
(Dollars in Thousands)
(Unaudited)
<CAPTION>
December 31,
1998 1997 1996 1995 1994
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Domestic equity...................... $1,807,759 $1,704,426 $1,330,398 $1,172,710 $1,096,988
Foreign equity....................... 363,770 850,274 807,962 699,842 696,882
Subtotal(2)........... 2,171,529 2,554,700 2,138,360 1,872,552 1,793,870
Precious metals(3)................... 94,033 118,416 201,295 273,411 347,023
Fixed income......................... 758,686 634,029 668,841 712,830 976,104
Money market funds................... 146,730 165,559 196,212 220,981 277,997
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Total................. $3,170,978 $3,472,704 $3,204,708 $3,079,774 $3,394,994
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(1) Included in the institutional assets under management are invested
assets of 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"), principal
stockholders of the Company, and certain other related persons, which
assets at December 31, 1998 were valued at approximately $867 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.
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LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL STATEMENTS
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1998 COMPARED WITH 1997
The consolidated net income in 1998 was $0.7 million, $0.14 per
share, compared to net income of $2.4 million, $0.45 per share in
1997.
Total assets under management at December 31, 1998 were $3.2
billion compared to $3.5 billion at December 31, 1997. Mutual fund
assets under management decreased $0.4 billion from the prior year,
while private account assets increased $0.1 billion. The decrease
in mutual fund assets is mainly attributable to the termination of
an advisory relationship with one of the Company's larger accounts
in the fourth quarter of 1998. Assets under management in this
relationship were approximately $300 million. In addition, the
turmoil in emerging markets in 1998 adversely affected the
Company's funds with exposure to these markets. The Lexington
Troika Dialog Russia Fund and the Lexington Worldwide Emerging
Markets Fund each declined by approximately $100 million from
December 31, 1997. Partially offsetting these declines was strong
performance or growth in several other products, most notably the
Lexington GNMA Income Fund which increased in size by approximately
$100 million from December 31, 1997. Both the private account and
institutional segments, which are primarily invested in the U.S.
equity and bond markets, experienced growth in assets through
strong performance results associated with the robust U.S. capital
markets in 1998.
For the year ended December 31, 1998, total revenues of $19.4
million declined by $1.8 million from $21.2 million in 1997. Net
mutual fund revenues decreased by approximately $2.6 million from
$13.5 million to $10.9 million with the decline in assets under
management.
Mutual fund commissions of $72 thousand were more than the $63
thousand recorded in 1997 because sales of the Company's two
products with sales loads increased as a result of investor
interest in precious metals mutual funds.
Other management fees of $8.0 million are up approximately $1.0
million from $7.0 million in 1997. The Company's private account
business accounted for approximately $0.9 million of the increase
due to continued increases in assets under management associated
with the continuing strength of the U.S. equity markets.
Institutional asset management fees contributed $0.1 million of the
increase.
Commission income of $109 thousand decreased $42 thousand from $151
thousand in 1997. The decrease is due to client terminations.
Other income of $0.3 million decreased $0.2 million from $0.5
million in 1997. The decrease is a result of unrealized
depreciation of marketable securities. The unrealized depreciation
stems from the Company's investments in a number of the funds
managed by the Company.
Total expenses in 1998 increased by approximately $0.5 million to
$18.0 million from $17.5 million in 1997 due primarily to
administrative and general expenses, which increased $0.7 million.
This increase is almost entirely attributable to the Company's
administrative contract with Select Advisors ("Select") for the
Company's private account business. This contract was part of the
reorganization of this business, which occurred in 1996. Under this
contract the Company pays fees to Select for administrative and
support services for the Company's private account clients. Because
these clients are billed annually in advance, the expenses incurred
for the administrative contract are amortized evenly over a
twelve-month period. The 1998 expense includes amortization of the
contract expense across the entire client base. In 1997, the
Company benefited from the fact that no administrative fees were
charged in 1997 for those accounts which entered into or renewed
advisory agreements in the first nine months of 1996; i.e., prior
to September 30, 1996, the date of the reorganization. Partially
offsetting the increase is a decrease of $0.3 million in selling
and promotional expense, mainly attributed to a reduction in
advertising and sales literature for the year. These expenses
declined as the Company made greater use of public relations in its
promotional efforts. Total personnel costs of $9.0 million are even
with 1997. Although the costs are even, the Company recognized an
increase of $0.5 million of expense associated with the issuance of
restricted stock to certain key executive employees. In addition,
salaries increased
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$0.2 million due to annual salary increases. Offsetting the
increase was a reduction in bonus expense due to the Company's
lower earnings.
Pre-tax income of $1.5 million is $2.2 million less than the $3.7
million recorded in 1997. The provision for state and federal taxes
decreased $0.5 million due to the decrease in taxable income. The
Company used approximately $1.8 million of net operating loss
carryforwards (NOLs) in 1998 and has remaining NOLs of
approximately $0.2 million which are available to offset future
taxable income which expire over the period 2008 through 2013.
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1997 COMPARED WITH 1996
The consolidated net income in 1997 was $2.4 million, $0.45 per
share, compared to net income of $2.5 million, $0.45 per share in
1996. 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: Lexington Capital
Management Associates ("LCMA"), Lexington Financial Services, Inc.
("LFSI"), Lexington Plan Administrators ("LPA"), and LCMI Insurance
Services ("LCMII"). On December 31, 1996, the remaining West Coast
subsidiary, Lexington Capital Management ("LCM") was merged into
Lexington Management Corporation ("LMC"), the Company's principal
operating subsidiary.
Total assets under management at December 31, 1997 were $3.5
billion compared to $3.2 billion at December 31, 1996. Each of the
Company's three primary served markets, (Mutual Funds, Private
Client, and Institutional), contributed $0.1 billion to the growth
in assets. Both the Private Client and Institutional segments,
which are primarily invested in the U.S. bond and equity markets,
experienced growth in assets through superior performance results
associated with the relatively strong U.S. capital markets in 1997.
Mutual fund assets under management grew primarily through net cash
inflows of $0.2 billion. One of the Company's newer products, the
Lexington Troika Dialog Russia Fund, experienced net cash inflows
of approximately $150 million in 1997 due to superior investment
performance (ranked number one among emerging markets funds tracked
by Lipper Analytical Services, Inc. and as the number four fund in
the Overall Lipper Equity Fund Universe (4,883 funds)); one of the
Company's older products, the Lexington Corporate Leaders Trust
Fund contributed over $100 million in net positive cash flow due
primarily to its superior long term track record and the U.S.
equity markets. Although not as significant from a cash flow
standpoint, the Company enjoyed superior investment performance
from a number of its other products, including the Lexington GNMA
Income Fund (number one fund among GNMA Funds tracked by Lipper
Analytical Services, Inc.) and the Lexington Natural Resources
Trust (which was the number one natural resources fund in the
variable insurance products category according to Lipper Analytical
Services, Inc.). In contrast, the Lexington Worldwide Emerging
Markets Fund experienced net cash outflows of approximately $100
million in 1997 due to lower quartile performance and a
disaffection with emerging markets on the part of investors due to
turmoil in the Asian economies and capital markets. The Asian
"contagion" significantly affected performance in a number of the
Company's mutual funds and was a contributing factor to net
depreciation of $0.1 billion for the mutual fund group as a whole.
In short, mutual fund asset growth amounted to $0.1 billion and was
comprised of net cash inflow of $0.2 billion partially offset by
net depreciation of $0.1 billion.
Total revenues of $21.2 million are 2.8% below 1996 when the
Company recorded revenues of $21.8 million. Revenues from the West
Coast operations which were reorganized and partially disposed of
in 1996, amounted to $3.4 million in 1997 and $5.6 million in 1996.
Excluding the West Coast operations, total revenues of $17.8
million were $1.6 million above the $16.2 million recorded in 1996.
Net mutual fund management fees, the Company's largest revenue
source, increased approximately $1.8 million to $13.5 million in
1997 compared to $11.7 million in 1996. These revenues increased as
a result of the growth in mutual fund assets under management.
However, underlying the growth in assets under management is a
shift in assets under management from some of the Company's higher
priced products (emerging markets and precious metals) to some of
the lower priced products (domestic equity and fixed income) and to
products with shared revenue arrangements (sub-advisory
relationships). This shift occurred as a result of relative
investment performance and changing investor preferences which
toward the end of the year favored U.S. capital markets over some
of the foreign markets, particularly the emerging markets.
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Mutual fund commissions of $63 thousand were less than the $216
thousand recorded in 1996 because sales of the Company's two
products with sales loads decreased as a result of declining
investor interest in precious metals mutual funds.
Other management fees of $7.0 million are down $0.4 million from
$7.4 million in 1996. The disposed West Coast operations account
for all of this decline. Similarly, commissions income declined to
$0.2 million in 1997 from $1.7 million in 1996 as a result of the
disposal of the West Coast operations. Other income of $0.5 million
is $0.2 million below the 1996 figure of $0.7 million due to the
weaker performance of some of the Company's investments in the
Lexington Funds which were adversely affected by the turmoil in the
Asian markets.
Total expenses of $17.5 million are $1.2 million below total
expenses of $18.7 million in 1996. Virtually all of the decline is
attributable to the disposed and reorganized West Coast operations
which recorded total expenses of $2.3 million in 1997 compared to
$5.3 million in the prior year period, offset by an increase of
$0.9 million of subadvisor fees due to the increase in assets under
management with sub-advisory agreements.
Total personnel costs of $9.0 million are $2.2 million lower than
the $11.2 million recorded in 1996. A $2.8 million decline in West
Coast personnel expenses was partially offset by a $0.6 million
increase in LMC's personnel costs; LMC added personnel to support
and service its remaining West Coast revenue stream. In addition,
the Company recognized approximately $150,000 of expense associated
with the issuance of restricted stock to certain key executive
employees. Finally, employee benefits increased approximately $0.1
million as a result of higher medical insurance premiums despite
the Company's switch to a different provider.
Selling and promotional costs of $1.3 million are $0.1 million
above the $1.2 million in such costs in the prior year, reflecting
LMC's greater advertising support behind several mutual funds with
superior performance results. In particular, the Lexington Troika
Dialog Russia Fund received significant support in the second half
of 1997 as its performance placed the Fund in the top five of the
entire equity fund universe followed by Lipper Analytical Services.
General and administrative costs of $7.2 million are $1.0 million
above the prior year's figure of $6.2 million. The increase is
primarily attributable to a $0.9 million increase in sub-advisory
fees. The increase was due to an increase in assets under
management with sub-advisory agreements. Also contributing to the
increase were higher administrative costs related to assets
generated from its West Coast operations and one-time costs related
to the termination of the Company's former portfolio management
system. The Company's new system is fully state-of-the-art which
includes compliance with the year 2000 data requirements.
Offsetting the increase was a decrease in general and
administrative costs attributable to the disposed West Coast
operations. In addition, the Company benefited from the absence of
certain legal and audit fees associated with the Company's
reorganization which impacted the prior year results.
Pre-tax income amounted to $3.7 million for 1997 and 1996. The
provision for state and federal taxes remained relatively unchanged
due to the comparable profit performance in 1997 and 1996. The
Company used approximately $3.8 million of net operating loss
carryforwards (NOLs) in 1997 and has remaining NOLs of
approximately $2.1 million which are available to offset future
taxable income which expire over the period 2003 through 2012.
Overall, net income amounted to $2.4 million or $0.45 per share in
1997 compared to $2.5 million, $0.45 per share in 1996.
- --------------------------------------------------------------------------------
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.
----------
12
<PAGE>
Historically, the Company has been cash self-sufficient. Cash flows
from operations have ranged between $1.5 million and $3.7 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
$0.5 million and outflows of $0.3 million over the past three years.
The primary use of cash in 1998 was for the purchase of computer
equipment.
Cash flows from financing activities consistently have been negative
over the past three years. On March 7, 1997, and September 17, 1998
the Board of Directors of the Company authorized share repurchase
programs of up to 750,000 shares for a total program of up to
1,500,000 shares. Repurchases have been and will be made from time
to time in the open market or through privately negotiated
transactions at market prices. The stock repurchase plans have terms
of three years. During 1998, the Company repurchased 532,350 shares
of stock for an aggregate purchase price of $2,353,857. During 1997,
the Company repurchased 313,000 shares of its common stock for an
aggregate purchase price of $2,280,375. 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, 1998 the Company has
$8.4 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, 1998 of $25,000. The aggregate
net capital of LFD was $0.3 million at December 31, 1998. 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, 1998 decreased to $8.9 million
from $10.1 million a year earlier primarily as a result of the
Company's purchase of treasury shares.
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.
- --------------------------------------------------------------------------------
YEAR 2000
The Company, like most commercial and financial institutions, is
working to ensure that its operating and processing systems will,
along with those of its service providers, continue to function when
the Year 2000 arrives. The Company has developed and implemented a
comprehensive plan to prepare the Company's computer systems and
applications for the Year 2000, as well as to identify and address
any other Year 2000 operational issues which may affect the Company.
Progress reports on the Company's Year 2000 program are presented
regularly to the Company's Board of Directors and senior management.
The Company's Year 2000 program, which was commenced in June 1997
and is administered by internal staff, consists of the following
three components relating to the Company's operations: (i)
information technology ("IT") computer systems and applications
which may be impacted by the Year 2000 problem, (ii) non-IT systems
and equipment which include embedded technology which may be
impacted by the Year 2000 problem and (iii) third party vendors with
which the Company has significant relationships which could
adversely affect the Company if such parties fail to be Year 2000
compliant.
The general phases common to all three components of the Company's
Year 2000 program are: (1) Awareness (the identification of the Year
2000 issues facing the Company); (2) Assessment (the prioritization
of the issues and the actions to be taken); (3) Renovation
(implementation of the specific actions determined upon assessment,
including repair, modification or replacement of items that are
determined not to be Year 2000 compliant); (4) Validation (testing
of the new or modified information systems, other systems, and
equipment to verify the Year 2000 readiness); (5) Implementation
(actual operation of such systems and equipment and, if necessary,
the actual implementation of any contingency plans in the event Year
2000 problems occur, notwithstanding the Company's renovation
program).
The Company has completed an assessment of its Year 2000 readiness
and is undergoing a renovation of its internal systems which are not
currently Year 2000 compliant. This phase involves the replacement
----------
13
<PAGE>
of certain systems with purchased software, the renovation of other
systems, and the purchase of certain hardware and other devices, all
of which are Year 2000 compliant. The Company anticipates that the
renovation phase related to these applications should be completed
by the end of March 1999, and that the validation phase should be
completed by the end of April 1999. The implementation phase has
commenced (overlapping the validation phase) with systems being
installed at the completion of their validation testing. Excluding
normal system upgrades, the Company estimates that total costs for
conversion and testing of new or modified IT systems and
applications will aggregate approximately $174,000, of which an
aggregate of $56,000 has been incurred to date.
The Company is keeping apprised of the progress of outside vendors'
plans to become Year 2000 compliant. All outside vendors are in the
validation phase.
The Company expects to be Year 2000 compliant during the second
quarter of 1999 and is in the process of preparing a contingency
plan, which should be completed by the second quarter of 1999.
Although the Company believes it is adequately addressing its Year
2000 issues, the failure to correct a material Year 2000 problem
could result in an interruption in, or a failure of, certain normal
business activities or operations. Such failure could materially
affect the Company's results of operations, liquidity and financial
condition.
----------
14
<PAGE>
LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
MANAGEMENT'S REPORT
ON FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
The Management of the Company is responsible for the financial information
appearing in this Annual Report. The consolidated financial statements were
prepared by Management in conformity with generally accepted accounting
principles and, where amounts must be based on estimates and judgments, they
represent the best estimates and judgments of Management. The remaining
financial information presented was prepared on the same basis and is consistent
with the financial statements.
The Company maintains a system of internal financial controls designed to
provide reasonable assurance as to the realiability of financial records and
protection of assets. Qualified personnel in the Company maintain and monitor
these financial controls on an ongoing basis.
The Company engages independent certified public accountants to audit its
financial statements and express an opinion thereon. The independent accountants
have full access to each member of management in conducting their audits. The
audits are conducted in accordance with generally accepted auditing standards
and include a review of the internal financial control structure, tests of
transactions and other auditing procedures considered necessary to express an
opinion on the financial statements.
The Audit Committee of The Board of Directors, consisting solely of Directors
who are not officers or employees of the Company, meet regularly with Management
and the independent accountants to review the work of each, discuss the results
of the independent accountants' audits and the quality of financial reporting by
the Company. The independent accountants meet alone with and have unrestricted
access to the Audit Committee to discuss any matters which they believe should
be brought before the Committee.
/s/ Richard M. Hisey
Richard M. Hisey
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
----------
15
<PAGE>
<TABLE>
LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
REVENUES: ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment advisory:
Mutual fund management fees (including
approximately $318,000, $521,000 and $430,000,
respectively, from related parties)........................ $10,920,941 $13,458,933 $11,736,786
Mutual fund commissions...................................... 71,600 62,838 215,656
Other management fees (including approximately
$2,954,000, $2,695,000 and $2,102,000, respectively,
from related parties)...................................... 7,991,944 7,044,356 7,395,337
Commissions income........................................... 108,508 151,334 1,734,411
Other income................................................. 343,711 495,175 742,092
----------- ----------- -----------
Total revenues....................................... 19,436,704 21,212,636 21,824,282
----------- ----------- -----------
- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES: Salaries and other compensation................................ 9,011,246 9,015,128 11,241,242
Selling and promotional........................................ 971,841 1,299,742 1,231,927
Administrative and general..................................... 7,979,098 7,233,004 6,223,394
----------- ----------- -----------
Total expenses....................................... 17,962,185 17,547,874 18,696,563
----------- ----------- -----------
Income before income taxes, gain on sale of
subsidiaries, and minority interest............... 1,474,519 3,664,762 3,127,719
Gain on sale of subsidiaries................................... -- -- 529,881
Provision (benefit) for income taxes:
Current...................................................... 346,539 13,929 1,353,734
Deferred..................................................... 377,527 1,193,629 (83,559)
----------- ----------- -----------
Total provision...................................... 724,066 1,207,558 1,270,175
----------- ----------- -----------
Income before minority interest...................... 750,453 2,457,204 2,387,425
Minority interest 36,013 60,149 (87,227)
----------- ----------- -----------
Net income........................................... $ 714,440 $ 2,397,055 $ 2,474,652
----------- ----------- -----------
----------- ----------- -----------
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS Basic earnings per share....................................... $0.14 $0.45 $0.45
PER SHARE ----------- ----------- -----------
(NOTE 12): ----------- ----------- -----------
Diluted earnings per share..................................... $0.14 $0.45 $0.45
----------- ----------- -----------
----------- ----------- -----------
Average shares outstanding during the period................... 4,994,048 5,322,172 5,487,887
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
----------
16
<PAGE>
<TABLE>
LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
ASSETS: ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents:
Cash.................................................................... $ 228,347 $ 193,383
Money market accounts................................................... 8,209,827 8,511,915
------------ ------------
8,438,174 8,705,298
------------ ------------
Receivables:
Investment advisory and management fees................................. 863,920 1,233,377
Due from funds and other................................................ 426,585 596,333
------------ ------------
1,290,505 1,829,710
------------ ------------
Trading securities........................................................ 1,337,110 1,524,788
Prepaid expenses.......................................................... 1,859,517 1,608,122
Prepaid taxes............................................................. 182,066 106,203
Fixed assets (net of accumulated depreciation and amortization)........... 1,193,515 1,384,772
Intangible assets (net of accumulated amortization)....................... 178,476 194,676
Assets associated with deferred compensation.............................. 834,309 --
Deferred tax asset, net................................................... 1,560,686 1,938,213
Other assets.............................................................. 8,608 141,491
------------ ------------
Total assets.................................................... $16,882,966 $17,433,273
------------ ------------
------------ ------------
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES: Accounts payable and accrued expenses..................................... $ 769,969 $ 926,177
Accrued compensation...................................................... 615,055 1,530,100
Accrued employee benefits................................................. 2,559,653 1,981,308
Deferred income........................................................... 1,879,969 1,626,123
Deferred compensation..................................................... 834,309 --
Federal income taxes payable.............................................. 843,434 863,667
Other liabilities......................................................... 11,391 10,579
------------ ------------
Total liabilities............................................... 7,513,780 6,937,954
------------ ------------
Minority interest......................................................... 428,821 405,058
- ---------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' Common stock, $.01 par value; 15,000,000 authorized shares; 5,487,887
EQUITY: issued, 4,720,208 and 5,174,887, respectively, outstanding............. 54,879 54,879
Additional paid-in capital................................................ 21,573,392 21,708,142
Accumulated deficit....................................................... (8,633,541) (9,345,918)
Deferred compensation..................................................... (1,118,758) (1,654,342)
Treasury stock at cost.................................................... (2,935,607) (672,500)
------------ ------------
Total stockholders' equity...................................... 8,940,365 10,090,261
------------ ------------
Total liabilities and stockholders' equity...................... $16,882,966 $17,433,273
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to the consolidated financial statements.
----------
17
<PAGE>
<TABLE>
LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997, and 1996
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
---------------------- TOTAL
SHARES ADDITIONAL ACCUMULATED DEFERRED TREASURY STOCKHOLDERS'
ISSUED AMOUNTS PAID-IN CAPITAL DEFICIT COMPENSATION SHARES EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Net income.................. -- -- -- 2,397,055 -- -- 2,397,055
Purchase of treasury
shares at cost........... -- -- -- (8,250) -- (2,280,375) (2,288,625)
Issuance of restricted
stock awards............. -- -- 206,625 -- -- 1,607,875 1,814,500
Deferred compensation
amortization............. -- -- -- -- (1,654,342) -- (1,654,342)
Balance at December 31,
1997..................... 5,487,887 54,879 21,708,142 (9,345,918) (1,654,342) (672,500) 10,090,261
Net income.................. -- -- -- 714,440 -- -- 714,440
Purchase of treasury
shares at cost........... -- -- -- -- -- (2,353,857) (2,353,857)
Issuance of restricted
stock awards............. -- -- -- (2,063) -- 90,750 88,687
Deferred compensation
amortization............. -- -- -- -- 535,584 -- 535,584
Miscellaneous
adjustment............... -- -- (134,750) -- -- -- (134,750)
--------- ------- ----------- ----------- ----------- ----------- -----------
Balance at December 31,
1998..................... 5,487,887 $54,879 $21,573,392 ($8,633,541) ($1,118,758) ($2,935,607) $ 8,940,365
--------- ------- ----------- ----------- ----------- ----------- -----------
--------- ------- ----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
----------
18
<PAGE>
<TABLE>
LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS Net income..................................................... $ 714,440 $ 2,397,055 $2,474,652
FROM Adjustments to reconcile net income to net cash provided
OPERATING by operating activities:
ACTIVITIES: Depreciation and amortization.............................. 337,706 319,267 389,090
Amortization of deferred costs............................. -- 9,220 36,884
Gain on sale of subsidiaries............................... -- -- (529,881)
Deferred income taxes...................................... 377,527 1,193,629 (83,559)
Minority interest.......................................... 36,013 60,149 (87,227)
Compensation expense for restricted shares awarded......... 624,271 151,908 --
Change in assets and liabilities
Receivables................................................ 539,205 200,412 754,372
Trading securities......................................... 187,678 (319,438) (273,068)
Prepaid expenses........................................... (251,395) (1,240,043) (17,391)
Prepaid taxes.............................................. (75,863) (94,303) 30,465
Accounts payable and accrued expenses...................... (492,908) 746,259 (566,869)
Federal income taxes payable .............................. (20,233) (151,684) 36,167
Deferred income............................................ 253,846 428,547 (394,955)
Other...................................................... 133,695 45,432 48,823
Net assets of subsidiaries sold............................ -- -- (286,425)
----------- ----------- ----------
Net cash provided by operating activities...................... 2,363,982 3,746,410 1,531,078
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS Purchases of furniture, equipment and leasehold
FROM improvements................................................ (130,249) (340,515) (425,803)
INVESTING Purchases of intangibles....................................... -- -- (7,225)
ACTIVITIES: Sale of furniture and equipment................................ -- -- 157,470
Net proceeds from sale of subsidiaries......................... -- 49,954 816,306
----------- ----------- ----------
Net cash (used in) provided by investing activities............ (130,249) (290,561) 540,748
----------- ----------- ----------
----------- ----------- ----------
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS Principal payments under capital lease obligations............. -- -- (157,019)
FROM Dividends and other............................................ (147,000) -- --
FINANCING Purchase of treasury stock..................................... (2,353,857) (2,280,375) --
ACTIVITIES: ----------- ----------- ----------
Net cash used in financing activities.......................... (2,500,857) (2,280,375) (157,019)
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents........... (267,124) 1,175,474 1,914,807
Cash and cash equivalents, beginning of year 8,705,298 7,529,824 5,615,017
----------- ----------- ----------
Cash and cash equivalents, end of year............... $ 8,438,174 $ 8,705,298 $7,529,824
----------- ----------- ----------
----------- ----------- ----------
- ----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL Income taxes paid.............................................. $ 302,543 $ 472,910 $1,665,849
CASH FLOW ----------- ----------- ----------
DISCLOSURE: ----------- ----------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
----------
19
<PAGE>
LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
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), Market Systems Research 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 Market Systems Research Advisors, Inc., ("MSR") are
registered investment advisors under the Investment Advisers Act of
1940, as amended. Lexington Funds Distributor, Inc. ("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 consolidated financial statements and the reported
amounts 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.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments. At
December 31, 1998 and 1997 cash equivalents consist primarily of
investments in Lexington Money Market Trust, recorded at market value
(which approximates cost).
TRADING SECURITIES
The Company designates all marketable equity securities as held for
trading purposes.
Marketable equity securities (including funds that are advised by
the Company) are carried at value. The value of marketable equity
securities (excluding funds that are advised by the Company) is
generally based on quoted market prices. The value of the Funds that
are advised by the Company is determined by multiplying the number
of shares held in each Fund by its respective net asset value.
Realized gains and losses are calculated on the
specific-identification method and are included in other income.
Unrealized appreciation (depreciation) arises from the difference
between the cost and value of securities and is recognized in other
income.
----------
20
<PAGE>
- --------------------------------------------------------------------------------
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 recorded on trade date.
SEGMENT REPORTING
The Company considers itself to operate in three business segments:
mutual funds, institutional, and private accounts.
DEPRECIATION AND AMORTIZATION
Furniture and equipment are depreciated on a straight-line basis
over their estimated useful lives. Leasehold improvements are
amortized on a straight-line basis over the shorter of the lease
term or the estimated useful life.
INTANGIBLE ASSETS
The Company assesses the recoverability of its intangible assets
whenever significant events or changes occur which may impair
recovery of recorded costs. Based on its most recent analysis, the
Company believes that no material impairment of its intangible
assets exists at December 31, 1998.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock-based compensation plans
under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25) and has adopted the
disclosure requirements of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") effective January 1, 1996.
INCOME TAXES
The Company and its wholly owned subsidiaries are included in the
consolidated federal income tax return filed by the Company.
Partially owned subsidiaries file their own federal income tax
returns.
The Company accounts for income taxes under the asset and liability
method. 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.
FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, receivables, accounts
payable and accrued expenses approximates cost because of the
immediate or short-term maturity of these financial instruments. The
fair value of trading securities has been disclosed in the
accompanying consolidated financial statements and notes.
SECURITIES TRANSACTIONS
Purchases and sales of fund shares through the underwriting
activities of LFD are recorded on a trade-date basis. All customer
funds and securities in connection with its investment management
and advisory services are maintained by independent custodians.
FINANCIAL STATEMENT PRESENTATION
Certain prior year amounts have been reclassified to conform with
the current year presentation.
----------
21
<PAGE>
LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
- --------------------------------------------------------------------------------
3. FIXED ASSETS
Fixed assets at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Furniture, fixtures and equipment......................... $3,191,678 $3,074,485
Leasehold improvements.................................... 168,577 155,521
---------- ----------
Depreciable fixed assets................................ 3,360,255 3,230,006
Less accumulated depreciation and amortization............ 2,166,740 1,845,234
---------- ----------
Fixed assets, net......................................... $1,193,515 $1,384,772
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization charged to operations were $337,706,
$319,267, and $389,090 for the years ended December 31, 1998, 1997
and 1996, respectively. These amounts include amortization of
goodwill of approximately $16,200 each year.
Depreciation and amortization are provided using the straight-line
method over the following estimated lives:
<TABLE>
<CAPTION>
ASSET ESTIMATED LIFE
----- --------------
<S> <C>
Furniture and fixtures................ 5 - 12 years
Office equipment...................... 3 - 5 years
Leasehold improvements................ term of lease
</TABLE>
- --------------------------------------------------------------------------------
4. Trading Securities
At December 31, 1998 and 1997, trading securities consisted of
the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Funds advised by the Company.................. $1,036,211 $1,272,519
Equity securities............................. 300,899 252,269
---------- ----------
Total trading securities...................... $1,337,110 $1,524,788
---------- ----------
---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
5. Deferred Income and Prepaid Expenses
Certain clients pay investment advisory fees to LMC annually in
advance. These fees are recorded as deferred income and recognized
as income over the periods the services are performed. At December
31, 1998 and 1997, the balance in the deferred income account was
$1,879,969 and $1,626,123, respectively, and was recorded as a
liability in the accompanying consolidated statements of financial
condition.
LMC has an agreement with SAI Capital Holdings, Inc. ("Select"),
whereby Select provides back office and other administrative
services for these clients in return for an administration fee. The
administration fee ranges from 50% to 82% of the investment advisory
fee received from these clients. The fee is paid to Select annually
in advance and is recorded as a prepaid expense and amortized as
services are received. At December 31, 1998 and 1997, the balance in
prepaid expense for administrative services was $1,259,097 and
$1,255,175, respectively.
----------
22
<PAGE>
- --------------------------------------------------------------------------------
6. 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, 1998, the
amount of net capital required for the broker dealer subsidiary
pursuant to such rules and regulations was $25,000. The net capital
of the broker/dealer subsidiary at December 31, 1998 amounted to
$304,975.
- --------------------------------------------------------------------------------
7. INTANGIBLE ASSETS
Intangible assets represent the goodwill arising from the original
acquisition of the LMC business by Piedmont Management Company, Inc.
("Piedmont") in 1969. The goodwill is 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.
Accumulated amortization of goodwill amounted to approximately
$485,000 and $469,000 at December 31, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES
The Subsidiaries lease administrative offices under noncancellable
operating leases.
The future minimum lease payments as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999 ................................................. $ 624,000
2000 ................................................. 586,000
2001 ................................................. 578,000
2002 ................................................. 578,000
2003 ................................................. 386,000
----------
$2,752,000
----------
----------
</TABLE>
Rent expense was approximately $736,000, $626,000, and $941,000, for
the years ended December 31, 1998, 1997, and 1996, respectively.
- --------------------------------------------------------------------------------
9. PREFERRED STOCK
The Company has 5,000,000 shares of preferred stock, $.01 par value
authorized; no shares are issued or outstanding.
- --------------------------------------------------------------------------------
10. INCENTIVE PLAN
The Company has reserved 750,000 shares of common stock for issuance
to key employees under the Long Term Incentive Plan (the "Plan")
established in 1995. The Plan provides for the granting of stock
options, stock appreciation rights and other stock-based performance
awards to employees.
RESTRICTED AWARD PLAN
Under the Plan the Company established the Restricted Stock Award
Plan, which provides for awards of common stock to key employees,
subject to forfeiture if employment terminates prior to the end of
the prescribed periods. The restrictions on the shares will be
released over a three-year period as the employees provide service.
The market value of shares awarded under the plan is recorded as
deferred compensation in stockholders' equity. The unearned amounts
are amortized to compensation expense over the periods the employees
provide services.
----------
23
<PAGE>
LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
- --------------------------------------------------------------------------------
10. INCENTIVE PLAN (CONTINUED)
During the years ended December 31, 1998 and 1997, the Company
awarded restricted shares which will be issued out of Treasury Stock
when the awards vest. The restricted shares awarded and the
respective market values at date of grant were as follows:
<TABLE>
<CAPTION>
Shares Market
Awarded Value
------- ------
<S> <C> <C>
February 3, 1997....................... 33,000 $6.25
November 7, 1997....................... 200,000 $8.00
April 1, 1998.......................... 11,000 $8.06
</TABLE>
For the years ended December 31, 1998 and 1997, the Company
recognized $624,271 and $151,908, respectively, of compensation
expense relating to the Restricted Stock Award Plan.
STOCK OPTION PLAN
Under the Plan the Company also established a Stock Option Plan,
which reserves shares of common stock for issuance to key employees.
In 1998, 81,500 stock options were granted at an exercise price of
$8.06 and 7,000 stock options were granted at an exercise price of
$4.00, the market values at the respective dates of grant. In 1997,
131,000 stock options were granted at an exercise price of $6.25 and
10,000 stock options were granted at an exercise price of $8.00, the
market values at the respective dates of grant. No grants were made
in 1996. No options were exercised or expired in 1998, 1997 and 1996
although 170,250 were exercisable at December 31, 1998.
The Company has adopted the disclosure-only provisions of SFAS No.
123, "ACCOUNTING FOR STOCK-BASED COMPENSATION." Accordingly, no
compensation cost has been recognized for the stock options. Had
compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards in
1998, 1997 and 1995 consistent with the provisions of SFAS No. 123,
the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT FOR EARNINGS PER SHARE INFORMATION)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net earnings:
As reported........................... $714 $2,397 $2,475
Pro forma............................. $513 $2,252 $2,399
Basic earnings per share:
As reported........................... $0.14 $0.45 $0.45
Pro forma............................. $0.10 $0.42 $0.44
Diluted earings per share:
As reported........................... $0.14 $0.45 $0.45
Pro forma............................. $0.10 $0.42 $0.44
</TABLE>
The fair value of each option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1998, 1997
and 1995: dividend yield of 0%; expected volatility of 35.0%;
risk-free interest rate of 5.23% to 6.64%; and expected lives of 10
years.
----------
24
<PAGE>
- --------------------------------------------------------------------------------
10. INCENTIVE PLAN (CONTINUED)
The Stock Option Plan provides that shares granted come from the
Company's authorized but unissued or reacquired common stock. The
price of the options granted pursuant to the Stock Option Plan will
not be less than 100 percent of the fair market value of the shares
on the date of grant. An option may not be exercised within one year
from the date of grant and no option will be exercisable after ten
years from the date of grant. Participants may exercise
approximately one-fourth of the stock option shares after the end of
each year of the cycle.
Information regarding the Stock Option Plan for 1998, 1997 and 1996
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------- --------
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE SHARES SHARES
------ ----- ------ ------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year.................. 321,000 $5.4634 180,000 180,000
Options exercised....................................... -- -- -- --
Options granted......................................... 88,500 $7.7389 141,000 --
------- ------- -------
Options outstanding, end of year........................ 409,500 321,000 180,000
------- ------- -------
------- ------- -------
Option price range, end of year......................... $4.00 $6.25 $4.75
$8.06 $8.00 --
Option price range for exercised shares................. -- -- --
Weighted-average fair value of options, granted
during the year...................................... $7.7389 $6.3741 --
Weighted-average grant-date fair value of options,
granted during the year.............................. $4.5480 $3.8720 --
The following table summarizes information about stock options outstanding at December 31, 1998:
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
------------------------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$4.00 7,000 10 $4.00 -- --
$4.75 180,000 7 $4.75 135,000 $4.75
$6.25 131,000 8 $6.25 32,750 $6.25
$8.00 - $8.06 91,500 9 $8.05 2,500 $8.00
------- -------
$4.00 - $8.06 409,500 170,250
------- -------
------- -------
</TABLE>
- --------------------------------------------------------------------------------
11. COMMON STOCK BUY-BACK PROGRAM
On March 7, 1997, and September 17, 1998 the Board of Directors of
the Company authorized share repurchase programs of up to 750,000
shares for a total program of up to 1,500,000 shares. Repurchases
have been and will be made from time to time in the open market or
through privately negotiated transactions at market prices. The
stock repurchase plans have terms of three years. During 1998, the
Company repurchased 532,350 shares of stock for an aggregate
purchase price of $2,353,857. Also during 1998, 11,000 treasury
shares were awarded under the Company's Restricted Stock Award Plan.
During 1997, the Company repurchased 313,000 shares of its common
stock for an aggregate purchase price of $2,280,375. Also during
1997, 233,000 treasury shares were awarded under the Company's
Restricted Stock Award Plan. To date, 244,000 shares have been
awarded and 77,671 shares have been issued under the Restricted
Stock Award Plan. At December 31, 1998 and 1997, 767,679 and 313,000
treasury shares were held, respectively.
----------
25
<PAGE>
LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
- --------------------------------------------------------------------------------
12. EARNINGS PER SHARE
At December 31, 1997, the Company adopted SFAS No. 128, "Earnings
Per Share," which establishes standards for computing and presenting
earnings per share ("EPS"). SFAS No. 128 replaces the presentation
of primary EPS with basic EPS and fully diluted EPS with diluted
EPS. Basic EPS excludes dilution and is calculated by dividing
income applicable to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS is
computed similarly to fully diluted EPS. All periods presented have
been restated to conform with SFAS No. 128.
Basic earnings per common share amounts were computed by dividing
net income by the weighted-average number of common shares
outstanding during the year. The average number of common shares
outstanding was the average number of shares of common stock
outstanding adjusted for repurchased shares.
Diluted earnings per share amounts were calculated by dividing net
income by the weighted-average number of common shares and dilutive
potential common shares outstanding during the year.
Diluted earnings per share assumes the conversion into common stock
of outstanding stock options as computed under the treasury stock
method, if dilutive. Under the treasury stock method, the number of
incremental shares is determined by assuming the issuance of the
outstanding stock options, reduced by the number of shares assumed
to be repurchased from the issuance proceeds, using the average
market price for the year of the Company's common stock.
The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31, 1998, 1997 and
1996.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income......................................... $ 714,440 $2,397,055 $2,474,652
------------ ---------- ----------
------------ ---------- ----------
Numerator for basic and diluted earnings
per share-income available to common
stockholders.................................... $ 714,440 $2,397,055 $2,474,652
------------ ---------- ----------
------------ ---------- ----------
Denominator:
Denominator for basic earnings per share-
weighted-average shares outstanding............. 4,994,048 5,322,172 5,487,887
Effect of dilutive securities:
Employee stock options.......................... 62,118 59,613 10,957
------------ ---------- ----------
Dilutive potential common shares................... 62,118 59,613 10,957
Denominator for diluted earnings per share-
adjusted weighted-average shares
and assumed conversions......................... 5,056,166 5,381,785 5,498,844
------------ ---------- ----------
------------ ---------- ----------
Basic earnings per share............................. $0.14 $0.45 $0.45
------------ ---------- ----------
------------ ---------- ----------
Diluted earnings per share........................... $0.14 $0.45 $0.45
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
13. 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
----------
26
<PAGE>
- --------------------------------------------------------------------------------
13. EMPLOYEE AND RETIREE BENEFIT PLANS (CONTINUED)
from Piedmont, 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. Employees are eligible to participate upon
attaining age twenty-one and completing six months of service. 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 or 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 savings plan expense by LMC and MSR were
$117,498, $122,760, and $114,409 for the years ended December 31,
1998, 1997, and 1996, respectively.
RETIREMENT PLAN
LMC sponsors a defined benefit plan ("Retirement Plan") which is
part of a master trust. An employee becomes a participant in the
Retirement Plan after attaining age twenty-one and completing one
year of service. Full vesting in the accrued benefit occurs at the
earlier of completing five years of service after attaining age
eighteen or reaching early retirement age. The funding policy for
the Retirement Plan is to annually contribute the statutory required
minimum amount as actuarially determined. Approximately 26% of the
plan assets are invested in the Lexington Group of Mutual Funds.
LMC also maintains non-qualified supplemental benefit plans ("SERP")
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 $85,303, $86,900, and
$116,600 for the years ended December 31, 1998, 1997, and 1996,
respectively.
The following is selected actuarial information for the Retirement
Plan and SERP (the "Plans"):
The Plans' projected benefit obligation at December 31, 1998 and
1997 was comprised of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Benefit obligation at beginning of year........... $7,067,630 $5,888,552
Service cost..................................... 338,530 267,931
Interest cost.................................... 487,785 436,804
Actuarial loss................................... 390,032 647,121
Benefits paid.................................... (309,508) (298,411)
---------- ----------
Benefit obligation at end of year................. $7,974,469 $6,941,997
---------- ----------
---------- ----------
The plan assets at fair value for the years ended December 31, 1998
and 1997 was comprised of:
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Fair value of plan assets at beginning of year.... $5,158,165 $4,848,048
Actual return on plan assets..................... 706,108 486,981
Employer contributions........................... 138,656 121,547
Benefits paid.................................... (309,508) (298,411)
---------- ----------
Fair value of plan assets at end of year.......... $5,693,421 $5,158,165
---------- ----------
---------- ----------
The following table presents the Plans' funded status and amounts
recorded in the Company's accompanying consolidated statements of
financial condition at December 31, 1998 and 1997:
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Funded status..................................... ($2,281,048) ($1,783,832)
Unrecognized net actuarial loss.................. 685,031 631,001
Unrecognized transition obligation or (asset).... 123,142 (20,164)
Unrecognized prior service cost.................. 372,489 267,066
---------- ----------
Net amount recorded at end of year................ ($1,100,386) ($905,929)
---------- ----------
---------- ----------
</TABLE>
----------
27
<PAGE>
LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
- --------------------------------------------------------------------------------
13. EMPLOYEE AND RETIREE BENEFIT PLANS (CONTINUED)
Amounts recorded in the consolidated statements of financial
condition at December 31, 1998 and 1997 consisted of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accrued benefit liability......................... ($1,343,147) ($1,133,718)
Intangible asset.................................. 242,761 227,789
----------- -----------
Net amount recorded at end of year................ ($1,100,386) ($905,929)
----------- -----------
----------- -----------
The following table presents year end information for the Plans'
accumulated benefit obligations in excess of plan assets at
December 31, 1998 and 1997:
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Projected benefit obligation...................... $7,974,469 $6,941,997
Accumulated benefit obligation.................... 7,036,568 6,193,505
Fair value of plan assets......................... 5,693,421 5,158,165
Actuarial computations at December 31, 1998, 1997 and 1996 were made
utilizing the following assumptions:
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate..................................... 6.75% 7.00% 7.50%
Expected return on plan assets.................... 10.00% 10.00% 10.00%
Rate of compensation increase..................... 6.00% 6.00% 6.00%
Net expense under the Plans for the years ended December 31, 1998,
1997 and 1996 was comprised of:
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost...................................... $ 338,530 $ 267,931 $ 309,741
Interest cost..................................... 487,785 436,804 404,717
Expected return on plan assets.................... (501,717) (469,064) (449,958)
Amortization of prior service cost................ 26,188 18,674 5,760
Amortization of transitional asset................ (17,673) (26,196) (26,196)
--------- --------- ---------
Net periodic benefit cost......................... $ 333,113 $ 228,149 $ 244,064
--------- --------- ---------
--------- --------- ---------
</TABLE>
POSTRETIREMENT EMPLOYEE BENEFITS
In addition to providing pension benefits, the Company, along with
certain affiliates, provides the option of life and medical
insurance benefits for retirees. Pensioners whose employment was
terminated by retirement (age 55 and 10 years of service) become
eligible for these benefits. The medical insurance benefits are
partially contributory in nature. Postretirement benefit plans other
than pensions are not funded.
As of January 1, 1992, the provisions of SFAS 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.
----------
28
<PAGE>
- --------------------------------------------------------------------------------
13. EMPLOYEE AND RETIREE BENEFIT PLANS (CONTINUED)
The following is selected actuarial information for the Company's
postretirement employee benefits:
The postretirement employee benefits' accumulated benefit obligation
at December 31, 1998 and 1997 was comprised of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Benefit obligation at beginning of year........... $1,236,634 $1,473,965
Service cost...................................... 57,181 54,702
Interest cost..................................... 75,775 78,203
Actuarial gain.................................... (102,883) (286,666)
Benefits paid..................................... (28,628) (83,570)
---------- ----------
Benefit obligation at end of year................. $1,238,079 $1,236,634
---------- ----------
---------- ----------
The following table presents the postretirement employee benefits'
funded status and amounts recorded in the Company's accompanying
consolidated statements of financial condition at December 31, 1998
and 1997:
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Funded status..................................... ($1,238,079) ($1,103,304)
Unrecognized net actuarial gain................... (94,122) (109,028)
Unrecognized transition obligation................ 316,000 341,000
---------- ----------
Net amount recorded at end of year................ ($1,016,201) ($871,332)
---------- ----------
---------- ----------
Amounts recorded in the accompanying consolidated statements of
financial condition at December 31, 1998 and 1997 consisted of:
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accrued benefit liability......................... ($1,016,201) ($871,332)
---------- ----------
Net amount recorded at end of year................ ($1,016,201) ($871,332)
---------- ----------
Actuarial computations at December 31, 1998, 1997 and 1996 were made
utilizing the following assumptions:
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate..................................... 6.75% 7.00% 7.50%
For measurement purposes, a 9.8% (pre age 65 coverage) and 8.4%
(post age 65 coverage) annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998. The rate
is assumed to decrease gradually to 5% for 2007 and remain at that
level thereafter.
Net expense under the postretirement employee benefits for the years
ended December 31, 1998, 1997 and 1996 was comprised of:
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost...................................... $ 57,181 $ 54,702 $76,000
Interest cost..................................... 75,775 78,203 96,000
Expected return on plan assets.................... (3,260) (2,461) 4,000
Amortization of transitional obligation........... 25,000 25,000 25,000
-------- -------- --------
Net periodic benefit cost......................... $154,696 $155,444 $201,000
-------- -------- --------
-------- -------- --------
</TABLE>
----------
29
<PAGE>
LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
- --------------------------------------------------------------------------------
13. EMPLOYEE AND RETIREE BENEFIT PLANS (CONTINUED)
Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates
would have the following effects:
<TABLE>
<CAPTION>
One-percentage One-percentage
point increase point decrease
-------------- --------------
<S> <C> <C>
Effect on total of service and interest
cost components................................ $ 26,340 ($26,340)
Effect on postretirement benefit obligation....... 203,431 (203,431)
</TABLE>
DEFERRED COMPENSATION PROGRAM
The Company sponsors a supplemental retirement plan which is a
non-qualified deferred compensation plan (the "Plan"). The Plan is
maintained by the Company for purposes of providing deferred
compensation for a select group of key employees. The Company
established a trust for this Plan and consolidates the trust assets
with those of the Company in the accompanying consolidated
statements of financial condition and records an offsetting
liability. The investments held in the trust consist of various
mutual fund holdings, including funds in the Lexington Group of
Mutual Funds (approximately 27% of the trust's assets). The value of
these investments at December 31, 1998 was $834,309.
- --------------------------------------------------------------------------------
14. INCOME TAXES
A reconciliation of income tax expense computed at the U.S.
statutory rate to the effective rate reflected in the accompanying
consolidated statements of operations for the years ended
December 31, 1998, 1997, and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected tax rate...................... 34.00% 34.00% 34.00%
State and local taxes.................. 9.92 6.81 6.35
Restricted Stock....................... 8.02 -- --
Other.................................. (1.61) (7.31) (6.43)
----- ----- -----
Effective tax rate..................... 50.33% 33.50% 33.92%
----- ----- -----
----- ----- -----
The tax effects of temporary differences that give rise to the net
deferred tax asset at December 31, 1998 and 1997 are as follows:
<CAPTION>
1998 1997
---- ----
<C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 63,213 $ 708,678
Deferred compensation........................... 651,300 647,256
Retirement and postretirement................... 800,068 648,001
Other........................................... 189,059 90,349
---------- ----------
Total deferred tax asset..................... 1,703,640 2,094,284
---------- ----------
Deferred tax liabilities:
Deferred state taxes............................ (106,865) (86,976)
Other........................................... (36,089) (69,095)
---------- ----------
Total deferred tax liabilities............... (142,954) (156,071)
---------- ----------
Net deferred tax asset....................... $1,560,686 $1,938,213
---------- ----------
---------- ----------
</TABLE>
----------
30
<PAGE>
- --------------------------------------------------------------------------------
14. INCOME TAXES (CONTINUED)
Income tax expense attributable to income for the years ended
December 31, 1998, 1997, and 1996 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Year ended December 31, 1998:
U.S. Federal.............................. $ 71,794 $ 436,024 $ 507,818
State and local........................... 274,745 (58,497) 216,248
----------- ----------- -----------
$ 346,539 $ 377,527 $ 724,066
----------- ----------- -----------
----------- ----------- -----------
Year ended December 31, 1997:
U.S. Federal.............................. ($339,801) $1,175,028 $ 835,227
State and local........................... 353,730 18,601 372,331
----------- ----------- -----------
$ 13,929 $1,193,629 $1,207,558
----------- ----------- -----------
----------- ----------- -----------
Year ended December 31, 1996:
U.S. Federal.............................. $ 903,832 $ 5,859 $ 909,691
State and local........................... 449,902 (89,418) 360,484
----------- ----------- -----------
$1,353,734 ($83,559) $1,270,175
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Company believes it is more likely than not that it 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
$186,000 which are available to offset future taxable income which
expire over the period 2008 through 2013.
- --------------------------------------------------------------------------------
15. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company and its subsidiaries are principally engaged in a
variety of asset management and related services to retail
investors, institutions and private accounts.
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION", which the Company has adopted in the current
year. SFAS No. 131 establishes standards for the way a public
enterprise reports information about operating segments in its
annual and interim financial statements. Generally, financial
information will be required to be reported on the basis used by
management for evaluating segment performance and for deciding how
to allocate resources to segments.
The Company operates in three business segments: Mutual Funds,
Institutional, and Private Accounts. The Company, through its
subsidiaries, markets, promotes, and distributes the Lexington
family of 17 mutual funds providing a variety of investment choices.
The institutional segment for investment management services
includes corporate, government and multi-employee pension plans,
charitable endowments and foundations, insurance company general
accounts and defined contribution and 401(k) plans. The private
account segment offers equity, fixed income and balanced fund
alternatives, tailored to the individual investment objectives of
its private clients.
----------
31
<PAGE>
LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
- --------------------------------------------------------------------------------
15. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
(CONTINUED)
<TABLE>
<CAPTION>
MUTUAL PRIVATE
YEAR ENDED DECEMBER 31, 1998 FUNDS INSTITUTIONAL ACCOUNTS OTHER TOTAL
---------------------------- ----- ------------- -------- ----- ------
<S> <C> <C> <C> <C> <C>
Revenue................................. $11,055,576 $4,052,963 $4,287,002 $41,163 $19,436,704
Salaries and other compensation......... 3,941,343 3,852,303 1,217,600 -- 9,011,246
Selling and promotional................. 562,642 255,755 99,983 53,461 971,841
Administrative and general.............. 3,459,644 1,271,214 2,979,938 268,302 7,979,098
Income before income taxes
and minority interest................. $3,091,947 ($1,326,309) ($10,519) ($280,600) $1,474,519
YEAR ENDED DECEMBER 31, 1997
----------------------------
Revenue................................. $13,829,223 $3,899,630 $3,448,775 $35,008 $21,212,636
Salaries and other compensation......... 3,982,392 3,913,902 1,118,834 -- 9,015,128
Selling and promotional................. 810,112 337,928 87,932 63,770 1,299,742
Administrative and general.............. 3,982,367 1,379,779 1,624,753 246,105 7,233,004
Income before income taxes
and minority interest................. $5,054,352 ($1,731,979) $617,256 ($274,867) $3,664,762
YEAR ENDED DECEMBER 31, 1996
----------------------------
Revenue................................. $12,353,380 $3,803,814 $5,592,285 $74,803 $21,824,282
Salaries and other compensation......... 3,752,832 3,405,083 4,083,327 -- 11,241,242
Selling and promotional................. 804,776 250,926 128,525 47,700 1,231,927
Administrative and general.............. 2,635,663 1,132,598 1,665,746 789,387 6,223,394
Income before income taxes
and minority interest................. $5,160,109 ($984,793) ($285,313) ($762,284) $3,127,719
</TABLE>
Management does not evaluate assets as a means to allocate resources
and assess performance. The Company is domiciled in the United
States and does not have any international operations.
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32
<PAGE>
- --------------------------------------------------------------------------------
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited quarterly financial data for the years ended
December 31, 1998, 1997, and 1996 follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998
----
Total revenues.................. $5,148,793 $5,013,062 $4,567,306 $4,707,543
Total expenses.................. 4,734,477 4,673,205 4,353,313 4,201,190
Provision for taxes............. 181,100 157,968 116,274 268,724
Net income...................... 232,587 174,447 89,017 218,389
Basic earnings per share........ $0.04 $0.03 $0.02 $0.05
Diluted earnings per share...... $0.04 $0.03 $0.02 $0.05
COMMON STOCK PRICE RANGE:
High............................ $9.500 $8.500 $7.250 $5.250
Low............................. $6.750 $6.750 $3.313 $3.250
1997
----
RESULTS OF OPERATIONS:
Total revenues.................. $5,015,387 $5,205,805 $5,722,193 $5,269,251
Total expenses.................. 3,740,999 4,050,523 4,532,895 5,223,457
Provision for taxes............. 523,329 210,861 543,465 (70,097)
Net income...................... 738,964 931,782 628,824 97,485
Basic earnings per share........ $0.13 $0.17 $0.12 $0.02
Diluted earnings per share...... $0.13 $0.17 $0.12 $0.02
COMMON STOCK PRICE RANGE:
High............................ $7.125 $7.000 $9.500 $10.125
Low............................. $5.875 $5.875 $6.875 $8.000
1996
----
RESULTS OF OPERATIONS:
Total revenues.................. $5,892,531 $5,838,642 $5,836,374 $4,256,735
Total expenses.................. 5,130,544 5,088,203 5,104,182 3,373,634
Provision for taxes............. 206,807 335,985 580,875 146,508
Net income...................... 543,940 396,835 789,326 744,551
Basic earnings per share........ $0.10 $0.07 $0.14 $0.14
Diluted earnings per share...... $0.10 $0.07 $0.14 $0.14
COMMON STOCK PRICE RANGE:
High............................ $4.906 $6.500 $5.500 $7.313
Low............................. $3.625 $4.375 $4.250 $5.000
</TABLE>
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33
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
Lexington Global Asset Managers, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Lexington Global Asset Managers, Inc. and Subsidiaries ("the Company") as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the two-year
period then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
accompanying consolidated statements of operations, changes in stockholders'
equity, and cash flows for the year ended December 31, 1996 were audited by
other auditors whose report thereon, dated February 19, 1997, except for Note 15
as to which the date is March 22, 1999, expressed an unqualified opinion on
these consolidated financial statements.
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 1998 and 1997 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Lexington Global Asset Managers, Inc. and Subsidiaries as of December 31, 1998
and 1997, and the results of their operations and their cash flows for the
two-year period then ended in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
New York, New York
February 16, 1999
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34
<PAGE>
LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CORPORATE DIRECTORY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OFFICERS AND DIRECTORS
OFFICERS DIRECTORS
<S> <C>
Stuart Smith Richardson Sion A. Boney, III
CHAIRMAN OF THE BOARD OF DIRECTORS PRESIDENT, BRISTOL-MYERS PRODUCTS
Lunsford Richardson, Jr. Robert M. DeMichele
VICE CHAIRMAN OF THE BOARD PRESIDENT
LEXINGTON GLOBAL ASSET MANAGERS, INC.
Robert M. DeMichele
PRESIDENT Haynes G. Griffin
CHIEF EXECUTIVE OFFICER CHAIRMAN
VANGUARD CELLULAR SYSTEMS, INC.
Richard M. Hisey
EXECUTIVE VICE PRESIDENT William R. Miller
CHIEF FINANCIAL OFFICER RETIRED
GENERAL MANAGER--MUTUAL FUNDS
L. Richardson Preyer
Lawrence Kantor RETIRED
EXECUTIVE VICE PRESIDENT
Lunsford Richardson, Jr.
Lisa Curcio VICE CHAIRMAN
SECRETARY LEXINGTON GLOBAL ASSET MANAGERS, INC.
Peter L. Richardson
PRESIDENT
SMITH RICHARDSON FOUNDATION, INC.
Stuart Smith Richardson
CHAIRMAN
LEXINGTON GLOBAL ASSET MANAGERS, INC.
Carl H. Tiedemann
GENERAL PARTNER
TIEDEMANN BOLTRES PARTNERS
</TABLE>
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35
<PAGE>
LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CORPORATE DIRECTORY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL OFFICERS OF SUBSIDIARY COMPANIES
<S> <C>
LEXINGTON MARKET SYSTEMS
MANAGEMENT CORPORATION RESEARCH ADVISORS, INC.
Robert M. DeMichele Robert M. DeMichele
CHAIRMAN OF THE BOARD CHAIRMAN OF THE BOARD
CHIEF EXECUTIVE OFFICER
Frank A. Peluso
Richard M. Hisey PRESIDENT
MANAGING DIRECTOR
CHIEF FINANCIAL OFFICER Richard M. Hisey
CHIEF FINANCIAL OFFICER
Lawrence Kantor
MANAGING DIRECTOR
EXECUTIVE VICE PRESIDENT
Lisa Curcio
SENIOR VICE PRESIDENT AND SECRETARY
COMPLIANCE OFFICER
Denis Jamison
SENIOR VICE PRESIDENT
DIRECTOR OF FIXED INCOME INVESTMENT STRATEGY
Richard J. Lavery
SENIOR VICE PRESIDENT
MUTUAL FUND OPERATIONS AND SALES
Richard Saler
SENIOR VICE PRESIDENT
DIRECTOR OF INTERNATIONAL EQUITY INVESTMENT STRATEGY
Alan Wapnick
SENIOR VICE PRESIDENT
DIRECTOR OF DOMESTIC EQUITY INVESTMENT STRATEGY
</TABLE>
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36
<PAGE>
LEXINGTON GLOBAL ASSET MANAGERS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CORPORATE AND STOCKHOLDER
INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
EXECUTIVE OFFICES STOCKHOLDER INFORMATION
Lexington Global Asset Managers, Inc.
Park 80 West Plaza Two The common stock of Lexington is traded on the
Saddle Brook, New Jersey 07663 NASDAQ National Market System under the Symbol
LGAM. As of December 31, 1998 there were 607
PRINCIPAL SUBSIDIARIES holders of record of Common Stock. As of
March 12, 1999 there were 604 holders of record
Lexington Management Corporation of Common Stock.
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663 STOCK TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York
Lexington Funds Distributor, Inc. Stock Transfer Division
Park 80 West Plaza Two P.O. Box 2500
Saddle Brook, New Jersey 07663 Jersey City, New Jersey 07303-2500
Telephone Response Center: (201) 324-0498
Market Systems Research Advisors, Inc. Hearing Impaired: TDD: (201) 222-4955
80 Maiden Lane Internet Info: e-mail: [email protected]
New York, New York 10038 FCTC Website: http://www.fctc.com
ANNUAL MEETING
The 1998 Annual Meeting of stockholders of
Lexington will be held at 9:15 A.M. Thursday
May 13, 1999 at the Executive Offices of the
Company.
STOCKHOLDER REQUESTS/FORM 10-K
FOR INFORMATION OR ASSISTANCE REGARDING YOU
SHARE-HOLDINGS, AS WELL AS TO RECEIVE, WITHOUT
A CHARGE, A COPY OF FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, PLEASE
ADDRESS YOUR REQUEST TO:
RICHARD M. HISEY
LEXINGTON GLOBAL ASSET MANAGERS, INC.
PARK 80 WEST PLAZA TWO
SADDLE BROOK, NEW JERSEY 07663
INDEPENDENT AUDITORS
KPMG LLP
345 Park Avenue
New York, New York 10054
</TABLE>
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37
<PAGE>
LEXINGTON GLOBAL ASSET MANAGERS, INC.
PARK 80 WEST PLAZA TWO, SADDLE BROOK, NJ 07663
