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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8529
LEGG MASON, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
MARYLAND 52-1200960
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 South Calvert Street - Baltimore, MD 21203-1476
(Address of principal executive offices) (Zip code)
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(410) 539-0000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
11,715,569 shares of Common Stock as of the close of business on
February 1, 1994.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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LEGG MASON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
December 31, 1993 March 31, 1993
(Unaudited)
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ASSETS:
Cash and cash equivalents............. $ 69,944 $ 24,998
Cash and securities segregated for
regulatory purposes.................. 137,767 106,065
Resale agreements..................... 142,474 73,801
Receivable from brokers and dealers... 8,674 8,296
Receivable from customers............. 239,839 208,273
Securities owned, at market value..... 60,949 109,097
Securities borrowed................... 114,430 14,155
Investment securities................. 23,209 2,986
Office equipment and leasehold
improvements......................... 14,577 11,071
Intangible assets..................... 23,500 25,766
Other................................. 75,219 55,946
-------- --------
$910,582 $640,454
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Payable to brokers and dealers........ $ 14,310 $ 14,698
Payable to customers.................. 331,095 267,316
Short-term borrowings................. 54,957 59,079
Repurchase agreements................. 8,625 20,416
Securities loaned..................... 128,349 10,840
Securities sold, but not yet purchased,
at market value...................... 4,046 6,638
Accrued compensation.................. 18,308 15,487
Other................................. 42,874 34,455
-------- --------
602,564 428,929
-------- --------
Subordinated liabilities............... 102,497 34,597
-------- --------
Stockholders' equity:
Common stock.......................... 1,170 900
Additional paid-in capital............ 75,595 73,498
Retained earnings..................... 128,756 102,530
-------- --------
205,521 176,928
-------- --------
$910,582 $640,454
======== ========
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See notes to condensed consolidated financial statements.
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<TABLE>
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LEGG MASON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands except per share amounts)
(Unaudited)
Three Months Nine Months
Ended December 31, Ended December 31,
1993 1992 1993 1992
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Revenues:
Commissions......................... $ 35,430 $29,717 $103,945 $ 82,225
Principal transactions.............. 12,539 11,954 40,316 40,652
Investment advisory and related fees 16,781 12,950 47,299 37,089
Investment banking.................. 23,312 18,566 67,483 49,756
Interest............................ 7,807 6,256 22,126 17,852
Other............................... 7,256 5,700 20,071 16,516
-------- ------- -------- --------
103,125 85,143 301,240 244,090
-------- ------- -------- --------
Expenses:
Compensation and benefits........... 59,094 50,188 171,723 140,987
Occupancy and equipment rental...... 6,738 5,814 19,752 17,408
Communications...................... 5,629 5,150 16,821 14,544
Floor brokerage and clearing fees... 1,473 1,423 4,479 4,004
Interest............................ 3,969 2,974 11,241 8,832
Other............................... 9,900 8,322 28,957 23,380
-------- ------- -------- --------
86,803 73,871 252,973 209,155
-------- ------- -------- --------
Earnings Before Income Taxes......... 16,322 11,272 48,267 34,935
Income taxes........................ 6,433 4,227 18,886 13,442
-------- ------- -------- --------
Net Earnings......................... $ 9,889 $ 7,045 $ 29,381 $ 21,493
======== ======= ======== ========
Earnings per common share:
Primary............................. $ .81 $ .61 $ 2.43 $ 1.86
Fully diluted....................... $ .65 $ .55 $ 1.95 $ 1.69
Average number of common
shares outstanding:
Primary............................. 12,183 11,616 12,086 11,528
Fully diluted....................... 16,425 13,251 16,112 13,211
Dividends declared per common share.. $ .10 $ .08 $ .28 $ .232
Book value per common share.......... $17.57 $15.03 $17.57 $15.03
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See notes to condensed consolidated financial statements.
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LEGG MASON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months
Ended December 31,
1993 1992
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings..................................... $ 29,381 $21,493
Noncash items included in earnings:
Depreciation and amortization................. 6,249 6,264
Tax benefit of pooled entity..................... 264 318
Gain on sale of mortgage servicing portfolio..... (345)
------- -------
35,894 27,730
(Increase)decrease in assets:
Cash and securities segregated for regulatory
purposes..................................... (31,702) 10,793
Receivable from brokers and dealers............ (378) (7,382)
Receivable from customers...................... (31,486) (30,474)
Securities owned............................... 48,148 4,806
Securities borrowed............................ (100,275) (9,781)
Other.......................................... (18,856) (14,001)
Increase(decrease) in liabilities:
Payable to brokers and dealers................. (388) 5,753
Payable to customers........................... 63,779 58,480
Securities loaned.............................. 117,509 10,393
Securities sold, but not yet purchased......... (2,592) 848
Accrued compensation........................... 2,794 (2,395)
Other.......................................... 8,112 7,405
-------- -------
CASH PROVIDED BY OPERATING ACTIVITIES............ 90,559 62,175
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Office equipment and leasehold improvements.... (6,197) (3,140)
Intangible assets.............................. (1,198) (2,480)
Proceeds from sale of mortgage servicing
portfolio...................................... 474
Net increase in investment securities........... (20,223) (14,594)
-------- -------
CASH USED FOR INVESTING ACTIVITIES............... (27,618) (19,740)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in resale agreements............... (68,673) (3,448)
Net decrease in short-term borrowings........... (4,122) (8,295)
Net (decrease)increase in repurchase
agreements..................................... (11,791) 9,058
Issuance(repayment) of subordinated
liabilities.................................... 67,900 (420)
Issuance of common stock........................ 1,682 1,416
Dividends paid.................................. (2,991) (2,584)
-------- -------
CASH USED FOR FINANCING ACTIVITIES............... (17,995) (4,273)
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS........ 44,946 38,162
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD. 24,998 18,931
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....... $ 69,944 $57,093
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
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LEGG MASON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
December 31, 1993
(Unaudited)
1. Interim Basis of Reporting:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the instructions
for Form 10-Q and, therefore, do not include all information and
notes required by generally accepted accounting principles for
complete financial statements. The interim financial statements
have been prepared utilizing the interim basis of reporting and, as
such, reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for
a fair presentation of the results for the periods presented. The
nature of the Company's business is such that the results of any
interim period are not necessarily indicative of results for a full
year.
2. Net Capital Requirements:
The Company's broker-dealer subsidiaries are subject to the
Securities and Exchange Commission's Uniform Net Capital Rule. The
Rule provides that equity capital may not be withdrawn or cash
dividends paid if resulting net capital would fall below specified
levels. As of December 31, 1993, the broker-dealer subsidiaries
had aggregate net capital, as defined, of $97,388 which exceeded
required net capital by $91,300.
3. Legal Proceedings:
The Company and its subsidiaries have been named as defendants
in various legal actions arising primarily from securities and
investment banking activities, including certain class actions
which primarily allege violation of securities laws and seek
unspecified damages which could be substantial. While the ultimate
resolution of these actions and a range of loss and impact on
operating results cannot be currently estimated, in the opinion of
management, after consultation with legal counsel, the actions will
be resolved with no material adverse effect on the financial
position of the Company.
4. Business Combination:
On April 20, 1993, the Company issued 325,000 shares of its
common stock in exchange for all of the outstanding common stock of
The Fairfield Group, Inc., a provider of mutual fund advisory and
other services to banks and bank trust departments.
The acquisition was accounted for as a pooling of interests,
but is not material to the Company's results of operations and
financial position. Accordingly, the results of operations of The
Fairfield Group, Inc. are included from the date of acquisition.
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5. Income Taxes:
Effective April 1, 1993, the Company adopted the provisions
of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". The effect of adopting SFAS No. 109
was not material to the Company's financial position or results of
operations.
6. Subordinated Liabilities:
On April 28, 1993, the Company issued $68,000 of 5.25%
convertible subordinated debentures. The debentures mature on
May 1, 2003, and are convertible at any time prior to maturity into
common stock of the Company at a conversion price of $25.80 per
share, subject to adjustment in certain events and to prior
redemption. The Company may redeem the debentures in whole or in
part at 103.28% beginning May 1, 1996, and thereafter at prices
declining annually to 100% of the principal amount on or after May
1, 2001. The net proceeds of the offering are included in resale
agreements and investment securities.
7. Common Stock Split:
On September 24, 1993, the Company effected a five-for-four
stock split to shareholders of record on September 8, 1993.
Accordingly, all share and per share information has been
retroactively restated to reflect the stock split.
8. Supplemental Cash Flow Information:
Interest payments were $11,057 in 1993 and $8,839 in 1992.
Income tax payments were $20,543 in 1993 and $14,199 in 1992.
Included in Other Assets is a $414 taxable pooling non-cash
benefit derived from the implementation of SFAS No. 109. The
Fairfield Group's net assets of $237 were acquired through the
issuance of 325,000 shares of the Company's common stock.
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Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended December 31, 1993
In the third fiscal quarter ended December 31, 1993, the
Company's revenues were $103.1 million, a 21% increase from
revenues of $85.1 million in the corresponding quarter of the prior
year. Net earnings were $9.9 million, a 40% increase from net
earnings of $7.0 million in the prior year's quarter. Primary
earnings per share rose 33% to $.81 from $.61. Fully diluted
earnings per share increased 18% to $.65 from $.55.
Compared to the prior year's quarter, commission revenues rose
19% to $35.4 million, principally because of increases in sales of
non-affiliated mutual funds, over-the-counter securities, variable
annuities and listed securities. Revenues from principal
transactions increased 5%, reflecting improved earnings on taxable
fixed-income securities trading and increases in sales of over-the
counter equity securities, substantially offset by a decline in
sales of fixed-income securities. Investment advisory and related
fees increased 30% because of growth in assets under management in
Company-sponsored mutual funds, the Company's fixed-income
investment advisory subsidiary and fee-based brokerage accounts.
The Company, through its subsidiaries, now serves as investment
advisor to more than $16 billion in mutual funds and institutional
and private accounts. Investment banking revenues rose 26% to
$23.3 million, reflecting substantially higher levels of
underwritten and managed corporate offerings, particularly co-
managed offerings of real estate investment trusts. Interest
income increased 25% as a result of higher client margin account
balances, substantially higher levels of conduit stock loan
activities, and investment of proceeds of the $68.0 million
subordinated debenture offering in April 1993. Increases in
interest income were partially offset by a decline in interest
earnings on substantially lower holdings of fixed-income
securities. Other income rose 27%, reflecting increased levels of
mortgage banking loan originations and restructurings and the
addition of fees earned by The Fairfield Group acquired in April
1993.
Operating expenses for the quarter were $86.8 million, an 18%
increase from expenses of $73.9 million in the corresponding
quarter of 1992. Compensation and benefits rose 18%, reflecting
higher sales compensation on increased commission-based revenues,
increased profitability-based compensation and personnel additions
in certain product areas. Occupancy and equipment rental increased
16%, principally as a result of increased rent at the corporate
headquarters and several office locations, as well as higher
transaction volume processed by the Company's data processing
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service bureau. Communications expense rose 9% because of increase
in office supply and telephone costs. Floor brokerage and clearing
fees increased 3% because of heavier securities transaction volume.
Interest expense increased 33%, attributable to debt-service on the
convertible subordinated debenture offering and increased levels of
conduit stock loan activity, partially offset by a decline in
financing costs on lower holdings of fixed-income securities.
Other expenses increased 19% because of higher promotional and data
processing-related expenses.
The Company's pre-tax profit margin was 15.8% in the current
quarter and 13.2% in the prior year's quarter. The effective
income tax rate increased to 39.4% from 37.5% primarily as a result
of the increase in the federal statutory corporate income tax rate.
Nine Months Ended December 31, 1993
In the first nine months of the current fiscal year, the
Company's revenues, net earnings and earnings per share exceeded
those in any nine months in the Company's history. Net earnings
increased 37% to $29.4 million from $21.5 million. Primary
earnings per share rose 31% to $2.43 from $1.86. Fully diluted
earnings per share increased 15% to $1.95 from $1.69. Revenues
were $301.2 million, a 23% increase from revenues of $244.1 million
in the corresponding period of the prior year.
Compared to the prior year's nine month period, commission
revenues increased 26% to $103.9 million, primarily because of
increases in sales of listed securities, non-affiliated mutual
funds, over-the-counter securities and variable annuities.
Principal transaction revenues declined 1% to $40.3 million because
of a decline in sales of U.S. government, agency, and mortgage-
backed securities, substantially offset by increased sales of over-
the-counter securities. Investment advisory and related fees
increased 28%, primarily because of growth in assets under
management in Company-sponsored mutual funds, the Company's fixed-
income investment advisory subsidiary and fee-based brokerage
accounts. Investment banking revenues rose 36%, reflecting
substantially higher levels of underwritten and managed corporate
offerings, particularly co-managed offerings of real estate
investment trusts. Interest income increased 24% as a result of
higher client margin account balances, increased stock loan conduit
activity and investment of proceeds of the $68.0 million subordinated
debenture offering. Other income rose 22%, reflecting increased
levels of mortgage banking loan originations and the addition of
fees earned by The Fairfield Group.
Operating expenses in the first nine months were $253.0
million, a 21% increase from expenses of $209.2 million in 1992.
Compensation and benefits rose 22%, reflecting higher sales
compensation on increased commission-based revenues, increased
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profitability-based compensation and personnel additions in
certain product areas. Occupancy and equipment rental rose 13% to
$19.8 million, principally as a result of higher transaction volume
processed by the Company's data processing service bureau and
increased rent at the corporate headquarters and several office
locations. Communications expense rose 16% because of increased
telephone and office supply costs. Floor brokerage and clearing
fees increased 12% because of increased transaction volume.
Interest expense rose 27% to $11.2 million, attributable to
interest on the convertible subordinated debentures issued in April
1993 and increased levels of conduit stock loan activity. Other
expenses increased 24% because of increased litigation-related
charges and higher promotional and programming costs.
The Company's pre-tax profit margin in the current nine month
period was 16.0% compared to 14.3% in the corresponding period of
the prior year. The effective income tax rate increased to 39.1%
from 38.5% as a result of the increase in the corporate income tax
rate.
Financial Condition
There has been no material change in the Company's financial
position since March 31, 1993. A substantial portion of the
Company's assets is liquid, consisting mainly of cash and assets
readily convertible into cash. These assets are financed primarily
by free credit balances, equity capital, bank lines of credit,
subordinated borrowings and other payables.
On April 28, 1993, the Company issued $68.0 million of 5.25%
convertible subordinated debentures in a public offering. The
proceeds of the offering are intended for use as working capital
for general corporate purposes, including expansion of activities
in the Company's securities brokerage business and continued
expansion and diversification of its investment advisory and other
financial service businesses, both by internal growth and
acquisition.
The Company borrows and lends securities in the normal course
of business to facilitate the settlement of its customer and firm
proprietary transactions. In addition, the firm engages in conduit
securities borrowing and lending activities in which the firm acts
as an agent to facilitate settlement for other institutions.
Beginning in August 1993, the Company substantially expanded its
conduit securities business. In both firm and conduit
transactions, the Company deposits or receives cash generally equal
to 102% of the market value of securities exchanged and monitors
the adequacy of collateral levels on a daily basis.
During the nine months ended December 31, 1993, cash and cash
equivalents increased $44.9 million. Cash flows from operating
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activities increased $90.6 million as a result of a decline in the
firm's securities inventory, a net increase in customer payables
and net earnings. The Company used $27.6 million of cash for
investing activities, principally for the purchase of investment
securities and office equipment. Cash of $18.0 was used for
repayment of repurchase agreements and short-term borrowings.
Additionally, $68.0 million was provided though issuance of
subordinated debentures and was primarily utilized in acquiring
resale agreements.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(11) Statement re: computation of per share
earnings
(b) No reports on Form 8-K were filed during the
quarter ended December 31, 1993.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
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LEGG MASON, INC.
(Registrant)
DATE February 14, 1994 /s/ John F. Curley, Jr.
John F. Curley, Jr.
Vice Chairman of the Board
DATE February 14, 1994 /s/ F. Barry Bilson
F. Barry Bilson
Vice President - Finance
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INDEX TO EXHIBITS
PAGE
11. Statement re: computation of per share earnings. 14-15
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EXHIBIT 11
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STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(in thousands except per share amounts)
For The Three Months Ended December 31,
1993 1992
Fully Fully
Primary Diluted Primary Diluted
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Weighted average shares
outstanding:
Common stock 11,697 11,697 11,217 11,217
Shares available under
options 486 507 399 449
Issuable upon conversion
of debentures - 4,221 - 1,585
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12,183 16,425 11,616 13,251
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Weighted average common
and common equivalent
shares outstanding 12,183 16,425 11,616 13,251
======= ======= ======= =======
Net earnings $ 9,889 $ 9,889 $ 7,045 $ 7,045
Interest expense, net, on
debentures - 736 - 295
------- ------- ------- -------
Net earnings applicable
to common stock $ 9,889 $10,625 $ 7,045 $ 7,340
======= ======= ======= =======
Per share $ .81 $ .65 $ .61 $ .55
======= ======= ======= =======
</TABLE>
All share and per share information has been restated to reflect a 5 for
4 stock split on September 24, 1993 to shareholders of record on September 8,
1993.
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EXHIBIT 11
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<CAPTION>
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(in thousands except per share amounts)
For The Nine Months Ended December 31,
1993 1992
Fully Fully
Primary Diluted Primary Diluted
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Weighted average shares
outstanding:
Common stock 11,619 11,619 11,145 11,145
Shares available under
options 467 530 383 481
Issuable upon conversion
of debentures - 3,963 - 1,585
------- ------- ------- -------
12,086 16,112 11,528 13,211
======= ======= ======= =======
Weighted average common
and common equivalent
shares outstanding 12,086 16,112 11,528 13,211
======= ======= ======= =======
Net earnings $29,381 $29,381 $21,493 $21,493
Interest expense, net, on
debentures - 2,076 - 884
------- ------- ------- -------
Net earnings applicable
to common stock $29,381 $31,457 $21,493 $22,377
======= ======= ======= =======
Per share $ 2.43 $ 1.95 $ 1.86 $ 1.69
======= ======= ======= =======
</TABLE>
All share and per share information has been restated to reflect a 5 for
4 stock split on September 24, 1993 to shareholders of record on September 8,
1993.
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