<PAGE> 1
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 the Quarter Ended December 31, 1995
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)
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)
(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.
15,383,321 shares of Common Stock as of the close of business on
February 1, 1996.
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LEGG MASON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands of dollars)
<TABLE>
<CAPTION>
December 31,1995 March 31,1995
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 176,639 $ 59,823
Cash and securities segregated for
regulatory purposes 99,302 30,528
Resale agreements 107,268 63,960
Receivable from customers 368,109 306,004
Securities borrowed 145,735 120,402
Securities owned, at market value 78,267 51,890
Investment securities, at market value 14,744 19,589
Property and equipment,net 30,956 25,871
Intangible assets 67,060 72,463
Other 81,423 66,128
---------- --------
$1,169,503 $816,658
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Payable to customers $ 523,993 $320,830
Payable to brokers and dealers 19,595 3,929
Securities loaned 117,885 104,304
Short-term borrowings 70,211 -
Securities sold, but not yet purchased,
at market value 6,782 6,362
Accrued compensation 38,524 15,866
Other 40,227 36,427
---------- --------
817,217 487,718
---------- --------
Subordinated liabilities 68,000 102,487
---------- --------
Stockholders' equity:
Common stock 1,400 1,225
Additional paid-in capital 115,763 79,591
Retained earnings 166,787 145,279
Net unrealized appreciation on
investment securities 336 358
---------- --------
284,286 226,453
---------- --------
$1,169,503 $816,658
========== ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 3
<TABLE>
<CAPTION>
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,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 40,950 $ 29,987 $118,892 $ 88,542
Principal transactions 15,238 15,347 47,934 42,377
Investment advisory and related fees 33,224 21,167 93,471 61,621
Investment banking 10,130 8,488 29,280 29,785
Interest 14,342 10,690 40,160 27,915
Other 8,604 7,208 23,965 20,934
-------- -------- -------- --------
122,488 92,887 353,702 271,174
-------- -------- -------- --------
Expenses:
Compensation and benefits 71,231 54,817 202,592 159,894
Occupancy and equipment rental 8,810 7,258 25,963 21,594
Communications 6,707 6,266 19,853 18,412
Floor brokerage and clearing fees 1,021 1,227 3,674 3,674
Interest 6,204 4,378 18,047 11,931
Other 13,109 11,953 39,278 34,990
-------- -------- -------- --------
107,082 85,899 309,407 250,495
-------- -------- -------- --------
Earnings Before Income Taxes 15,406 6,988 44,295 20,679
Income taxes 6,248 2,855 18,077 8,442
-------- -------- -------- --------
Net Earnings $ 9,158 $ 4,133 $ 26,218 $ 12,237
======== ======== ======== ========
Earnings per common share:
Primary $ .63 $ .33 $ 1.91 $ .98
Fully diluted $ .56 $ .29 $ 1.62 $ .86
Average number of common shares
outstanding:
Primary 14,609 12,565 13,727 12,489
Fully diluted 17,245 16,804 17,161 16,737
Dividends declared per common share $ .12 $ .11 $ .35 $ .32
Book value per common share $ 20.30 $ 18.28 $ 20.30 $ 18.28
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 4
<TABLE>
<CAPTION>
LEGG MASON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(Unaudited)
Nine Months
Ended December 31,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 26,218 $ 12,237
Noncash items included in earnings:
Depreciation and amortization 10,475 6,977
-------- --------
36,693 19,214
(Increase) decrease in assets:
Cash and securities segregated for regulatory
purposes (68,774) 91,087
Receivable from customers (62,105) (46,364)
Securities borrowed (25,333) (16,946)
Securities owned (26,377) (13,760)
Other (15,788) ( 8,520)
Increase(decrease) in liabilities:
Payable to customers 203,163 52,595
Payable to brokers and dealers 15,666 (636)
Securities loaned 13,581 (7,502)
Securities sold, but not yet purchased 420 (1,559)
Accrued compensation 22,658 3,757
Other 3,483 (8,675)
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 97,287 62,691
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Property and equipment (9,711) (10,923)
Intangible assets (445) (482)
Net (increase) decrease in resale agreements (43,308) 14,268
Purchases of investment securities - (48,877)
Proceeds from sales of investment securities 4,808 32,239
-------- --------
CASH USED FOR INVESTING ACTIVITIES (48,656) (13,775)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings 70,211 38,853
Repayment of subordinated liabilities (69) -
Issuance of common stock 2,420 1,794
Repurchase of common stock - (140)
Dividends paid (4,377) (3,727)
-------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 68,185 36,780
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 116,816 85,696
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 59,823 40,208
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $176,639 $125,904
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 5
LEGG MASON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
December 31, 1995
(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, 1995, the broker-dealer subsidiaries
had aggregate net capital, as defined, of $102,008 which exceeded
required net capital by $92,983.
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 violations of securities laws and seek
unspecified damages which could be substantial. While the ultimate
resolution of these actions cannot be currently determined, in the
opinion of management, after consultation with legal counsel, the
actions will be resolved with no material adverse effect on the
consolidated financial statements of the Company.
4. Supplemental Cash Flow Information:
Interest payments were $18,847 1995 and $13,198 in 1994.
Income tax payments were $17,551 in 1995 and $8,899 in 1994.
<PAGE> 6
5. Convertible Subordinated Debenture Redemption:
On July 26, 1995, the Company called for redemption on August
25, 1995 the $34.5 million aggregate principal amount outstanding
of its 7% Convertible Subordinated Debentures due June 15, 2011
(the "Debentures").
Substantially all holders converted their Debentures into
45.96 shares of Common Stock of the Company for each $1 thousand
principal amount of Debentures (based on the conversion price of
$21.76 per share of Common Stock) for a total issuance of 1,581,939
new common shares. Cash was paid in lieu of fractional shares.
6. Litigation Settlement Charge:
Other expense for the nine months ended December 31, 1994,
includes a charge of $2,000 ($950 after tax) related to the
proposed settlement of class action litigation arising from taxable
municipal bond offerings underwritten in 1986 by one of the
Company's subsidiaries.
7. Recent Accounting Development:
In October 1995, the Financial Accounting Standards Board
issued Statement No. 123, "Accounting for Stock-Based
Compensation". Statement No. 123 is effective for fiscal years
beginning after December 15, 1995. The Company is currently
evaluating whether to adopt the elective compensation measurement
provisions of Statement No. 123.
8. Subsequent Events:
On January 2, 1996, the Company completed the acquisition of
Bartlett & Co., an investment advisory firm located in Cincinnati,
Ohio, through the issuance of 1,324,091 shares of common stock of
the Company. The transaction will be accounted for as a pooling of
interests.
On February 9, 1996, the Company initiated a public offering
of $100.0 million of 6.50% Senior Notes due February 15, 2006. The
proceeds from the offering will be used for general corporate
purposes.
<PAGE> 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
RESULTS OF OPERATIONS
During the Company's third quarter and nine months ended December
31, 1995, the securities industry benefitted from higher securities
transaction volume, rising equity markets and declining interest
rates as compared with the unfavorable market conditions
experienced during the corresponding periods of the prior year.
Quarter Ended December 31, 1995 Compared to Quarter Ended December
31, 1994
In the third fiscal quarter ended December 31, 1995, the Company's
net earnings increased 122% to $9.2 million from $4.1 million in
the prior year's quarter. Revenues rose 32% to $122.5 million from
$92.9 million. Primary earnings per share were $.63, up 91% from
$.33. Fully diluted earnings per share increased 93% to $.56 from
$.29.
Commission revenues rose 37% to $41.0 million because of increased
sales of listed securities, non-affiliated mutual funds and
over-the-counter securities.
Revenues from principal transactions fell 1% to $15.2 million, with lower
sales of municipal, U.S. government and agency securities substantially
offset by higher trading profits on firm proprietary positions and higher
sales of over-the-counter and corporate debt securities.
Investment advisory and related fees increased for the 23rd
consecutive quarter and were 57% higher than in the corresponding
quarter of the prior year as a result of the addition of fees
earned by Batterymarch Financial Management, acquired in January
1995, and growth in assets under management in Company-sponsored
mutual funds and the Company's fixed-income investment advisory
subsidiary. Company subsidiaries now serve as investment advisors
to individual and institutional accounts and mutual funds with
assets of $30.9 billion, up from $18.0 billion at December 31,
1994.
Investment banking revenues were $10.1 million, 19% higher than in
the corresponding quarter of the prior year, reflecting an increase
in fees from energy-related securities offerings.
Other revenues increased 19% to $8.6 million because of an increase
in loan originations by the Company's mortgage banking
subsidiaries.
Compensation and benefits increased 30% to $71.2 million,
reflecting higher sales and profitability-based compensation and
the addition of expenses of Batterymarch.
Occupancy and equipment rental increased 21% to $8.8 million,
principally as a result of increased location costs for new retail
brokerage offices, higher transaction volume processed by the
Company's data processing service bureau and increased computer
<PAGE> 8
depreciation expense. In addition, the current quarter includes
the expenses of Batterymarch.
Communications expense of $6.7 million rose 7% because of the
addition of Batterymarch and new retail brokerage office locations.
Floor brokerage and clearing fees decreased 17% to $1.0 million, as
a result of installation of a new order processing system beginning
in November 1995.
Other expense increased 10% to $13.1 million, attributable to the
addition of expenses of Batterymarch, including amortization of
intangibles, and higher consulting and programming expenses, offset
in part by lower litigation-related expenses.
Interest revenue increased 34% to $14.3 million, because of higher
interest rates earned on larger customer margin account and firm
investment balances, as well as higher conduit stock loan activity.
Interest expense increased 42% to $6.2 million as a result of
larger customer credit balances and conduit stock loan balances,
partially offset by reduced interest expense following conversion
of the Company's 7% Convertible Subordinated Debentures in August
1995.
Income taxes rose 119% to $6.2 million because of an increase in
pre-tax earnings. The effective tax rate was 40.6% compared with
40.9% in the prior year's quarter.
<PAGE> 9
Nine Months Ended December 31, 1995 Compared to Nine Months Ended
December 31, 1994
The Company's net earnings in the nine months ended December 31,
1995 increased 114% to $26.2 million from $12.2 million in the
prior year's corresponding period. Revenues rose 30% to $353.7
million from $271.2 million. Primary earnings per share were
$1.91, up 95% from $.98. Fully diluted earnings per share
increased 88% to $1.62 from $.86.
Commission revenues rose 34% to $118.9 million because of increases
in sales of listed and over-the counter securities and
non-affiliated mutual funds.
Revenues from principal transactions increased 13% to $47.9 million,
mainly because of higher sales of over-the-counter stocks and corporate
bonds and higher trading profits on firm proprietary positions, partially
offset by a decline in sales of municipal securities.
Investment advisory and related fees increased 52% to $93.5
million, principally as a result of the addition of fees earned by
Batterymarch, growth in assets under management in Company-sponsored
mutual funds and in the Company's fixed-income investment advisory
subsidiary.
Investment banking revenues fell 2% to $29.3 million as a result of
a substantial decline in the number and size of co-managed
offerings of real estate investment trusts, substantially offset by
an increase in fees from energy- and banking-related stock
offerings, as well as increased private placement activities.
Other revenues rose 14% to $24.0 million, primarily because of
increased loan origination fees at the Company's mortgage banking
subsidiaries.
Compensation and benefits increased 27% to $202.6 million because
of higher sales and profitability-based compensation and the
addition of expenses of Batterymarch.
Occupancy and equipment rental increased 20% to $26.0 million
because of increased rent and depreciation expense related to new
retail brokerage office locations and expanded product areas, the
addition of expenses of Batterymarch and higher transaction volume
processed by the Company's data processing service bureau.
Communications expense increased 8% to $19.9 million, primarily
because of the addition of retail brokerage office locations, the
addition of expenses of Batterymarch and increased quote services
related to brokerage office and product area expansion.
Other expense increased 12% to $39.3 million, attributable to the
addition of expenses of Batterymarch, including amortization of
intangibles, and increased programming and computer data service
costs, offset in part by lower litigation-related and promotional
expenses.
<PAGE> 10
Interest revenue increased 44% to $40.2 million because of higher
interest rates earned on larger customer margin account and higher
stock loan balances.
Interest expense increased 51% to $18.0 million because of higher
interest rates paid on larger customer credit balances and higher
conduit stock loan balances, offset in part by reduced interest
expense as a result of conversion of the Company's 7% Convertible
Subordinated Debentures.
Income taxes rose 114% to $18.1 million, principally because of an
increase in pre-tax earnings. The effective tax rate was 40.6% and
40.8% in the current and prior year periods, respectively.
Liquidity and Capital Resources
On July 26, 1995, the Company called for redemption on August 25,
1995, the $34.5 million aggregate principal amount outstanding of
its 7% Convertible Subordinated Debentures due June 15, 2011 (the
"Debentures").
Substantially all holders converted their Debentures into 45.96
shares of Common Stock for each $1 thousand principal amount of
Debentures (based on the conversion price of $21.76 per share of
Common Stock), with cash paid in lieu of fractional shares.
Except for the Debenture redemption described above, the use of
short-term borrowing facilities and larger customer credit
balances, which historically increase at calendar year end, there
has been no material change in the Company's financial position
since March 31, 1995. 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.
During the nine months ended December 31, 1995, cash and cash
equivalents increased $116.8 million. Cash flows from operating
activities provided the Company with $97.3 million of cash,
principally from increased customer payables. Cash flows from
financing activities contributed $68.2 million, attributable to
higher short-term borrowings by the Company's mortgage banking and
securities brokerage affiliates. Cash flows from investing
activities used $48.7 million as a result of reduced levels of
investments in resale agreements.
On January 5, 1995, the Company acquired the assets of Batterymarch
Financial Management ("Batterymarch"). The Company paid $54.1
million in cash at closing. An additional payment, due in early
1998 and based on Batterymarch's achievement of specified revenue
levels for calendar 1997, could increase the total consideration up
to $120.0 million. If the amount of any 1998 payment exceeds $40.0
million, the Company may pay all or any portion of the excess in
the form of shares of the Company's common stock.
On February 9, 1996, the Company initiated a public offering of
$100.0 million of 6.50% Senior Notes due February 15, 2006. The
proceeds from the offering will be used for general corporate
<PAGE> 11
purposes. The Company has available for offering an additional
$50.0 million of debt and convertible debt securities pursuant to
a shelf registration filed on January 11, 1996.
Recent Accounting Development
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation".
Statement No. 123 is effective for fiscal years beginning after
December 15, 1995. The Company is currently evaluating whether to
adopt the elective compensation measurement provisions of Statement
No. 123.
Subsequent Event
On January 2, 1996, the Company completed the acquisition of
Bartlett & Co., an investment advisory firm located in Cincinnati,
Ohio, through the issuance of 1,324,091 shares of common stock of
the Company. The transaction will be accounted for as a pooling of
interests.
<PAGE> 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(11) Statements re: computation of per share
earnings
(27) Financial Data Schedules
(b) No reports on Form 8-K were filed during the
quarter ended December 31, 1995.
<PAGE> 13
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.
LEGG MASON, INC.
(Registrant)
DATE: February 14, 1996 /s/ John F. Curley, Jr.
John F. Curley, Jr.
Vice Chairman of the Board
DATE: February 14, 1996 /s/ F. Barry Bilson
F. Barry Bilson
Vice President - Finance
<PAGE> 14
INDEX TO EXHIBITS
PAGE
11. Statement re: computation of per share earnings. 15-16
27. Statement re: financial data schedules. 17
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
[CAPTION]
<TABLE>
For The Three Months Ended December 31,
1995 1994
Fully Fully
Primary Diluted Primary Diluted
<S> <C> <C> <C> <C>
Weighted average shares
outstanding:
Common stock 13,988 13,988 12,190 12,190
Shares available under
options 621 621 375 394
Issuable upon conversion
of debentures - 2,636 - 4,220
------- ------- ------- -------
Weighted average common
and common equivalent
shares outstanding 14,609 17,245 12,565 16,804
======= ======= ======= =======
Net earnings $ 9,158 $ 9,158 $ 4,133 $ 4,133
Interest expense, net,
on debentures - 428 - 727
------- ------- ------- -------
Net earnings applicable
to common stock $ 9,158 $ 9,586 $ 4,133 $ 4,860
======= ======= ======= =======
Per share $ .63 $ .56 $ .33 $ .29
======= ======= ======= =======
</TABLE>
<PAGE> 2
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For The Nine Months Ended December 31,
1995 1994
Fully Fully
Primary Diluted Primary Diluted
<S> <C> <C> <C> <C>
Weighted average shares
outstanding:
Common stock 13,137 13,137 12,128 12,128
Shares available under
options 590 593 361 389
Issuable upon conversion
of debentures - 3,431 - 4,220
------- ------- ------- -------
Weighted average common
and common equivalent
shares outstanding 13,727 17,161 12,489 16,737
======= ======= ======= =======
Net earnings $26,218 $26,218 $12,237 $12,237
Interest expense, net,
on debentures - 1,527 - 2,182
------- ------- ------- -------
Net earnings applicable
to common stock $26,218 $27,745 $12,137 $14,419
======= ======= ======= =======
Per share $ 1.91 $ 1.62 $ .98 $ .86
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AND CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000704051
<NAME> LEGG MASON INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> $275,941
<RECEIVABLES> $368,109
<SECURITIES-RESALE> $107,268
<SECURITIES-BORROWED> $145,735
<INSTRUMENTS-OWNED> $78,267
<PP&E> $30,956
<TOTAL-ASSETS> $1,169,503
<SHORT-TERM> $70,211
<PAYABLES> $543,588
<REPOS-SOLD> $0
<SECURITIES-LOANED> $117,885
<INSTRUMENTS-SOLD> $6,782
<LONG-TERM> $68,000
<COMMON> $1,400
$0
$0
<OTHER-SE> $282,886
<TOTAL-LIABILITY-AND-EQUITY> $1,169,503
<TRADING-REVENUE> $47,934
<INTEREST-DIVIDENDS> $40,160
<COMMISSIONS> $118,892
<INVESTMENT-BANKING-REVENUES> $29,280
<FEE-REVENUE> $93,471
<INTEREST-EXPENSE> $18,047
<COMPENSATION> $202,592
<INCOME-PRETAX> $44,295
<INCOME-PRE-EXTRAORDINARY> $44,295
<EXTRAORDINARY> $0
<CHANGES> $0
<NET-INCOME> $26,218
<EPS-PRIMARY> $1.91
<EPS-DILUTED> $1.62
</TABLE>
