<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 September 30, 1997
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.
24,709,746 shares of Common Stock as of the close of business on
November 3, 1997.
<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)
September 30,1997 March 31,1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Cash and cash equivalents.............. $ 230,562 $ 150,976
Cash and securities segregated for
regulatory purposes................... 515,401 442,305
Resale agreements...................... 72,653 132,801
Receivable from customers.............. 695,713 527,456
Securities borrowed.................... 420,443 263,612
Securities owned, at market value...... 108,881 78,862
Investment securities, at market value. 93,748 66,983
Equipment and leasehold
improvements, net..................... 43,320 35,809
Intangible assets...................... 61,097 61,423
Other.................................. 157,826 118,741
---------- ----------
$2,399,644 $1,878,968
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Payable to customers................... $1,222,156 $ 960,646
Payable to brokers and dealers......... 7,589 7,112
Securities loaned...................... 354,576 250,804
Short-term borrowings.................. 93,569 13,400
Securities sold, but not yet purchased,
at market value....................... 37,208 12,507
Accrued compensation................... 69,316 58,893
Other.................................. 62,450 57,396
Senior notes........................... 99,605 99,581
---------- ----------
1,946,469 1,460,339
---------- ----------
Stockholders' equity:
Common stock........................... 2,462 1,827
Additional paid-in capital............. 196,998 192,817
Retained earnings...................... 253,290 223,752
Net unrealized appreciation on
investment securities................. 425 233
---------- ----------
453,175 418,629
---------- ----------
$2,399,644 $1,878,968
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 3
LEGG MASON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Commissions......................... $ 63,870 $ 41,718 $115,479 $ 89,304
Principal transactions.............. 20,840 16,610 42,890 34,954
Investment advisory and related fees 63,176 42,881 118,579 85,364
Investment banking.................. 25,232 18,750 40,153 32,891
Interest............................ 30,519 18,944 57,324 36,902
Other............................... 9,213 8,391 17,665 16,716
-------- -------- -------- --------
212,850 147,294 392,090 296,131
-------- -------- -------- --------
Expenses:
Compensation and benefits........... 120,578 82,765 221,410 167,212
Occupancy and equipment rental...... 13,952 10,071 25,786 20,196
Communications...................... 10,464 6,736 19,706 13,867
Floor brokerage and clearing fees... 1,500 1,271 2,685 2,804
Interest............................ 17,929 8,534 32,604 17,996
Other ....................... 16,345 14,742 30,869 28,895
-------- -------- ------- -------
180,768 124,119 333,060 250,970
-------- -------- ------- -------
Earnings Before Income Taxes......... 32,082 23,175 59,030 45,161
Income taxes........................ 13,238 9,279 24,396 18,365
-------- -------- ------- -------
Net Earnings......................... $ 18,844 $ 13,896 $ 34,634 $ 26,796
======== ======== ======== ========
Earnings per common share:
Primary............................. $ .72 $ .58 $ 1.33 $ 1.19
Fully diluted....................... $ .72 $ .56 $ 1.32 $ 1.08
Average number of common shares
outstanding:
Primary............................. 26,165 23,808 25,983 22,609
Fully diluted....................... 26,350 25,016 26,251 24,985
Dividends declared per common share.. $ .11 $ .098 $ .208 $ .188
Book value per common share.......... $ 18.41 $ 16.19 $ 18.41 $ 16.19
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 4
LEGG MASON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended September 30,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................................... $ 34,634 $ 26,796
Noncash items included in earnings:
Depreciation and amortization................. 9,313 7,621
-------- --------
43,947 34,417
(Increase) decrease in assets:
Cash and securities segregated for regulatory
purposes..................................... (73,096) (6,642)
Receivable from customers...................... (168,257) (81,643)
Securities borrowed............................ (156,831) (23,991)
Securities owned............................... (30,019) (10,153)
Other.......................................... (39,202) (8,822)
Increase(decrease) in liabilities:
Payable to customers........................... 261,510 101,741
Payable to brokers and dealers................. 477 3,996
Securities loaned.............................. 103,772 20,164
Securities sold, but not yet purchased......... 24,701 14,556
Accrued compensation........................... 10,423 (427)
Other.......................................... 4,587 1,574
-------- --------
CASH (USED FOR)PROVIDED BY OPERATING ACTIVITIES.. (17,988) 44,770
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Equipment and leasehold improvements........... (13,757) (4,936)
Intangible assets.............................. (2,600) (32)
Net decrease in resale agreements............... 60,148 (30,664)
Purchases of investment securities.............. (97,568) (82,837)
Proceeds from maturities of investment securities 71,121 111,817
-------- --------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES. 17,344 (6,652)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings........... 80,169 31,758
Repayment of subordinated liabilities .......... - (29)
Issuance of common stock........................ 4,819 1,656
Dividends paid.................................. (4,758) (3,695)
-------- --------
CASH PROVIDED BY FINANCING ACTIVITIES............ 80,230 29,690
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS........ 79,586 67,808
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD. 150,976 89,378
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....... $230,562 $157,186
======== ========
</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)
September 30, 1997
(Unaudited)
1. Interim Basis of Reporting:
The accompanying unaudited condensed consolidated financial
statements of Legg Mason, Inc. and its wholly-owned subsidiaries
(the "Company")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 September 30, 1997, the broker-dealer subsidiaries had
aggregate net capital, as defined, of $138,933 which exceeded
required net capital by $123,236.
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 for the six months ended September 30, 1997 and
September 30, 1996 were $32,305 and $19,225, respectively. Income
tax payments for the six months ended September 30, 1997 and
September 30, 1996 were $25,893 and $23,824, respectively.
<PAGE> 6
5. Common Stock Split:
On July 24, 1997, the Company declared a four-for-three stock split,
paid September 24, 1997 to shareholders of record on September 8, 1997.
Accordingly, all share and per share information has been retroactively
restated to reflect the stock split.
6. Recent Accounting Developments:
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" effective for fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This Statement requires the disclosure of an amount that
represents total comprehensive income and the components of comprehensive
income in a financial statement. The impact of adoption will not affect
the Company's financial position or results of operations.
In June 1997, Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" was issued and is effective for financial
statements for periods beginning after December 15, 1997. This Statement
establishes standards for determining an entity's operating segments and the
type and level of financial information to be disclosed in both annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The impact of adoption will not affect the Company's financial position or
results of operations.
<PAGE> 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
RESULTS OF OPERATIONS
During its second fiscal quarter and the six months ended September 30, 1997,
Legg Mason, Inc. and its subsidiaries (the "Company") continued to benefit
from the favorable conditions in the securities markets that prevailed during
the periods. Rising equity markets and higher securities transaction volume
contributed to record revenues, net earnings and earnings per share.
Quarter Ended September 30, 1997 Compared to Quarter Ended
September 30, 1996
In the second fiscal quarter ended September 30, 1997, the Company's net
earnings increased 36% to $18.8 million from $13.9 million in the
corresponding quarter of the prior year. Revenues rose 45% to $212.9 million
from $147.3 million. Primary earnings per share increased 24% to $.72 from
$.58. Fully diluted earnings per share were $.72, up 29% from $.56.
Commission revenues were $63.9 million, up 53% from $41.7 million in the
prior year's quarter, reflecting an increased volume of listed and
over-the-counter securities transactions and sales of non-affiliated mutual
funds.
Revenues from principal transactions rose 25% to $20.8 million, principally
as a result of higher sales of over-the-counter securities and corporate bonds.
Despite losses on energy-related equity positions, profits on firm proprietary
positions increased from the prior year's quarter.
Investment advisory and related fees increased for the 30th consecutive quarter
to $63.2 million and were 47% higher as a result of growth in assets under
management in Company-sponsored mutual funds, the Company's fixed-income
investment advisory subsidiary and fee-based brokerage accounts. Company
subsidiaries now serve as investment advisors to individual and institutional
accounts and mutual funds with assets of $51.7 billion, up from $37.9 billion
at September 30, 1996.
Investment banking revenues were $25.2 million, 35% higher than in the
corresponding quarter of the prior year, reflecting an increase in corporate
finance activities, particularly public offerings of real estate investment
trusts.
Other revenues increased 10% to $9.2 million because of higher fees from
increased investor activity.
Compensation and benefits increased 46% to $120.6 million, reflecting higher
sales and profitability-based compensation and an increase in the average
number of full-time employees as a result of business expansion.
<PAGE> 8
Occupancy and equipment rental increased 39% to $14.0 million as a result of
increased technology-related expenses and additional costs related to the
Company's relocation of its corporate headquarters scheduled to be completed
in February 1998.
Communications expense rose 55% to $10.5 million because of increased telephone,
quote service and postage expenses related to increased business activity.
Floor brokerage and clearing fees increased 18% to $1.5 million, as a result of
substantially higher transaction volume.
Other expense increased 11% to $16.3 million, primarily because of higher
litigation-related and promotional expenses, offset in part by lower
programming expenses.
Interest revenue increased 61% to $30.5 million because of larger firm
investment, customer margin account and conduit stock loan balances.
Interest expense increased 110% to $17.9 million as a result of larger
interest-bearing customer credit and conduit stock loan balances.
Income taxes rose 43% to $13.2 million because of an increase in pre-tax
earnings. The effective tax rate was 41.3% compared with 40.0% in the prior
year's quarter as a result of non-deductible foreign operating losses.
<PAGE> 9
Six Months Ended September 30, 1997 Compared to Six Months Ended September
30, 1996
The Company's revenues were $392.1 million, a 32% increase from revenues of
$296.1 million in the corresponding period of the prior year. Net earnings
rose 29% to $34.6 million from $26.8 million. Primary earnings per share
increased 12% to $1.33 from $1.19. Fully diluted earnings per share
increased 22% to $1.32 from $1.08.
Commission revenues were $115.5 million, up 29% from $89.3 million in the prior
year, reflecting an increased volume of transactions in listed securities and
non-affiliated mutual funds.
Revenues from principal transactions rose 23% to $42.9 million, because of
increased sales of over-the-counter securities and profits on firm proprietary
positions.
Investment advisory and related fees increased 39% to $118.6 million,
principally as a result 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 were $40.2 million, 22% higher than in the
corresponding period of the prior year, reflecting increased corporate finance
activities, particularly public offerings of real estate investment trusts.
Other revenues increased 6% to $17.7 million because of higher fees from
increased customer activity.
Compensation and benefits increased 32% to $221.4 million, reflecting higher
sales and profitability-based compensation and an increase in the average number
of full-time employees as a result of business expansion.
Occupancy and equipment rental increased 28% to $25.8 million as a result of
increased technology-related expenses and additional costs related to the
Company's relocation of its corporate headquarters scheduled to be completed
in February 1998.
Communications expense of $19.7 million rose 42% as a result of higher
telephone, quote service and printing expenses related to increased business
activity.
Other expense increased 7% to $30.9 million, primarily due to higher
promotional and litigation-related expenses, offset in part by lower
programming expenses.
Interest revenue increased 55% to $57.3 million because of larger firm
investment, customer margin and conduit stock loan balances.
Interest expense increased 81% to $32.6 million as a result of larger interest
- -bearing customer credit balances.
Income taxes rose 33% to $24.4 million because of an increase in pre-tax
earnings. The effective tax rate was 41.3% compared with
<PAGE> 10
40.7% in the prior year period as a result of non-deductible foreign
operating losses.
Liquidity and Capital Resources
There has been no material change in the Company's financial position since
March 31, 1997. A substantial portion of the Company's assets is liquid,
consisting mainly of cash and assets readily convertible into cash. These
assets are financed principally by free credit balances, equity capital, bank
lines of credit, senior notes and other payables.
During the six months ended September 30, 1997, cash and cash equivalents
increased $79.6 million. Cash flows from financing activities increased $80.2
million, attributable to higher short-term borrowings by the Company's mortgage
banking affiliates. Cash flows from investing activities increased $17.3
million, principally from reduced levels of investments, offset in large part
by purchases of equipment and leasehold improvements. The Company used $18.0
million of cash in operating activities, principally to fund increased
regulatory cash requirements, higher stock borrowed levels and clearing
deposits, substantially offset by higher net customer payables and net earnings
adjusted for depreciation and amortization.
<PAGE> 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
Registrant's annual meeting of stockholders was held July 24, 1997. In
the election of directors, the six director nominees were elected with the
following votes:
<TABLE>
<CAPTION>
Votes
Cast For Withhold
<S> <C> <C> <C>
Charles A. Bacigalupo 15,483,072 15,483,072 76,131
Harry M. Ford, Jr. 15,485,636 15,485,636 73,566
Margaret DeB. Tutwiler 15,491,249 15,491,249 67,952
James E. Ukrop 13,663,990 13,663,990 1,895,212
John E. Koerner, III 15,484,808 15,484,808 74,394
Peter F. O'Malley 15,492,973 15,492,973 66,229
</TABLE>
The stockholders voted in favor of the ratification of the appointment of
Coopers & Lybrand L.L.P. as independent auditors of the Registrant as follows:
<TABLE>
<CAPTION>
Votes
Cast For Against Abstain Non-Vote
<S> <C> <C> <C> <C> <C>
Ratification of
Appointment of
Auditors 15,546,855 15,537,530 9,325 12,347 ---
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Articles of Incorporation of the Company,
as amended (incorporated by reference to
Form 10-Q for the quarter ended September
30, 1996)
3.2 By-laws of the Company as amended and
restated April 25, 1988 (incorporated by
reference to the Company's Annual Report
on Form 10-K for the year ended March 31,
1988)
11. Statement re: computation of per share
earnings
27. Statement re: financial data schedules
(b) No reports on Form 8-K were filed during
the quarter ended September 30, 1997.
<PAGE> 12
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: November 14, 1997 /s/ John F. Curley, Jr.
John F. Curley, Jr.
Vice Chairman of the Board
DATE: November 14, 1997 /s/ F. Barry Bilson
F. Barry Bilson
Vice President - Finance
<PAGE> 13
INDEX TO EXHIBITS
11. Statement re: computation of per
share earnings
27. Statement re: financial data
schedules
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For The Three Months Ended September 30,
1997 1996
Fully Fully
Primary Diluted Primary Diluted
<S> <C> <C> <C> <C>
Weighted average shares
outstanding:
Common stock 24,545 24,545 22,940 22,940
Shares available under
options 1,620 1,781 868 932
Issuable upon conversion
of debentures - 24 - 1,144
------- ------- ------- -------
Weighted average common
and common equivalent
shares outstanding 26,165 26,350 23,808 25,016
======= ======= ======= =======
Net earnings $18,844 $18,844 $13,896 $13,896
Interest expense, net,
on debentures - 4 - -
------- ------- ------- -------
Net earnings applicable
to common stock $18,844 $18,848 $13,896 $13,896
======= ======= ======= =======
Per share $ .72 $ .72 $ .58 $ .56
======= ======= ======= =======
</TABLE>
All share and per share information has been restated to reflect
a 4 for 3 stock split paid on September 24, 1997 to shareholders of record
on September 8, 1997.
<PAGE> 2
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For The Six Months Ended September 30,
1997 1996
Fully Fully
Primary Diluted Primary Diluted
<S> <C> <C> <C> <C>
Weighted average shares
outstanding:
Common stock 24,478 24,478 21,740 21,740
Shares available under
options 1,505 1,749 869 923
Issuable upon conversion
of debentures - 24 - 2,322
------- ------- ------- -------
Weighted average common
and common equivalent
shares outstanding 25,983 26,251 22,609 24,985
======= ======= ======= =======
Net earnings $34,634 $34,634 $26,796 $26,796
Interest expense, net,
on debentures - 9 - 143
------- ------- ------- -------
Net earnings applicable
to common stock $34,634 $34,643 $26,796 $26,939
======= ======= ======= =======
Per share $ 1.33 $ 1.32 $ 1.19 $ 1.08
======= ======= ======= =======
</TABLE>
All share and per share information has been restated to reflect
a 4 for 3 stock split paid on September 24, 1997 to shareholders of record
on September 8, 1997.
<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
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> $230,562,000
<RECEIVABLES> $695,713,000
<SECURITIES-RESALE> $72,653,000
<SECURITIES-BORROWED> $420,443,000
<INSTRUMENTS-OWNED> $108,881,000
<PP&E> $43,320,000
<TOTAL-ASSETS> $2,399,644,000
<SHORT-TERM> $93,569,000
<PAYABLES> $1,229,745,000
<REPOS-SOLD> $0
<SECURITIES-LOANED> $354,576,000
<INSTRUMENTS-SOLD> $37,208,000
<LONG-TERM> $99,605,000
$0
$0
<COMMON> $2,462,000
<OTHER-SE> $450,713,000
<TOTAL-LIABILITY-AND-EQUITY> $2,399,644,000
<TRADING-REVENUE> $42,890,000
<INTEREST-DIVIDENDS> $57,324,000
<COMMISSIONS> $115,479,000
<INVESTMENT-BANKING-REVENUES> $40,153,000
<FEE-REVENUE> $118,579,000
<INTEREST-EXPENSE> $32,604,000
<COMPENSATION> $221,410,000
<INCOME-PRETAX> $59,030,000
<INCOME-PRE-EXTRAORDINARY> $59,030,000
<EXTRAORDINARY> $0
<CHANGES> $0
<NET-INCOME> $34,634,000
<EPS-PRIMARY> $1.33
<EPS-DILUTED> $1.32
</TABLE>
