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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
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 No. 1-8529
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LEGG MASON, INC.
(Exact name of registrant as specified in its charter)
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Maryland 52-1200960
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Light Street 21202
Baltimore, Maryland (Zip Code)
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (410) 539-0000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of May 18, 1999, the aggregate market value of the registrant's
common stock held by non-affiliates was $1,873,409,000.
As of May 18, 1999, the number of shares outstanding of the
registrant's common stock was 56,507,106
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement dated June 17,
1999 are incorporated by reference into Part III.
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<PAGE>
Part I
Item 1. BUSINESS.
GENERAL
Legg Mason, Inc. is a holding company which, through its
subsidiaries, is engaged in investment management of institutional and
individual accounts and Company-sponsored mutual funds, securities brokerage and
trading, investment banking for corporations and municipalities, commercial
mortgage banking and other related financial services.
The Company's principal investment advisory subsidiaries are Legg
Mason Fund Adviser, Inc., which serves as investment adviser to or manager of
Company-sponsored mutual funds; Western Asset Management Company, which manages
fixed income assets for institutional clients; Brandywine Asset Management,
Inc., which primarily manages equity portfolios for institutional and high net
worth individual clients; Batterymarch Financial Management, Inc., which manages
U.S., international and emerging markets equity portfolios for institutional
clients; Bartlett & Co., which manages equity, balanced and fixed income
portfolios for high net worth individuals and institutional clients; Legg Mason
Capital Management, Inc., which manages equity and fixed income portfolios for
individual and institutional accounts; Gray, Seifert & Co., Inc., which
primarily manages equity portfolios for wealthy individual, family group,
endowment and foundation clients; and Western Asset Global Management Limited,
which manages international fixed income and currency assets for institutional
clients. In addition to Legg Mason Fund Adviser, all of the above firms also
serve as investment advisor to Company-sponsored mutual funds and/or other
Company-structured investment products.
As of March 31, 1999, the Company's investment advisory
subsidiaries had approximately $89 billion of assets under management, of which
approximately 38% were equity assets and approximately 62% were fixed income
assets.
The Company's principal broker-dealer subsidiary is Legg Mason Wood
Walker, Incorporated ("Legg Mason Wood Walker"), a full service regional
broker-dealer and investment banking firm operating primarily in the Eastern and
Mid-South regions of the United States. Another broker-dealer subsidiary,
Howard, Weil, Labouisse, Friedrichs Incorporated ("Howard Weil"), engages
primarily in energy-related investment banking and institutional brokerage.
The Company's real estate finance subsidiary is Legg Mason Real
Estate Services, Inc., which is primarily engaged in commercial mortgage banking
and commercial loan servicing. On April 1, 1999, Legg Mason Dorman & Wilson,
Inc., the Company's other real estate finance subsidiary, was merged into Legg
Mason Real Estate Services, Inc.
See "Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition - Business Description" for the revenues and
pre-tax earnings of each of the Company's business segments.
The Company was incorporated in Maryland in 1981 to serve as a
holding company for Legg Mason Wood Walker and other subsidiaries. The
predecessor company to Legg Mason Wood Walker was formed in 1970 under the name
Legg Mason & Co., Inc. to combine the operations of Legg & Co., a Maryland-based
broker-dealer formed in 1899, and Mason & Company, Inc., a Virginia-based
broker-dealer formed in 1962. The Company's subsequent growth has occurred
through internal expansion as well as through its acquisitions of investment
management, broker-dealer and commercial mortgage banking firms.
Unless the context otherwise requires, all references in this
Report to the Company include Legg Mason, Inc. and its predecessors and
subsidiaries.
<PAGE>
REGISTRATIONS AND EXCHANGE MEMBERSHIPS
Legg Mason Wood Walker and Howard Weil are registered as
broker-dealers with the Securities and Exchange Commission ("SEC"), are members
of the New York Stock Exchange, Inc. ("NYSE"), the New York Futures Exchange,
Inc., the National Association of Securities Dealers, Inc. ("NASD") and the
Securities Investors Protection Corporation ("SIPC"), and are registered as
futures commission merchants with the Commodity Futures Trading Commission. In
addition, Legg Mason Wood Walker is a member of the Philadelphia, Pacific,
Cincinnati, Boston and Chicago Stock Exchanges.
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BROKERAGE OFFICES
The following table reflects, as of March 31, 1999, certain information
with respect to the Company's securities brokerage offices.
Number of
Financial Number of
Location Advisors Offices
-------- --------- ---------
United States:
Maryland 292 17
Pennsylvania 203 23
Virginia 108 13
Louisiana 90 10
North Carolina 71 10
Florida 63 10
Massachusetts 60 3
Texas 45 5
Ohio 44 6
New York 42 3
New Jersey 38 5
District of Columbia 36 1
Alabama 27 3
Connecticut 17 3
South Carolina 17 3
Maine 16 1
Mississippi 15 3
West Virginia 15 2
Delaware 9 1
Tennessee 6 1
Rhode Island 6 1
Illinois 4 1
California 3 1
United Kingdom:
London 6 1
Switzerland:
Geneva 7 1
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Total 1,240 128
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REVENUES BY SOURCE
The following table sets forth certain information regarding the
revenues of the Company by source.
<TABLE>
<CAPTION>
LEGG MASON, INC. AND SUBSIDIARIES (1)
Years Ended March 31,
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1997 1998 1999
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(Dollars in thousands)
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- --------- ------- --------- -------
<S><C>
Investment Advisory and
Related Fees $ 208,243 31.3% $ 295,645 33.3% $ 390,216 37.3%
Commissions
Listed and Over-the-Counter 124,841 18.8 164,022 18.4 187,560 17.9
Mutual Funds 41,054 6.2 48,687 5.5 57,586 5.5
Insurance and Annuities 20,436 3.1 22,613 2.5 26,172 2.5
Options and Commodities 3,649 0.5 5,962 0.7 7,818 0.8
------------ ----------- ------------- ----------- ------------- -----------
Total 189,980 28.6 241,284 27.1 279,136 26.7
------------ ----------- ------------- ----------- ------------- -----------
Principal Transactions (2)
Customer Related:
Government and Agency 14,660 2.2 15,405 1.7 17,631 1.7
Municipal 15,662 2.4 17,102 1.9 22,387 2.1
Corporate Debt 8,437 1.3 11,301 1.3 15,580 1.5
Over-the-Counter 31,327 4.7 34,179 3.9 26,976 2.6
------------ ----------- ------------- ----------- ------------- -----------
70,086 10.6 77,987 8.8 82,574 7.9
------------ ----------- ------------- ----------- ------------- -----------
Dealer Related:
Government and Agency 1,602 0.2 2,312 0.3 2,575 0.2
Municipal 46 - 1,159 0.1 816 0.1
Corporate Debt 295 - 1,035 0.1 1,645 0.2
Over-the-Counter 1,152 0.2 4,255 0.5 6,495 0.6
------------ ----------- ------------- ----------- ------------- -----------
3,095 0.4 8,761 1.0 11,531 1.1
------------ ----------- ------------- ----------- ------------- -----------
Total 73,181 11.0 86,748 9.8 94,105 9.0
------------ ----------- ------------- ----------- ------------- -----------
Investment Banking (3)
Corporate 63,850 9.6 90,123 10.1 66,640 6.4
Municipal 8,212 1.2 7,015 0.8 9,478 0.9
------------ ----------- ------------- ----------- ------------- -----------
Total 72,062 10.8 97,138 10.9 76,118 7.3
------------ ----------- ------------- ----------- ------------- -----------
Interest Income 84,129 12.7 127,268 14.3 160,292 15.3
Other Sources (4) 37,006 5.6 40,977 4.6 46,139 4.4
------------ ----------- ------------- ----------- ------------- -----------
Total Revenues $ 664,601 100.0% $ 889,060 100.0% $1,046,006 100.0%
============ =========== ============= =========== ============= ===========
</TABLE>
(1) All financial information includes the results of Brandywine Asset
Management, Inc., acquired on a pooling of interests basis on January 16,
1998.
(2) Principal transactions (securities transactions in which the Company buys
for or sells from its own inventory) are classified as "Customer Related"
when such transactions are effected with a customer of the Company (whether
an individual or institutional investor) and as "Dealer Related" when such
transactions are effected with another dealer.
(3) Principally selling concessions from underwriting participations and fees
from managed and co-managed offerings.
(4) Includes revenues from mortgage servicing and loan originations (1997:
$16,922; 1998: $21,475; 1999: $22,618).
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INVESTMENT ADVISORY BUSINESS SEGMENT
The Investment Advisory business segment provides investment
advisory services to Company-sponsored mutual funds and asset management for
institutional and individual clients.
COMPANY-SPONSORED MUTUAL FUNDS
Through various subsidiaries, the Company sponsors and serves
as investment advisor and distributor for domestic and international equity,
fixed-income and money market mutual funds and offshore investment funds. As of
March 31, 1998 and 1999, the aggregate net assets of all of these proprietary
funds were approximately $13.8 billion and $20.8 billion, respectively.
For the fiscal years ended March 31, 1997, 1998 and 1999, the
Company received approximately $37.8 million, $66.5 million and $102.7 million,
respectively, in asset-based sales charges from its proprietary mutual funds and
offshore investment funds.
INVESTMENT ADVISORY SERVICES
Legg Mason Fund Adviser, Inc. serves as investment adviser to
or manager of various Company-sponsored mutual funds. In addition, all of the
firms described in the following paragraphs also serve as investment advisor to
Company-sponsored mutual funds and/or other Company-structured investment
products. The amounts indicated as assets under management by those firms
include the assets in such funds and/or other products.
Western Asset Management Company manages fixed-income assets
for institutional clients. At March 31, 1998 and 1999, Western managed assets
with a value of approximately $39.6 billion and $49.2 billion, respectively.
Brandywine Asset Management, Inc. primarily manages equity
portfolios for institutional and high net worth individual clients. At March 31,
1998 and 1999, Brandywine managed assets with a value of approximately $8.2
billion and $7.0 billion, respectively.
Bartlett & Co. manages equity, balanced and fixed-income
portfolios for high net worth individuals and institutional clients. At March
31, 1998 and 1999, Bartlett managed assets with a value of approximately $3.1
billion and $3.0 billion, respectively.
Gray, Seifert & Co., Inc. primarily manages equity portfolios
for wealthy individuals and family groups, endowments and foundations. At March
31, 1998 and 1999, Gray Seifert managed assets with a value of approximately
$1.4 billion and $1.2 billion, respectively.
Batterymarch Financial Management, Inc. manages U.S.,
international and emerging markets equity portfolios for institutional clients.
At March 31, 1998 and 1999, Batterymarch managed assets with a value of
approximately $4.3 billion and $4.5 billion, respectively.
Western Asset Global Management Limited manages international
fixed-income and currency assets for institutions worldwide. At March 31, 1998
and 1999, Western Asset Global managed assets with a value of approximately $1.9
billion and $3.3 billion, respectively.
Legg Mason Capital Management, Inc. manages equity and
fixed-income portfolios for individual and institutional clients. At March 31,
1998 and 1999, this subsidiary managed assets with values of approximately $2.7
billion and $4.3 billion, respectively.
The Company has revenue sharing agreements with Legg Mason
Fund Adviser, Western Asset Management Company, Brandywine, Bartlett and Gray
Seifert and/or certain of their key officers pursuant to which a specified
percentage of the subsidiary's revenues is required to be distributed to Legg
Mason, Inc., and the balance of
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the revenues is retained to pay operating expenses, including salaries and
bonuses, with specific expense and compensation allocations being determined by
the subsidiary's management.
The Company is terminating the operations of its Fairfield
Group, Inc. subsidiary. Fairfield's Navigator REPO/LINE, a service structured to
meet the specialized investment needs of banks and bank trust departments, was
assigned to a third party in May 1999.
PRIVATE CLIENT BUSINESS SEGMENT
The Private Client business segment, principally consisting of the
operations of Legg Mason Wood Walker, distributes a wide range of financial
products through its branch distribution network, including equity and fixed
income securities, proprietary and non-affiliated mutual funds and annuities.
RETAIL SECURITIES BUSINESS
For the fiscal years ended March 31, 1997, 1998 and 1999,
revenues derived from securities transactions for individual investors
(excluding interest on margin accounts) constituted approximately 84%, 83% and
82%, respectively, of total revenues from securities transactions and 37%, 34%
and 30%, respectively, of the Company's total revenues. Management believes that
such services will continue to be a significant source of revenues in the
foreseeable future, although the percentage of total revenues may continue to
decrease primarily as a result of increases in investment advisory and
investment banking revenues. Retail commissions are charged on both exchange and
over-the-counter ("OTC") transactions in accordance with a schedule which the
Company has formulated and may change from time to time. Discounts from the
schedule are granted in certain cases. The Company also offers certain account
arrangements under which a single fee is charged based on a percentage of the
assets held in a customer's account and no commissions are charged on a
transaction-by-transaction basis. This fee covers all execution and advisory
services, including advisory services provided by the Company's investment
advisory affiliates and selected independent advisory firms. In addition, the
Company provides asset allocation and advisor performance and selection
consultation services. When OTC transactions are executed by the Company as a
dealer, the Company receives, in lieu of commissions, mark-ups or mark-downs
that are included in the "Revenues by Source" table as customer-related
principal transactions. The Company has dealer-sales agreements with major
distributors that offer mutual fund shares through broker-dealers. In addition,
the Company sells shares of Company-sponsored mutual funds. See "Investment
Advisory Business Segment--Company-Sponsored Mutual Funds."
MARGIN ACCOUNTS, INTEREST INCOME AND FREE CREDIT BALANCES
Customers' securities transactions are effected on either a
cash or a margin basis. In a margin account, the customer pays less than the
full cost of the securities purchased and the broker-dealer makes a loan for the
balance of the purchase price secured by the securities purchased or other
securities owned by the customer. The amount of the loan is subject to the
margin regulations (Regulation T) of the Board of Governors of the Federal
Reserve System, NYSE margin requirements, and the Company's internal policies,
which in some instances are more stringent than Regulation T or NYSE
requirements. In permitting a customer to purchase securities on margin, the
Company is subject to the risk that a market decline could reduce the value of
its collateral below the amount of the customer's indebtedness and that the
customer might be unable otherwise to repay the indebtedness.
Interest is charged on amounts borrowed by customers (debit
balances) to finance their margin transactions. The rate of interest charged to
customers is the prime rate plus or minus an additional amount that varies
depending upon the size of the customer's average debit balance. Interest income
derived from these sources constituted approximately 5%, 6% and 6% of the
Company's total revenues for the fiscal years ended March 31, 1997, 1998 and
1999, respectively. Interest is also earned on securities owned by the Company
and on operating and segregated cash balances.
Free credit balances (excess funds kept by customers in their
brokerage accounts) is the primary source of funds used to finance customers'
margin account borrowings. Legg Mason Wood Walker pays interest on certain free
credit balances in customers' accounts when the customer has indicated that the
funds will be used for
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<PAGE>
reinvestment at a future date. In fiscal 1999, Legg Mason
Wood Walker paid interest on approximately 94% of customer free credit balances.
INSURANCE BROKERAGE AND FINANCIAL PLANNING
Approximately 1,100 of the Company's financial advisors are
licensed to sell insurance. Legg Mason Financial Services, Inc., a wholly-owned
subsidiary of the Company, acts as general agent for several life insurance
companies and sells fixed and variable annuities and insurance. The Company also
offers comprehensive financial planning services to individuals. See "Revenues
by Source" for information regarding revenue generated by insurance brokerage
activities.
OTHER SERVICES
At March 31, 1999, the Company served as a non-bank custodian
for approximately 245,000 IRA's, 26,000 Simplified Employee Pension Plans and
9,000 Qualified Plans.
Legg Mason Trust Company, a state chartered, non-depository
bank, provides services as a trustee for trusts established by the Company's
individual and employee benefit plan clients. The Company provides brokerage and
advisory services for a significant portion of the assets held in the Trust
Company's accounts. The Company's application to establish a unitary thrift
institution with authority to exercise trust powers was granted by the United
States Office of Thrift Supervision on May 21, 1999, subject to satisfaction of
certain conditions. The Company expects to establish the thrift, to be named
Legg Mason Trust Bank, F.S.B., during fiscal year 2000. Legg Mason Trust Company
will be merged into the new entity, which will continue to provide the same
trust services as are presently provided by Legg Mason Trust Company.
CAPITAL MARKETS BUSINESS SEGMENT
The Capital Markets business segment, which is conducted
through Legg Mason Wood Walker and Howard Weil, consists of the Company's equity
and fixed income institutional sales and trading, syndicate, corporate and
public finance activities.
INSTITUTIONAL BUSINESS
The Company is engaged in executing securities transactions
for institutional investors such as banks, mutual funds, insurance companies and
pension and profit-sharing plans. Such investors normally purchase and sell
securities in large quantities which require special marketing and trading
expertise. The Company believes that a significant portion of its institutional
brokerage commissions is received as a consequence of provision to institutions
of research opinions and services regarding specific corporations and industries
and other matters affecting the securities markets. See "Research."
Transactions are executed by the Company acting as broker or
as principal. The Company permits discounts from its commission schedule to its
institutional customers. The size of such discounts varies with the size of
particular transactions and other factors. For the fiscal years ended March 31,
1997, 1998 and 1999, revenues derived from securities transactions for
institutional investors constituted approximately 16%, 17% and 18%,
respectively, of total revenues from securities transactions and 7% of the
Company's total revenues in each year.
PRINCIPAL TRANSACTIONS
The Company makes primary markets in equity securities that
are traded OTC, particularly securities of companies located in the Mid-Atlantic
and Mid-South regions. The Company is also an active market maker and
distributor of municipal bonds, particularly bonds issued by municipalities
located in the Mid-Atlantic and Mid-South regions.
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<PAGE>
As of March 31, 1999, the Company made markets in equity
securities of approximately 400 corporations, including corporations for which
the Company has acted as a managing or co-managing underwriter. The Company has
46 traders involved in trading corporate equity and debt securities, 22 in
trading municipal securities, and 11 in trading government securities.
The Company's market-making activities are also conducted with
other dealers, and with institutional and individual customers of its branch
office system. Mark ups and mark downs from market-marking activities are
allocated to the Private Client business segment when the transaction involves
an individual client. In making markets in equity and debt securities, the
Company maintains positions in such securities to service its customers and
accordingly exposes its own capital to the risk of fluctuations in market value.
While the Company seeks to avoid substantial market risk, and may engage in
hedging transactions to minimize risk, it does, nonetheless, realize profits and
losses from market fluctuations. Trading profits (or losses) depend upon the
skills of the employees engaged in market making, the amount of capital
allocated to positions in securities and the general level of activity and trend
of prices in the securities markets.
INVESTMENT BANKING
Corporate and Municipal Finance
The Company participates as an underwriter in public offerings
of corporate debt and equity issues as well as municipal securities. The Company
also serves as manager or co-manager of corporate equity and municipal
offerings, generally involving issuers located in the Mid-Atlantic and Mid-South
regions.
The following tables set forth, for the periods indicated, (i)
the total number and dollar amount of corporate stock and bond and municipal
bond offerings managed or co-managed by the Company, and (ii) the total number
and dollar amount of its underwriting participations in those offerings and in
offerings managed by others.
<TABLE>
<CAPTION>
Managed or Co-Managed Offerings
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Calendar Year Number Of Issues Amount Of Offering
- ------------- ------------------------ ---------------------------------------
Corporate Municipal Corporate Municipal
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<S><C>
1994 24 227 $3,764,956,000 $5,779,156,000
1995 22 165 958,377,000 4,112,580,000
1996 33 258 3,808,000,000 5,555,638,000
1997 76 224 8,453,000,000 7,208,000,000
1998 45 223 8,090,054,000 8,381,696,000
</TABLE>
<TABLE>
<CAPTION>
Underwriting Participations
---------------------------------------------------------------------------
Calendar Year Number Of Issues Amount Of Participation
- ------------- ------------------------ ---------------------------------------
Corporate Municipal Corporate Municipal
--------- --------- -------------- --------------
<S><C>
1994 411 309 $ 776,258,000 $1,187,236,000
1995 354 232 675,257,000 627,973,000
1996 427 246 1,313,233,000 587,548,000
1997 298 198 1,380,000,000 936,668,000
1998 153 237 827,443,000 1,476,674,000
</TABLE>
Underwriting involves both economic and regulatory risks. An
underwriter may incur losses if it is unable to resell the securities it is
committed to purchase, or if it is forced to liquidate its commitments at less
than the agreed purchase price. In addition, an underwriter is subject to
substantial potential liability for material misstatements or omissions in
prospectuses and other communications with respect to underwritten offerings.
See "Item 3. Legal Proceedings." Furthermore, because underwriting commitments
require a charge against net capital,
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<PAGE>
the Company's broker-dealer subsidiaries could find it necessary to limit their
underwriting participations to remain in compliance with regulatory net capital
requirements. See "Net Capital Requirements."
Other Investment Banking Activities
The Company's investment banking activities also include
private debt and equity placements and initiation and advice with respect to
merger and acquisition transactions, as well as provision of financial advisory
services to corporate and municipal clients.
At March 31, 1999, the Company had 102 professionals engaged
in investment banking activities, including 80 in corporate finance and 22 in
municipal finance.
MERCHANT BANKING
Legg Mason Merchant Banking, Inc. manages private equity
funds sponsored by the Company. As of March 31, 1999, Legg Mason Merchant
Banking, Inc. managed approximately $25 million of invested capital for Legg
Mason Capital Partners, L.P., a private equity fund raised by the Company in
September 1996.
OTHER BUSINESS SEGMENT
The Other businesses are principally the Company's real estate
business, conducted through Legg Mason Real Estate Services, Inc., and
unallocated corporate revenues and expenses.
MORTGAGE BANKING AND REAL ESTATE SERVICES
Legg Mason Real Estate Services, Inc. ("LMRES") is engaged in
the commercial mortgage banking business. On April 1, 1999, Legg Mason Dorman &
Wilson, Inc. was merged into LMRES. The firm originates, structures, places and
services commercial mortgages on income-producing properties for insurance
companies, pension funds and other investors. LMRES is also engaged in the
business of managing commercial mortgage portfolios on behalf of pension funds,
with a major portion of this business consisting of management services provided
to four public pension funds. In addition, LMRES provides real estate consulting
services, specializing in sports arena and facility feasibility, analysis and
financing, as well as in providing corporate real estate services and equity
sales. LMRES' headquarters are located in Philadelphia, Pennsylvania, and it has
offices located in the Mid-Atlantic and Southeastern regions of the United
States.
As of March 31, 1998 and 1999, prior to the merger of LMRES
and Legg Mason Dorman & Wilson, Inc., the commercial mortgage servicing
portfolio of LMRES was $4.6 billion and $4.6 billion, respectively, and of Legg
Mason Dorman & Wilson was $4.9 billion and $4.3 billion, respectively.
RESEARCH
The Company employs approximately 40 analysts who develop
investment recommendations and market information with respect to companies and
industries. Legg Mason Wood Walker's research generally focuses on the
identification of securities of financially sound, well-managed companies that
appear to be undervalued in relation to their long-term earning power or the
value of underlying assets. Legg Mason refers to this investment strategy as the
"Value Approach" to investing. Legg Mason Wood Walker's research also covers
certain other companies and industries. Howard Weil's analysts concentrate on
the oil and gas exploration, pipeline and service industries. The Company's
research services are supplemented by research services purchased from outside
firms.
The Company's clients do not pay for research services
directly, although the Company is often compensated for its research services by
institutional clients through the direction of brokerage transactions to the
Company for execution. The Company believes that its research activities are
extremely important in attracting and retaining institutional and individual
brokerage clients.
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<PAGE>
ADMINISTRATION
Administrative and operations personnel are responsible for
the processing of securities transactions; receipt, identification and delivery
of funds and securities; internal financial controls; office services; custody
of customers' securities and the handling of margin accounts. At March 31, 1999,
the Company had approximately 340 full-time employees performing such functions.
There is considerable fluctuation during any year and from
year to year in the volume of transactions the Company must process. The Company
records transactions and posts its books on a daily basis. Operations personnel
monitor day-to-day operations to determine compliance with applicable laws,
rules and regulations. Failure to keep current and accurate books and records
can render the Company liable to disciplinary action by governmental and
self-regulatory authorities, as well as to claims by its clients.
Legg Mason Wood Walker executes and clears securities
transactions as a member of the NYSE and various regional exchanges, and a
participant in both The Depository Trust Company and National Securities
Clearing Corporation. Legg Mason Wood Walker also provides clearing services to
affiliated and unaffiliated broker-dealers.
During the past several years the Company has increased its
staff and expenditures on technology, especially as it relates to expanding its
client support and building new business opportunities using the Internet.
The Company believes that its internal controls and safeguards
are adequate, although fraud and misconduct by customers and employees and the
possibility of theft of securities are risks inherent in the securities
industry. As required by the NYSE and certain other authorities, the Company
carries a fidelity bond covering loss or theft of securities as well as forgery
of checks and drafts and embezzlement and misplacement of securities. See "Item
7. Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources -- Year 2000 Processing Issue"
regarding the potential impact of "Year 2000" issues.
EMPLOYEES
At March 31, 1999, the Company had approximately 4,350
employees. None of the Company's employees is covered by a collective bargaining
agreement. The Company considers its relations with its employees to be
satisfactory. However, competition for experienced financial services personnel,
especially financial advisors and investment management professionals, is keen
and from time to time the Company may experience a loss of valuable personnel.
The Company recognizes the importance of hiring and training
financial advisors. The Company trains new financial advisors who are required
to take examinations given by the NYSE, the NASD and various states in order to
be registered and qualified, and maintains ongoing training for financial
advisors.
COMPETITION
The Company is engaged in an extremely competitive business.
Its competition includes, with respect to one or more aspects of its business,
numerous national, regional and local broker-dealer and investment advisory
firms, and commercial banks and thrift institutions. Many of these organizations
have substantially greater personnel and financial resources than the Company.
Discount brokerage firms oriented to the retail market, including firms
affiliated with banks and mutual fund organizations and on-line brokerage firms,
are devoting substantial funds to advertising and direct solicitation of
customers in order to increase their share of commission dollars and other
securities-related income. In many instances, the Company is competing directly
with such organizations. The Company also competes for investment funds with
banks, insurance companies and investment companies. The principal competitive
factors relating to the Company's business are the quality of advice and
services provided to investors and the price of those services.
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<PAGE>
Competition in the Company's business periodically has been
affected by significant developments in the securities industry. See "Factors
Affecting the Company and the Securities Industry -- Industry Changes and
Competitive Factors."
REGULATION
The securities industry in the United States is subject to
extensive regulation under both Federal and state laws. The SEC is the Federal
agency charged with administration of the Federal securities laws. Much of the
regulation of broker-dealers has been delegated to self-regulatory authorities,
principally the NASD and the securities exchanges. These self-regulatory
organizations conduct periodic examinations of member broker-dealers in
accordance with rules they have adopted and amended from time to time, subject
to approval by the SEC. Securities firms are also subject to regulation by state
securities commissions in those states in which they do business. In addition,
securities firms are subject to regulation by various foreign governments,
securities exchanges, central banks and regulatory bodies, particularly in those
countries where they have established an office.
Broker-dealers are subject to regulations that cover all
aspects of the securities business, including sales methods, trading practices
among broker-dealers, uses and safekeeping of customers' funds and securities,
capital structure and financial soundness of securities firms, recordkeeping and
the conduct of directors, officers and employees. Additional legislation,
changes in rules promulgated by the SEC and self-regulatory authorities, or
changes in the interpretation or enforcement of existing laws and rules, may
directly affect the mode of operation and profitability of broker-dealers. The
SEC, self-regulatory authorities and state securities commissions may conduct
administrative proceedings that can result in censure, fine, suspension or
expulsion of a broker-dealer, its officers or employees. Such administrative
proceedings, whether or not resulting in adverse findings, can require
substantial expenditures and can have an adverse impact on the reputation of a
broker-dealer. The principal purpose of regulation and discipline of
broker-dealers is the protection of customers and the securities markets, rather
than protection of creditors and stockholders of the regulated entity.
The Company's investment advisory subsidiaries and the
Company-sponsored mutual funds are also subject to extensive federal regulation
by the SEC. The investment advisory subsidiaries of the Company are registered
as investment advisers with the SEC. The investment advisory subsidiaries are
also required to make notice filings in certain states. Virtually all aspects of
the investment advisory business are subject to various federal and state laws
and regulations. These laws and regulations are primarily intended to benefit
the investment advisory clients and generally grant supervisory agencies and
bodies broad administrative powers, including the power to limit or restrict an
investment adviser from carrying on its investment advisory business in the
event that it fails to comply with such laws and regulations. Possible sanctions
which may be imposed for such failure include the suspension of individual
employees, limitations on the investment advisory subsidiary engaging in the
investment advisory business for specified periods of time, the revocation of
registrations, other censures and fines.
The Company's broker-dealer subsidiaries are required by
federal law to belong to the SIPC. When the SIPC fund falls below a certain
amount, members are required to pay annual assessments of up to 1% of adjusted
gross revenues. As a result of adequate fund levels, the Company's broker-dealer
subsidiaries each were required to pay the minimum annual assessment of $150 in
fiscal 1999. The SIPC fund provides protection for securities held in customer
accounts up to $500,000 per customer, with a limitation of $100,000 on claims
for cash balances. The Company purchases insurance that provides additional
protection for securities of up to $24,500,000 per customer.
NET CAPITAL REQUIREMENTS
Every registered broker-dealer doing business with the public
is subject to the Uniform Net Capital Rule ("Rule 15c3-1") promulgated by the
SEC. Rule 15c3-1, which is designed to measure the financial soundness and
liquidity of broker-dealers, specifies minimum net capital requirements. Since
the Company is not itself a registered broker-dealer, it is not directly subject
to Rule 15c3-1. However, its broker-dealer subsidiaries are subject to Rule
15c3-1, and a provision of Rule 15c3-1 requires that a broker-dealer notify the
SEC prior to the withdrawal of
11
<PAGE>
equity capital by a parent company if the withdrawal would exceed the greater of
$500,000 or 30 percent of the broker-dealer's excess net capital.
Rule 15c3-1 provides that a broker-dealer doing business with
the public shall not permit its aggregate indebtedness to exceed 15 times its
net capital (the "primary method") or, alternatively, that it not permit its net
capital to be less than 2% of its aggregate debit items (primarily receivables
from customers and broker-dealers) computed in accordance with Rule 15c3-1. As
of March 31, 1999, the Company's broker-dealer subsidiaries had aggregate net
capital of $206.0 million, which exceeded the minimum net capital requirements
by $186.5 million.
Under NYSE Rule 326, Legg Mason Wood Walker as a member
organization that carries customer accounts, would be required to reduce its
business activities if its net capital, as defined, was less than 4% of
aggregate debit items, as defined, and would be precluded from expanding its
business if its net capital was less than 5% of aggregate debit items.
Compliance with applicable net capital rules could limit
operations of the Company's broker-dealer subsidiaries, particularly operations
such as underwriting and trading activities that require use of significant
amounts of capital. A significant operating loss or an extraordinary charge
against net capital could adversely affect the ability of the broker-dealers to
expand or even maintain their present levels of business. See Note 16 of Notes
to Consolidated Financial Statements in Item 8 of this Report.
OUTSTANDING SUBORDINATED LIABILITIES
Legg Mason Wood Walker has incurred subordinated liabilities
("Subordinated Liabilities") which it is permitted to treat as capital for the
purposes of the Uniform Net Capital Rule and NYSE Rules 325 and 326. The
Subordinated Liabilities instruments issued by Legg Mason Wood Walker provide
that such liabilities shall be subordinated in right of payment to the prior
payment in full, or provision for such payment, of all obligations to all other
present and future creditors of Legg Mason Wood Walker (except for other
Subordinated Liabilities similarly subordinated). At March 31, 1999, Legg Mason
Wood Walker had $35.0 million of Subordinated Liabilities outstanding, due to
Legg Mason, Inc. The Subordinated Liabilities may, with the prior written
consent of the NYSE, be prepaid in whole or in part at any time after such
Subordinated Liabilities have been outstanding for more than one year. Legg
Mason Wood Walker may not pay or permit the payment or withdrawal of any
Subordinated Liability if, after giving effect to such payment or withdrawal,
its net capital would be less than 5% (6% in the case of the Subordinated
Liability due to Legg Mason, Inc.) of aggregate debit items. See Note 16 of
Notes to Consolidated Financial Statements in Item 8 of this Report.
FACTORS AFFECTING THE COMPANY AND THE SECURITIES INDUSTRY
The securities industry is characterized by frequent change,
the effects of which have been difficult to predict. In addition to an evolving
regulatory environment, the industry has been subject to radical changes in
pricing structure, alternating periods of contraction and expansion and intense
competition from within and outside the industry.
Fluctuating Securities Volume and Prices
The securities industry is subject to substantial fluctuations
in volume and price levels of securities transactions. These fluctuations can
occur on a daily basis as well as over longer periods as a result of national
and international economic and political events, and broad trends in business
and finance, as well as interest rate movements. Reduced volume and prices
generally result in lower brokerage and investment banking revenues, as well as
losses from trading as principal and from underwriting. Profitability is
adversely affected in periods of reduced volume because fixed costs remain
relatively unchanged. To the extent that purchases of securities are permitted
to be made on margin, securities firms also are subject to risks inherent in
extending credit, especially during periods of rapidly declining markets, in
that a market decline could reduce collateral value below the amount of a
customer's indebtedness. In the past, heavy trading volume has caused clearance
and processing problems for
12
<PAGE>
many securities firms, and this could occur in the future. In addition, there is
risk of loss from errors that can occur in the execution and settlement process.
See "Administration."
Industry Changes and Competitive Factors
Considerable consolidation has occurred in the securities
industry as numerous securities firms have either been acquired by other
securities firms or ceased operations, in many cases resulting in firms with
greater financial resources than firms such as the Company. In addition, a
number of heavily capitalized companies not previously engaged in the securities
business have made investments in and acquired securities firms. Increasing
competitive pressures in the securities industry require regional securities
firms to offer to their customers many of the financial services that are
provided by much larger securities firms that have substantially greater
resources than the Company. A sizable number of new investment advisory firms
and mutual funds have been established in recent years, increasing competition
in that area of the Company's activities.
An increasing number of firms, including on-line brokerage
firms and affiliates of banks and mutual fund organizations, that offer discount
brokerage services to retail customers have been established in recent years.
These firms generally effect transactions at substantially lower commission
rates on an "execution only" basis, including through the Internet, without
offering other services such as investment and financial advice and research
that are provided by "full-service" brokerage firms such as the Company.
Some of these discount brokerage firms have increased the range of services that
they offer. Continued increases in the number of discount brokerage firms and
services provided by such firms may adversely affect the Company.
Furthermore, certain full-service brokerage firms have begun
to provide certain discount services, including on-line trading over the
Internet. In response to the substantial recent growth in the availability of,
and investor demand for, on-line securities trading, the Company intends to
offer its clients the ability to execute certain securities transactions
on-line during fiscal year 2000. The growing demand for and availability of
on-line securities trading, including the Company's intended provision of
on-line trading services at competitive prices, may have an adverse effect on
the Company's retail business.
Certain institutions, notably commercial banks and thrift
institutions, have become a competitive factor in the securities industry by
offering certain investment banking and corporate and individual financial
services traditionally provided only by securities firms. The Federal Reserve
Board has approved applications of major commercial banks to underwrite and deal
in certain types of securities that such banks had not been permitted to
underwrite and deal in previously, subject to limitations on the resulting
underwriting volume and market share. Commercial banks, generally, are expanding
their securities activities, as well as their activities relating to the
provision of financial services, and are deriving more revenue from such
activities. In addition, legislation proposing repeal of statutes that limit the
securities, insurance and other non-banking activities of any company that
controls an insured bank came closer to passage last year than any financial
modernization bill to date and resolved certain issues that had long stood as
obstacles to the progress of prior modernization bills. Continued expansion of
the type and extent of competitive services that banks and other institutions
offer or further repeal or modification of administrative or legislative
barriers may adversely affect securities firms such as the Company that are
heavily oriented to individual retail customers.
Regulation
The business of the Company and its subsidiaries in the
securities industry is subject to regulation by various regulatory authorities
that are charged with protecting the interests of broker-dealers' and investment
advisers' customers. See "Regulation."
Effect of Net Capital Requirements
The SEC and the NYSE have stringent rules with respect to the
net capital requirements of securities firms. A significant operating loss or
extraordinary charge against net capital may adversely affect the ability of the
13
<PAGE>
Company's broker-dealer subsidiaries to expand or even maintain their present
levels of business. See "Net Capital Requirements."
Litigation
Many aspects of the Company's business involve substantial
risks of liability. In the normal course of business, the Company's subsidiaries
have been named as defendants or co-defendants in lawsuits seeking substantial
damages. There has been an increased incidence of litigation in the securities
industry in recent years, including customer claims as well as class action
suits seeking substantial damages. See "Item 3. Legal Proceedings."
Item 2. PROPERTIES.
The Company currently leases all of its office space. The
Company's headquarters, Baltimore sales office and operations functions are
located in an office building in which the Company is the major tenant,
currently occupying approximately 344,000 square feet. The initial term of the
lease will expire in 2009 and annual base rent is approximately $7.3 million.
The lease has two renewal options of eight years each.
Information concerning the location of the Company's sales
offices is contained in Item 1 of this Report. See Note 9 of Notes to
Consolidated Financial Statements in Item 8 of this Report.
Item 3. LEGAL PROCEEDINGS.
In November 1998, the United States District Court for the
Southern District of New York approved a settlement in the litigation captioned
IN RE: NASDAQ MARKET-MAKERS ANTITRUST LITIGATION in which Legg Mason Wood
Walker together with other defendants in the litigation have agreed to pay an
aggregate $1.027 billion to the plaintiffs in such litigation. Legg Mason Wood
Walker's share of the total settlement amount was approximately $2.8 million.
In January 1999, the SEC issued an order accepting Legg Mason
Wood Walker's offer of settlement to certain related public administrative
proceedings, which imposed sanctions on Legg Mason Wood Walker, including a
$425,000 civil penalty, in connection with Legg Mason Wood Walker's activities
as a market-maker in certain securities quoted on The Nasdaq Stock Market.
These two settlements terminated Legg Mason Wood Walker's
involvement in and liability for the IN RE: NASDAQ MARKET-MAKERS ANTITRUST
LITIGATION and related SEC investigation.
In addition to the matters described above, the Company's
subsidiaries have been named as defendants or co-defendants in various other
lawsuits alleging substantial damages. Some of these proceedings relate to
public offerings of securities in which one or more subsidiaries of the Company
participated as a member of the underwriting syndicate. The Company is also
aware of litigation against certain underwriters of offerings in which one or
more subsidiaries of the Company was a participant, but where the subsidiary is
not now a defendant. In these latter cases, it is possible that a subsidiary may
be called upon to contribute to settlements or judgments. While the ultimate
resolution of pending litigation cannot be predicted with certainty, in the
opinion of management, after consultation with legal counsel, pending litigation
will not have a material adverse effect on the consolidated financial statements
of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 4A. EXECUTIVE OFFICERS OF THE COMPANY.
Information (not included in the Company's definitive proxy
statement for the 1999 Annual Meeting of Stockholders) regarding certain
executive officers of the Company is as follows:
14
<PAGE>
F. Barry Bilson, age 46, was elected Senior Vice President of
the Company in October 1998. Mr. Bilson was Vice President-Finance of the
Company from June 1984 through October 1998, and he served as Controller of the
Company from October 1983 until September 1988, and as Controller of Legg Mason
Wood Walker from April 1981 to September 1988. Mr. Bilson has served in various
financial management capacities since joining the Company in 1981, and presently
has responsibility for business development projects and proprietary mutual fund
accounting. Mr. Bilson is a certified public accountant.
Robert G. Donovan, age 54, was elected an Executive Vice
President of the Company in January 1998 and of Legg Mason Wood Walker in
February 1998. He became a Senior Vice President of Legg Mason Wood Walker in
1990. Mr. Donovan has responsibility for the securities brokerage operations
function of Legg Mason Wood Walker.
Robert A. Frank, age 49, became Executive Vice President of
the Company and Executive Vice President, Director of Research and Co-head of
the Capital Markets Committee of Legg Mason Wood Walker in August 1996. From
1975 until he joined the Company, he was employed by Alex. Brown Incorporated in
various capacities, including as a Managing Director and Head of the Real Estate
Securities Research Group. Mr. Frank is a former Governor of the National
Association of Real Estate Investment Trusts, past president of the Real Estate
Analyst Group of New York, a Fellow of the Financial Analysts Federation and a
trustee of the Mid-Atlantic Realty Trust.
Theodore S. Kaplan, age 56, became Senior Counsel of the
Company in November 1998 and became Senior Vice President of the Company in
April 1993. He served as General Counsel of the Company from April 1993 until
November 1998.
Robert F. Price, age 51, became Senior Vice President and
General Counsel of the Company and Legg Mason Wood Walker in November 1998. From
September 1991 through August 1997, Mr. Price was Secretary and General Counsel
of Alex. Brown Incorporated. From September 1997 until October 1998, Mr. Price
was a Managing Director of BT Alex. Brown Incorporated, a wholly owned
subsidiary of Bankers Trust Corporation.
Timothy C. Scheve, age 41, has been Executive Vice President
of the Company and of Legg Mason Wood Walker since January 1998 and was
Treasurer of the Company from January 1992 to April 1999 and of Legg Mason Wood
Walker from August 1992 to January 1999. He became a Vice President of the
Company in July 1993 and a Senior Vice President of Legg Mason Wood Walker in
August 1994. Mr. Scheve has served in various financial and administrative
capacities since joining the Company in 1984, and presently has primary
responsibility for the Company's administrative functions.
Andrew M. Silton, age 45, became a Senior Vice President of
the Company in May 1998. He has various responsibilities in connection with the
Company's investment management activities. From January 1996 until December
1997, Mr. Silton was the President of Trade Street Investment Associates, a
registered investment adviser. From April 1994 until December 1997, he was a
Senior Vice President of NationsBank Corporation responsible for oversight of
asset management and trust operations and, from May 1993 until April 1994, he
was the President of Cooperative Ventures, a financial services consulting firm.
Elisabeth N. Spector, age 51, became a Senior Vice President
of the Company and Legg Mason Wood Walker in January 1994. She has general
responsibilities in business and financial strategy. From November 1989 until
she joined the Company, Ms. Spector was employed by the Resolution Trust
Corporation, where, among other things, she served as the initial Director of
the RTC's Capital Markets Division.
15
<PAGE>
Edward A. Taber III, age 55, became an Executive Vice
President of the Company in September 1992 and a Senior Executive Vice President
in July 1995. He has overall responsibility for the Company's investment
management activities. Mr. Taber is a Director of the Legg Mason Value Trust,
Inc., the Legg Mason Total Return Trust, Inc., the Legg Mason Special Investment
Trust, Inc. and LM Institutional Fund Advisors I, Inc., Chairman and President
of LM Institutional Fund Advisors II, Inc., a trustee of the Legg Mason Tax-Free
Income Fund and the Legg Mason Cash Reserve Trust, President of the Legg Mason
Income Trust, Inc., President and a director of the Legg Mason Global Trust,
Inc. and the Legg Mason Investors Trust, Inc.
16
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Shares of Legg Mason, Inc. common stock are listed and traded
on the New York Stock Exchange (symbol LM). As of March 31, 1999, there were
2,151 shareholders of record of the Company's common stock. Information with
respect to the Company's dividends and stock prices is as follows:
<TABLE>
<CAPTION>
Quarter ended*
- --------------------------------------------------------------------------------------------------------
Mar. 31 Dec. 31 Sept. 30 June 30
- --------------------------------------------------------------------------------------------------------
<S><C>
FISCAL 1999
Cash dividend per share $.065 $.065 $.065 $.055
Stock price range:
High 35.875 31.563 31.344 32.281
Low 26.438 17.313 20.156 26.813
FISCAL 1998
Cash dividend per share $.055 $.055 $.055 $.049
Stock price range:
High 31.938 28.156 27.000 20.250
Low 23.375 22.469 19.531 15.750
- --------------------------------------------------------------------------------------------------------
</TABLE>
*Adjusted to reflect the 2-for-1 stock split paid September 1998.
17
<PAGE>
Item 6. SELECTED FINANCIAL DATA*
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Years ended March 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S><C>
OPERATING RESULTS
Revenues $1,046,006 $ 889,060 $ 664,601 $ 533,343 $ 404,234
Expenses 897,231 760,681 568,391 468,792 375,959
- ------------------------------------------------------------------------------------------------------------
Earnings before income taxes 148,775 128,379 96,210 64,551 28,275
Income taxes 59,441 52,258 39,018 26,270 11,673
- ------------------------------------------------------------------------------------------------------------
Net earnings $ 89,334 $ 76,121 $ 57,192 $ 38,281 $ 16,602
- ------------------------------------------------------------------------------------------------------------
PER COMMON SHARE**
Basic earnings $ 1.64 $ 1.40 $ 1.12 $ .86 $ .40
Diluted earnings $ 1.55 $ 1.31 $ 1.02 $ .73 $ .36
Dividends declared $ .250 $ .214 $ .191 $ .176 $ .161
Book value $ 10.08 $ 9.08 $ 7.85 $ 6.55 $ 5.64
Average shares outstanding:
Basic 54,336,821 54,430,958 51,138,256 44,314,062 41,090,006
Diluted 57,656,632 58,006,668 55,985,412 54,785,496 53,509,876
- ------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION
Total assets $3,473,687 $ 2,832,329 $1,886,736 $1,320,820 $ 829,538
Senior notes $ 99,676 $ 99,628 $ 99,581 $ 99,534 --
Subordinated liabilities -- -- -- $ 68,000 $ 102,487
Total stockholders' equity $ 554,177 $ 500,095 $ 423,039 $ 302,189 $ 233,061
============================================================================================================
</TABLE>
* Restated to reflect all pooling of interests transactions.
** Adjusted to reflect all stock splits.
18
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
BUSINESS DESCRIPTION
Legg Mason, Inc. and its subsidiaries (the "Company") are principally engaged in
providing investment advisory, securities brokerage, investment banking, and
commercial mortgage banking services to individuals, institutions, corporations
and municipalities. The Company's profitability is sensitive to a variety of
factors including the volume of trading in securities, the volatility and
general level of market prices, and the demand for investment banking and
mortgage banking services.
In fiscal 1999, U.S. equity markets achieved record trading volume and price
levels, principally because of continuing economic growth, stable interest
rates, gains in corporate earnings and modest inflation. As a result, the
Company achieved a fourth consecutive year of record revenues and net earnings,
attributable to growth in its investment advisory and securities brokerage
businesses.
Total assets under management for institutions, Company-sponsored mutual
funds and private accounts managed by the Company's subsidiaries were $89
billion at March 31, 1999, up 25% from $71 billion a year earlier. Earnings from
investment advisory services tend to be more stable than those from securities
brokerage and investment banking activities because they are less affected by
changes in securities market conditions. Revenues from investment advisory
activities represented 37% of the Company's total revenues in fiscal 1999.
The Company's investment advisory activities and their contribution to
operating results have grown significantly, through both internal growth and
acquisition, over the past ten years. During fiscal 1998, the Company acquired
Brandywine Asset Management, Inc. ("Brandywine"), as described in Note 2 of
Notes to Consolidated Financial Statements. Brandywine, acquired in January
1998, manages approximately $6.9 billion* for institutional clients and high net
worth individuals.
During fiscal 1996, the Company acquired Bartlett & Co. ("Bartlett") and
Lehman Brothers Global Asset Management Limited, since renamed Western Asset
Global Management Limited ("Western Asset Global"). Bartlett, acquired in
January 1996, manages approximately $2.9 billion* for high net worth
individuals, family groups and institutions. Western Asset Global, acquired in
February 1996, manages assets of approximately $3.3 billion,* invested
principally in international fixed-income securities.
* At March 31, 1999, excluding assets managed in Legg Mason Funds.
Net interest income continued to be a stable, growing source of earnings,
primarily as a result of significant growth in retail brokerage margin loan and
credit account balances.
Results of any individual period should not be considered representative of
future profitability. Many of the Company's activities have fixed operating
costs which do not decline with reduced levels of volume. While the Company
attempts to reduce costs, particularly during periods of low volume, it does
not, as a general rule, attempt to do so through personnel reductions.
Accordingly, sustained periods of unfavorable market conditions may adversely
affect profitability.
The Company operates within four business segments: Investment Advisory;
Private Client; Capital Markets and Other. Operations contained within each
business segment and each segment's financial information for the most recent
fiscal years are summarized below:
INVESTMENT ADVISORY
(in millions)
Years ended March 31,
----------------------------------
1999 1998 1997
---------------------------------------------------------------------------
Revenues $ 266.7 $ 215.2 $ 162.4
Pre-tax earnings $ 79.0 $ 53.7 $ 40.4
Businesses contained within the Investment Advisory segment primarily provide
investment advisory services to Company-sponsored mutual funds and management of
assets for institutional and individual clients through the Company's asset
management subsidiaries.
PRIVATE CLIENT
(in millions)
Years ended March 31,
----------------------------------
1999 1998 1997
---------------------------------------------------------------------------
Revenues $ 610.5 $ 513.6 $ 380.9
Pre-tax earnings $ 67.0 $ 53.3 $ 44.5
Private Client distributes a wide range of financial products through its
branch distribution network, including equity and fixed-income securities,
proprietary and non-affiliated mutual funds and annuities. Net interest profit
from customers' margin loan and credit account balances is included in this
segment.
19
<PAGE>
CAPITAL MARKETS
(in millions)
Years ended March 31,
----------------------------------
1999 1998 1997
---------------------------------------------------------------------------
Revenues $ 131.0 $ 128.1 $ 92.3
Pre-tax earnings $ 12.0 $ 20.4 $ 10.2
The Capital Markets segment includes the Company's equity and fixed-income
capital markets businesses, including origination, institutional sales and
trading.
OTHER
(in millions)
Years ended March 31,
-----------------------------------
1999 1998 1997
----------------------------------------------------------------------------
Revenues $ 37.8 $ 32.2 $ 29.0
Pre-tax earnings $ (9.2) $ 1.0 $ 1.1
The Other business segment primarily includes the Company's real estate
service businesses and unallocated corporate revenues and expenses. In 1999,
pre-tax earnings include a non-cash increase in deferred compensation expense of
$10.4 million related to a change in accounting treatment for a non-qualified
deferred compensation stock plan and related compensation arrangements. See Note
14 of Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, items in the
Consolidated Statements of Earnings as percentages of total revenues and the
increase (decrease) by item as a percentage of the amount for the previous
period:
<TABLE>
<CAPTION>
Percentage of Total Revenues Period to Period Change
---------------------------------------------------------------------
Years ended March 31, 1999 1998
------------------------------------- Compared Compared
1999 1998 1997 to 1998 to 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S><C>
Revenues
Investment advisory and related fees 37.3% 33.3% 31.3% 32.0% 42.0%
Commissions 26.7 27.1 28.6 15.7 27.0
Principal transactions 9.0 9.8 11.0 8.5 18.5
Investment banking 7.3 10.9 10.8 (21.6) 34.8
Interest 15.3 14.3 12.7 25.9 51.3
Other 4.4 4.6 5.6 12.6 10.7
----- ----- -----
100.0 100.0 100.0 17.7 33.8
----- ----- -----
Expenses
Compensation and benefits 55.9 57.5 57.6 14.4 33.6
Occupancy and equipment rental 6.2 6.4 6.6 13.3 29.6
Communications 4.6 4.8 4.7 12.3 37.5
Floor brokerage and clearing fees 0.6 0.6 0.9 22.2 (7.6)
Interest 9.1 8.3 6.5 28.8 70.0
Non-cash deferred compensation 1.0 -- -- NM --
Other 8.4 8.0 9.2 24.9 15.1
----- ----- -----
85.8 85.6 85.5 18.0 33.8
----- ----- -----
Earnings Before Income Taxes 14.2 14.4 14.5 15.9 33.4
Income taxes 5.7 5.8 5.9 13.7 33.9
----- ----- -----
Net Earnings 8.5% 8.6% 8.6% 17.4% 33.1%
===== ===== =====
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM-Not meaningful
20
<PAGE>
FISCAL 1999 AS COMPARED TO FISCAL 1998
In fiscal 1999, revenues, net earnings and earnings per share reached record
levels and were substantially higher than in the prior fiscal year. Revenues
were $1.05 billion, an increase of 18% from revenues of $889.1 million in fiscal
1998. Net earnings were $89.3 million, up 17% from net earnings in the prior
fiscal year. Basic earnings per share increased by 17% to $1.64 from $1.40.
Diluted earnings per share increased 18% to $1.55 from $1.31.
In accordance with Emerging Issues Task Force ("EITF") 97-14, results for
fiscal 1999 include a non-cash increase in deferred compensation expense of
$10.4 million related to a change in accounting treatment for a non-qualified
deferred compensation stock plan and related compensation arrangements. See Note
14 of Notes to Consolidated Financial Statements.
REVENUES
INVESTMENT ADVISORY AND RELATED FEES
Investment advisory and related fees increased 32% to $390.2 million as a result
of growth in assets under management in Company-sponsored mutual funds,
fixed-income investment advisory accounts and fee-based brokerage accounts.
INVESTMENT ADVISORY REVENUES AND
ASSETS UNDER MANAGEMENT
Bar chart appears here depicting the growth of assets under management and
investment advisory and related fee revenues for the last five fiscal years
Investment
Advisory Assets
and Related Under
Fee Revenues Management
(in millions, "M") (in billions, "B")
------------------ ------------------
1995 $117.7M $24.6B
1996 $162.1M $35.4B
1997 $208.2M $43.8B
1998 $295.6M $71.0B
1999 $390.2M $88.9B
COMMISSIONS
Commission revenues rose 16% to $279.1 million in fiscal 1999, primarily as a
result of increases in securities transaction volume.
PRINCIPAL TRANSACTIONS
Revenues from principal transactions increased 8% to $94.1 million, principally
as a result of increases in fixed-income sales and equity trading operations.
INVESTMENT BANKING
Investment banking revenues declined 22% to $76.1 million, primarily as a result
of decreased public offerings of equity securities, particularly co-managed
public offerings of real estate investment trusts.
INTEREST REVENUE AND EXPENSE
(millions of dollars)
Bar chart appears here depicting interest revenue and interest expense for the
last five fiscal years
Interest Expense Interest Revenue
---------------- ----------------
1995 $17.2 $ 39.7
1996 26.2 57.1
1997 43.4 84.1
1998 73.7 127.3
1999 94.9 160.3
INTEREST REVENUE AND EXPENSE
Interest revenue increased 26% to $160.3 million as a result of increased firm
investments, predominantly funds segregated for regulatory purposes and customer
margin loan account balances.
Interest expense increased 29% to $94.9 million, primarily due to larger
interest-bearing customer credit balances.
As a result of significantly higher levels of interest-bearing customer
credit balances, the Company's net interest margin declined to 40.8% in fiscal
1999 from 42.1% in fiscal 1998.
The Company's net interest profit increased 22% to $65.4 million in fiscal
1999 from $53.6 million in fiscal 1998.
OTHER REVENUES
Other revenues rose 13% to $46.1 million, primarily as a result of proceeds from
a key man life insurance policy and an increase in remarketing fees and loan
originations at the Company's commercial mortgage banking subsidiaries.
EXPENSES
COMPENSATION AND BENEFITS
Compensation and benefits increased 14% to $584.8 million as a result of higher
sales compensation on increased revenues and higher fixed compensation costs,
primarily attributable to an increased number of employees.
A substantial part of compensation expense fluctuates in proportion to the
level of business activity. Other compensation costs, primarily salaries and
benefits, are fixed and may not decline with reduced levels of volume.
Therefore, profitability may be adversely affected by sustained periods of
unfavorable market conditions or slow revenue growth in acquired businesses or
new product areas.
21
<PAGE>
OCCUPANCY AND EQUIPMENT RENTAL
Occupancy and equipment rental increased 13% to $64.3 million as a result of
continued investments in technology, a full year of expenses related to the
Company's new corporate headquarters and additional and expanded branch office
locations.
COMMUNICATIONS
Communications expense increased 12% to $48.0 million, due to higher business
volume which gave rise to increased costs for telephone usage, quote services,
printed materials and postage.
FLOOR BROKERAGE AND CLEARING FEES
Floor brokerage and clearing fees increased 22% to $6.7 million, reflecting
higher securities transaction volume.
NON-CASH DEFERRED COMPENSATION
In fiscal 1999, in accordance with EITF 97-14, the Company incurred a non-cash
deferred compensation charge of $10.4 million related to a change in accounting
treatment for a non-qualified deferred compensation stock plan and related
compensation arrangements. See Note 14 of Notes to Consolidated Financial
Statements.
OTHER EXPENSES
Other expenses increased 25% to $88.2 million, attributable to increased loss,
error and litigation charges, and higher promotional expenses.
INCOME TAXES
Income taxes rose 14% to $59.4 million in fiscal 1999 as a result of increased
pre-tax earnings. The Company's effective tax rate was 40.0% in fiscal 1999 as
compared to 40.7% in the prior year.
FISCAL 1998 AS COMPARED TO FISCAL 1997
REVENUES
INVESTMENT ADVISORY AND RELATED FEES
Investment advisory and related fees increased 42% to $295.6 million 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.
COMMISSIONS
Commission revenues rose 27% to $241.3 million in fiscal 1998 because of
increases in sales of listed and over-the-counter securities, non-affiliated
mutual funds and variable annuities. During fiscal 1998, commission revenues
benefited from an active and rising equity market.
PRINCIPAL TRANSACTIONS
Revenues from principal transactions increased 19% to $86.7 million, principally
because of increased sales of fixed-income and over-the-counter securities,
coupled with a reduction in losses on proprietary positions in energy-related
equity securities. In fiscal 1998, sales of over-the-counter securities
benefited from the favorable equity market.
INVESTMENT BANKING
Investment banking revenues rose 35% to $97.1 million, primarily as a result of
increased corporate finance activities, particularly co-managed public offerings
of real estate investment trusts.
INTEREST REVENUE AND EXPENSE
Interest revenue increased 51% to $127.3 million because of larger firm
investments, predominantly funds segregated for regulatory purposes and customer
margin account and conduit stock loan balances.
Interest expense increased 70% to $73.7 million because of larger
interest-bearing customer credit and conduit stock loan balances.
As a result of significantly higher levels of interest-bearing customer
credit balances, the Company's net interest margin fell to 42.1% in fiscal 1998
from 48.5% in fiscal 1997.
OTHER REVENUES
Other revenues rose 11% to $41.0 million as a result of an increase in loan
origination fees at the Company's commercial mortgage banking subsidiaries.
EXPENSES
COMPENSATION AND BENEFITS
Compensation and benefits increased 34% to $511.4 million in fiscal 1998,
reflecting higher sales and profitability-based compensation and personnel
additions in sales, product and support areas.
OCCUPANCY AND EQUIPMENT RENTAL
Occupancy and equipment rental increased 30% to $56.7 million because of higher
depreciation expense from continued investments in technology and additional
costs related to the Company's relocation of its corporate headquarters,
completed in February 1998.
COMMUNICATIONS
Communications expense increased 38% to $42.7 million as a result of expansion
of the Company's data network and higher business volume which gave rise to
increased costs for printed materials, quote services, postage and telephone
usage.
FLOOR BROKERAGE AND CLEARING FEES
Despite increased trading volume, floor brokerage and clearing fees declined 8%
to $5.5 million, reflecting lower execution costs from more efficient order
routing.
OTHER EXPENSES
Other expenses increased 15% to $70.6 million, attributable to higher
promotional and litigation-related expenses.
INCOME TAXES
Income taxes rose 34% to $52.3 million, principally because of increased pre-tax
earnings. The Company's effective tax rate was 40.7% in fiscal 1998 and 40.6% in
fiscal 1997.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are primarily liquid, consisting mainly of cash and assets
readily convertible into cash. These assets are financed primarily by customer
credit balances, equity capital, Senior Notes, bank lines of credit, and other
payables.
During the year ended March 31, 1999, cash and cash equivalents increased
$1.9 million. Cash flows from financing activities provided $31.6 million,
attributable to increases in short-term borrowings, offset in part by dividends
paid to common stockholders. Investing activities provided $29.5 million as a
result of reduced investments in resale agreements and net sales and maturities
of investment securities, partially offset by purchases of equipment and
leasehold improvements. Operating activities utilized $59.2 million, principally
as a result of higher levels of segregated cash and proprietary securities
inventory positions, offset in part by increased net customer payables and net
earnings, adjusted for depreciation and amortization and non-cash deferred
compensation.
The Company has outstanding $100 million principal amount of 6.5% Senior
Notes due February 15, 2006. The proceeds of these notes are being used for
general corporate purposes. The Company has available for offering an additional
$50 million of debt or convertible debt securities pursuant to a shelf
registration filed in January 1996.
The Company's broker-dealer subsidiaries are subject to the requirements of
the Securities and Exchange Commission's Uniform Net Capital Rule which is
designed to measure the general financial soundness and liquidity of
broker-dealers. At March 31, 1999, the brokerage subsidiaries had aggregate net
capital of $206.0 million, which exceeded minimum net capital requirements by
$186.5 million. The amount of the broker-dealers' net assets that may be
distributed is subject to restrictions under applicable net capital rules.
The principal sources of the Company's funds are its investment advisory and
broker-dealer subsidiaries. The Company has a revolving bank line of credit in
the amount of $50 million, none of which is currently outstanding, and the
Company's subsidiaries have lines of credit, aggregating $261.5 million,
pursuant to which they may borrow on a short-term demand basis at varying rates
based upon the Federal Funds rate. Management believes that funds available from
operations and its lines of credit are sufficient to meet its present and
reasonably foreseeable capital needs, although the Company may augment its
capital funds for continued expansion 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 proprietary transactions. In
addition, the Company engages in conduit securities borrowing and lending
activities in which it acts as an agent to facilitate settlement for other
institutions. 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.
RISK MANAGEMENT
In 1997, the Securities and Exchange Commission issued risk management
disclosure requirements designed to assist investors in assessing market risks
and how those risks are managed. Certain of the Company's business activities
expose it to market risk, including its securities inventory positions and
securities held for investment. The Company's market risk generally represents
the risk of loss that may result from the potential change in value of a
financial instrument as a result of fluctuations in interest rates and equity
prices or changes in credit ratings of issuers of debt securities.
Interest rate risk arises from the exposure of holding interest sensitive
financial instruments such as government, corporate and municipal bonds and
certain preferred equities. The Company manages its exposure to interest rate
risk by setting and monitoring limits and, where feasible, hedging with
offsetting positions in securities with similar interest rate risk
characteristics. The Company's securities inventories are marked to market,
accordingly there are no unrecorded gains or losses in value. While a
significant portion of the Company's securities inventories have contractual
maturities in excess of five years, these inventories, on average, turn over in
excess of twelve times per year. Accordingly, the exposure to interest rate risk
inherent in the Company's securities inventories is less than that of similar
financial instruments held by firms in other industries. At March 31, 1999, the
Company's securities inventories comprised of debt and preferred equity
securities owned and securities sold, but not yet purchased were approximately
$140 million and $10 million, respectively. The weighted average interest rates
in these inventories (excluding the preferred equities) were 6.1% and 5.0%,
respectively. Additionally, the Company held, as investments, debt securities,
principally U.S. Treasury securities, aggregating approximately $10 million,
with average maturities of less than one year and a weighted average interest
rate of 5.9%. The Company has performed an evaluation of its potential interest
rate risk and management is of the opinion that the exposure to interest rate
risk would not be material to its financial position.
The Company also has outstanding $100 million principal amount of Senior
Notes maturing in February 2006 which bear interest at 6.5%. The fair value of
the Senior Notes, estimated using current market prices, was $100,837 and
$98,958 at March 31, 1999 and 1998, respectively.
23
<PAGE>
The Company's equity securities inventories are exposed to risk of loss in
the event of unfavorable price movements. The Company's equity securities
inventories are marked to market and there are no unrecorded gains or losses. At
March 31, 1999, the balances of the Company's equity securities positions,
excluding preferred equities, owned and sold, but not yet purchased were
approximately $5 million and $2 million, respectively. The Company also has
investments in equity securities, primarily seed money investments in
Company-sponsored mutual funds with a carrying value of $7.2 million at March
31, 1999. In the opinion of management, the potential exposure to equity price
risk would not be material to the Company's financial position.
The Company is also subject to credit risk arising from non-performance by
trading counterparties, customers and issuers of debt securities owned. The
Company manages this risk by imposing and monitoring position limits, monitoring
trading counterparties, reviewing security concentrations, holding and marking
to market collateral and conducting business through clearing organizations
which guarantee performance. The Company does not trade or have positions in
complex derivative financial instruments and owned approximately $.4 million of
non-investment grade debt securities at March 31, 1999. For an additional
discussion of this risk, see Note 15 of Notes to Consolidated Financial
Statements.
EFFECTS OF INFLATION
The Company's assets are not significantly affected by inflation because they
are primarily monetary, consisting of cash, resale agreements, securities and
receivables. However, the rate of inflation affects various expenses, including
employee compensation, occupancy, and communications, which may not be readily
recoverable in charges for services provided by the Company.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
Statement No. 133 establishes standards for accounting and reporting for
derivative instruments and hedging activities. In May 1999, the FASB issued an
exposure draft to delay the effective date for all fiscal quarters for all
fiscal years beginning after June 15, 2000. The impact of adopting Statement No.
133 will not be material to the Company's consolidated financial statements.
YEAR 2000 PROCESSING ISSUE
The Year 2000 issue affects the ability of computer systems to correctly process
dates after December 31, 1999. The Company has completed the inventory and
assessment phases of its Year 2000 project plan through an evaluation of its
internal and third party software, as well as its service providers' computer
systems, to determine their ability to accurately process in the next
millennium. The Company has also assessed the Year 2000 status of its
non-information technology systems and equipment which may contain embedded
hardware or software.
Having identified and assessed those computer systems, processes and
equipment that require modification, the Company has substantially completed the
remediation and testing phases of its project plan. The Company has completed
the remediation and testing of its critical internal applications systems. In
addition to internal testing, the Company actively participated in testing among
securities brokerage firms, securities exchanges, clearing organizations, and
other vendors.
In November 1997, the Company converted its securities brokerage processing
system to a vendor that is the principal service provider of this type to the
securities brokerage industry. The vendor has confirmed to the Company that it
has substantially completed the necessary coding modifications and that its
testing plan is on schedule with expected completion during the second quarter
of 1999. The Company has received similar confirmation for its proprietary
mutual funds from the vendors that are the principal service providers to the
mutual fund industry.
The Company is also continuing to communicate with its remaining vendors and
other third parties, including its landlords and utility suppliers, to determine
the likely extent to which the Company may be affected by third parties' Year
2000 plans and target dates. The Company expects its critical third party
vendors to demonstrate or provide assurances of their Year 2000 compliance by
the end of the second quarter of 1999.
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. While the Company does not have a current expectation of any
material loss as a result of the Year 2000 issue, there can be no assurance that
the Company's internal systems or the systems of third parties on which the
Company relies will be remediated on a timely basis, or that a failure to
remediate by another party, or a remediation or conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company. The Company has developed contingency plans in the event that third
parties fail to achieve their Year 2000 plans and target dates. However, there
can be no assurance that any such contingency plans will fully mitigate the
effects of any such failure.
24
<PAGE>
Based on information currently available, including information provided by
third party vendors, the Company expects its aggregate expenditures for its Year
2000 project plan to be approximately $3.1 million, of which an estimated $1.6
million has been incurred as of March 31, 1999. A significant portion of these
costs will not be incremental costs to the Company, but rather will represent
the redeployment of existing information technology and operations resources,
primarily to test the remediation efforts of the Company's third party vendors.
The Company expects to fund all Year 2000 related costs through operating cash
flows and a reallocation of the Company's overall information technology
spending. In accordance with generally accepted accounting principles, Year 2000
expenditures will be expensed as incurred. The costs of the Company's Year 2000
project and the dates on which the Company plans to complete the Year 2000
modifications are based on management's best current estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party compliance plans and other
factors. However, there can be no assurance that these estimates will prove
correct and actual results could differ materially from those plans.
FORWARD-LOOKING STATEMENTS
Information or statements provided by or on behalf of the Company from time to
time, including those within this Fiscal 1999 Annual Report, may contain certain
"forward-looking information," including information relating to anticipated
growth in revenues or earnings per share, anticipated changes in its businesses
or in the amount of client assets under management, anticipated expense levels,
and expectations regarding financial market conditions. The Company cautions
readers that any forward-looking information provided by or on behalf of the
Company is not a guarantee of future performance. Actual results may differ
materially from those in forward-looking information as a result of various
factors, including but not limited to those discussed below. Further, such
forward-looking statements speak only as of the date on which such statements
are made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
In addition to those factors discussed above with respect to the Year 2000
processing issue, the Company's future revenues may fluctuate due to other
factors such as: the volume of trading in securities; the volatility and general
level of market prices; the total value and composition of assets under
management; the relative investment performance of Company-sponsored mutual
funds as compared to competing offerings and market indices; sentiment and
investor confidence; the ability of the Company to maintain investment
management and administrative fees at current levels; competitive conditions in
each of the Company's business segments and the demand for investment banking
and mortgage banking services.
The Company's future operating results are also dependent upon the level of
operating expenses, which are subject to fluctuation for the following or other
reasons: variations in the level of compensation expense incurred by the Company
as a result of changes in the number of total employees, competitive factors, or
other reasons; expenses and capital costs, including depreciation, amortization
and other non-cash charges incurred by the Company to maintain its
administrative infrastructure, including costs incurred with respect to
readiness for Year 2000 processing; unanticipated costs that may be incurred by
the Company from time to time to protect client goodwill; and third-party
noncompliance in Year 2000 processing.
The Company's business is also subject to substantial governmental
regulation, and changes in legal, regulatory, accounting, tax, and compliance
requirements may have a substantial effect on the Company's business and results
of operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition - Liquidity and Capital Resources - Risk
Management" for disclosure about market risk.
25
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders, Legg Mason, Inc.
In our opinion, the accompanying consolidated statements of financial condition
of Legg Mason, Inc. and Subsidiaries (the "Company") and the related
consolidated statements of earnings, changes in stockholders' equity and cash
flows present fairly, in all material respects, the consolidated financial
position of Legg Mason, Inc. and Subsidiaries at March 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended March 31, 1999, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Baltimore, Maryland
June 2, 1999
26
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Years ended March 31,
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S><C>
REVENUES
Investment advisory and related fees $ 390,216 $ 295,645 $ 208,243
Commissions 279,136 241,284 189,980
Principal transactions 94,105 86,748 73,181
Investment banking 76,118 97,138 72,062
Interest 160,292 127,268 84,129
Other 46,139 40,977 37,006
- ----------------------------------------------------------------------------------------------------------
1,046,006 889,060 664,601
- ----------------------------------------------------------------------------------------------------------
EXPENSES
Compensation and benefits 584,830 511,413 382,909
Occupancy and equipment rental 64,289 56,740 43,793
Communications 47,963 42,726 31,067
Floor brokerage and clearing fees 6,677 5,464 5,912
Interest 94,910 73,706 43,364
Non-cash deferred compensation 10,352 -- --
Other 88,210 70,632 61,346
- ----------------------------------------------------------------------------------------------------------
897,231 760,681 568,391
- ----------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 148,775 128,379 96,210
Income taxes 59,441 52,258 39,018
- ----------------------------------------------------------------------------------------------------------
NET EARNINGS $ 89,334 $ 76,121 $ 57,192
==========================================================================================================
EARNINGS PER COMMON SHARE
Basic $ 1.64 $ 1.40 $ 1.12
Diluted $ 1.55 $ 1.31 $ 1.02
==========================================================================================================
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------
<S><C>
ASSETS
Cash and cash equivalents $ 208,142 $ 206,245
Cash and securities segregated for regulatory purposes 1,374,255 921,606
Resale agreements 141,016 175,623
Receivable from customers 921,267 713,391
Securities borrowed 308,719 448,453
Securities inventory, at market value 143,998 81,457
Investment securities, at market value 17,230 30,853
Equipment and leasehold improvements, net 55,807 51,991
Intangible assets, net 56,127 61,304
Other 247,126 141,406
- ----------------------------------------------------------------------------------------------------------
$ 3,473,687 $ 2,832,329
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Payable to customers $ 2,170,588 $ 1,562,997
Payable to brokers and dealers 10,430 5,284
Securities loaned 311,818 453,030
Short-term borrowings 49,262 13,880
Securities sold, but not yet purchased, at market value 11,822 14,132
Accrued compensation 115,480 97,912
Deferred compensation trust 48,986 --
Other 101,448 85,371
Senior notes 99,676 99,628
- ----------------------------------------------------------------------------------------------------------
2,919,510 2,332,234
- ----------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
- ----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $.10; authorized 100,000,000 shares;
issued 56,376,253 shares in 1999 and 27,524,880 in 1998 5,638 2,753
Additional paid-in capital 215,387 203,133
Deferred compensation and employee note receivable (5,362) --
Employee stock trust (18,475) --
Appreciation of employee stock trust, net (11,470) --
Retained earnings 368,632 293,263
Accumulated other comprehensive income, net (173) 946
- ----------------------------------------------------------------------------------------------------------
554,177 500,095
- ----------------------------------------------------------------------------------------------------------
$ 3,473,687 $ 2,832,329
==========================================================================================================
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Deferred Appreciation
Compensation of Accumulated
Common Stock Additional and Employee Employee Other
------------------- Paid-in Employee Note Stock Stock Retained Comprehensive
Shares Amount Capital Receivable Trust Trust, net Earnings Income, net
- -------------------------------------------------------------------------------------------------------------------------------
<S><C>
BALANCE MARCH 31, 1996 17,957,649 $ 1,796 $ 122,067 -- -- -- $178,016 $ 310
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 253,428 25 4,951
Conversion of subordinated
debentures 2,634,515 264 66,906
Dividends declared
($.191 per share)* (8,939)
Adjustments of pooled entity 120 408
Comprehensive income:
Net earnings 57,192
Unrealized holding loss
on investment securities
(net of taxes of $23) (77)
Comprehensive income
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1997 20,845,592 $ 2,085 $ 194,044 -- -- -- $226,677 $ 233
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 524,061 52 9,725
4-for-3 stock split 6,155,227 616 (636)
Dividends declared
($.214 per share)* (10,847)
Adjustments to conform
fiscal year of pooled entity 920
Adjustments of pooled entity 392
Comprehensive income:
Net earnings 76,121
Unrealized holding gain on
investment securities
(net of taxes of ($496)) 713
Comprehensive income
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1998 27,524,880 $ 2,753 $ 203,133 -- -- -- $293,263 $ 946
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 843,472 84 9,424
2-for-1 stock split 27,807,901 2,781 (2,781)
Dividends declared
($.25 per share)* (13,965)
Employee stock transactions 200,000 20 5,611 $(5,362) $(18,475) $(11,470)
Comprehensive income:
Net earnings 89,334
Unrealized holding loss
on investment securities
(net of taxes of $671) (1,119)
Comprehensive income
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1999 56,376,253 $ 5,638 $ 215,387 $(5,362) $(18,475) $(11,470) $368,632 $ (173)
===============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders'
Equity
- -----------------------------------------------
<S><C>
BALANCE MARCH 31, 1996 $ 302,189
- -----------------------------------------------
Issuance of common stock 4,976
Conversion of subordinated
debentures 67,170
Dividends declared
($.191 per share)* (8,939)
Adjustments of pooled entity 528
Comprehensive income:
Net earnings
Unrealized holding loss
on investment securities
(net of taxes of $23)
Comprehensive income 57,115
- -----------------------------------------------
BALANCE MARCH 31, 1997 $ 423,039
- -----------------------------------------------
Issuance of common stock 9,777
4-for-3 stock split (20)
Dividends declared
($.214 per share)* (10,847)
Adjustments to conform
fiscal year of pooled entity 920
Adjustments of pooled entity 392
Comprehensive income:
Net earnings
Unrealized holding gain on
investment securities
(net of taxes of ($496))
Comprehensive income 76,834
- -----------------------------------------------
BALANCE MARCH 31, 1998 $ 500,095
- -----------------------------------------------
Issuance of common stock 9,508
2-for-1 stock split --
Dividends declared
($.25 per share)* (13,965)
Employee stock transactions (29,676)
Comprehensive income:
Net earnings
Unrealized holding loss
on investment securities
(net of taxes of $671)
Comprehensive income 88,215
- -----------------------------------------------
BALANCE MARCH 31, 1999 $ 554,177
===============================================
</TABLE>
* Adjusted to reflect all stock splits.
See notes to consolidated financial statements.
29
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended March 31,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 89,334 $ 76,121 $ 57,192
Non-cash items included in earnings:
Depreciation and amortization 21,566 21,986 17,422
Deferred compensation 10,352 -- --
Adjustments of pooled entities -- 1,058 688
Adjustment to conform fiscal year of pooled entity -- 920 --
Deferred income taxes (6,296) (7,712) (3,417)
(Increase) decrease in assets:
Cash and securities segregated for regulatory purposes (452,649) (479,301) (273,446)
Receivable from customers (207,876) (179,373) (130,724)
Securities borrowed 139,734 (184,841) (67,043)
Securities inventory (62,541) (2,595) 5,357
Other (89,432) (16,087) (34,956)
Increase (decrease) in liabilities:
Payable to customers 607,591 602,351 395,948
Payable to brokers and dealers 5,146 (1,828) 3,258
Securities loaned (141,212) 202,226 79,975
Securities sold, but not yet purchased (2,310) 1,625 1,814
Accrued compensation 17,568 37,480 17,305
Deferred compensation trust 1,028 -- --
Other 10,792 26,053 10,559
- -------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (59,205) 98,083 79,932
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Equipment and leasehold improvements (19,138) (31,687) (19,390)
Intangible assets (655) (5,587) (653)
Sale of property -- -- 6,154
Net (increase) decrease in resale agreements 34,607 (42,823) (24,387)
Purchases of investment securities (36,677) (149,745) (178,858)
Proceeds from sales and maturities of investment securities 51,395 187,256 195,196
- -------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 29,532 (42,586) (21,938)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 35,382 (20) 6,746
Repayment of subordinated liabilities -- -- (29)
Issuance of common stock 9,508 9,777 4,976
Dividends paid (13,320) (10,197) (8,412)
- -------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 31,570 (440) 3,281
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,897 55,057 61,275
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 206,245 151,188 89,913
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 208,142 $ 206,245 $151,188
=========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Legg Mason, Inc. ("Parent") and its wholly-owned subsidiaries (collectively, the
"Company") are principally engaged in providing investment advisory, securities
brokerage, investment banking and commercial mortgage banking services to
individuals, institutions, corporations and municipalities.
The consolidated financial statements include the accounts of the Parent and
its wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated. Where appropriate, prior years' financial
statements have been reclassified to conform with the 1999 presentation.
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles which require management to make
assumptions and estimates that affect the amounts and disclosures presented.
Actual amounts could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid investments with original maturities of less
than 90 days, other than those held for sale in the ordinary course of business.
RESALE AGREEMENTS
The Company invests in short-term resale agreements collateralized by U.S.
government and agency securities. Resale agreements are accounted for as
collateralized financings. It is the policy of the Company to obtain possession
of collateral with a market value in excess of the principal amount loaned.
Collateral is valued daily, and the Company may require counterparties to
deposit additional collateral when appropriate. Resale agreements are carried at
the amounts at which the securities will be subsequently resold as specified in
the respective agreements, plus accrued interest.
SECURITIES
Securities transactions are recorded on a settlement date basis which does not
differ materially from a trade date basis. Commission revenues and related
expenses for unsettled transactions are recorded on a trade date basis.
Securities inventory and securities sold, but not yet purchased by the Company's
broker-dealer subsidiaries, both for trading and investing, are valued at market
and resulting unrealized gains and losses are reflected in earnings. Market
values are determined based on quoted market, dealer prices or pricing models.
Investment securities of the Parent and its non-broker-dealer subsidiaries held
as available-for-sale are valued at market and resulting unrealized gains and
losses are reflected in stockholders' equity and comprehensive income.
SECURITIES LENDING
Securities borrowed and loaned are accounted for as collateralized financings
and recorded at the amount of collateral advanced or received. Securities
borrowed transactions require the Company to deposit cash or other collateral
with the lender. The Company generally receives collateral in the form of cash
for securities loaned. The fee received or paid by the Company is recorded as
interest revenue or expense. The Company monitors the market value of securities
borrowed and loaned on a daily basis, with additional collateral obtained or
refunded, as necessary.
DEPRECIATION AND AMORTIZATION
Equipment and leasehold improvements are reported at cost, net of accumulated
depreciation and amortization of $58,910 and $49,874 at March 31, 1999 and 1998,
respectively.
Depreciation and amortization are determined by use of the straight line
method over the estimated useful life of the asset or the remaining life of the
lease. Maintenance and repair costs are expensed as incurred.
INTANGIBLE ASSETS
Intangible assets consist principally of goodwill, asset management and mortgage
servicing contracts, attributable to business combinations and are reported at
cost net of accumulated amortization. Intangibles are amortized using straight
line and accelerated methods over periods not exceeding forty years. Accumulated
amortization at March 31, 1999 and 1998 was $43,914 and $54,209, respectively.
The Company periodically reviews its accounting for goodwill and other
intangible assets, considering such factors as historical profitability and
projected operating cash flows, to determine that the assets are realizable and
the amortization periods are appropriate.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At March 31, 1999 and 1998, substantially all financial instruments are carried
at fair value or amounts which approximate fair value. The fair value of the
Senior Notes, estimated using current market prices, was $100,837 and $98,958 at
March 31, 1999 and 1998, respectively.
31
<PAGE>
INVESTMENT ADVISORY AND RELATED FEES
The Company earns investment advisory fees on assets in accounts managed by its
subsidiaries, distribution fees on assets in Company-sponsored mutual funds and
asset-based fees on various types of single-fee brokerage accounts. Revenues
from investment advisory and related activities are accrued over the period in
which services are performed.
EARNINGS PER SHARE
Basic earnings per common share ("EPS") is calculated by dividing net earnings
by the weighted-average number of common shares outstanding. Diluted EPS is
similar to basic EPS, but adjusts for the effect of potential common shares.
The following table presents the computations of basic and diluted EPS:
Years ended March 31,
(shares in thousands) 1999 1998 1997
- --------------------------------------------------------------------
Weighted-average common
shares outstanding 54,337 54,431 51,138
Potential common shares:
Employee stock
options 3,272 3,528 2,490
Shares issuable upon
conversion of
debentures 48 48 2,357
- --------------------------------------------------------------------
Total weighted-average
diluted common shares 57,657 58,007 55,985
- --------------------------------------------------------------------
Net earnings $89,334 $76,121 $57,192
Interest expense on
convertible debentures, net 18 18 153
- --------------------------------------------------------------------
Net earnings applicable to
diluted common shares $89,352 $76,139 $57,345
- --------------------------------------------------------------------
Basic EPS $ 1.64 $ 1.40 $ 1.12
Diluted EPS $ 1.55 $ 1.31 $ 1.02
- --------------------------------------------------------------------
At March 31, 1999 and 1997, options to purchase 2,718,200 and 31,462 shares,
respectively, were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average price of the
common shares for the period. In addition, at March 31, 1999, 1,423,619 shares
held in an employee stock trust were antidilutive and therefore excluded from
the computation of diluted earnings per share.
2. BUSINESS COMBINATIONS
The Company acquired Brandywine Asset Management, Inc. ("Brandywine") in
January 1998. Brandywine provides investment management services for
institutions and high net worth individuals.
The Company issued 5,148,312 shares of its common stock to acquire Brandywine
in a transaction accounted for as a pooling of interests. Accordingly, all years
presented include the results of Brandywine. In order to conform to the
Company's fiscal year, Brandywine's operating profit of $920 for the quarter
ended March 31, 1997 was reflected as an adjustment to retained earnings. The
acquisition was not material to the Company's financial statements.
3. RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
Receivable from and payable to customers represent balances arising from cash
and margin transactions. Securities owned by customers are held as collateral
for the receivable balances. Included in payable to customers are free credit
balances of approximately $2,069,350 as of March 31, 1999, and $1,447,286 as of
March 31, 1998. The Company pays interest on certain customer free credit
balances held for investment purposes.
4. SECURITIES, AT MARKET
Securities positions consist of the following at March 31:
Securities inventory
1999 1998
- --------------------------------------------------------------------
U.S. government and federal
agencies $ 70,991 $18,757
State and municipal bonds 39,982 36,342
Corporate debt and equity 33,025 26,358
- --------------------------------------------------------------------
$143,998 $81,457
- --------------------------------------------------------------------
Securities sold,
but not yet purchased
1999 1998
- --------------------------------------------------------------------
U.S. government and federal
agencies $ 8,688 $ 4,073
State and municipal bonds 728 1,570
Corporate debt and equity 2,406 8,489
- --------------------------------------------------------------------
$11,822 $14,132
- --------------------------------------------------------------------
32
<PAGE>
5. INVESTMENT SECURITIES
The Company's investment securities, including the type and maturity range for
available-for-sale securities, are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1999 March 31, 1998
- ------------------------------------------------------------------ --------------------------------------------
COST/ GROSS GROSS FAIR Cost/ Gross Gross Fair
AMORTIZED UNREALIZED UNREALIZED MARKET amortized unrealized unrealized market
COST GAINS LOSSES VALUE cost gains losses value
- ------------------------------------------------------------------ --------------------------------------------
<S><C>
Non-broker-dealer:
Corporate debt:
within one year $ 1,998 $ (5) $ 1,993
U.S. governments:
within one year $1,351 $ 4 $ 1,355 697 (1) 696
one to five years 252 252 1,107 $ 1 (2) 1,106
Equities 4,425 937 $(997) 4,365 8,348 2,363 (572) 10,139
- ------------------------------------------------------------------ --------------------------------------------
$6,028 $941 $(997) $ 5,972 $12,150 $2,364 $(580) $13,934
- ------------------------------------------------------------------ --------------------------------------------
Broker-dealer 11,258 16,919
- ------------------------------------------------------------------ --------------------------------------------
$17,230 $30,853
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The proceeds and gross realized gains (losses) from the sales and maturities of
available-for-sale securities are as follows:
Years ended March 31,
1999 1998 1997
- --------------------------------------------------------------------
Proceeds $51,395 $187,256 $195,196
Gross realized gains -- 260 1
Gross realized losses -- (25) --
- --------------------------------------------------------------------
6. SHORT-TERM BORROWINGS
Short-term borrowings consist of loans from banks totaling $49,262 and $13,880
at March 31, 1999 and 1998, respectively.
The Company's subsidiaries have secured and unsecured bank lines of credit
totaling $261,500 that are generally subject to termination at either party's
discretion. At March 31, 1999 and 1998, the subsidiaries had $14,962 and
$13,880, respectively, outstanding under these agreements which bear interest at
a weighted average rate of 7.7%. The borrowings were collateralized by assets
with market values of $17,271 at March 31, 1999 and $19,048 at March 31, 1998.
Together with certain subsidiaries, the Parent has jointly entered into
revolving credit agreements which permit it to borrow up to $110,000, generally
repayable within 30 days. At March 31,1999, the Company had $34,300 outstanding
under these agreements which bear interest at 5.6%. At March 31, 1998, there
were no borrowings outstanding under these agreements.
In addition, the Parent has a revolving credit agreement that permits it to
borrow up to $50,000, repayable in January 2000, at floating rates. At March 31,
1999 and 1998, there were no borrowings outstanding under this agreement. Under
the terms of the agreement, the Company is required, among other things, to
maintain consolidated net worth plus subordinated liabilities of not less than
$383,714 plus 50% of consolidated annual net earnings subsequent to March 31,
1999.
Interest payments were $94,610 in 1999, $73,406 in 1998 and $45,072 in 1997.
7. SENIOR NOTES
In February 1996, the Company issued $100 million principal amount of Senior
Notes due February 15, 2006, which bear interest at 6.5%. The notes were sold at
a discount to yield 6.57%. The Company has available for offering an additional
$50 million of debt or convertible debt securities pursuant to a shelf
registration filed in January 1996.
8. SUBORDINATED LIABILITIES
During fiscal 1997, the Company called for redemption the full principal amount
outstanding of its 5.25% Convertible Subordinated Debentures. Substantially all
holders converted their debentures into 103.36 shares of common stock for each
one thousand dollars of principal amount of the debentures (based on the
conversion price of $9.68 per share of common stock), with cash paid in lieu of
fractional shares.
33
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities and equipment under non-cancellable
operating leases and also has multi-year agreements for data processing and
other services. These leases and service agreements expire on varying dates
through 2011. Certain leases provide for renewal options and contain escalation
clauses providing for increased rentals. As of March 31, 1999, the minimum
annual aggregate rentals are as follows:
- --------------------------------------------------------------------
2000 $ 44,219
2001 37,672
2002 34,107
2003 27,313
2004 20,122
Thereafter 63,385
- --------------------------------------------------------------------
$226,818
- --------------------------------------------------------------------
Total rental expense, including cancellable equipment leases, was $42,818,
$37,908 and $30,050 for 1999, 1998 and 1997, respectively.
The Company enters into when-issued and underwriting commitments. Had the
open transactions relating to these commitments as of March 31, 1999 been
closed, the effect on the consolidated financial statements of the Company would
not have been material.
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. However, if during any period a potential adverse
contingency should become probable, the results of operations in that period
could be materially affected.
10. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return.
The provision for income taxes consists of:
- --------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------
Federal $49,515 $43,162 $31,823
State and local 9,926 9,096 7,195
- --------------------------------------------------------------------
$59,441 $52,258 $39,018
- --------------------------------------------------------------------
Current $65,737 $59,970 $42,435
Deferred (6,296) (7,712) (3,417)
- --------------------------------------------------------------------
$59,441 $52,258 $39,018
- --------------------------------------------------------------------
A reconciliation of the difference between the effective income tax rate and
the statutory federal income tax rate follows:
- --------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------
Taxes at statutory rates 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax benefit 4.4 4.6 4.9
Tax-exempt interest
income, net (0.5) (0.5) (0.6)
Life insurance proceeds (0.7) -- --
Other, net 1.8 1.6 1.3
- --------------------------------------------------------------------
Effective income tax rates 40.0% 40.7% 40.6%
- --------------------------------------------------------------------
Components of the Company's deferred tax assets and liabilities, included in
other assets and liabilities, are as follows:
- --------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------
Deferred tax assets:
Accrued compensation
and benefits $32,905 $18,556
Accrued expenses 5,751 4,247
Operating loss carryforwards 548 731
Amortization of leasehold
improvements 1,691 1,479
Other 2,052 2,208
Valuation allowance (477) (1,039)
- --------------------------------------------------------------------
$42,470 $26,182
- --------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 4,785 $ 1,971
Deferred expenses 600 1,126
Deferred income 1,225 1,229
Other 195 148
- --------------------------------------------------------------------
$ 6,805 $ 4,474
- --------------------------------------------------------------------
At March 31, 1999 and 1998, the deferred tax valuation allowance was
primarily for benefits related to net operating losses of subsidiaries which
expire from 2004 to 2019.
Income tax payments were $70,452 in 1999, $56,019 in 1998 and $45,054 in
1997.
11. EMPLOYEE BENEFITS
The Company, through its subsidiaries, maintains various defined contribution
plans covering substantially all employees. Discretionary contributions charged
to operations amounted to $18,693, $17,155 and $12,144 in 1999, 1998 and 1997,
respectively. In addition, employees can make voluntary contributions under
certain plans.
12. CAPITAL STOCK
At March 31, 1999, the authorized numbers of common and preferred shares were
100,000,000 and 4,000,000, respectively. In addition, at March 31, 1999 and
1998, there were 11,507,227 and 11,916,102 shares of common stock, respectively,
reserved for issuance under the Company's stock plans. Dividends declared but
not paid at March 31, 1999, 1998 and 1997 were $3,660, $3,025 and $2,375,
respectively.
34
<PAGE>
The Company paid a 2-for-1 stock split and a 4-for-3 stock split in fiscal
1999 and 1998, respectively. All references in the consolidated financial
statements to the number of common shares and per share amounts have been
adjusted retroactively to reflect the stock splits, except for the number of
issued common shares presented in the consolidated financial statements.
13. STOCK PLANS
At March 31, 1999, 8,000,000 shares were authorized to be issued under the
Company's employee stock plans. Options under the Company's employee stock plans
have been granted at prices not less than 100% of the fair market value. Options
are generally exercisable in 20% or 25% increments over 4 to 5 years and expire
within 5 to 10 years from the date of grant.
Stock option transactions under the plans during the three years ending March
31, 1999 are summarized below:
- --------------------------------------------------------------------
Weighted-
average
Number of exercise
shares price
- --------------------------------------------------------------------
Options outstanding
at March 31, 1996 4,997,902 $ 7.11
Granted 1,103,090 $10.97
Exercised (526,172) $ 6.06
Canceled (88,204) $ 9.67
- --------------------------------------------------------------------
Options outstanding
at March 31, 1997 5,486,616 $ 7.95
Granted 1,368,042 $20.54
Exercised (976,826) $ 6.65
Canceled (116,472) $11.22
- --------------------------------------------------------------------
Options outstanding
at March 31, 1998 5,761,360 $11.09
Granted 2,734,332 $29.95
Exercised (982,668) $ 7.14
Canceled (139,889) $17.55
- --------------------------------------------------------------------
OPTIONS OUTSTANDING
AT MARCH 31, 1999 7,373,135 $18.49
- --------------------------------------------------------------------
The following information summarizes the Company's stock options outstanding
at March 31, 1999:
- --------------------------------------------------------------------
Weighted- Weighted-
Option average average
Exercise shares exercise remaining life
price range outstanding price (in years)
- --------------------------------------------------------------------
$ 1.23-$ 9.99 1,817,582 $ 6.61 3.9
$10.00-$19.99 1,970,333 $12.30 2.4
$20.00-$29.99 2,129,820 $25.99 7.5
$30.00-$30.74 1,455,400 $30.72 7.3
- --------------------------------------------------------------------
At March 31, 1999, 1998 and 1997, options were exercisable on 2,679,080,
2,464,746 and 2,160,722 shares, respectively, and the weighted-average exercise
prices were $10.38, $6.89 and $6.47, respectively.
The following information summarizes the Company's stock options exercisable
at March 31, 1999:
- --------------------------------------------------------------------
Weighted-
Option average
Exercise shares exercise
price range exercisable price
- --------------------------------------------------------------------
$ 1.23-$ 9.99 1,545,159 $ 6.40
$10.00-$19.99 769,682 $11.09
$20.00-$29.99 364,239 $25.79
$30.00-$30.74 -- --
- --------------------------------------------------------------------
During fiscal 1999, the Company granted 80,000 restricted shares of common
stock at a fair market value of $28.16 per share. The restricted shares, granted
under the Company's employee stock plans, vest in 25% increments over four
years. Compensation expense is being recognized over the four year vesting
period. The restricted stock award was a non-cash transaction. Additionally,
during fiscal 1999, the Company entered into a stock purchase and related loan
transaction in which an officer purchased 120,000 shares of common stock valued
at $3,379.
The Company accounts for stock-based compensation under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," rather than the fair value method in Financial Accounting Standards
Board Statement No. 123, "Accounting for Stock-Based Compensation." In fiscal
1999, the Company recognized $269 in compensation expense for grants made under
the Company's stock plans. Pro forma results based on the fair value method
prescribed in Statement No. 123 are as follows:
- --------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------
NET EARNINGS
As reported $89,334 $76,121 $57,192
Pro forma $84,833 $73,225 $56,398
EARNINGS PER SHARE
As reported:
Basic $ 1.64 $ 1.40 $ 1.12
Diluted $ 1.55 $ 1.31 $ 1.02
Pro forma:
Basic $ 1.56 $ 1.35 $ 1.10
Diluted $ 1.47 $ 1.26 $ 1.01
- --------------------------------------------------------------------
The weighted-average fair value of stock options granted in fiscal 1999, 1998
and 1997, using an option-pricing model, was $9.27, $5.50 and $3.65 per option
share, respectively. The following weighted-average assumptions were used in the
model for grants in fiscal 1999, 1998 and 1997, respectively: expected dividend
yield of 1.34%, 1.55% and 1.85%; risk-free interest rate of 5.40%, 6.06% and
6.58%; expected volatility of 23.46%, 21.99% and 21.62%; and expected lives of
6.37 years, 4.90 years and 4.37 years.
Pro forma compensation expense associated with option grants is recognized
over the vesting period. The initial impact of applying Statement No. 123 is not
representative of the potential impact on pro forma net earnings for future
35
<PAGE>
years, which will include compensation expense related to vesting of fiscal 1996
and subsequent grants.
The Company has also adopted the "Legg Mason, Inc., Stock Option Plan For
Non-Employee Directors." Options granted under the plan are immediately
exercisable at a price equal to the fair market value of the shares on the date
of grant. Options issuable under the plan, limited to 1,100,000 shares in
aggregate, have a term of not more than ten years from the date of grant. At
March 31, 1999, options on 381,920 shares have been granted, of which 305,274
are currently outstanding.
The Company has an Employee Stock Purchase Plan covering substantially all
employees. Shares of common stock are purchased in the open market on behalf of
participating employees, subject to a 4,333,334 total share limit under the
plan. Purchases are made through payroll deductions with the Company matching 5%
of the employees' contributions. Charges to earnings were not significant with
respect to this plan.
14. DEFERRED COMPENSATION EMPLOYEE STOCK TRUST
In July 1998, the Emerging Issues Task Force ("EITF") reached a consensus on
EITF Issue 97-14, "Accounting for Deferred Compensation Arrangements Where
Amounts Earned Are Held in a Rabbi Trust and Invested" ("EITF 97-14"). Under
EITF 97-14, assets of the Trust must be consolidated with those of the employer,
and the value of the employer's stock held in the rabbi trust must be classified
in stockholders' equity and generally accounted for in a manner similar to
treasury stock. In certain situations, the corresponding deferred compensation
liability must be recorded at the fair market value of the shares held in the
rabbi trust and the changes in the fair market value of the deferred
compensation liability after September 30, 1998 must be recognized in earnings.
The Company adopted EITF 97-14 as of September 30, 1998. The shares of the
Company's stock (1,423,619 at March 31, 1999) are shown in stockholders' equity
similar to treasury stock, at cost, and the deferred compensation obligation is
recorded in liabilities at the fair market value of the stock held in the trust.
The difference between the cost and fair market value through September 30, 1998
has been presented as a separate component of stockholders' equity. In
accordance with EITF 97-14, for the fiscal year ended March 31, 1999, the
Company recorded a non-cash charge to earnings of $10,352.
The Company has amended the plan so that subsequent to the first quarter of
fiscal 2000, changes in the value of the stock held by the plan will no longer
affect the Company's earnings and stockholders' equity will be substantially
restored.
15. OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT
In the normal course of business, the Company executes, settles and finances
customer and proprietary securities transactions. These activities expose the
Company to off-balance sheet risk in the event that customers or other parties
fail to satisfy their obligations.
In accordance with industry practice, securities transactions are recorded on
settlement date, generally three business days after trade date. Should a
customer or broker fail to deliver cash or securities as agreed, the Company may
be required to purchase or sell securities at unfavorable market prices.
The Company extends credit to customers, collateralized by cash and
securities, and subject to regulatory and internal requirements. Customer margin
transactions include sales of securities, not yet purchased, option contracts
and commodity futures contracts. The Company continually monitors margin
requirements and requests customers to deposit additional collateral or reduce
positions when necessary. Such transactions expose the Company to risk in the
event that margin requirements are insufficient to fully cover customer losses.
The Company invests in short-term resale agreements collateralized by U.S.
government and agency securities. The Company generally takes possession of
securities purchased under these agreements. Such transactions expose the
Company to risk in the event the counterparty does not repurchase the securities
and the value of the collateral held is less than the underlying receivable. The
Company monitors the value of the collateral daily and requests additional
collateral when necessary.
The Company borrows and lends securities to finance transactions and
facilitate the settlement process, utilizing both firm proprietary positions and
customer margin securities held as collateral. In addition, the Company engages
in conduit securities borrowing and lending activities in which it acts as an
agent to facilitate settlement for other institutions. In both firm and conduit
transactions, the Company deposits or receives cash generally equal to 102% of
the market value of the securities exchanged and monitors the adequacy of
collateral levels on a daily basis. The Company periodically borrows from banks
on a collateralized basis, utilizing firm and customer margin securities in
compliance with Securities and Exchange Commission rules. Should the
counterparty fail to return customer securities pledged, the Company is subject
to the risk of acquiring the securities at prevailing market prices in order to
satisfy its customer obligations. The Company sells securities it does not
currently own, and is obligated to subsequently purchase such securities at
prevailing market prices. The Company is exposed to risk of loss if securities
prices increase prior to closing the transactions.
16. REGULATORY 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 March 31, 1999, the broker-dealer
subsidiaries had aggregate net capital, as defined, of $206,016 which exceeded
required net capital by $186,484.
The Company's principal broker-dealer subsidiary must maintain a separate
account for the exclusive benefit of customers in accordance with Securities and
Exchange Commission Rule 15c3-3, as determined by periodic computations. The
rule allows the broker-dealer to maintain the required amounts in cash or
qualified securities.
36
<PAGE>
17. BUSINESS SEGMENT INFORMATION
The Company provides financial services through four business segments:
Investment Advisory; Private Client; Capital Markets and Other. Segment results
include all direct revenues and expenses of the operating units in each segment
and allocations of indirect expenses based on specific methodologies.
Investment Advisory provides investment advisory services to
Company-sponsored mutual funds and asset management for institutional and
individual clients. Subadvisory revenues and expenses are eliminated in
consolidated segment reporting.
Private Client distributes a wide range of financial products through its
branch distribution network, including equity and fixed-income securities,
proprietary and non-affiliated mutual funds and annuities. Net interest profit
from customers' margin loan and credit account balances is included in this
segment.
Capital Markets consists of the Company's equity and fixed-income
institutional sales and trading, syndicate, corporate and public finance
activities. Sales credits associated with underwritten offerings are reported in
Private Client when sold through retail distribution channels and in Capital
Mar-kets when sold through institutional distribution channels.
Other businesses are principally the Company's real estate business and
unallocated corporate revenues and expenses. In 1999, pre-tax earnings include a
non-cash increase in deferred compensation expense of $10,352. See Note 14 of
Notes to Consolidated Financial Statements.
Business segment financial results are as follows:
- --------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------
Revenues:
Investment Advisory $ 266,740 $215,167 $162,386
Private Client 610,529 513,641 380,920
Capital Markets 130,949 128,048 92,303
Other 37,788 32,204 28,992
- --------------------------------------------------------------------
$1,046,006 $889,060 $664,601
- --------------------------------------------------------------------
Earnings before income taxes:
Investment Advisory $ 79,020 $ 53,691 $ 40,440
Private Client 67,039 53,314 44,543
Capital Markets 11,955 20,345 10,160
Other (9,239) 1,029 1,067
- --------------------------------------------------------------------
$ 148,775 $128,379 $ 96,210
- --------------------------------------------------------------------
The Company's revenues and earnings presented above are substantially derived
from domestic operations. Results of international operations are not
significant. The Company does not report asset information by business segment.
QUARTERLY FINANCIAL DATA
(Dollars in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------- --------------------------------------------
<S><C>
Quarter ended* MAR. 31 DEC. 31 SEPT. 30 JUNE 30 Mar. 31 Dec. 31 Sept. 30 June 30
- -------------------------------------------------------------------------- --------------------------------------------
REVENUES $289,146 $260,514 $247,603 $248,743 $246,345 $235,212 $220,923 $186,580
EXPENSES 249,187 229,550 210,690 207,804 207,182 206,602 188,059 158,838
- -------------------------------------------------------------------------- --------------------------------------------
EARNINGS BEFORE INCOME
TAXES 39,959 30,964 36,913 40,939 39,163 28,610 32,864 27,742
Income taxes 15,168 12,629 15,069 16,575 15,642 11,574 13,559 11,483
- -------------------------------------------------------------------------- --------------------------------------------
NET EARNINGS $ 24,791 $ 18,335 $ 21,844 $ 24,364 $ 23,521 $ 17,036 $ 19,305 $ 16,259
========================================================================== ============================================
EARNINGS PER SHARE:
Basic $ .45 $ .34 $ .39 $ .44 $ .43 $ .31 $ .36 $ .30
Diluted .43 .32 .37 .41 .40 .29 .33 .28
CASH DIVIDEND PER SHARE .065 .065 .065 .055 .055 .055 .055 .049
STOCK PRICE RANGE:
High 35-7/8 31-9/16 31-11/32 32-9/32 31-15/16 28-5/32 27 20-1/4
Low 26-7/16 17-5/16 20-5/32 26-13/16 23-3/8 22-15/32 19-17/32 15-3/4
- -------------------------------------------------------------------------- --------------------------------------------
</TABLE>
* Adjusted to reflect all stock splits.
37
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is contained under the
caption "Election of Directors" on pages 1 through 3 of the Company's definitive
proxy statement for the 1999 Annual Meeting of Stockholders and the caption
"Compliance With Section 16(a) of the Securities Exchange Act of 1934" on page
19 of such proxy statement. Such information is incorporated herein by reference
to the proxy statement. See Part I, Item 4A of this Report for information
regarding certain executive officers of the Company.
Item 11. EXECUTIVE COMPENSATION.
The information required by this item is contained under the
caption "Compensation of Directors" on page 4 of the Company's definitive proxy
statement for the 1999 Annual Meeting of Stockholders and the caption "Executive
Compensation" on pages 7 and 8 of the Company's definitive proxy statement for
the 1999 Annual Meeting of Stockholders. Such information is incorporated herein
by reference to the proxy statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item is contained under the
caption "Security Ownership of Management and Principal Stockholders" on pages 5
and 6 of the Company's definitive proxy statement for the 1999 Annual Meeting of
Stockholders. Such information is incorporated herein by reference to the proxy
statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is contained under the
caption "Certain Transactions" on page 13 of the Company's definitive proxy
statement for the 1999 Annual Meeting of Stockholders. Such information is
incorporated herein by reference to the proxy statement.
38
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of the report:
1. The following consolidated financial statements are included
in Item 8 of this Report:
Page Number in
This Report
--------------
Report of Independent Accountants 26
Consolidated Statements of Earnings 27
Consolidated Statements of Financial
Condition 28
Consolidated Statements of Changes in
Stockholders' Equity 29
Consolidated Statements of Cash Flows 30
Notes to Consolidated Financial
Statements 31-37
2. Financial Statement Schedules (included on pages S-1 to S-5 of
this Report):
Report of Independent Accountants on Financial Statement
Schedules
Schedule I - Condensed Financial Statement of Registrant
All other schedules to the consolidated financial statements
for which provision is made in the accounting regulations of the Securities and
Exchange Commission are not applicable or are not required and therefore have
been omitted.
3. 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)
4. The Company hereby agrees, pursuant to Item
601(b)(4)(iii)(A) of Regulation S-K, to
furnish to the Commission upon request a copy of
each instrument with respect to the rights of
holders of long-term debt of the Company or its
subsidiaries.
10.1 Legg Mason, Inc. 1981 Incentive Stock Option
Plan, as amended through June 2, 1988
(incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
March 31, 1988)*
39
<PAGE>
10.2 Legg Mason, Inc. 1998 Stock Option Plan For Non-
Employee Directors, (incorporated by reference to
the Company's Annual Report on Form 10-K for the
year ended March 31, 1998)*
10.3 Form of Option Agreement under Legg Mason, Inc.
1998 Stock Option Plan for Non-Employee Directors
(incorporated by reference to Form 10-Q for the
quarter ended June 30, 1998)*
10.4 Legg Mason Wood Walker, Incorporated Deferred
Compensation/Phantom Stock Plan (June 1999
Amending Restatement), filed herewith*
10.5 Legg Mason, Inc. 1991 Omnibus Long-Term
Compensation Plan (incorporated by reference to
Exhibit A to the definitive proxy statement for
the Company's 1991 Annual Meeting of
Stockholders)*
10.6 Form of Option Agreement under Legg Mason, Inc.
1991 Omnibus Long-Term Compensation Plan
(incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
March 31, 1993)*
10.7 Legg Mason, Inc. Executive Incentive Compensation
Plan (incorporated by reference to Appendix A to
the definitive proxy statement for the Company's
1995 Annual Meeting of Stockholders)*
10.8 Legg Mason, Inc. 1996 Equity Incentive Plan
(incorporated by reference to Appendix A to the
definitive proxy statement for the Company's 1996
Annual Meeting of Stockholders)*
10.9 Form of Option Agreement under Legg Mason, Inc.
1996 Equity Incentive Plan (incorporated by
reference to the Company's Annual Report on Form
10-K for the year ended March 31, 1996)*
10.10 Form of Non-Qualified Stock Option Agreement
under Legg Mason, Inc. 1996 Equity Incentive Plan
(incorporated by reference to Form 10-Q for the
quarter ended September 30, 1996)*
10.11 Executive Convertible Debenture Purchase and Loan
Agreement between Legg Mason, Inc. and an
Executive Officer of Legg Mason, Inc., dated as
of August 29, 1996 (incorporated by reference to
Form 10-Q for the quarter ended December 31,
1996)*
10.12 Legg Mason, Inc. Executive Convertible
Subordinated Debenture Due August 29, 2000 issued
to an Executive Officer of Legg Mason, Inc.
(incorporated by reference to Form 10-Q for the
quarter ended December 31, 1996)*
10.13 Promissory Note of Executive Officer of Legg
Mason, Inc., dated as of August 29, 1996
(incorporated by reference to Form 10-Q for the
quarter ended December 31, 1996)*
10.14 Pledge Agreement by and between an Executive
Officer of Legg Mason, Inc. as Pledgor, and Legg
Mason, Inc. as Pledgee, dated as of August 29,
1996 (incorporated by reference to Form 10-Q for
the quarter ended December 31, 1996)*
40
<PAGE>
10.15 Executive Stock Purchase and Loan Agreement
between Legg Mason, Inc. and an Executive Officer
of Legg Mason, Inc., dated as of December 8, 1998
(incorporated by reference to Form 10-Q for the
quarter ended December 31, 1998)*
10.16 Restricted Stock Agreement between Legg Mason,
Inc. and an Executive Officer of Legg Mason,
Inc., dated as of December 8, 1998 (incorporated
by reference to Form 10-Q for the quarter ended
December 31, 1998)*
10.17 Promissory Note of Executive Officer of Legg
Mason, Inc., dated as December 8, 1998
(incorporated by reference to Form 10-Q for the
quarter ended December 31, 1998)*
10.18 Pledge Agreement by and between Legg Mason, Inc.
and an Executive Officer of Legg Mason, Inc.,
dated as of December 8, 1998 (incorporated by
reference to Form 10-Q for the quarter ended
December 31, 1998)*
21. Subsidiaries of the Company, filed herewith
23. Consent of independent accountants, filed
herewith
27. Financial data schedule, filed herewith
- ---------------
*These exhibits are management contracts or compensatory plans or
arrangements.
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 1999.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LEGG MASON, INC.
By: /s/ Raymond A. Mason
_________________________________
Raymond A. Mason, Chairman of the
the Board, President and
Chief Executive Officer
Date: June 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Raymond A. Mason
__________________________ Chairman of the Board, June 28, 1999
Raymond A. Mason President and Chief
Executive Officer
(Principal Executive Officer)
/s/ Timothy C. Scheve
__________________________ Executive Vice President June 28, 1999
Timothy C. Scheve (Principal Financial Officer)
/s/ Charles J. Daley, Jr.
__________________________ Principal Accounting Officer June 28, 1999
Charles J. Daley, Jr.
/s/ James W. Brinkley
__________________________ Director June 28, 1999
James W. Brinkley
/s/ Edmund J. Cashman, Jr.
__________________________ Director June 28, 1999
Edmund J. Cashman, Jr.
/s/ Charles A. Bacigalupo
__________________________ Director June 28, 1999
Charles A. Bacigalupo
42
<PAGE>
/s/ Harry M. Ford, Jr.
__________________________ Director June 28, 1999
Harry M. Ford, Jr.
/s/ Nicholas J. St. George
__________________________ Director June 28, 1999
Nicholas J. St. George
/s/ Richard J. Himelfarb
__________________________ Director June 28, 1999
Richard J. Himelfarb
/s/ James E. Ukrop
__________________________ Director June 28, 1999
James E. Ukrop
/s/ Harold L. Adams
__________________________ Director June 28, 1999
Harold L. Adams
/s/ John E. Koerner, III
__________________________ Director June 28, 1999
John E. Koerner, III
/s/ Roger W. Schipke
__________________________ Director June 28, 1999
Roger W. Schipke
/s/ W. Curtis Livingston
__________________________ Director June 28, 1999
W. Curtis Livingston
/s/ Edward I. O'Brien
__________________________ Director June 28, 1999
Edward I. O'Brien
/s/ Peter F. O'Malley
__________________________ Director June 28, 1999
Peter F. O'Malley
43
<PAGE>
/s/ Margaret DeB. Tutwiler
__________________________ Director June 28, 1999
Margaret DeB. Tutwiler
/s/ William Wirth
__________________________ Director June 28, 1999
William Wirth
44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
--------
Our report on the consolidated financial statements of Legg Mason, Inc.
and Subsidiaries is included on page 26 in this Form 10-K. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedules listed in the index on page 39 of this form 10-K.
In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ PRICEWATERHOUSECOOPERS LLP
--------------------------
Baltimore, Maryland
June 2, 1999
S-1
<PAGE>
SCHEDULE I
LEGG MASON, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31,
-----------------------------------------
1998 1999
-------------- --------------
<S><C>
ASSETS
Cash and cash equivalents $ 95,314 $ 77,161
Resale agreements 42,623 73,016
Investment securities 11,171 4,070
Investments in and advances
to subsidiaries 452,851 496,759
Other 4,000 15,758
-------------- --------------
$ 605,959 $ 666,764
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Dividends payable $ 3,025 $ 3,660
Other 3,211 9,251
Senior notes 99,628 99,676
-------------- --------------
105,864 112,587
-------------- --------------
STOCKHOLDERS' EQUITY
Common stock, par value $.10;
authorized 100,000,000 shares;
issued 27,524,880 in 1998
and 56,376,253 in 1999 2,753 5,638
Additional paid-in capital 203,133 215,387
Deferred compensation and employee note
receivable - (5,362)
Employee stock trust - (18,475)
Appreciation of employee stock trust, net - (11,470)
Retained earnings 293,263 368,632
Net unrealized appreciation
on investment securities 946 (173)
-------------- --------------
500,095 554,177
-------------- --------------
$ 605,959 $ 666,764
============== ==============
</TABLE>
See notes to financial statements.
S-2
<PAGE>
SCHEDULE I
LEGG MASON, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF EARNINGS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------------------------
1997 1998 1999
-------------- --------------- --------------
<S><C>
REVENUE
Interest income $ 13,082 $ 14,962 $ 14,916
Other - 249 1,200
-------------- --------------- --------------
13,082 15,211 16,116
EXPENSE
Interest expense 8,076 7,781 7,671
Operating expenses 1,423 2,788 9,110
-------------- --------------- --------------
9,499 10,569 16,781
-------------- --------------- --------------
Earnings before income taxes and
equity in net earnings of
subsidiaries 3,583 4,642 (665)
Federal and state income taxes 1,434 1,859 (1,493)
-------------- --------------- --------------
Earnings before equity in net
earnings of subsidiaries 2,149 2,783 828
Equity in net earnings of
subsidiaries 55,043 73,338 88,506
-------------- --------------- --------------
Net earnings $ 57,192 $ 76,121 $ 89,334
-------------- --------------- --------------
Other comprehensive income:
Unrealized holding gain (loss) on
investment securities (100) 1,209 (1,790)
Income tax related to other
comprehensive income 23 (496) 671
-------------- --------------- --------------
Other comprehensive income (77) 713 (1,119)
-------------- --------------- --------------
Comprehensive income $ 57,115 $ 76,834 $ 88,215
============== =============== ==============
</TABLE>
See notes to financial statements.
S-3
<PAGE>
SCHEDULE I
LEGG MASON, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 57,192 $ 76,121 $ 89,334
Equity in earnings of subsidiaries (55,043) (73,338) (88,506)
Depreciation and amortization - - 269
(Increase) decrease in assets 1,202 (1,264) (11,710)
Increase (decrease) in liabilities (1,609) 2,231 6,035
--------------- --------------- ---------------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 1,742 3,750 (4,578)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in resale agreements (14,388) 31,178 (30,393)
Purchase of investment securities (168,510) (127,737) (25,544)
Proceeds from sales and maturities of investment
securities 195,166 171,339 31,521
Investments in and advances to subsidiaries 17,705 (21,354) 14,653
--------------- --------------- ---------------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 29,973 53,426 (9,763)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of subordinated liabilities (29) - -
Issuance of common stock 4,976 9,777 9,508
Dividends paid (8,412) (10,197) (13,320)
--------------- --------------- ---------------
CASH USED FOR FINANCING ACTIVITIES (3,465) (420) (3,812)
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 28,250 56,756 (18,153)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,308 38,558 95,314
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 38,558 $ 95,314 $ 77,161
=============== =============== ===============
</TABLE>
Interest payments were $9,406 in 1997, $7,481 in 1998 and $7,371 in 1999. No
income tax payments were made by Legg Mason, Inc. in 1997, 1998 or 1999.
See notes to financial statements.
S-4
<PAGE>
LEGG MASON, INC.
(PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
BASIS OF PRESENTATION
The Parent Company Only financial statements include the accounts of
Legg Mason, Inc. In addition, all the assets and liabilities of its wholly-owned
subsidiaries are presented in Investments in and advances to subsidiaries.
The Notes to the Consolidated Financial Statements of Legg Mason, Inc.
and Subsidiaries included in Item 8 of this Report include disclosures with
respect to the Parent Company Only.
TRANSACTIONS WITH AFFILIATES
Parent Company interest income for 1997, 1998 and 1999 includes $4,509,
$3,993 and $3,367, respectively, arising from a promissory note between the
Parent Company and an investment advisory subsidiary of the Company. The note,
$39,812 at March 31, 1998 and $28,519 at March 31, 1999, is included in
Investments in and advances to subsidiaries.
In addition, interest income for 1997, 1998 and 1999 includes $363,
$1,576 and $2,865, respectively, principally arising from senior subordinated
loans to a broker-dealer subsidiary of the Company. The indebtedness, $40,000 at
March 31, 1998 and $35,000 at March 31, 1999, is included in Investments in and
advances to subsidiaries.
All income tax payments are paid by Legg Mason Wood Walker, Inc., a
wholly-owned subsidiary.
EMPLOYEE STOCK TRUST
In July 1998, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue 97-14, "Accounting for Deferred Compensation Where
Amounts Earned Are Held in a Rabbi Trust and Invested" ("EITF 97-14"). Under
EITF 97-14, assets of the Trust must be consolidated with those of the employer,
and the value of the employer's stock held in the rabbi trust must be classified
in stockholders' equity and generally accounted for in a manner similar to
treasury stock. In certain situations, the corresponding deferred compensation
liability must be recorded at the fair market value of the shares held in the
rabbi trust and the changes in the fair market value of the deferred
compensation liability after September 30, 1998 must be recognized in earnings.
A subsidiary of the Company adopted EITF 97-14 as of September 30, 1998. The
shares of the Parent Company's stock (1,423,619 at March 31, 1999) are shown in
stockholders' equity similar to treasury stock, at cost, and the deferred
compensation obligation is recorded in liabilities at the fair market value of
the stock held in trust. The difference between the cost and fair market value
through September 30, 1998, has been presented as a separate component of
stockholders' equity. In accordance with EITF 97-14, for the fiscal year ended
March 31, 1999, the subsidiary of the Company recorded a non-cash charge to
earnings of $10,352 which is included in equity in net earnings of subsidiaries.
The subsidiary of the Company has amended the plan so that subsequent to
the first quarter of fiscal 2000, changes in the value of the stock held by the
plan will no longer affect the Company's earnings and stockholders' equity will
be substantially restored.
S-5
LEGG MASON WOOD WALKER, INCORPORATED
DEFERRED COMPENSATION/PHANTOM STOCK PLAN
(JUNE, 1999 AMENDING RESTATEMENT)
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I GENERAL ........................................................1
1.1 Purpose of Plan ...........................................1
1.2 Nature of Plan ............................................1
ARTICLE II DEFINITIONS ....................................................1
2.1 Definitions ...............................................1
ARTICLE III ELIGIBILITY AND PARTICIPATION ..................................4
3.1 Requirements ..............................................4
3.2 Enrollment and Participation ..............................4
3.3 Change of Employment Category .............................4
3.4 Leaves of Absence .........................................4
3.5 Termination of Employment .................................4
3.6 Failure to Participate on Entry Date ......................5
3.7 Inactive Participation.....................................5
ARTICLE IV DEFERRAL ELECTIONS .............................................5
4.1 General ...................................................5
4.2 Timing of Elections .......................................5
4.3 Irrevocability of Elections ...............................6
4.4 Financial Hardship ........................................6
ARTICLE V CONTRIBUTIONS ..................................................6
5.1 Nature of Contributions ...................................6
5.2 Compensation Deferral Contributions .......................6
ARTICLE VI PARTICIPANT ACCOUNTS ...........................................7
6.1 Account Established for Each Participant ..................7
6.2 No Funding Requirement ....................................7
6.3 Value Adjustments .........................................8
i
<PAGE>
ARTICLE VII ENTITLEMENT TO BENEFITS ........................................9
7.1 Termination of Employment ................................10
7.2 Death ....................................................10
ARTICLE VIII DISTRIBUTION OF BENEFITS ......................................10
8.1 Benefits During Lifetime .................................10
8.2 Death Benefits ...........................................10
8.3 Payment Option Elections .................................11
8.4 Mode of Distribution .....................................11
8.5 Deductions ...............................................12
8.6 Payment to Minor or Incompetent ..........................12
8.7 Qualified Domestic Relations Order .......................12
8.8 Location of Participants and Beneficiaries ...............12
ARTICLE IX ADMINISTRATION ................................................12
9.1 Administrative Authority .................................12
9.2 Company Administration ...................................13
9.3 Administrative Committee .................................14
ARTICLE X AMENDMENT AND TERMINATION .....................................15
10.1 Right to Amend ...........................................15
10.2 Amendment Required by Federal Law ........................15
10.3 Right to Terminate .......................................15
10.4 Cessation of Business ....................................15
10.5 Successor to Company .....................................15
10.6 Change in Control or Cessation of Public Trading .........16
10.7 Termination of 401(k) Plan ...............................16
10.8 Preservation of Rights ...................................16
10.9 Effect of Termination ....................................16
ARTICLE XI MULTIPLE-EMPLOYER PROVISIONS ..................................16
11.1 Adoption by Other Employers ..............................17
11.2 Separate Plans ...........................................17
11.3 Participation ............................................17
11.4 Combined Service .........................................17
11.5 Administration ...........................................17
11.6 Amendment ................................................17
11.7 Termination ..............................................17
ii
<PAGE>
ARTICLE XII MISCELLANEOUS .................................................18
12.1 Limitations on Liability of Company ......................18
12.2 Construction .............................................18
12.3 Spendthrift Provision ....................................18
iii
<PAGE>
LEGG MASON WOOD WALKER, INCORPORATED
DEFERRED COMPENSATION/PHANTOM STOCK PLAN
(JUNE, 1999 AMENDING RESTATEMENT)
THIS AMENDING RESTATEMENT OF PLAN is adopted by LEGG MASON
WOOD WALKER, INCORPORATED under the terms and conditions hereinafter set forth.
R E C I T A L S
LEGG MASON WOOD WALKER, INCORPORATED has adopted a
deferred compensation/phantom stock plan for the benefit of
certain of its employees and has been operating thereunder
since the effective date of February 1, 1988. The purpose of
this amending restatement is to incorporate certain amendments
to the Plan approved by the Executive Committee of the Board
of Directors of the Company on June 3, 1999.
ARTICLE I
GENERAL
1.1 PURPOSE OF PLAN - The Plan is established to provide
supplemental retirement income benefits to those executives who, by virtue of
statutory restrictions within the Internal Revenue Code, are prevented from
fully participating in the Legg Mason Profit Sharing Plan and Trust.
1.2 NATURE OF PLAN - The Plan is intended to be a
non-qualified, unfunded plan maintained to provide deferred compensation to a
select group of management and/or highly compensated employees, and is not
intended to be subject to ERISA (other than Title 1, Subtitle B, Part I,
Reporting and Disclosure).
ARTICLE II
DEFINITIONS
2.1 DEFINITIONS - The following terms, as used herein, unless
a different meaning is implied by the context, shall have the following
meanings:
ACCOUNT - The account established for each
Participant pursuant to
1
<PAGE>
Section 6.1.
ADMINISTRATOR - The person, group or entity
designated in accordance with the provisions of ARTICLE IX to administer and
operate the Plan.
BENEFICIARY - Any person or persons so designated in
accordance with the provisions of Section 8.2.
CHANGE IN CONTROL - The happening of any of the
following events (a "Change Event"): (i) the approval by shareholders of LMI of
an agreement to merge or consolidate LMI with or into another corporation (with
LMI not surviving), or to sell or otherwise dispose of all or substantially all
of the assets of LMI, (ii) the approval by shareholders of the Company of an
agreement to merge or consolidate the Company with or into another corporation
(with the Company not surviving), or to sell or otherwise dispose of all or
substantially all of the assets of the Company, (iii) a determination by the
Board of Directors of LMI that, in connection with any proposed tender or
exchange offer for voting securities of LMI, any person has become the direct or
indirect beneficial owner of securities representing 40% or more of the combined
voting power of LMI's then outstanding securities; provided, however, that: (A)
a Change in Control shall be deemed not to have occurred for purposes of this
Plan if, not later than five business days after a Change Event described in
clause (i) or (ii) of this definition, that Change Event is designated by the
affirmative vote of 75% or more of the directors who were members of LMI's Board
of Directors immediately prior to the Change Event as not constituting a Change
in Control for purposes of the Plan; and (B) if a Change Event described in
clause (i) or (ii) of this definition occurs with respect to a portion of the
Company, the Change in Control, if any, shall be deemed to have occurred only
with respect to the employees transferred in connection therewith.
COMPANY - LEGG MASON WOOD WALKER, INCORPORATED, a
corporation duly organized and existing under the laws of the State of Maryland,
and its successors and assigns, unless otherwise herein provided, or any other
business organization which, as hereinafter provided, shall assume the
obligations hereunder, or which shall agree to become a party to the Plan.
COMPENSATION - A Participant's compensation as
defined under the 401(k) Plan for the purpose of calculating the Participant's
elective pre-tax deferrals thereunder.
COMPENSATION DEFERRAL AGREEMENT - The written
agreement whereby an Employee or Participant elects to commence or resume
participation in the Plan and to defer Compensation pursuant to the terms of the
Plan.
COMPENSATION DEFERRAL AMENDMENT - A special form of
Compensation Deferral Agreement whereby a Participant changes a previously-made
election.
COVERED EMPLOYEE - Any Employee who is a participant
in the 401(k)
2
<PAGE>
Plan and who is determined by the Company, in its sole and absolute discretion,
to be a member of "a select group of management or highly compensated employees"
within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA.
EFFECTIVE DATE - The effective date of the Plan,
which shall be February 1, 1988.
EMPLOYEE - Any person employed by the Company.
ENTRY DATE - The last day in each Plan Year, and,
with respect to any Employee, the earlier of: (i) 45 days after the date on
which the Company notifies him of his eligibility to participate in the Plan, or
(ii) the day, during such 45 day period, on which he files a completed
Compensation Deferral Agreement with the Company.
ERISA - The Employee Retirement Income Security Act
of 1974, or any provision or section thereof herein specifically referred to, as
such Act, provision or section may from time to time be amended or replaced.
401(K) PLAN - The Legg Mason Profit Sharing Plan and
Trust (as amended from time to time), a tax-qualified profit sharing plan
maintained by the Company pursuant to Sections 401(a) and 401(k) of the Internal
Revenue Code.
INTERNAL REVENUE CODE - The Internal Revenue Code of
1986, or any provision or section thereof herein specifically referred to, as
such Code, provision or section may from time to time be amended or replaced.
LMI - Legg Mason, Inc.
PARTICIPANT - Any person so designated in accordance
with the provisions of ARTICLE III, including, where appropriate according to
the context of the Plan, any former Employee in whose name an Account (with an
undistributed balance) exists under the Plan.
PAYMENT OPTION ELECTION - A written election, on a
form provided or approved by the Company, whereby a Participant elects the form
and/or timing of the distribution of his Account.
PLAN - The plan set forth herein, as amended from
time to time.
PLAN YEAR - A twelve month period coincident with the
plan year of the 401(k) Plan (which, as of the Effective Date, ends on the last
day of the month of December).
PUBLICLY TRADED - Traded on the New York Stock
Exchange, the American Stock Exchange or NASDAQ.
3
<PAGE>
SPONSOR - Legg Mason Wood Walker, Incorporated, and
its successors and assigns.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.1 REQUIREMENTS - On or after the Effective Date, every
Covered Employee shall be eligible to become a Participant on the first Entry
Date occurring after the date he has met each of the following requirements:
3.1.1 He has been, or in the judgment of the Company
will be, prevented from maximizing elective deferrals to the 401(k) Plan by
reason of the annual limit on elective deferrals imposed by Section 402(g) of
the Internal Revenue Code; and
3.1.2 He is individually approved by the Company, in
its sole and absolute discretion, for participation in the Plan.
3.2 ENROLLMENT AND PARTICIPATION - Participation in the Plan
is voluntary. Each Covered Employee may elect to participate in the Plan as of
the Entry Date on which he becomes eligible in accordance with Section 3.1. The
election to commence or resume participation shall be made by, and only by,
completing and delivering to the Company a Compensation Deferral Agreement on or
before the Entry Date.
Subject to the right of the Company to terminate the
participation of any Participant at any time (except as provided in Section
3.7), once an Employee has become a Participant his participation in the Plan
shall continue (without regard to whether or not a Compensation Deferral
Agreement is in effect) throughout his tenure as an Employee.
3.3 CHANGE OF EMPLOYMENT CATEGORY - During any period in which
a Participant remains in the employ of the Company but ceases to be a Covered
Employee, he will continue his Plan participation, but his Account shall not be
credited with, nor shall he be entitled to make, any contributions based upon
Compensation payable with respect to such period.
3.4 LEAVES OF ABSENCE - During any authorized absence from
active service under conditions which are not treated by the Company as a
termination of employment, the Employee shall remain as a Participant to the
same extent as if he had not taken the leave of absence.
3.5 TERMINATION OF EMPLOYMENT - Upon termination of a
Participant's employment, his participation in the Plan shall terminate (except
as provided in Section 3.7). If
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an Employee (whether or not a Participant) whose employment is terminated is
subsequently re-employed, he shall be treated as a new Employee who shall be
eligible to become a Participant only after again meeting the requirements of
Section 3.1 and filing a new Compensation Deferral Agreement pursuant to Section
3.2.
3.6 FAILURE TO PARTICIPATE ON ENTRY DATE - In the event that
an Employee who, pursuant to Section 3.1, is eligible to commence or resume
participation on an Entry Date fails to elect to participate as of that Entry
Date, he shall not again be eligible to participate until the next, or any
subsequent, Entry Date (provided he is still then otherwise eligible for
participation). If he does so elect, his participation shall be effective as of
the first Entry Date occurring on or after the date his Compensation Deferral
Agreement is filed with the Company.
3.7 INACTIVE PARTICIPATION - In the event that a Participant's
active participation in the Plan ceases, as described in Section 3.2 or 3.5, he
shall nevertheless be deemed to remain as a Participant for all purposes other
than the crediting of further Section 5.2 contributions to his Account, until
such time as there is no longer an undistributed balance in his Account.
ARTICLE IV
DEFERRAL ELECTIONS
4.1 GENERAL - The election by any Participant to defer
Compensation pursuant to the terms of the Plan shall be made by, and only by,
the filing of a completed Compensation Deferral Agreement (or Compensation
Deferral Amendment) with the Company. Subject to the remainder of this ARTICLE
IV, deferral elections shall be made at the time, in the manner, and subject to
the conditions specified by the Company.
4.2 TIMING OF ELECTIONS - Except as otherwise provided in
Section 4.2.1 or 4.4, the election to defer Compensation for a Plan Year shall
not be effective unless made prior to the first day of the Plan Year.
4.2.1 INITIAL ELECTION - The Compensation Deferral
Agreement constituting the initial deferral election by an Employee who becomes
eligible to commence or resume participation in the Plan, pursuant to Section
3.1 must be filed with the Company on or before the Employee's Entry Date.
Unless the Entry Date coincides with the last day of a Plan Year, the initial
election shall be for the remainder of the current Plan Year.
4.2.2 ELECTIONS FOR SUBSEQUENT PLAN YEARS - A
Participant may make changes in his deferral election (including a revocation of
further deferrals), effective for any Plan Year after his initial Plan Year as a
Participant, by filing a completed Compensation Deferral Amendment prior to the
first day of the subsequent Plan Year. If a Participant fails to
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file a completed Compensation Deferral Amendment prior to a Plan Year, and is
still eligible to defer, he will be deemed to have elected to keep his prior
election in force for that Plan Year.
4.3 IRREVOCABILITY OF ELECTIONS - Except as provided in
Section 4.2.1 or 4.4, any Participant electing to make deferral contributions
must make an irrevocable election for an entire Plan Year. Once a Plan Year has
begun, a deferral election may not be changed or revoked during the Plan Year
(except with respect to deferrals in future Plan Years).
4.4 FINANCIAL HARDSHIP - Notwithstanding the provisions of
Sections 4.2 and 4.3, in the event of a Participant's financial hardship, the
Participant may apply to the Company for permission to reduce or suspend
deferral contributions for the remainder of the Plan Year or any part thereof.
The Company shall have the sole discretion as to the extent (if at all) it shall
grant the Participant's request.
"Financial hardship" shall be defined as financial need
arising as a result of a sudden and unexpected illness or accident of the
Participant or of a dependent (as defined in Section 152(a) of the Internal
Revenue Code) of the Participant, loss of the Participant's property due to
casualty, or other similar extraordinary and unforeseeable circumstances arising
as a result of events beyond the control of the Participant, but only where such
financial need is not and may not be relieved: (i) through reimbursement or
compensation by insurance or otherwise, or (ii) by liquidation of the
Participant's assets, to the extent the liquidation of such assets would not
itself cause severe financial hardship.
ARTICLE V
CONTRIBUTIONS
5.1 NATURE OF CONTRIBUTIONS - Contributions described in this
ARTICLE V shall not represent actual deposits to a separate fund or trust, but
shall be bookkeeping entries in the form of credits to the Accounts of the
Participants on whose behalf the contributions are made.
5.2 COMPENSATION DEFERRAL CONTRIBUTIONS - By so electing in
his Compensation Deferral Agreement, each Participant may elect to defer
Compensation (which would otherwise have been paid to him) in any whole
percentage amount designated by him, provided that such amount is not less than
1%, nor more than 8%, of his Compensation for the Plan Year. In no event,
however, shall any Participant's deferrals for a Plan Year: (i) begin until he
has been prevented from making elective deferrals to the 401(k) Plan by reason
of the annual limit on elective deferrals imposed by Section 402(g) of the
Internal Revenue Code, or (ii) exceed $50,000, and the Company may establish
such procedures with respect to timing and amount of individual deferrals by
each Participant as it deems appropriate to implement these limitations (other
than any procedure which would require or permit the Company to pay to the
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Participant any Compensation previously deferred by the Participant pursuant to
this Section 5.2, whether during the current or any preceding Plan Year).
Pursuant to each Participant's deferral election, the
Company shall reduce the gross amount of the Participant's Compensation. In lieu
of paying the deferred portion of the Participant's Compensation to him as
earned, the Company will credit to the Participant's Account dollar amounts
equal to the deferred Compensation, each such credit to be made as of a date no
later than fifteen (15) business days after the last day of the month during
which the Participant would have been entitled to such Compensation had it been
paid as current Compensation.
Any FICA or other payroll tax which may be imposed on the
Participant with respect to deferral contributions shall, unless otherwise
determined by the Company, be deducted from the non-deferred remainder of the
Participant's remuneration.
ARTICLE VI
PARTICIPANT ACCOUNT
6.1 ACCOUNT ESTABLISHED FOR EACH PARTICIPANT - An individual
Account shall be established on the books of the Company in the name of each
Participant, for the purpose of accounting for contributions credited to, and
benefits paid to or on behalf of, the Participant, and to account for
incremental adjustments pursuant to Section 6.3. Each Account shall be divided
into such sub-accounts, if any, as the Company deems appropriate to properly
implement the provisions of the Plan.
6.2 NO FUNDING REQUIREMENT - The Company shall not be required
to purchase, hold or dispose of any investments with respect to amounts credited
to the Account, its only obligation being to make payments as described in
ARTICLE VIII. Should the Company elect to make contributions to a trust
(hereinafter referred to as the "Trust") to assist the Company in paying the
benefits which may accrue hereunder, the amounts contributed shall be used to
purchase the deemed investments under Section 6.3, subject to application of the
provisions of this Section 6.2 to the actual investments. However, contributions
to the Trust shall not reduce or otherwise affect the Company's liability to pay
benefits under this Plan (which benefits may be paid from the Trust or from the
Company's general assets, in the discretion of the Company), except that the
Company's liability shall be reduced by actual benefit payments from the Trust
(and the Account shall be appropriately adjusted to reflect such payments). If
any such investments, or any contributions to the Trust, are made by the
Company, such investments shall have been made solely for the purpose of aiding
the Company in meeting its obligations under the Plan, and, except for actual
contributions to the Trust, no trust or trust fund is intended. To the extent
that the Company does, in its discretion, purchase or hold any such investments
(other than through contributions to the Trust), the Company will be named sole
owner of all such
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investments and of all rights and privileges conferred by the terms of the
instruments or certificates evidencing such investments. Nothing stated herein
will cause such investments, or the Trust, to form part of the Account, or to be
treated as anything but the general assets of the Company, subject to the claims
of its general creditors, nor will anything stated herein cause such
investments, or the Trust, to represent the vested, secured or preferred
interest of the Participant or his Beneficiaries. The Company shall have the
right at any time to use such investments not held in the Trust in the ordinary
course of its business. Neither the Participant nor any of his Beneficiaries
shall at any time have any interest in the Account or the Trust or in any such
investments, except as a general, unsecured creditor of the Company to the
extent of the deferred compensation arrangement which is the subject of the
Plan.
6.3 VALUE ADJUSTMENTS
6.3.1 For purposes of this Section 6.3, the following
definitions shall be utilized:
COMMON STOCK - the common stock of LMI or
any successor corporation.
CONTRIBUTION CREDIT - a dollar amount equal
to a contribution credit made to the Account of a Participant pursuant to
ARTICLE V.
CREDIT DATE VALUE - the Value of a share of
Common Stock on the fifth business day after the date as of which a Contribution
Credit is made.
DIVIDEND UNIT - the equivalent of that
number of shares of Common Stock obtained by dividing the amount of any dividend
or other distribution paid or made by LMI with respect to a share of Common
Stock (but not including a distribution in Common Stock) by 95% of the Value of
a share of Common Stock on the fifth business day after the payment date of the
dividend or other distribution.
MATURITY VALUE - the value of a share of
Common Stock on the Valuation Date.
SHARE UNIT - the equivalent of one share of
Common Stock.
UNITS - Share Units and Dividend Units,
collectively.
VALUE - the fair market value of a share of
Common Stock, equal to the average of the closing prices on the principal
exchange on which the shares are traded for the five business days preceding the
applicable date, or, if the shares are not then traded on an exchange, as such
value is determined by the Company using any reasonable method of valuation
(including the mean of the high and low quotations of the shares as reported by
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NASDAQ for the applicable date, or, in the absence of any reported sales on such
date, the first preceding date on which there were such sales).
VALUATION DATE - the date as of which a
distribution is due to a Participant or Beneficiary pursuant to ARTICLE VII.
6.3.2 Units (calculated to four decimal places) shall
be credited to the Account of each Participant as follows:
6.3.2.1. As of the date on which any
Contribution Credit is made to the Account, (i) any Contribution Credit up to
$25,000 shall be converted to a number of Share Units equal to the Contribution
Credit divided by 95% of the Credit Date Value and (ii) any Contribution Credit
in excess of $25,000 shall be converted to a number of Share Units equal to the
Contribution Credit divided by 100% of the Credit Date Value.
6.3.2.2. Whenever, prior to the Valuation
Date, LMI shall pay any dividend (other than in Common Stock) upon issued and
outstanding Common Stock, or shall make any distribution (other than in Common
Stock) with respect thereto, there shall be credited to the Account such number
of Dividend Units as shall be allocable to the Units credited to the Account as
of the record date of the dividend or other distribution.
6.3.3 In the event that, prior to the Valuation Date:
(i) the number of outstanding shares of Common Stock shall be changed by reason
of a stock split, combination of shares, recapitalization, stock dividend or
otherwise, or (ii) the Common Stock is converted into or exchanged for other
shares as a result of a merger, consolidation, sale of assets, or other
reorganization or recapitalization, the number of Units then credited or to be
credited to the Account shall be appropriately adjusted so as to reflect such
change (based upon the best estimate of LMI management as to relative values).
6.3.4 The amount of any distribution to be paid to a
Participant or Beneficiary with respect to the Account shall be determined on
the Valuation Date and shall be based upon the Maturity Value of the Units
included in the Account.
6.3.5 Nothing herein contained shall be construed as
conferring upon any Participant or Beneficiary any rights as a stockholder of
LMI or any right to have access to the books and records, financial statements
or other financial information of or relating to the Company or LMI.
ARTICLE VII
ENTITLEMENT TO BENEFITS
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7.1 TERMINATION OF EMPLOYMENT - In the event of a termination
of employment by a Participant for any reason other than his death, then, as of
the fifth business day after the date of his termination of employment, he shall
become entitled to the full amount of his Account, payable according to the
provisions of ARTICLE VIII.
7.2 DEATH - In the event of the death of a Participant prior
to his termination of employment, then, as of the fifth business day after the
date of his death, the full amount of his Account shall become payable,
according to the provisions of ARTICLE VIII, to his designated Beneficiary, upon
submission of proof of death satisfactory to the Company.
ARTICLE VIII
DISTRIBUTION OF BENEFITS
8.1 BENEFITS DURING LIFETIME - In the event that the
Participant's employment with the Company terminates for any reason other than
his death, then, beginning as soon as is administratively practicable after the
fifth business day following termination of employment (but, if the Participant
has so elected in his Payment Option Election, no earlier than the first day of
the calendar year next following termination), the Company will, in accordance
with the Payment Option Election, either (i) distribute an amount equal to the
entire balance of the Account to the Participant in a single lump sum, or (ii)
distribute the first of a series of three annual installment distributions of
the balance of the Account; provided, however, that if the Participant's total
Account balance is less than $10,000, he may not elect option (ii) above.
8.2 DEATH BENEFITS - In the event of the death of a
Participant who has an undistributed balance in his Account:
8.2.1 As soon as is administratively practicable
after the fifth business day following the date of death, the Company will
distribute to the Participant's Beneficiary an amount equal to the balance of
the Account in a single lump sum, or, if the Participant has so indicated in his
Payment Option Election, in the same manner as the Account would have been
distributed to the Participant had he lived.
8.2.2 Each Participant from time to time may
designate any person or persons (who may be named contingently or successively)
to receive such benefits as may be payable under the Plan upon or after his
death, and such designation may be changed from time to time by the Participant
by filing a new designation. Each designation will revoke all prior designations
by the same Participant, shall be in form prescribed by the Company, and will be
effective only when filed in writing with the Company during his lifetime.
8.2.3 In the absence of a valid Beneficiary
designation, or if, at the time any benefit payment is due to a Beneficiary,
there is no living Beneficiary eligible to receive the
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payment, validly named by the Participant, the Company shall distribute any such
benefit payment to the person or persons designated to receive the Employee's
accrued benefit from the 401(k) Plan. In the absence of a valid designation to a
living person under the 401(k) Plan, the Company shall distribute the benefit
payment to the Participant's estate. In determining the existence or identity of
anyone entitled to a benefit payment, the Company may rely conclusively upon
information supplied by the Personal Representative of the Participant's estate.
In the event of a lack of adequate information having been supplied to the
Company, or in the event that any question arises as to the existence or
identity of anyone entitled to receive a benefit payment as aforesaid, or in the
event that a dispute arises with respect to any such payment, or in the event
that a Beneficiary designation conflicts with applicable law, or in the event
the Company is in doubt for any other reason as to the right of any person to
receive a payment as Beneficiary then, notwithstanding the foregoing, the
Company, in its sole discretion, may, in complete discharge, and without
liability for any tax or other consequences which might flow therefrom: (i)
distribute the payment to the Participant's estate, (ii) retain such payment,
without liability for interest, until the rights thereto are determined, or
(iii) deposit the payment into any court of competent jurisdiction.
8.3 PAYMENT OPTION ELECTIONS
8.3.1 GENERAL RULES - Simultaneously with the filing
of his Compensation Deferral Agreement, the Participant shall make an election
to receive the benefits payable hereunder in a lump sum or in periodic
installments. The Participant's election shall be set forth in a Payment Option
Election. Following the filing of his Compensation Deferral Agreement, the
Participant shall have no further right to alter any election set forth in his
Payment Option Election except pursuant to Section 8.3.2, but the Participant
shall have the right to make new elections from time to time (but not more than
once every five years), each on a separate Payment Option Election, provided
that each such new election shall be applicable only to the portion of his
Account attributable to Plan Years beginning after the filing of the new Payment
Option Election, and all pre-existing elections shall remain in effect with
respect to the portions of the Account attributable to the periods for which
such elections were applicable.
8.3.2 SPECIAL RE-ELECTION - Any Participant may
change his Payment Option Election with respect to his Account, whether
attributable to Plan Years beginning prior to or subsequent to the date of
change, by making a special, one-time Payment Option Election, designated by the
Participant and acknowledged by the Administrator as such. To be effective, the
special, one-time Payment Option Election must be made by the Participant
subsequent to the execution date of this June, 1999 Amending Restatement but on
or before June 30, 1999.
8.4 MODE OF DISTRIBUTION - The Company shall make all
distributions in Common Stock (as defined in Section 6.3.1); provided, however,
that the Company may not distribute Common Stock unless and until there exists
an effective registration statement under the Securities Act of 1933, as
amended, covering the shares to be distributed.
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8.5 DEDUCTIONS - Any amounts payable under the Plan shall be
subject to such deductions or withholdings as may be required by law, but shall
not be deemed to be salary or other compensation for the purpose of computing
benefits to which the Participant may be entitled under any retirement plan or
other arrangement of the Company for the benefit of its employees generally.
8.6 PAYMENT TO MINOR OR INCOMPETENT - If any person to whom a
payment is due under the Plan is a minor, or is found by the Company to be
incompetent by reason of physical or mental disability, the Company shall have
the right to cause the payments becoming due to such person to be made to
another for his benefit, without responsibility of the Company to see to the
application of such payments, and such payments will constitute a complete
discharge of the liabilities of the Company with respect thereto.
8.7 QUALIFIED DOMESTIC RELATIONS ORDER - Payments under the
Plan shall not be subject to the provision of any Qualified Domestic Relations
Order (a "QDRO"), as defined by Section 414(p) of the Internal Revenue Code,
applicable to a Participant's benefit under the 401(k) Plan. Any amount which
would be payable under this Plan to an alternate payee if the QDRO were applied
to this Plan shall instead be paid to the Participant, if living, otherwise to
his Beneficiary.
8.8 LOCATION OF PARTICIPANTS AND BENEFICIARIES - Any
communication, statement or notice addressed to a Participant (or Beneficiary)
at his last post office address filed with the Company, or if no such address
was filed with the Company then at his last post office address as shown on the
Company's records, shall be binding on the Participant (or Beneficiary) for all
purposes of the Plan. Except for the sending of a registered letter to the last
known address, the Company shall not be obliged to search for any Participant
(or Beneficiary). If the Company notifies any Participant (or Beneficiary) that
he is entitled to an amount under the Plan and the Participant (or Beneficiary)
fails to claim such amount or make his location known to the Company within
three years, then, except as otherwise required by law, the Company shall have
the right to treat the amount payable as a forfeiture.
ARTICLE IX
ADMINISTRATION
9.1 ADMINISTRATIVE AUTHORITY - Except as otherwise
specifically provided herein, the Company shall have the sole responsibility for
and the sole control of the operation and administration of the Plan, and shall
have the power and authority to take all action and to make all decisions and
interpretations which may be necessary or appropriate in order to administer and
operate the Plan, including, without limiting the generality of the foregoing,
the power, duty and responsibility to: (i) resolve and determine all disputes or
questions arising under the Plan, including the power to determine the rights of
Employees, Participants and
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Beneficiaries, and their respective benefits, and to remedy any ambiguities,
inconsistencies or omissions; (ii) adopt such rules of procedure and regulations
as in its opinion may be necessary for the proper and efficient administration
of the Plan and as are consistent with the Plan; (iii) implement the Plan in
accordance with its terms and such rules and regulations; (iv) notify the
Participants of any amendment or termination of, or of a change in any benefits
available under, the Plan; and (v) prescribe such forms as may be required for
Employees to make elections under, and otherwise participate in, the Plan.
Subject to the power to delegate in the manner described in Section 9.2, the
Company shall act through its Board of Directors.
9.2 COMPANY ADMINISTRATION - The Plan shall be operated and
administered on behalf of the Company by an Administrator. The Administrator
shall be governed by the following:
9.2.1 In the absence of any designation to the
contrary by the Company, the Administrator shall be the Administrative Committee
established pursuant to Section 9.3. Except as the Company shall otherwise
expressly determine, the Administrator shall have full authority to act for the
Company before all persons in any matter directly pertaining to the Plan,
including the exercise of any power or discretion otherwise granted to the
Company pursuant to the terms of the Plan, other than the power to amend or
terminate the Plan, to determine Company contributions, and to affect the
employer-employee relationship between the Company and any Employee, all of
which powers are reserved to the Company unless expressly granted to the
Administrator.
9.2.2 The Administrator may appoint any persons or
firms, or otherwise act to secure specialized advice or assistance, as it deems
necessary or desirable in connection with the administration and operation of
the Plan; the Administrator shall be entitled to rely conclusively upon, and
shall be fully protected in any action or omission taken by it in good faith
reliance upon, the advice or opinion of such firms or persons. The Administrator
shall have the power and authority to delegate from time to time by written
instrument all or any part of its duties, powers or responsibilities under the
Plan, both ministerial and discretionary, as it deems appropriate, to any
person, and in the same manner to revoke any such delegation of duties, powers
or responsibilities. Any action of such person in the exercise of such delegated
duties, powers or responsibilities shall have the same force and effect for all
purposes hereunder as if such action had been taken by the Administrator.
Further, the Administrator may authorize one or more persons to execute any
certificate or document on behalf of the Administrator, in which event any
person notified by the Administrator of such authorization shall be entitled to
accept and conclusively rely upon any such certificate or document executed by
such person as representing action by the Administrator until such third person
shall have been notified of the revocation of such authority. The Administrator
shall not be liable for any act or omission of any person to whom the
Administrator's duties, powers or responsibilities have been delegated, nor
shall any person to whom any duties, powers or responsibilities have been
delegated have any liabilities with respect to any duties, powers or
responsibilities not delegated to him.
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9.2.3 All representatives of the Company, and/or
members of the Administrative Committee, shall use ordinary care and diligence
in the performance of their duties pertaining to the Plan, but no such
individual shall incur any liability: (i) by virtue of any contract, agreement,
bond or other instrument made or executed by him or on his behalf in his
official capacity with respect to the Plan, (ii) for any act or failure to act,
or any mistake or judgment made, in his official capacity with respect to the
Plan, unless resulting from his gross negligence or willful misconduct, or (iii)
for the neglect, omission or wrongdoing of any other person involved with the
Plan. The Company shall indemnify and hold harmless each such individual who is
an Employee from the effects and consequences of his acts, omissions and conduct
in his official capacity with respect to the Plan, except to the extent that
such effects and consequences shall result from his own willful misconduct or
gross negligence. If any matter arises as to which an individual is entitled to
indemnity hereunder, the indemnitee shall give the Company prompt written notice
thereof. The Company, at its own expense, shall then take charge of the
disposition of the asserted liability, including compromise or the conduct of
litigation. The indemnitee may, at his own expense, retain his own counsel and
share in the conduct of any such litigation, but the failure to do so shall not
adversely affect his right to indemnity.
9.2.4 Nothing in the Plan shall be construed so as to
prevent any person involved in administration of the Plan from receiving any
benefit to which he may be entitled as a Participant.
9.2.5 Expenses incurred in the administration and
operation of the Plan (including the functioning of the Administrative
Committee) shall be paid by the Company.
9.3 ADMINISTRATIVE COMMITTEE - The Company shall designate and
appoint a committee, to be known as the Administrative Committee, as
Administrator. Except to the extent that the Company has retained any power or
authority, or allocated duties and responsibilities to another, said Committee
shall have full power and authority to administer and operate the Plan in
accordance with its terms and in particular the authority contained in this
ARTICLE IX, and, in acting pursuant thereto, shall have full power and authority
to deal with all persons in any matter directly connected with the Plan, in
accordance with the following provisions:
9.3.1 The Committee shall consist of one or more
individuals designated by the Company. Subject to his right to resign at any
time, each member of the Committee shall serve (without compensation, unless
otherwise determined by the Company) at the pleasure of the Company, and the
Company may appoint, and may revoke the appointment of, additional members to
serve with the Committee as may be determined to be necessary or desirable from
time to time. Each member of the Committee, by accepting his appointment to the
Committee, shall thereby be deemed to have accepted all of the duties and
responsibilities of such appointment, and to have agreed to the faithful
performance of his duties thereunder.
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9.3.2 The Committee shall adopt such formal
organization and method of operation as it shall deem desirable for the conduct
of its affairs. The Committee shall act as a body, and the individual members of
the Committee shall have no powers and duties as such, except as provided
herein; the Committee shall act by vote of a majority of its members at the time
in office, either at a meeting or in writing without a meeting.
9.3.3 The determination of the Committee on any
matter pertaining to the Plan within the powers and discretion granted to it
shall be final and conclusive on all Participants and all other persons dealing
in any way or capacity with the Plan.
ARTICLE X
AMENDMENT AND TERMINATION
10.1 RIGHT TO AMEND - Subject to Section 10.8, the Company
shall have the right to amend the Plan in writing, at any time, and with respect
to any provisions hereof, and all parties hereto or claiming any interest
hereunder shall be bound thereby.
10.2 AMENDMENT REQUIRED BY FEDERAL LAW - Notwithstanding the
provisions of Section 10.8, the Plan or any Plan may be amended at any time,
retroactively if required, if found necessary in order to conform to the
provisions and requirements of the Internal Revenue Code or ERISA, or any
similar act or any amendments thereto or regulations promulgated thereunder; no
such amendment shall be considered prejudicial to any interest of any Employee
or Participant.
10.3 RIGHT TO TERMINATE - The Company reserves the right, at
any time, to terminate the Plan.
10.4 CESSATION OF BUSINESS - Notwithstanding any other
provision of this Plan to the contrary, in the event the Company ceases to
actively carry on the trade or business in which the Participant was employed
(whether or not such cessation involves a liquidation of the Company's assets),
and if the cessation is not pursuant to a transaction whereby a successor entity
continues the trade or business (including the obligations under the Plan), the
entire value of the Account shall (as soon as possible but in any event prior to
the completion of any liquidation of assets) be distributed in a single lump sum
to the Participant or, in the event the Participant is not then living, to the
Beneficiary designated in accordance with Section 8.2.
10.5 SUCCESSOR TO COMPANY - Subject to Section 10.6, in the
event of the merger, consolidation, sale of all or substantially all the assets,
or reorganization, of the Company:
10.5.1 Provision may be made by which the Plan will
be continued by the
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successor employer, in which case such successor shall be substituted for the
Company under the Plan and Section 7.1 shall not apply to the transaction. The
substitution of the successor shall constitute an assumption of Plan liabilities
by the successor and the successor shall have all of the powers, duties and
responsibilities of the Company under the Plan.
10.5.2 If the action described in Section 10.5.1 has
not been taken within 90 days from the effective date of the transaction, the
Plan shall terminate as of the effective date of the transaction and the Account
balance of each Participant shall be distributed to him in a single lump sum.
10.5.3 In the event of a transaction described in
this Section 10.5 which applies to a portion of the Company, the provisions of
this 10.5 shall apply only to the employees transferred in connection therewith.
10.6 CHANGE IN CONTROL OR CESSATION OF PUBLIC TRADING- If
there is a Termination Vote within 90 days after a Change in Control, or within
90 days after the stock of LMI or any successor ceases to be Publicly Traded,
the Plan shall terminate and the Account balance of each Participant shall be
immediately distributed to him in a single lump sum. A Termination Vote shall
mean the affirmative vote to terminate the Plan by Participants whose Accounts
represent more than 50% of the total value of the Accounts of all of the
individuals who were Participants immediately prior to the Change in Control or
cessation of public trading (based upon values determined in accordance with
ARTICLE VI as of the fifth business day preceding the date of the vote).
10.7 TERMINATION OF 401(K) PLAN - In the event the Company
terminates the 401(k) Plan, this Plan shall be deemed to have simultaneously
terminated, and the provisions of Section 10.9 shall be applicable thereto.
10.8 PRESERVATION OF RIGHTS - Amendment or termination of the
Plan shall not affect the rights of any Participant (or Beneficiary) to payment
of the amount in his Account, to the extent that such amount was payable under
the terms of the Plan prior to the effective date of such amendment or
termination.
10.9 EFFECT OF TERMINATION - Upon termination of the Plan, the
rights of all Participants in their Accounts shall be payable as the Company
shall determine from either of the following alternatives: (i) continued
administration of all Accounts pursuant to the terms of the Plan, with
distributions to each Participant to be made pursuant to ARTICLES VII and VIII,
or (ii) immediate distribution to each Participant of his undistributed Account
balance.
ARTICLE XI
MULTIPLE-EMPLOYER PROVISIONS
16
<PAGE>
11.1 ADOPTION BY OTHER EMPLOYERS - Subject to approval of the
Sponsor, the Plan may be adopted by any other employer. Such adoption and
approval shall be evidenced by the execution of an Adoption Agreement by the
Sponsor and the adopting employer.
11.2 SEPARATE PLANS - It is intended that the provisions of
the Plan shall apply separately to each participating Company, if there be more
than one, and to the Participants of each such participating Company, and,
unless the context otherwise requires, the term "Company" as used throughout the
Plan shall be so construed, to the end that, except as otherwise provided in
this ARTICLE XI, the Plan shall constitute a separate Plan for each
participating Company.
11.3 PARTICIPATION - The participation of any participating
Company in the Plan shall become effective as of the date the Adoption Agreement
is executed and approved as provided in Section 11.1, or on such other date as
may be set forth in said Adoption Agreement. Once participation by a
participating Company has begun, such participation shall continue until
terminated in accordance with the terms of the Plan.
11.4 COMBINED SERVICE - Except as otherwise provided in the
Adoption Agreement, the term "service" or "employment" shall be deemed to refer
equally to service with any participating Company, so that, for any purpose
under the Plan, service with any participating Company shall be deemed to be the
equivalent of service with any other participating Company. A Participant shall
be deemed to have terminated employment only upon the termination of his
employment with all of the participating Companies.
11.5 ADMINISTRATION - The term "Company" as used in ARTICLE
IX, pertaining to administration of the Plan, refers only to the Sponsor, and to
the Administrative Committee appointed by the Sponsor, although any other
participating Company may appoint its own separate committee, or otherwise act,
to administer the Plan with regard to those internal matters peculiar to that
participating Company and which do not conflict with the concept set forth in
this Section 11.5.
11.6 AMENDMENT - The term "Company" as used in ARTICLE X,
pertaining to amendment of the Plan, refers only to the Sponsor, which shall be
vested with the sole power to amend the Plan in any manner, and such amendment
will bind each participating Company and its Participants. However, with the
consent of the Sponsor, any other participating Company shall have the right to
amend the Plan in any manner (otherwise permitted by ARTICLE X) which affects
the Plan only as to that participating Company and, in the sole judgment of the
Sponsor, in no significant way affects the Plan as to any other participating
Company.
11.7 TERMINATION - A participating Company may terminate the
Plan, pursuant to ARTICLE X, at any time. Any such action shall operate only as
to the Participants employed by that participating Company.
17
<PAGE>
ARTICLE XII
MISCELLANEOUS
12.1 LIMITATIONS ON LIABILITY OF COMPANY - Neither the
establishment of the Plan nor any modification thereof, nor the creation of any
Account, nor the payment of any benefits, shall be construed as giving to any
Participant or other person any legal or equitable right against the Company (or
any person connected therewith), except as provided by law or by any Plan
provision. Nothing contained in the Plan, and no action taken pursuant to its
provisions, shall create or be construed to create a fiduciary relationship
between the Company (or any person connected therewith) and any Participant,
Beneficiary or other person. In no event shall the Company (or any person
connected therewith) be liable to any person for the failure of any Participant,
Beneficiary or other person to be entitled to any particular tax consequences
with respect to the Plan or any contribution thereto or distribution therefrom.
12.2 CONSTRUCTION - The Plan is intended to be exempt from
ERISA (other than reporting and disclosure requirements as to which no exemption
is available) and, if any provision of the Plan is subject to more than one
interpretation or construction, such ambiguity shall be resolved in favor of
that interpretation or construction which is consistent with the Plan being so
exempted. In case any provision of the Plan shall be held to be illegal or void,
such illegality or invalidity shall not affect the remaining provisions of the
Plan, but shall be fully severable, and the Plan shall be construed and enforced
as if said illegal or invalid provisions had never been inserted herein. For all
purposes of the Plan, where the context admits, words in the masculine gender
shall include the feminine and neuter genders, the singular shall include the
plural, and the plural shall include the singular. Headings of Articles and
Sections are inserted only for convenience of reference and are not to be
considered in the construction of the Plan. Except to the extent preempted by
the laws of the United States of America, the laws of the state in which the
Company is domiciled shall govern, control and determine all questions arising
with respect to the Plan and the interpretation and validity of its respective
provisions. Participation under the Plan will not give any Participant the right
to be retained in the service of the Company nor any right or claim to any
benefit under the Plan unless such right or claim has specifically accrued
hereunder.
12.3 SPENDTHRIFT PROVISION - No amount payable under the Plan
will, except as otherwise specifically provided by law, be subject in any manner
to anticipation, alienation, attachment, garnishment, sale, transfer, assignment
(either at law or in equity), levy, execution, pledge, encumbrance, charge or
any other legal or equitable process, and any attempt to do so will be void; nor
will any benefit be in any manner liable for or subject to the debts, contracts,
liabilities, engagements or torts of the person entitled thereto. The foregoing
shall not preclude any arrangement for: (i) the withholding of taxes from Plan
benefit payments, (ii) the recovery by the Plan of overpayments of benefits
previously made to a Participant, or (iii) the direct deposit of benefit
payments to an account in a banking institution (if not part of an arrangement
constituting an assignment or alienation).
18
<PAGE>
In the event that any Participant's benefits are
garnished or attached by order of any court, the Company may bring an action for
a declaratory judgment in a court of competent jurisdiction to determine the
proper recipient of the benefits to be paid by the Plan. During the pendency of
said action, any benefits that become payable shall be paid into the court as
they become payable, to be distributed by the court to the recipient it deems
proper at the close of said action.
IN WITNESS WHEREOF, this Amending Restatement is executed
under seal this 3rd day of June, 1999.
LEGG MASON WOOD WALKER, INCORPORATED
By:__________________________(SEAL)
Timothy C. Scheve
Executive Vice President
19
EXHIBIT 21
LIST OF SUBSIDIARIES
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
Legg Mason Wood Walker, Incorporated Maryland
Howard Weil Financial Corporation Louisiana
Howard, Weil, Labouisse, Friedrichs Incorporated (1) Louisiana
Western Asset Management Company California
Legg Mason Real Estate Services, Inc. Pennsylvania
Legg Mason Dorman & Wilson, Inc. (2) Maryland
Legg Mason Merchant Banking, Inc. Maryland
Legg Mason Fund Adviser, Inc. Maryland
Legg Mason Capital Management, Inc. Maryland
Legg Mason Realty Group, Inc. Maryland
Legg Mason Mortgage Capital Corporation Maryland
Legg Mason Trust Company Maryland
LM Financial Partners, Inc. Maryland
Gray, Seifert & Co., Inc. New York
Batterymarch Financial Management, Inc. Maryland
Orchard Financial Services, Inc. Maryland
Bartlett & Co. Ohio
Bartlett Real Estate, Inc. (3) Ohio
Legg Mason Holdings Limited England
and Wales
Western Asset Global Management Limited (4) England
and Wales
Brandywine Asset Management, Inc. Delaware
- ------------------------------
(1) Subsidiary of Howard Weil Financial Corporation
(2) Was merged into Legg Mason Real Estate Services, Inc. on April 1, 1999
(3) Subsidiary of Bartlett & Co.
(4) Subsidiary of Legg Mason Holdings Limited
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
registration statements of Legg Mason, Inc. and Subsidiaries on Form S-8 (File
Nos. 2-87754; 33-20027; 33-28609; 33-45453; 33-48239; 33-55814; 33-61441;
33-61445; 333-08721; 333-45307; 333-59841; 333-61163; and 333-66891) and on Form
S-3 (File Nos. 333-00151 and 333-44475) of our reports dated June 2, 1999, on
our audits of the consolidated financial statements and financial statement
schedule of Legg Mason, Inc. and Subsidiaries as of March 31, 1999 and 1998, and
for each of the three years in the period ended March 31, 1999, which reports
are included in this Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
----------------------------
Baltimore, Maryland
June 28, 1999
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