SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 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 number 1-8529
LEGG MASON, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-1200960
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Light Street - Baltimore, MD 21202
(Address of principal executive offices) (Zip code)
(410) 539-0000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d)of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
57,186,376 shares of common stock as of the close of business
on November 4, 1999.
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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LEGG MASON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands of dollars)
September 30, March 31,
1999 1999
(Unaudited)
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ASSETS:
Cash and cash equivalents.................. $ 333,619 $ 208,142
Cash and securities segregated for
regulatory purposes....................... 1,149,926 1,374,255
Resale agreements.......................... 242,254 141,016
Receivable from customers.................. 1,083,095 921,267
Securities borrowed........................ 401,573 308,719
Securities inventory, at market value...... 126,682 143,998
Investment securities, at market value..... 13,973 17,230
Equipment and leasehold improvements, net.. 58,215 55,807
Intangible assets, net..................... 71,067 56,127
Other...................................... 235,932 247,126
$3,716,336 $3,473,687
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Payable to customers...................... $2,217,999 $2,170,588
Payable to brokers and dealers............ 12,147 10,430
Securities loaned......................... 387,855 311,818
Short-term borrowings..................... 112,318 49,262
Securities sold, but not yet purchased,
at market value.......................... 28,470 11,822
Accrued compensation...................... 113,917 115,480
Deferred compensation trust............... - 48,986
Other..................................... 91,049 101,448
Senior notes.............................. 99,699 99,676
3,063,454 2,919,510
Stockholders' Equity:
Common stock.............................. 5,707 5,638
Additional paid-in capital................ 230,737 215,387
Deferred compensation and employee note
receivable............................... (5,433) (5,362)
Employee stock trust...................... (22,995) (18,475)
Employee deferred compensation stock trust 22,995 (11,470)
Retained earnings......................... 421,525 368,632
Accumulated other comprehensive income,net 346 (173)
652,882 554,177
$3,716,336 $3,473,687
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
LEGG MASON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
(Unaudited)
Three months Six months
ended September 30, ended September 30,
1999 1998 1999 1998
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Revenues:
Investment advisory and related fees $126,347 $ 93,318 $249,380 $183,721
Commissions......................... 73,243 65,956 155,695 130,917
Principal transactions.............. 27,976 22,044 56,446 44,454
Investment banking.................. 13,459 16,244 35,555 37,179
Interest............................ 49,502 39,959 96,188 80,144
Other............................... 11,084 10,082 22,953 19,931
301,611 247,603 616,217 496,346
Expenses:
Compensation and benefits........... 170,497 137,896 346,631 275,045
Occupancy and equipment rental...... 18,336 15,004 37,296 30,840
Communications...................... 13,386 12,589 25,954 24,593
Floor brokerage and clearing fees... 1,900 1,758 3,901 3,262
Interest............................ 28,873 23,377 56,536 47,605
Other............................... 21,424 20,066 43,328 37,149
254,416 210,690 513,646 418,494
Earnings Before Income Tax............ 47,195 36,913 102,571 77,852
Income tax provision................ 18,871 15,069 41,429 31,644
Net Earnings ......................... $ 28,324 $ 21,844 $ 61,142 $ 46,208
Earnings per common share:
Basic............................... $ 0.50 $ 0.39 $ 1.09 $ 0.84
Diluted............................. $ 0.47 $ 0.37 $ 1.00 $ 0.78
Weighted average number of common
shares outstanding:
Basic............................... 56,789 55,438 56,104 55,287
Diluted............................. 60,450 58,861 60,239 58,876
Dividends declared per common share... $ 0.08 $ 0.065 $ 0.145 $ 0.12
Book value per common share........... $ 11.44 $ 9.51
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
LEGG MASON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(Unaudited)
Six months
ended September 30,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings..................................... $ 61,142 $ 46,208
Non-cash items included in earnings:
Depreciation and amortization.................. 12,063 10,288
Employee deferred compensation stock trust..... (1,063) (240)
(Increase) decrease in assets excluding
acquisitions:
Cash and securities segregated for regulatory
purposes...................................... 224,329 (28,014)
Receivable from customers....................... (161,828) (142,515)
Securities borrowed............................. (92,854) 174,289
Securities inventory............................ 17,316 (20,948)
Other........................................... 10,023 (11,302)
Increase (decrease) in liabilities excluding
acquisitions:
Payable to customers............................ 47,411 168,645
Payable to brokers and dealers.................. 1,717 2,868
Securities loaned............................... 76,037 (163,581)
Securities sold, but not yet purchased.......... 16,648 (5,717)
Accrued compensation............................ (1,563) (14,968)
Other........................................... (12,301) (5,183)
CASH PROVIDED BY OPERATING ACTIVITIES............. 197,077 9,830
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Equipment and leasehold improvements........... (11,450) (8,795)
Intangible assets.............................. (235) (418)
Acquisitions, net of cash acquired............. (27,875) -
Net increase in resale agreements................ (101,238) (41,864)
Purchases of investment securities............... (1,687) (24,111)
Proceeds from maturities of investment securities 5,638 22,673
CASH USED FOR INVESTING ACTIVITIES................ (136,847) (52,515)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings............ 63,056 76,442
Issuance of common stock......................... 9,533 5,051
Dividends paid................................... (7,342) (6,062)
CASH PROVIDED BY FINANCING ACTIVITIES............. 65,247 75,431
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 125,477 32,746
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.. 208,142 206,245
CASH AND CASH EQUIVALENTS AT END OF PERIOD........ $333,619 $238,991
See notes to condensed consolidated financial statements.
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<PAGE> 5
<TABLE>
<CAPTION>
LEGG MASON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of dollars)
(Unaudited)
Three months ended Six months ended
September 30, September 30,
1999 1998 1999 1998
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Net earnings.......................... $28,324 $21,844 $61,142 $46,208
Other comprehensive income (loss):
Net unrealized holding gains (losses)
arising during the period......... (295) (905) 775 (1,729)
Deferred income taxes................ 119 349 (256) 671
Total other comprehensive
income (loss)..................... (176) (556) 519 (1,058)
Comprehensive income.................. $28,148 $21,288 $61,661 $45,150
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE> 6
LEGG MASON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
September 30, 1999
(Unaudited)
1. Interim Basis of Reporting:
The accompanying unaudited condensed consolidated financial
statements of Legg Mason, Inc. and its wholly-owned subsidiaries (the
"Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information. The interim
financial statements have been prepared utilizing the interim basis of
reporting and, as such, reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results for the periods
presented. The nature of the Company's business is such that the
results of any interim period are not necessarily indicative of
results for a full year.
The information contained in the interim financial statements
should be read in conjunction with the Company's latest Annual Report
on Form 10-K filed with the Securities and Exchange Commission. Where
appropriate, prior years' financial statements have been reclassified
to conform with the 1999 presentation.
2. Net Capital Requirements:
The Company's broker-dealer subsidiaries are subject to the
Securities and Exchange Commission's Uniform Net Capital Rule. The
Rule provides that equity capital may not be withdrawn or cash
dividends paid if resulting net capital would fall below specified
levels. As of September 30, 1999, the broker-dealer subsidiaries had
aggregate net capital, as defined, of $247,831 which exceeded required
net capital by $224,943.
3. Legal Proceedings:
The Company has been named as a defendant 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.
<PAGE> 7
4. Recent Accounting Development:
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities." In May 1999, the effective date for
implementation was delayed until 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.
5. 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." 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 to account for its Deferred
Compensation Employee Stock Trust Plan ("Plan") effective September
30, 1998.
During the quarter ended June 30, 1999, the Company recorded a
non-cash gain of $1,063, which is included in compensation and benefit
expense. This gain represents the change in the fair market value of
the stock held in trust from April 1, 1999 to June 2, 1999.
On June 2, 1999, the Company amended the Plan to limit
distributions of Plan assets to shares of the Company's common stock.
In accordance with the provisions of EITF 97-14, changes in the value
of the stock held by the Plan subsequent to June 2, 1999 will no
longer affect the Company's earnings. In addition, as a result of the
Plan amendment, the obligation previously recorded as a deferred
compensation liability has been reclassified to stockholders' equity.
Accordingly, the Trust shares and the corresponding liability are
presented as components of stockholders' equity in the Statements of
Financial Condition.
6. Acquisitions:
On September 2, 1999, the Company acquired the assets of
Berkshire Asset Management, Inc. ("Berkshire") for $18,000. Berkshire
provides investment management services for predominantly domestic
equity and fixed-income accounts for high net worth individuals and
institutions. The acquisition was accounted for as a purchase and,
accordingly, the net assets and results of operations are included in
the Company's consolidated financial statements from the date of
acquisition. The excess of the purchase price over the tangible net
<PAGE> 8
assets acquired is being amortized on a straight-line basis over
twelve years.
In addition, on September 30, 1999, the Company entered into a
joint venture with Bingham Dana LLP, a Boston-based law firm, to
acquire a 50% interest in its trust administration business for
$10,000. The investment in this joint venture will be accounted for
under the equity method.
7. Subsequent Event:
On October 18, 1999, the Company announced a tender offer to
acquire all of the issued share capital of Johnson Fry Holdings PLC
("Johnson Fry"), a London-based retail fund management company, for
275 pence per share. Based on the exchange rate on October 18, 1999,
the cost of the acquisition will be approximately $70,000. This
acquisition will be accounted for as a purchase and, accordingly, the
net assets and results of operations will be included in the Company's
consolidated financial statements from the date of acquisition, which
is expected to occur in the third fiscal quarter.
8. 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 Markets when sold through
institutional distribution channels.
Other consists principally of the Company's real estate business
and unallocated corporate revenues and expenses.
<PAGE> 9
Segment financial results are as follows:
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Three months ended Six months ended
September 30, September 30,
1999 1998 1999 1998
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Revenues:
Investment Advisory......... $ 82,520 $ 65,066 $161,983 $127,779
Private Client.............. 178,641 146,879 360,557 293,600
Capital Markets............. 30,921 27,299 77,237 58,281
Other....................... 9,529 8,359 16,440 16,686
$301,611 $247,603 $616,217 $496,346
Earnings before income taxes:
Investment Advisory......... $ 30,162 $ 19,072 $ 55,383 $ 39,364
Private Client.............. 18,314 15,119 37,887 29,726
Capital Markets............. (2,300) 2,038 8,187 7,219
Other....................... 1,019 684 1,114 1,543
$ 47,195 $ 36,913 $102,571 $ 77,852
</TABLE>
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.
<PAGE> 10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
The Company's profitability may vary significantly from period to
period as a result of 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. Accordingly, sustained periods of unfavorable market
conditions may adversely affect profitability.
RESULTS OF OPERATIONS
During its second fiscal quarter and the six months ended September
30, 1999, Legg Mason, Inc. and its subsidiaries (the "Company")
reported substantial growth in revenues, net earnings, and earnings
per share from the corresponding periods in the prior year. The
increase in revenues and net earnings was primarily the result of
growth in fee-based revenues, securities brokerage activities and net
interest profit, partially offset by a decline in investment banking
revenues.
Quarter Ended September 30, 1999 Compared to Quarter Ended September
30, 1998
In the quarter ended September 30, 1999, the Company's net earnings
increased 30% to $28.3 million from $21.8 million in the prior year's
quarter. Revenues rose 22% to $301.6 million from $247.6 million in
the corresponding quarter of the prior year. Basic earnings per share
increased by 28% to $.50 from $.39. Diluted earnings per share
increased by 27% to $.47 from $.37.
Revenues:
The growth in revenues from the corresponding quarter of the prior
year was primarily due to increases in the Company's investment
advisory and securities brokerage activities, offset in part by a
decline in revenues from investment banking activities.
Investment advisory and related fees:
Investment advisory and related fees grew for the 38th consecutive
quarter to a record $126.3 million, up 35% from $93.3 million a year
ago. This increase was primarily the result of growth in assets under
management in Company-sponsored mutual funds. At September 30, 1999,
Legg Mason subsidiaries served as investment advisors to individual
and institutional accounts and mutual funds with an asset value of $95
billion, up 27% from $75 billion at September 30, 1998.
<PAGE> 11
Commissions:
Commission revenues of $73.2 million increased 11% from $66.0 million
in the prior year's quarter as a result of higher sales of variable
annuities, over-the-counter securities and non-affiliated mutual
funds, partially offset by a decline in the volume of listed
securities transactions.
Principal transactions:
Principal transaction revenues were $28.0 million, up 27% from $22.0
million in the prior year's quarter as a result of increased profits
from sales of fixed-income securities.
Investment banking:
Investment banking revenues of $13.5 million were down 17% from $16.2
million in the corresponding prior year quarter, attributable to a
decline in the volume of corporate and municipal finance activity.
Other:
Other revenues increased 10% to $11.1 million from $10.1 million in
the prior year's quarter primarily as a result of an increase in the
volume of loan originations from the Company's mortgage banking
subsidiary and increased customer activity.
Expenses:
Compensation and benefits:
Compensation and benefits increased 24% to $170.5 million from $137.9
million in the corresponding prior year quarter, reflecting higher
sales and profitability-based compensation on increased revenues, as
well as higher fixed compensation costs, primarily attributable to an
increase in the number of employees.
Occupancy and equipment rental:
Occupancy and equipment rental was $18.3 million, up 22% from $15.0
million in the corresponding prior year quarter primarily due to
higher costs resulting from the opening of new branch office
locations, expansion of space at the Company's headquarters and
increased investments in technology.
Communications:
Communications expense rose 6% to $13.4 million from $12.6 million in
the corresponding prior year quarter as a result of increased business
activity, which gave rise to increased costs for quote services and
telephone usage.
<PAGE> 12
Floor brokerage and clearing fees:
Floor brokerage and clearing fees increased 8% to $1.9 million,
reflecting an increase in securities transaction volume.
Other:
Other expenses increased 7% to $21.4 million from $20.1 million in the
corresponding prior year quarter primarily as a result of an increase
in litigation-related expenses.
Interest:
Interest revenue increased 24% to $49.5 million from $40.0 million in
the corresponding prior year quarter because of larger firm
investments (predominantly funds segregated for regulatory purposes)
and customer margin account balances, partially offset by lower
average interest rates.
Interest expense increased 24% to $28.9 million from $23.4 million in
the corresponding prior year quarter as a result of larger interest-
bearing customer credit balances, partially offset by lower average
interest rates.
Income tax provision:
The income tax provision rose 25% to $18.9 million because of an
increase in pre-tax earnings.
Six Months Ended September 30, 1999 Compared to Six Months Ended
September 30, 1998
The Company's revenues were $616.2 million, a 24% increase from
revenues of $496.3 million in the corresponding period of the prior
year. Net earnings rose 32% to $61.1 million from $46.2 million in
the corresponding prior year period. Basic earnings per share
increased by 30% to $1.09 from $.84. Diluted earnings per share
increased 28% to $1.00 from $.78.
Revenues:
The growth in revenues from the corresponding period of the prior year
was primarily due to increases in the Company's investment advisory
and securities brokerage activities.
Investment advisory and related fees:
Investment advisory and related fees increased 36% to $249.4 million
from $183.7 million in the corresponding prior year period,
principally as a result of growth in assets under management in
Company-sponsored mutual funds and fee-based brokerage and fixed-
income investment advisory accounts.
<PAGE> 13
Commissions:
Commission revenues of $155.7 million increased 19% from $130.9
million in the corresponding prior year period, reflecting increased
volume of listed securities transactions and increased sales of
variable annuities and over-the-counter securities.
Principal transactions:
Principal transaction revenues were $56.4 million, up 27% from $44.5
million in the corresponding prior year period as a result of
increased profits from sales of fixed-income securities.
Investment banking:
Investment banking revenues declined 4% to $35.6 million from $37.2
million in the corresponding prior year period, reflecting lower fees
from municipal banking activities.
Other:
Other revenues increased 15% to $23.0 million from $19.9 million in
the corresponding prior year period, due to a gain on the sale of a
merchant banking investment and increased customer activity, partially
offset by losses on firm investments.
Expenses:
Compensation and benefits:
Compensation and benefits rose 26% to $346.6 million from $275.0
million in the corresponding prior year period, reflecting higher
sales and profitability-based compensation on increased revenues, as
well as higher fixed compensation costs, primarily attributable to an
increase in the number of employees.
Occupancy and equipment rental:
Occupancy and equipment rental increased 21% to $37.3 million from
$30.8 million in the corresponding prior year period, as a result of
higher costs resulting from the opening of new branch office
locations, expansion of space at the Company's headquarters and
increased investments in technology.
Communications:
Communications expense rose 6% to $26.0 million from $24.6 million in
the corresponding prior year period as a result of increased business
activity, which gave rise to increased costs for quote services,
printed materials and telephone usage.
<PAGE> 14
Floor brokerage and clearing fees:
Floor brokerage and clearing fees increased 20% to $3.9 million,
reflecting an increase in securities transaction volume.
Other:
Other expenses increased 17% to $43.3 million from $37.1 million in
the prior year primarily as a result of higher litigation-related
expenses and promotional expenses.
Interest:
Interest revenue increased 20% to $96.2 million from $80.1 million in
the comparative prior year period because of larger firm investments
(predominantly funds segregated for regulatory purposes) and customer
margin account balances, partially offset by lower average interest
rates.
Interest expense increased 19% to $56.5 million from $47.6 million in
the comparative prior year period as a result of larger interest-
bearing customer credit balances, partially offset by lower average
interest rates.
Income tax provision:
The income tax provision rose 31% to $41.4 million because of an
increase in pre-tax earnings.
Liquidity and Capital Resources
There has been no material change in the Company's financial position
since March 31, 1999. A substantial portion of the Company's assets
are liquid, consisting mainly of cash and assets readily convertible
into cash. These assets are financed principally by free credit
balances, equity capital, senior notes, bank lines of credit and other
payables.
During the six months ended September 30, 1999, cash and cash
equivalents increased $125.5 million. Cash flows from operating
activities provided $197.1 million, which is attributable to lower
levels of segregated cash and an increase in net earnings adjusted for
depreciation and amortization, partially offset by an increase in net
customer receivables. Cash flows from financing activities provided
$65.2 million as a result of increased levels of short-term borrowings
by the Company's mortgage banking affiliates. Investing activities
used $136.8 million, principally as a result of an increase in the
funding of resale agreements, acquisitions and purchases of equipment
and leasehold improvements. As discussed in Note 6 of Notes to
Condensed Consolidated Financial Statements, the Company acquired
Berkshire Asset Management, Inc. for $18.0 million. Additionally, the
<PAGE> 15
Company acquired a 50% interest in the trust administration business
of Bingham Dana LLP.
As discussed in Note 7 of Notes to Condensed Consolidated Financial
Statements, the Company has made a tender offer to acquire all of the
issued and outstanding share capital of Johnson Fry. If all
shareholders accept the offer, the Company expects the cost of the
acquisition to be approximately (pounds sterling)43 million or $70 million,
which will be funded by the Company's available cash and cash equivalents.
To reduce the economic impact of foreign currency fluctuations on the
purchase price, the Company has purchased approximately 75% of the
pounds sterling necessary to fund the acquisition.
Year 2000
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 and equipment
that require modification, the Company has completed the remediation,
testing and implementation phases of its Year 2000 project plan. 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 completed the necessary coding
modifications and completed its Year 2000 testing in the second
quarter of 1999, as scheduled. The vendor offered additional testing
opportunities, in which the Company participated. The Company has
received similar confirmation of Year 2000 readiness for its
proprietary mutual funds from the vendors that are the principal
service providers to the mutual fund industry.
The Company has received from its critical third party vendors, and
substantially all of its non-critical third party vendors, assurances
or certification of their Year 2000 compliance. The Company is
continuing to communicate with its vendors and other third parties,
including its landlords and utility suppliers, to confirm their
continued Year 2000 compliance.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities
<PAGE> 16
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 of Year 2000
failures. However, there can be no assurance that any such contingency
plans will fully mitigate the effects of any such failure.
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 $3.7
million, of which an estimated $2.6 million has been incurred as of
September 30, 1999. A significant portion of these costs are not
incremental costs to the Company, but rather 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 are expensed as
incurred. The costs of the Company's Year 2000 project 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
The Company has made in this report, and from time to time may
otherwise make in its public filings, press releases and statements by
Company management, "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 concerning the
Company's operations, economic performance and financial condition.
The words or phrases "can be", "expects", "may affect", "may depend",
"believes", "estimate", "project" and similar words and phrases are
intended to identify such forward-looking statements. Such forward-
looking statements are subject to various known and unknown risks and
uncertainties and 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 could differ
materially from those anticipated in such forward-looking statements
due to a number of factors, some of which are beyond the Company's
control, in addition to those discussed elsewhere herein and in the
Company's other public filings, press releases and statements by
Company management, including (i) the volatile and competitive nature
of the securities business, (ii) changes in domestic and foreign
economic and market conditions, (iii) the effect of federal, state and
<PAGE> 17
foreign regulation on the Company's business, (iv) market, credit and
liquidity risks associated with the Company's underwriting, securities
trading, market-making and investment management activities, (v)
failure of the Company, its vendors or other third parties to achieve
Year 2000 compliance, (vi) impairment of acquired client contracts,
(vii) potential restrictions on the business of, and withdrawal of
capital from, certain subsidiaries of the Company due to net capital
requirements, (viii) potential liability under federal and state
securities laws and (ix) the effect of any future acquisitions. Due
to such risks, uncertainties and other factors, the Company cautions
each person receiving such forward-looking information not to place
undue reliance on such statements. All such forward-looking
statements are current only as of the date on which such statements
were made. The Company does not undertake any obligation to publicly
update any forward-looking statement to reflect events or
circumstances after the date on which any such statement is made or to
reflect the occurrence of unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
During the quarter ended September 30, 1999, there were no material
changes to the information contained in Part II, Item 7A of the
Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1999.
<PAGE> 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
Registrant's annual meeting of stockholders was held July 27,
1999. In the election of directors, the six director nominees were
elected with the following votes:
<TABLE>
<CAPTION>
Votes
Cast For Withhold
<S> <C> <C> <C>
Raymond A. Mason 52,241,288 51,203,198 1,038,090
James W. Brinkley 52,241,288 51,251,112 990,176
Nicholas J. St. George 52,241,288 48,503,547 3,737,741
Richard J. Himelfarb 52,241,288 51,308,471 932,817
Roger W. Schipke 52,241,288 51,290,636 950,652
Edward I. O'Brien 52,241,288 51,302,999 938,289
</TABLE>
The stockholders voted in favor of the approval of the amendment
of the Legg Mason, Inc. 1996 Equity Incentive Plan as follows:
<TABLE>
<S> <C>
Votes Cast 44,158,006
For 31,666,207
Against 12,491,799
Abstain 494,465
Non-Vote 7,588,817
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Articles of Incorporation of
the Company, as amended
(incorporated by reference to
Form 10-Q for the quarter ended
September 30, 1996)
3.2 By-laws of the Company as
amended and restated April 25, 1988
(incorporated by reference to the
Company's Annual Report on Form 10-
K for the year ended March 31,
1988)
10. Legg Mason, Inc. 1996 Equity
Incentive Plan, as amended July 27,
1999 (incorporated by reference to
Registration Statement No. 333-
86869 on Form S-8)
<PAGE> 19
11. Statement re: computation of
earnings per share
27. Statement re: financial data
schedule
(b) No reports on Form 8-K were filed
during the quarter ended September
30, 1999.
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
LEGG MASON, INC.
(Registrant)
DATE: November 12, 1999 /s/Timothy C. Scheve
Timothy C. Scheve
Executive Vice President
DATE: November 12, 1999 /s/Thomas L. Souders
Thomas L. Souders
Senior Vice President and
Treasurer
<PAGE> 21
INDEX TO 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)
10. Legg Mason, Inc. 1996 Equity
Incentive Plan, as amended July 27,
1999 (incorporated by reference to
Registration Statement No. 333-
86869 on Form S-8)
11. Statement re: computation of
earnings per share
27. Statement re: financial data
schedule
<TABLE>
<CAPTION>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
For the Three months ended September 30,
1999 1998
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Weighted average shares
outstanding:
Common stock 56,789 56,789 55,438 55,438
Shares available under
options - 3,614 - 3,317
Shares related to
deferred compensation - - - 59
Issuable upon conversion
of debentures - 47 - 47
Weighted average common
and common equivalent
shares outstanding 56,789 60,450 55,438 58,861
Net earnings $28,324 $28,324 $21,844 $21,844
Interest expense, net,
on debentures - 4 - 5
Net earnings applicable
to common stock $28,324 $28,328 $21,844 $21,849
Per share $ 0.50 $ 0.47 $ 0.39 $ 0.37
</TABLE>
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
For the Six months ended September 30,
1999 1998
Basic Diluted Basic Diluted
Weighted average shares
outstanding:
Common stock 56,104 56,104 55,287 55,287
Shares available under
options - 3,574 - 3,506
Shares related to
deferred compensation - 514 - 36
Issuable upon conversion
of debentures - 47 - 47
Weighted average common
and common equivalent
shares outstanding 56,104 60,239 55,287 58,876
Net earnings $61,142 $61,142 $46,208 $46,208
Adjustment related to
deferred compensation - (638) - -
Interest expense, net,
on debentures - 9 - 9
Net earnings applicable
to common stock $61,142 $60,513 $46,208 $46,217
Per share $ 1.09 $ 1.00 $ 0.84 $ 0.78
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> SEP-30-1999
<CASH> 333,619
<RECEIVABLES> 1,083,095
<SECURITIES-RESALE> 242,254
<SECURITIES-BORROWED> 401,573
<INSTRUMENTS-OWNED> 13,973
<PP&E> 58,215
<TOTAL-ASSETS> 3,716,336
<SHORT-TERM> 112,318
<PAYABLES> 2,217,999
<REPOS-SOLD> 0
<SECURITIES-LOANED> 387,855
<INSTRUMENTS-SOLD> 28,470
<LONG-TERM> 99,699
0
0
<COMMON> 5,707
<OTHER-SE> 647,175
<TOTAL-LIABILITY-AND-EQUITY> 3,716,336
<TRADING-REVENUE> 56,446
<INTEREST-DIVIDENDS> 96,188
<COMMISSIONS> 155,695
<INVESTMENT-BANKING-REVENUES> 35,555
<FEE-REVENUE> 249,380
<INTEREST-EXPENSE> 56,536
<COMPENSATION> 346,631
<INCOME-PRETAX> 102,571
<INCOME-PRE-EXTRAORDINARY> 102,571
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,142
<EPS-BASIC> 1.09
<EPS-DILUTED> 1.00
</TABLE>
