SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 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.
57,608,555 shares of common stock as of the close of business
on January 31, 2000.
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
LEGG MASON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands of dollars)
December 31, March 31,
1999 1999
(Unaudited)
ASSETS:
<S> <C> <C>
Cash and cash equivalents.................... $ 583,730 $ 208,142
Cash and securities segregated for
regulatory purposes......................... 1,421,657 1,374,255
Resale agreements............................ 85,401 141,016
Receivables:
Customers................................... 1,205,781 921,267
Brokers, dealers and clearing organizations. 173,055 111,526
Other....................................... 64,935 40,944
Securities borrowed.......................... 468,108 308,719
Securities inventory, at market value........ 55,342 143,998
Investment securities, at market value....... 18,852 17,230
Investments of finance subsidiaries.......... 244,212 -
Equipment and leasehold improvements, net.... 62,037 55,807
Intangible assets, net....................... 130,250 56,127
Other........................................ 108,602 94,656
$4,621,962 $3,473,687
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Payables:
Customers.................................. $2,634,830 $2,170,588
Brokers and dealers........................ 8,659 10,430
Securities loaned........................... 508,735 311,818
Short-term borrowings....................... 152,583 49,262
Securities sold, but not yet purchased,
at market value............................ 9,730 11,822
Accrued compensation........................ 140,450 115,480
Deferred compensation trust................. - 48,986
Other....................................... 135,465 101,448
Notes payable of finance subsidiaries....... 245,106 -
Senior notes................................ 99,711 99,676
3,935,269 2,919,510
Stockholders' Equity:
Common stock................................ 5,741 5,638
Additional paid-in capital.................. 236,603 215,387
Deferred compensation and employee note
receivable................................. (5,265) (5,362)
Employee stock trust........................ (26,394) (18,475)
Deferred compensation employee stock trust.. 26,394 (11,470)
Retained earnings........................... 450,283 368,632
Accumulated other comprehensive income, net. (669) (173)
686,693 554,177
$4,621,962 $3,473,687
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 3
<TABLE>
<CAPTION>
LEGG MASON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
(Unaudited)
Three months Nine months
ended December 31, ended December 31,
1999 1998 1999 1998
Revenues:
<S> <C> <C> <C> <C>
Investment advisory and related fees $136,510 $ 95,389 $385,890 $279,110
Commissions......................... 92,555 70,212 248,250 201,129
Principal transactions.............. 30,190 23,169 86,636 67,623
Investment banking.................. 11,772 20,061 47,327 57,240
Interest............................ 60,171 39,243 156,359 119,387
Other............................... 11,531 12,440 34,484 32,371
342,729 260,514 958,946 756,860
Expenses:
Compensation and benefits........... 185,819 146,967 533,513 422,252
Occupancy and equipment rental...... 21,119 16,498 58,415 47,338
Communications...................... 13,646 10,868 39,600 35,461
Floor brokerage and clearing fees... 1,895 1,652 5,796 4,914
Interest............................ 36,565 23,324 93,101 70,929
Non-cash deferred compensation...... - 7,482 (1,063) 7,242
Other............................... 28,002 22,759 71,330 59,908
287,046 229,550 800,692 648,044
Earnings Before Income Taxes.......... 55,683 30,964 158,254 108,816
Income tax provision................ 22,341 12,629 63,770 44,273
Net Earnings ......................... $ 33,342 $ 18,335 $ 94,484 $ 64,543
Earnings per common share:
Basic............................... $ 0.58 $ 0.34 $ 1.67 $ 1.19
Diluted............................. $ 0.55 $ 0.32 $ 1.56 $ 1.12
Weighted average number of common
shares outstanding:
Basic............................... 57,142 54,477 56,453 54,188
Diluted............................. 60,449 57,499 60,315 57,568
Dividends declared per common share... $ 0.08 $ 0.065 $ 0.225 $ 0.185
Book value per common share........... $ 11.96 $ 9.73
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 4
<TABLE>
<CAPTION>
LEGG MASON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(Unaudited)
Nine months
ended December 31,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings..................................... $ 94,484 $ 64,543
Non-cash items included in earnings:
Depreciation and amortization.................. 19,511 15,653
Deferred compensation employee stock trust..... (1,063) 7,242
(Increase) decrease in assets excluding
acquisitions:
Cash and securities segregated for regulatory
purposes...................................... (47,402) (337,832)
Receivable from customers....................... (284,514) (144,923)
Other receivables............................... (75,800) (18,803)
Securities borrowed............................. (159,389) 279,347
Securities inventory............................ 88,656 (45,447)
Other........................................... (10,378) (16,360)
Increase (decrease) in liabilities excluding
acquisitions:
Payable to customers............................ 464,242 548,775
Payable to brokers and dealers.................. (1,771) 2,738
Securities loaned............................... 196,917 (280,960)
Securities sold, but not yet purchased.......... (2,092) (7,486)
Accrued compensation............................ 24,970 9,896
Deferred compensation trust..................... - 933
Other........................................... 10,608 5,532
CASH PROVIDED BY OPERATING ACTIVITIES............. 316,979 82,848
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Equipment and leasehold improvements........... (18,857) (13,385)
Intangible assets.............................. (168) (566)
Acquisitions, net of cash acquired............. (85,179) -
Net decrease (increase) in resale agreements..... 55,615 (55,261)
Purchases of investment securities............... (22,890) (37,510)
Proceeds from sales and maturities
of investment securities....................... 23,244 41,645
CASH USED FOR INVESTING ACTIVITIES................ (48,235) (65,077)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings............ 103,321 41,701
Issuance of common stock......................... 15,433 7,984
Dividends paid................................... (11,910) (9,684)
CASH PROVIDED BY FINANCING ACTIVITIES............. 106,844 40,001
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 375,588 57,772
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.. 208,142 206,245
CASH AND CASH EQUIVALENTS AT END OF PERIOD........ $583,730 $264,017
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 5
<TABLE>
<CAPTION>
LEGG MASON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of dollars)
(Unaudited)
Three months ended Nine months ended
December 31, December 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net earnings.......................... $33,342 $18,335 $94,484 $64,543
Other comprehensive income (loss):
Foreign currency translation
adjustment........................ (954) - (954) -
Net unrealized holding gains (losses)
arising during the period......... (108) 413 667 (1,316)
Deferred income taxes................ 47 (188) (209) 483
Total other comprehensive
income (loss)..................... (1,015) 225 (496) (833)
Comprehensive income.................. $32,327 $18,560 $93,988 $63,710
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 6
LEGG MASON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
December 31, 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 the
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 current year's 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 December 31, 1999, the broker-dealer subsidiaries had
aggregate net capital, as defined, of $261,207 which exceeded required
net capital by $235,443.
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, and has been involved in certain governmental and self
regulatory agency investigations and proceedings. While the ultimate
resolution of these matters cannot be currently determined, in the
opinion of management, after consultation with legal counsel, the
matters 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. This gain represents the change in the fair
market value of the stock held in trust from April 1, 1999 to June 2,
1999.
During the quarter and nine months ended December 31, 1998, the
Company recorded a non-cash charge to earnings of $7,482 and $7,242,
respectively. These charges represent the change in the fair market
value of the stock held in trust from the beginning of the respective
periods to December 31, 1998.
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 Condensed
Consolidated Statements of Financial Condition.
6. Acquisitions:
On October 18, 1999, the Company announced a tender offer to
acquire all of the issued and outstanding share capital of Johnson Fry
Holdings PLC ("Johnson Fry"), a London-based retail fund management
<PAGE> 8
company, for 275 pence per share. The acquisition became effective on
December 6, 1999, when the tender offer was declared wholly
unconditional. At that time, the Company had acquired approximately
80% of the outstanding shares of Johnson Fry. By December 31, 1999,
the Company owned essentially 100% of the outstanding shares.
The acquisition was accounted for as a purchase. Accordingly,
the net assets and results of operations are included in the Company's
consolidated financial statements from the date of acquisition. The
total purchase price was approximately $72,000, including $64,000 of
cash and $8,000 in liabilities, primarily loan notes issued to certain
Johnson Fry shareholders. The excess of the purchase price over the
tangible net assets acquired is being amortized on a straight-line
basis over 20 years.
Johnson Fry has two wholly-owned finance subsidiaries. The
objectives of the finance companies are to raise funds by issuing
secured fixed-rate loan securities, with a minimum maturity of five
years, and to use the proceeds to invest in a portfolio of bonds
issued by various financial institutions which are not generally
available to the public in tranches small enough for the retail
investor. The investments are considered "held to maturity" and are
therefore reflected at their amortized cost.
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 is being accounted for under the
equity method.
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.
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
assets acquired is being amortized on a straight-line basis over 12
years.
<PAGE> 9
The following unaudited pro forma consolidated results are presented
as though the acquisitions of Johnson Fry and Berkshire had occurred
as of the beginning of each period presented, adjusted for
amortization of the excess of cost over the net tangible assets
acquired.
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues $350,073 $272,854 $990,311 $796,165
Net earnings 30,686 17,152 87,191 60,331
Earnings per common share:
Basic $ 0.54 $ 0.31 $ 1.54 $ 1.11
Diluted $ 0.51 $ 0.30 $ 1.45 $ 1.05
</TABLE>
7. 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. Intercompany 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, and 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> 10
<TABLE>
<CAPTION>
Segment financial results are as follows:
Three months ended Nine months ended
December 31, December 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Investment Advisory......... $ 94,817 $ 65,962 $256,807 $193,741
Private Client.............. 207,495 149,377 568,056 442,972
Capital Markets............. 31,408 34,955 108,643 93,234
Other....................... 9,009 10,220 25,440 26,913
$342,729 $260,514 $958,946 $756,860
Earnings before income taxes:
Investment Advisory......... $ 29,468 $ 19,439 $ 84,771 $ 59,225
Private Client.............. 28,786 15,757 66,749 45,477
Capital Markets............. (2,943) 2,008 5,233 9,247
Other....................... 372 (6,240) 1,501 (5,133)
$ 55,683 $ 30,964 $158,254 $108,816
</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> 11
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 third fiscal quarter and the nine months ended December 31,
1999, Legg Mason, Inc. and its subsidiaries (the "Company") reported
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 December 31, 1999 Compared to Quarter Ended December 31,
1998
In the quarter ended December 31, 1999, the Company's net earnings
increased 82% to $33.3 million from $18.3 million in the prior year's
quarter. Revenues rose 32% to $342.7 million from $260.5 million in
the corresponding quarter of the prior year. Basic earnings per share
increased by 71% to $.58 from $.34. Diluted earnings per share
increased by 72% to $.55 from $.32.
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 39th consecutive
quarter to a record $136.5 million, up 43% from $95.4 million a year
ago, primarily as a result of growth in assets under management in
Company-sponsored equity mutual funds. At December 31, 1999, Legg
Mason subsidiaries served as investment advisors to individual and
institutional accounts and mutual funds with an asset value of $104
billion, up 27% from $82 billion at December 31, 1998.
Commissions:
Commission revenues of $92.6 million increased 32% from $70.2 million
in the prior year's quarter as a result of higher sales of non-
affiliated mutual funds, an increased volume of over-the-counter and
<PAGE> 12
listed securities transactions and increased sales of variable
annuities.
Principal transactions:
Principal transaction revenues were $30.2 million, up 30% from $23.2
million in the prior year's quarter as a result of an increased volume
of fixed-income and over-the-counter securities transactions.
Investment banking:
Investment banking revenues of $11.8 million were down 41% from $20.1
million in the corresponding prior year's quarter, reflecting a
decline in corporate banking advisory fees.
Other:
Other revenues declined 7% to $11.5 million from $12.4 million in the
prior year's quarter, primarily as a result of a decrease in gains
recognized on firm investments and a decrease in the volume of loan
originations at the Company's mortgage banking subsidiary, offset in
part by the recognition of equity in the earnings of a 50% owned joint
venture and increased customer activity.
Expenses:
Compensation and benefits:
Compensation and benefits increased 26% to $185.8 million from $147.0
million in the corresponding quarter of the prior year, 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 $21.1 million, up 28% from $16.5
million in the corresponding quarter of the prior year, 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 25% to $13.6 million from $10.9 million in
the corresponding quarter of the prior year as a result of increased
business activity, which gave rise to increased costs for printed
materials, postage, quote services and telephone usage.
Floor brokerage and clearing fees:
Floor brokerage and clearing fees increased slightly to $1.9 million,
reflecting an increase in securities transaction volume.
<PAGE> 13
Non-cash deferred compensation:
In the third fiscal quarter ended December 31, 1998, the Company
incurred a non-cash deferred compensation charge of $7.5 million
related to a change in accounting treatment for a non-qualified
deferred compensation stock plan and related compensation arrangements
in accordance with Emerging Issues Task Force ("EITF") 97-14. There
are no comparable charges in the current period as a result of a
change in the plan, which occurred in June, 1999. See Note 5 of the
Notes to Condensed Consolidated Financial Statements.
Other:
Other expenses increased 23% to $28.0 million from $22.8 million in
the corresponding prior year quarter primarily as a result of an
increase in litigation-related costs, promotional expenses and
additional intangible amortization from acquisitions.
Interest:
Interest revenue increased 54% to $60.2 million from $39.2 million in
the corresponding prior year's quarter because of larger firm
investments (predominantly funds segregated for regulatory purposes)
and increased customer margin account balances and higher average
interest rates.
Interest expense increased 57% to $36.6 million from $23.3 million in
the corresponding quarter of the prior year as a result of larger
interest-bearing customer credit balances and higher average interest
rates.
Income tax provision:
The income tax provision rose 77% to $22.3 million because of an
increase in pre-tax earnings. The effective tax rate decreased to
40.1% for the quarter ended December 31, 1999 from 40.8% for the
comparable prior year period as a result of reduced pre-tax losses of
foreign subsidiaries for which there is no tax benefit.
Nine Months Ended December 31, 1999 Compared to Nine Months Ended
December 31, 1998
The Company's revenues increased 27% to $958.9 million from revenues
of $756.9 million in the corresponding period of the prior year. Net
earnings rose 46% to $94.5 million from $64.5 million in the
corresponding prior year period. Basic earnings per share increased
by 40% to $1.67 from $1.19. Diluted earnings per share increased 39%
to $1.56 from $1.12.
<PAGE> 14
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 38% to $385.9 million
from $279.1 million in the corresponding prior year period,
principally as a result of growth in assets under management in
Company-sponsored equity mutual funds and fee-based brokerage and
fixed-income investment advisory accounts.
Commissions:
Commission revenues of $248.3 million increased 23% from $201.1
million in the corresponding prior year period, reflecting increased
sales of non-affiliated mutual funds, an increased volume of over-the-
counter securities, listed securities, and variable annuity
transactions.
Principal transactions:
Principal transaction revenues were $86.6 million, up 28% from $67.6
million in the corresponding prior year period as a result of an
increased volume of fixed-income and over-the-counter securities
transactions.
Investment banking:
Investment banking revenues declined 17% to $47.3 million from $57.2
million in the corresponding prior year period, reflecting lower
corporate and municipal banking revenues.
Other:
Other revenues increased 6% to $34.5 million from $32.4 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 a decline in commercial banking loan origination fees.
Expenses:
Compensation and benefits:
Compensation and benefits rose 26% to $533.5 million from $422.3
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.
<PAGE> 15
Occupancy and equipment rental:
Occupancy and equipment rental increased 23% to $58.4 million from
$47.3 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 12% to $39.6 million from $35.5 million in
the corresponding prior year period as a result of increased business
activity, which gave rise to increased costs for printed materials,
quote services and telephone usage.
Floor brokerage and clearing fees:
Floor brokerage and clearing fees increased slightly to $5.8 million,
reflecting an increase in securities transaction volume.
Non-cash deferred compensation:
The Company incurred a non-cash deferred compensation gain of $1.1
million in the nine months ended December 31, 1999 and a charge of
$7.2 million in the nine months ended December 31, 1998 related to a
change in accounting treatment for a non-qualified deferred
compensation stock plan and related compensation arrangements in
accordance with EITF 97-14. See Note 5 of the Notes to Condensed
Consolidated Financial Statements.
Other:
Other expenses increased 19% to $71.3 million from $59.9 million in
the prior year primarily as a result of higher litigation-related
expenses and promotional expenses.
Interest:
Interest revenue increased 31% to $156.4 million from $119.4 million
in the comparative prior year period because of larger firm
investments (predominantly funds segregated for regulatory purposes)
and increased customer margin account balances, partially offset by
lower average interest rates.
Interest expense increased 31% to $93.1 million from $70.9 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 44% to $63.8 million because of an
increase in pre-tax earnings. The effective income tax rate decreased
<PAGE> 16
to 40.3% for the nine months ended December 31, 1999 from 40.7% for
the comparable prior year period as a result of reduced pre-tax losses
of foreign subsidiaries for which there is no tax benefit.
Liquidity and Capital Resources
Except for the acquisitions described below, 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 nine months ended December 31, 1999, cash and cash
equivalents increased $375.6 million. Cash flows from operating
activities provided $317.0 million, attributable to net earnings
adjusted for depreciation and amortization, an increase in net
customer payables and decreased levels of proprietary securities
inventories. Cash flows from financing activities provided $106.8
million as a result of increased levels of short-term borrowings by
the Company's mortgage banking affiliates. Investing activities used
$48.2 million, principally as a result of business acquisitions and
purchases of equipment and leasehold improvements, partially offset by
a decrease in the funding of resale agreements. As discussed in Note
6 of Notes to Condensed Consolidated Financial Statements, the Company
completed the acquisition of Johnson Fry Holdings PLC ("Johnson Fry"),
a London-based retail fund management company. The Company acquired
Johnson Fry for approximately $64 million of cash and approximately $8
million of liabilities, principally loan notes issued to certain
Johnson Fry shareholders.
As further discussed in Note 6 of Notes to Condensed Consolidated
Financial Statements, the Company acquired Berkshire Asset Management,
Inc. for $18.0 million. Additionally, the Company acquired a 50%
interest in the trust administration business of Bingham Dana LLP for
$10.0 million.
Year 2000
Through December 31, 1999, the Company incurred approximately $3.5
million to implement and test its Year 2000 remediation plans. A
significant portion of these costs were not incremental costs to the
Company, but rather represented the redeployment of existing
information technology and operations resources, primarily to test the
remediation efforts of the Company's third party vendors. In
accordance with generally accepted accounting principles, Year 2000
expenditures were expensed as incurred.
The Company completed its assessment of all critical and non-critical
systems and has not experienced any material problems in the
conversion to year 2000. The Company does not expect to incur any
material expenditures in the fourth fiscal quarter or beyond.
However, there can be no assurance that the Company will not be
<PAGE> 17
adversely affected by an undiscovered Year 2000 problem, including any
failure of a third party vendor to correct a material Year 2000
problem.
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
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)
impairment of acquired client contracts, (vi) potential restrictions
on the business of, and withdrawal of capital from, certain
subsidiaries of the Company due to net capital requirements, (vii)
potential liability under federal and state securities laws and (viii)
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 December 31, 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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Articles of Incorporation of
the Company, as amended
(incorporated by reference to
Form 10-Q for the quarter ended
September 30, 1996)
3.2 By-laws of the Company as
amended and restated April 25, 1988
(incorporated by reference to the
Company's Annual Report on Form 10-
K for the year ended March 31,
1988)
11. Statement re: computation of
earnings per share
27. Statement re: financial data
schedule
(b) No reports on Form 8-K were filed
during the quarter ended December
31, 1999.
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
LEGG MASON, INC.
(Registrant)
DATE: February 11, 2000 /s/Timothy C. Scheve
Timothy C. Scheve
Executive Vice President
DATE: February 11, 2000 /s/Thomas L. Souders
Thomas L. Souders
Senior Vice President and
Treasurer
<PAGE> 20
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)
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 December 31,
1999 1998
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Weighted average shares
outstanding:
Common stock 57,142 57,142 54,477 54,477
Shares available under
options - 3,260 - 2,975
Issuable upon conversion
of debentures - 47 - 47
Weighted average common
and common equivalent
shares outstanding 57,142 60,449 54,477 57,499
Net earnings $33,342 $33,342 $18,335 $18,335
Interest expense, net,
on debentures - 5 - 4
Net earnings applicable
to common stock $33,342 $33,347 $18,335 $18,339
Per share $ 0.58 $ 0.55 $ 0.34 $ 0.32
</TABLE>
<TABLE>
<CAPTION>
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
For the Nine months ended December 31,
1999 1998
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Weighted average shares
outstanding:
Common stock 56,453 56,453 54,188 54,188
Shares available under
options - 3,473 - 3,333
Shares related to
deferred compensation - 342 - -
Issuable upon conversion
of debentures - 47 - 47
Weighted average common
and common equivalent
shares outstanding 56,453 60,315 54,188 57,568
Net earning $94,484 $94,484 $64,543 $64,543
Adjustment related to
deferred compensation - (638) - -
Interest expense, net,
on debentures - 13 - 13
Net earnings applicable
to common stock $94,484 $93,859 $64,543 $64,556
Per share $ 1.67 $ 1.56 $ 1.19 $ 1.12
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 583,730
<RECEIVABLES> 1,205,781
<SECURITIES-RESALE> 85,401
<SECURITIES-BORROWED> 468,108
<INSTRUMENTS-OWNED> 263,064
<PP&E> 62,037
<TOTAL-ASSETS> 4,621,962
<SHORT-TERM> 152,583
<PAYABLES> 2,634,830
<REPOS-SOLD> 0
<SECURITIES-LOANED> 508,735
<INSTRUMENTS-SOLD> 9,730
<LONG-TERM> 344,817
0
0
<COMMON> 5,741
<OTHER-SE> 680,592
<TOTAL-LIABILITY-AND-EQUITY> 4,621,962
<TRADING-REVENUE> 86,636
<INTEREST-DIVIDENDS> 156,359
<COMMISSIONS> 248,250
<INVESTMENT-BANKING-REVENUES> 47,327
<FEE-REVENUE> 385,890
<INTEREST-EXPENSE> 93,101
<COMPENSATION> 533,513
<INCOME-PRETAX> 158,254
<INCOME-PRE-EXTRAORDINARY> 158,254
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94,484
<EPS-BASIC> 1.67
<EPS-DILUTED> 1.56
</TABLE>
