-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F1gFg9a9A5d+uV9dXUkK6Og3FwhU4ZSh6GV6FOF2iFXTs45bDD5onbXWCiCb0vYR h5OFJrbQ2nKTzoNXSqJS9Q== 0000704051-99-000024.txt : 19991115 0000704051-99-000024.hdr.sgml : 19991115 ACCESSION NUMBER: 0000704051-99-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEGG MASON INC CENTRAL INDEX KEY: 0000704051 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 521200960 STATE OF INCORPORATION: MD FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08529 FILM NUMBER: 99746835 BUSINESS ADDRESS: STREET 1: 100 LIGHT ST CITY: BALTIMORE STATE: MD ZIP: 21202-1476 BUSINESS PHONE: 4105390000 MAIL ADDRESS: STREET 1: 100 LIGHT ST CITY: BALTIMORE STATE: MD ZIP: 21202-1476 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 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. 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements
LEGG MASON, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands of dollars) September 30, March 31, 1999 1999 (Unaudited) 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.
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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 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.
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LEGG MASON, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) (Unaudited) Six months ended September 30, 1999 1998 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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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 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.
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. 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 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. 9 Segment financial results are as follows:
Three months ended Six months ended September 30, September 30, 1999 1998 1999 1998 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
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. 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. 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. 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. 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. 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 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 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 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. 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:
Votes Cast For Withhold 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
The stockholders voted in favor of the approval of the amendment of the Legg Mason, Inc. 1996 Equity Incentive Plan as follows: Votes Cast 44,158,006 For 31,666,207 Against 12,491,799 Abstain 494,465 Non-Vote 7,588,817
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) 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. 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 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 EX-11 2
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 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
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 EX-27 3
BD 1,000 6-MOS MAR-31-2000 SEP-30-1999 333,619 1,083,095 242,254 401,573 13,973 58,215 3,716,336 112,318 2,217,999 0 387,855 28,470 99,699 0 0 5,707 647,175 3,716,336 56,446 96,188 155,695 35,555 249,380 56,536 346,631 102,571 102,571 0 0 61,142 1.09 1.00
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