FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year 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: 0-26868
Lexington Global Asset Managers, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 22-3395036
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
PARK 80 WEST PLAZA TWO
SADDLE BROOK, NJ 07663
(Address of principal executive offices) (Zip code)
(201) 845-7300
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The number of shares outstanding of the registrant's voting Common Stock
and the aggregate market value of such Common Stock held by non-affiliates on
March 17, 2000 was as follows:
Common Stock-$.01 Par Value Per Share
Authorized 15,000,000 Shares
4,505,038 Shares Outstanding
Aggregate Market Value $18,729,750
PART I
The statements contained in the Annual Report on Form 10-K ("Annual
Report") which are not historical facts, including, but not limited to,
statements found in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements that involve
a number of risks and uncertainties. The actual results of the future events
described in such forward-looking statements in this Annual Report could differ
materially from those stated in such forward-looking statements. Among the
factors that could cause actual results to differ materially are risks and
uncertainties set forth below under the heading Risk Factors and other risks and
uncertainties discussed in this Annual Report and set forth from time to time in
the registrant's other public reports and filings and public statements.
Item 1. Business
HISTORY AND BUSINESS OF LEXINGTON GLOBAL ASSET MANAGERS, INC.
Lexington Global Asset Managers, Inc. (the "Company") was incorporated in
Delaware in September 1995 as a holding company that offers, through its
subsidiaries, a variety of asset management and related services to retail
investors, institutions and private clients.
Prior to the spin-off of the Company on December 13, 1995 (the
"Spin-off"), the Company was a wholly-owned subsidiary of Piedmont Management
Company Inc. ("Piedmont"), a Delaware corporation. Pursuant to the Spin-off,
Piedmont contributed to the Company all of its subsidiaries engaged in the asset
management business and distributed to each Piedmont stockholder one share of
Common Stock of the Company for each share of Piedmont common stock held by such
stockholder. The Spin-off resulted in 100% of the Common Stock of the Company
being distributed to Piedmont stockholders.
On February 29, 2000, the Company announced that it has signed a
definitive agreement for ReliaStar Financial Corp. ("ReliaStar") to acquire the
Company in a stock-and-cash transaction valued at $47.5 million. The definitive
agreement provides for the purchase price to be allocated in terms of one-third
cash and two-thirds in shares of ReliaStar common stock. Completion of the
acquisition is subject to normal closing conditions, including approval by the
Company's shareholders, fund directors and fund shareholders, and various
regulatory approvals. The transaction is expected to close in the third quarter
of 2000. Upon closing of the acquisition, Company shareholders will be entitled
to 0.231 shares of ReliaStar common stock and $3.306 in cash in exchange for
each share of Company common stock they hold, subject to adjustment based on
ReliaStar common stock price and the Company's assets under management. The
Company will become part of a ReliaStar subsidiary, Pilgrim Capital Corporation,
which manages, markets and distributes open- and closed-end mutual funds and
structured finance products.
The acquisition of the Company by ReliaStar will precipitate numerous
actions which will cause the Company to incur additional costs. These include:
1) Change in control provisions contained in the Company's Long Term
Incentive Plan which will accelerate vesting of incentive stock
options and restricted stock;
2) Change in control provisions contained in Employment Agreements with
key executives of the Company which provide for severance payments to
these employees;
3) Severance payment to employees who will be terminated;
4) Payments to third parties including investment bankers, attorneys,
and accountants.
In the aggregate, these costs will substantially reduce shareholders' net
equity as of December 31, 1999.
In addition, the merger agreement between ReliaStar and the Company imposes
numerous restrictions upon the Company including, but not limited to
restrictions on:
1) The declaration or payment any dividends;
2) The acquisition of any corporation, partnership, or other business
organization;
3) The sale or disposition of any of its assets that are material;
4) The incurrence of any indebtedness;
5) The entering into of any new material contract.
The Company can make no assurance that the merger will occur. In the event
the proposed transaction does not occur, the Company could be contingently
liable for termination fees payable to ReliaStar. Depending on the reason for
termination, the Company could be liable for payments to the Buyer of up to
$2.250 million.
The Company manages portfolios of equity, balanced, fixed income, mortgage-
backed and money market investments, which are designed to meet a broad range of
investment objectives.
At December 31, 1999 total assets under management amounted to $3.6
billion, with $1.7 billion in mutual funds, $1.2 billion in institutional
accounts and $0.7 billion in private client accounts. The Company's client base
consists of approximately 126,000 mutual fund shareholder accounts,
approximately 20 institutional accounts, and approximately 780 private client
accounts. The tables below set forth the Company's total assets under management
in each of its three major markets at the dates indicated and the Company's
total assets under management by type of investment.
1
Asset Composition By Market (1)
(Dollars in Thousands)
December 31,
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Mutual Funds $ 1,670,148 $ 1,460,303 $ 1,896,293 $ 1,797,238 $ 1,517,260
Institutional 1,185,021 1,115,762 1,109,339 1,047,244 1,134,080
Private Clients 718,106 594,913 467,072 360,226 428,434
---------------------------------------------------------------------------------
Total $ 3,573,275 $ 3,170,978 $ 3,472,704 $ 3,204,708 $ 3,079,774
=================================================================================
Asset Composition By Type of Investment
(Dollars in Thousands)
(Unaudited)
December 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Domestic Equity $ 1,872,066 $ 1,807,759 $ 1,704,426 $ 1,330,398 $ 1,172,710
Foreign Equity 629,752 363,770 850,274 807,962 699,842
----------------------------------------------------------------------------
Subtotal (2) 2,501,818 2,171,529 2,554,700 2,138,360 1,872,552
Precious Metals (3) 97,998 94,033 118,416 201,295 273,411
Fixed Income 833,363 758,686 634,029 668,841 712,830
Money Market Funds 104,096 146,730 165,559 196,212 220,981
----------------------------------------------------------------------------
Total $ 3,573,275 $ 3,170,978 $ 3,472,704 $ 3,204,708 $ 3,079,774
============================================================================
_________________________
(1) Included in the institutional assets under management are invested assets
of members of the Richardson Family (defined below, see "Risk Factors--
Substantial Stockholders"), principal stockholders of the Company, and
certain other related persons, which assets at December 31, 1999 were
valued at approximately $944 million. The fees charged for the management
of such assets are based upon standard fee schedules and are comparable
with the fees charged to unaffiliated accounts.
(2) Excludes precious metal equities.
(3) Precious Metals includes precious metals and precious metal equities.
The following chart illustrates the structure of the Company as of December 31,
1999.
----------------------------------------
Lexington Global Asset
Managers, Inc.
----------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
100% 100% 65% 51% 55%
- ------------------- ------------------ ------------------- ------------------- --------------------
Lexington Lexington Market Peidmont Lexington
Funds Management Systems Asset Advisors Global Asset
Distributor, Corporation Research L.L.C. Managers
Inc. (LMC) Advisors, Inc. (PAA) (BVI), Ltd.
(LFD) Saddle Brook, (MSR) New York, (LGAM (BVI))
Saddle Brook, New Jersey New York, New York Cayman Islands,
New Jersey New York BVI
- ------------------- ------------------ ------------------- ------------------- --------------------
100%
-------------------
Market
Systems
Research
Inc.
(MSRI)
New York,
New York
-------------------
2
Primary Markets and Strategy for Growth
Markets
The Company's business strategy is targeted at three large market segments:
Mutual Funds--The Company, through its subsidiaries, markets,
promotes, and distributes the Lexington family of 16 mutual funds (the
"Lexington Funds") providing a variety of investment choices for the
retail investor, financial planner and intermediary, and the defined
benefit and defined contribution marketplace, including the rapidly
growing 401(k) market.
Institutional Market--The institutional market for investment
management services includes corporate, government and multi-employee
(Taft Hartley) pension plans, charitable endowments and foundations,
insurance company general accounts and defined contribution and 401(k)
plans. Lexington has secured both domestic and international
assignments, utilizing investments in domestic and foreign equity
securities, precious metal equities, fixed income and its family of
mutual funds.
Private Clients--The Company offers equity, fixed income and
balanced fund alternatives, tailored to the individual investment
objectives of its private clients.
In each of these areas, management's overall objective is to execute
specific business strategies (see following discussions) to profitably maximize
assets under management and provide clients with investment performance that
meets their objectives.
The Company derives its revenues primarily from fees for its investment
advisory services provided to retail investors, institutions and private
clients.
Mutual Funds
Background. The mutual fund industry has expanded rapidly in the last
several years. According to the Investment Company Institute, the trade
association for investment companies, total assets of U.S. mutual funds have
increased from $982 billion at December 31, 1989 to $6.8 trillion at December
31, 1999, an average growth rate of approximately 21% per year.
In the mutual fund industry, mutual funds may be sold to investors with a
sales charge or a commission (a "load" fund) or without a sales charge or a
commission (a "no-load" fund). All of the sixteen Lexington Funds are no-load
funds. Mutual funds may also be either closed-end or open-end. Generally,
closed-end funds raise money from stockholders only once, unlike an open-end
fund which issues and redeems shares of the fund on a continuous basis. In
addition, unlike open-end mutual funds, closed-end funds do not stand ready to
redeem their shares at net asset value. Instead, stockholders wishing to sell
their shares must do so by trading them on a national securities exchange or in
the over-the-counter market, at a price determined by the market, which may be
higher or lower than the fund's net asset value. All of the Company's mutual
funds are open-end funds.
The mutual fund industry is highly competitive and is currently
characterized by a high degree of fragmentation and a large and rapidly
increasing number of product offerings. The Company believes that the mutual
fund industry is becoming similar to the consumer products business, where
marketing strategies, product development, business development, sales expertise
and servicing are increasingly important.
Investment Products and Services. The Company has developed the Lexington
family of 16 mutual funds which are managed, marketed and distributed under the
Lexington name through Lexington Management Corporation and Lexington Funds
Distributor, Inc. The Lexington Funds are designed to provide a variety of
investment options for retail investors, financial planners and intermediaries,
and for the defined benefit and defined contribution marketplace, including the
401(k) market. These funds have been selected for inclusion in various no fee
transaction broker programs, such as the Charles Schwab Mutual Fund OneSource(R)
program.
Each of the Company's global/international equity funds may invest their
assets in any country approved by the fund's Board of Directors provided such
assets are custodied with an eligible custodian under Rule 17f-5 of the
Investment Company Act of 1940, as amended. Currently, Chase Manhattan Bank is
acting as master custodian of assets for each of the Lexington Funds.
Except for the Lexington Goldfund, Inc., which has a significant portion of
its assets under management invested in Australia, Canada and South Africa, the
Lexington Small Cap Asia Growth Fund, which has a significant portion of its
assets under management invested in Asia, and the Lexington Troika Dialog Russia
Fund, which has a significant portion of its assets under management invested in
Russia, the Company believes that, in general, the assets under management in
its global/international and precious metal equities funds are invested in a
geographically diversified manner.
Strategy. The Company's current strategies in the mutual fund market are
to: (i) identify emerging trends in order to develop new investment products;
(ii) strengthen the "brand name" awareness of the Lexington Funds both at the
broker-dealer level and the retail investor level; (iii) broaden its efforts to
offer subadvisory and administration services to other mutual funds; and, (iv)
expand into other distribution channels.
3
The Company believes that with focused market research efforts it can
identify demographic and industry trends relevant to the growth of the mutual
fund business and thereby develop products to meet emerging needs and
opportunities. For example, the Company launched the Lexington Global Technology
Fund, Inc. in December 1999 after the Company's research indicated that
international technology investing was an emerging investment trend.
Furthermore, the Company believes that its smaller relative size in the mutual
fund industry provides it with a competitive advantage by enabling the Company
to capitalize upon trends more quickly than its competitors. As another example,
in 1996, the Company launched the Lexington Troika Dialog Russia Fund, the first
open-end fund in the United States devoted to Russian equities.
To achieve greater "brand name" awareness, the Company has used media
relations consultants to assist in building relationships with the media. The
Company's portfolio managers, analysts and management have appeared in national
print publications as well as on television and radio. This program, combined
with the Company's internal promotion staff that communicates directly with
financial planners, is designed to enhance the "brand name" awareness of
Lexington and its investment products.
The Company continuously markets to insurance companies, financial
planners, consultants, bank trust departments and other financial intermediaries
to sell its subadvisory and fund administration services and secure new
distribution channels for its investment products.
Management believes that the integration of financial products with
targeted services will also allow it to better pursue opportunities in various
markets. For example, the Company has developed funds for the specific purpose
of funding variable annuity and variable life insurance policies issued by
insurance companies. Currently, two such funds are being sold by six insurance
companies.
Institutional Market
Background. The market for institutional clients includes corporate,
government and multi-employee (Taft Hartley) pension plans, charitable
endowments and foundations, insurance company general accounts, and defined
contribution and 401(k) plans. According to the 1999 Money Market Directory of
Pension Funds (including 401(k) plans), the institutional market represented
over $6.4 trillion in total assets under management, including defined benefit
plan assets, endowments and foundations.
The institutional market is extremely competitive with long lead times
between initial contact and acquisition of an account. Institutional investors
increasingly rely upon a competitive review process when selecting investment
advisory firms. The process often includes the assistance of independent
investment consultants, who analyze, rank and recommend advisors as well as
conduct searches for advisors on behalf of clients. Consultants typically
classify firms according to their investment style and place heavy emphasis upon
a demonstrated record of investment performance within a particular style. These
consultants often control access to prospective clients.
Investment Products and Services. The products the Company offers to the
institutional market include investments in domestic and foreign equity
securities, precious metal equities, fixed income securities and a family of
mutual funds to be utilized in a client's pension, defined contribution or
401(k) plan.
The Company, through its subsidiaries, acts as subadvisor under several
variable annuity contracts and variable life insurance policies, including
contracts and policies with London Pacific Life & Annuity Company. The Company
also makes certain of its mutual funds available to selected insurance companies
as funding vehicles for variable annuity contracts and variable life insurance
policies, including Aetna Insurance Company of America, SafeCo Life Insurance
Company, Kemper Investors Life Insurance Company, Transamerica Occidental Life
Insurance Company, Great-West Life & Annuity Insurance Company, and Fortis
Benefits Insurance Company.
Strategy. The Company's strategy in the institutional market is to target
specialized segments such as: (i) Taft Hartley and charitable foundations and
endowments, (ii) public retirement accounts, (iii) insurance company general
accounts and, (iv) broker wrap accounts. In addition, the Company has formed
joint management arrangements with other investment advisory companies which
offer specialized products or services.
By targeting specialized segments, management believes that it can market
directly to these segments and leverage upon the integrated financial products
and services that it offers. The Company believes the strategy will allow better
penetration of the institutional market.
The Company believes that the 401(k) market is of key interest. According
to Pensions and Investments, assets in the 401(k) market, where investment
decisions are made by the individual, will surpass the assets in the private
pension system. The Company is targeting the 401(k) market as a key growth
market by participating in administrative alliances and various discount broker
programs which target the defined contribution and 401(k) market.
The Company has formed joint management arrangements with investment
advisory firms to expand investment product offerings. The Company develops
investment products in consultation with these firms which usually have a
specialization in evaluating and investing in specific market segments such as
convertible securities, specific geographic regions and global fixed income.
These products are subsequently distributed utilizing Lexington's distribution
channels and are jointly managed by the Company and the investment advisory
firm. These joint management arrangements are subject to the approval of the
shareholders
4
of the fund utilizing these services and the annual approval of the Board of
Directors of the fund. Firms with which the Company has developed joint
management arrangements include Crosby Asset Management (US), Inc. (Asia),
Stratos Advisors<184> Inc. (emerging markets), and, Troika Dialog Asset
Management, ZAO (Russia). Each of these firms is a registered investment
advisor.
The Lexington Small Cap Asia Growth Fund has a joint management arrangement
with Crosby Asset Management (US), Inc., a wholly-owned subsidiary of the Crosby
group. The Crosby group is an independent merchant bank in Asia founded in 1984
which provides a variety of financial services including investment management
and corporate finance.
The Lexington Worldwide Emerging Markets Fund, Inc., the Lexington Emerging
Markets Fund, Inc., and the Lexington Global Technology Fund, Inc. have a joint
management arrangement with Stratos Advisors, Inc., which is an affiliate of VZB
Partners, LLC. Stratos specializes in managing assets in emerging markets and
seeks to provide investment management services to institutional investors for
sophisticated individual investors with net worth in excess of $1 million.
The Lexington Troika Dialog Russia Fund, Inc. has a joint management
arrangement with Troika Dialog Asset Management, ZAO, a Russian Closed Joint
Stock Company, established in 1991. Troika Dialog Asset Management, a pioneer in
the development of Russia's securities markets, is a sister company of the
largest brokerage firm in Russia, Troika Dialog.
Private Clients
Background. With the changing demographics of the United States, the aging
of the "baby boomer" generation and the accumulation of assets in retirement
accounts, the private client sector is a growing segment of the investment
advisory industry. The Company believes that the principal needs for private
clients are investment advice and asset management services because these
clients, as they near retirement, have a large amount of accumulated assets and
require sophisticated estate planning advice.
Investment Products and Services. The Company offers equity, fixed income
and balanced fund investment options to its high net worth clients through
portfolios which are tailored to the client's individual investment objectives.
The average account size of the Company's private clients is $920,000. With
approximately 780 private clients, the Company's clients are generally heads of
households in their mid-40s to 60s with a high proportion of their wealth in
liquid assets.
Strategy. The Company's strategies in the private client sector are to: (i)
integrate the products and services offered to these clients by the Company's
various subsidiaries, (ii) design an integrated set of financial products and
services to meet the financial service needs of these individuals and (iii)
excel in customer service through utilization of the most current and
sophisticated investment planning, management and reporting techniques.
The Company offers products and services to its private clients through
LMC's private client group. Currently, marketing of investment products and
services to high net worth prospects is primarily conducted by LMC through
direct sales and referral sales by retail stockbrokers, CPAs and financial
planners.
LMC and LFD
LMC and LFD, both located in Saddle Brook, New Jersey, form the core
business of the Company generating approximately 93% of revenues in 1999. LMC
and its predecessors have been active in the investment management business
since 1938. LMC provides products and services for institutional clients
including corporate, government and Taft Hartley pension plans, charitable
endowments and foundations, insurance company general and separate accounts and
defined contribution and 401(k) plans. The Company's private client business is
also conducted primarily through LMC. LMC targets accounts in this market with
up to $5 million to invest, which accounts typically include wealthy individuals
and smaller institutional accounts, including foundations, not-for-profit
corporations, pension plans and employee benefit plans.
LMC and LFD are responsible for managing, servicing, marketing and
distributing the Lexington Funds to financial intermediaries and the retail
market. The Lexington Funds are designed to provide a variety of investment
options for retail investors, financial planners and intermediaries, and for the
defined benefit and defined contribution marketplace, including the 401(k)
market. The Lexington Funds include equity, balanced, fixed income,
mortgage-backed and money market funds. The geographical orientation of the
Lexington Funds range from domestic to international to global.
Certain funds specialize in specific industries or sectors, such as
precious metals and natural resources, but most are broadly diversified.
Currently, the Lexington Funds have approximately 126,000 shareholders. All of
the Company's funds are no-load funds. Investment advisory services, as well as
management research and statistical services, are provided to each fund by LMC
and LFD. As compensation for such services, the mutual funds pay a fee which is
based upon average net assets under management.
The following table sets forth the assets for each of the five years ended
December 31, 1999 of each of the Lexington Funds and for each fund to which LMC
and LFD provides subadvisory and/or administration services.
5
Fund Assets (1)
(Dollars in Thousands)
December 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Domestic Equity*
Lexington Growth & Income Fund $ 255,665 $ 245,734 $ 228,058 $ 200,231 $ 138,840
Lexington Corporate Leaders Trust Fund 454,661 482,678 476,405 384,990 247,560
London Pacific Corporate Leaders 9,243 8,182 3,506 1,311 -
Lexington Natural Resources Trust 31,753 35,442 65,320 37,896 16,962
Lexington SmallCap Fund, Inc. 7,965 8,165 9,578 8,056 -
---------------------------------------------------------------------------------
Total Domestic Equity $ 759,287 $ 780,201 $ 782,876 $ 632,484 $ 403,362
---------------------------------------------------------------------------------
Fixed Income*
Lexington Money Market Trust $ 97,618 $ 86,494 $ 94,349 $ 97,680 $ 88,961
Lexington GNMA Income Fund, Inc. 376,657 273,063 157,608 133,660 130,735
Lexington Global Income Fund (3) 31,692 36,411 23,569 28,992 10,754
Lexington TaxFree Money Fund, Inc. (4) - - - 26,528 28,203
Lexington Convertible Securities Fund - 10,306 10,350 11,208 11,634
SBL Fund Series K (5) (6) (7) (11) - 13,066 14,445 11,755 5,684
Security Income Fund-Global Aggressive
Bond Series (5) (6) (7) (11) - 4,327 6,269 4,915 4,409
---------------------------------------------------------------------------------
Total Fixed Income $ 505,967 $ 423,667 $ 306,590 $ 314,738 $ 280,380
---------------------------------------------------------------------------------
Global/International Equity*
Lexington Worldwide Emerging Markets Fund,
Inc. (8) $ 153,318 $ 67,732 $ 137,988 $ 256,532 $ 260,423
Lexington Global Corporate Leaders
Fund, Inc. 19,608 17,846 35,088 37,216 53,635
Lexington Emerging Markets Fund, Inc. 38,775 15,357 24,061 21,581 7,840
Lexington International Funds, Inc. 25,291 24,000 19,950 18,891 17,855
Lexington Small Cap Asia Growth Fund, Inc. 13,988 18,209 13,986 25,246 8,900
SBL Fund Series D (5) (6) (7) (10) - - 285,864 246,908 177,935
Parkstone Advantage International Discovery
Fund (7) - - - - 11,649
Security Equity Fund-Global Series (5) (6)
(7) (10) - - 33,834 28,543 21,870
Lexington Global Technology Fund, Inc. (2) 100 - - - -
Lexington Troika Dialog Russia Fund (9) 55,817 19,258 137,649 13,804 -
---------------------------------------------------------------------------------
Total Global/International Equity $ 306,897 $ 162,402 $ 688,420 $ 648,721 $ 560,107
---------------------------------------------------------------------------------
Precious Metal Equity*
Lexington Goldfund, Inc. $ 72,559 $ 50,886 $ 53,945 $ 109,215 $ 136,361
Lexington Strategic Investments Fund,
Inc. (12) - 17,502 20,760 43,702 76,280
Lexington Silver Fund, Inc. 25,438 25,645 43,711 48,378 60,770
---------------------------------------------------------------------------------
Total Precious Metal Equity $ 97,997 $ 94,033 $ 118,416 $ 201,295 $ 273,411
---------------------------------------------------------------------------------
Total Funds $ 1,670,148 $1,460,303 $1,896,293 $1,797,238 $ 1,517,260
=================================================================================
____________________________________________
(1) Each of the funds listed is an open-end fund. Unless otherwise indicated,
each of the funds is a no-load fund.
(2) Fund commenced operations in December 1999.
(3) Fund changed objective from tax-exempt bond fund to global income fund on
January 3, 1995.
(4) Fund liquidated in August 1997.
(5) Fund sponsored by Security Benefit Life Insurance Company.
(6) Fund to which the Company, through its subsidiaries, provides subadvisory
and administration services.
(7) Load fund.
(8) Fund changed objective from growth fund to emerging markets growth fund in
June 1991.
(9) Fund commenced operations in June 1996.
(10) Sub-advisory relationship terminated November 2, 1998.
(11) Sub-advisory relationship terminated January 1, 1999.
(12) Fund merged into Lexington Goldfund, Inc. in June 1999.
* Of each of the Company's four market segments, Domestic Equity, Fixed
Income, Global/International Equity and Precious Metal Equity, invested
assets held by the Richardson Family constituted 32.0%, 20.1%, 28.2% and
0%, respectively, of the total assets under management with respect to each
segment at December 31, 1999.
6
Other Subsidiaries
At December 31, 1999, the Company had 3 subsidiaries in addition to LMC and LFD:
Market Systems Research Advisors, Inc. ("MSR"), Lexington Global Asset Managers
(BVI), Ltd. ("LGAM BVI"), and Piedmont Asset Advisors L.L.C. ("PAA").
MSR, MSRI--New York, New York.
MSR provides professional portfolio management services to investors
through the use of proprietary quantitative price momentum stock selectivity
models. MSR offers investment advisory services to accounts within the Lexington
organization and to other clients. MSR publishes a monthly research report
through a subsidiary company, Market Systems Research, Inc. ("MSRI"), which is
marketed to other investment advisory companies. MSR is owned 65% by the Company
and 35% by Frank A. Peluso, a principal employee who also serves as President
and a Director of the Company.
LGAM (BVI)--Cayman Islands, BVI
The Company owns 55% of LGAM (BVI), an entity formed in 1998. LGAM (BVI)
owns 50% of Troika Dialog Lexington Partners (BVI), Ltd. which is the investment
advisor to the Troika Dialog Lexington Russia Eurasia Opportunity Fund. The
remainder of LGAM (BVI) is owned by certain key employees of the Company.
PAA--New York, New York.
The Company owns 51% of PAA, an entity formed in 1994 which served as a
general partner of a limited investment partnership engaged in the asset
management business. (PAA's activities in the limited partnership were
terminated in the third quarter of 1996.) The remainder of PAA is owned by
R.V.Consultants, Inc. a company which is owned by Messrs. Stuart S. Richardson,
Robert M. DeMichele and Richard M. Hisey, all of whom are principal employees of
the Company. At this point in time, PAA is an inactive company.
Marketing and Distribution
Traditionally, load mutual funds were principally sold by registered
representatives of broker-dealers, who received sales commissions as
compensation for fund sales. No-load mutual funds were sold directly to the
investing public without the assistance of a registered representative and
therefore no sales commission was imposed on the purchase.
The Company's products and services are marketed and distributed through a
variety of captive and non-captive distribution channels which are listed below.
The approximate percentage of assets under management distributed through each
of the Company's distribution channels listed below is provided in the
parenthetical immediately prior to the description of such distribution channel.
(57%) The Lexington Family of No Load Mutual Funds are sold through
direct sales and marketing efforts utilizing print, radio and television
advertising.
(38%) The Company also has shareholder servicing arrangements with
discount brokers, including Charles Schwab Mutual Fund OneSource(R), Fidelity
Funds Network(R), DLJ Direct, Waterhouse Mutual Fund Connection and First Trust
Corporation. The Company also has a number of its funds included in strategic
alliances and "wrap" programs, which will offer greater distribution
opportunities in the future. At December 31, 1999, approximately $639 million,
or 38%, of LMC's total mutual fund assets have been generated through these
named shareholder servicing arrangements. Under these shareholder servicing
arrangements, the discount broker, which sells, markets and distributes many
mutual funds other than the Lexington Funds is paid a fee for recordkeeping,
shareholder communications and other services provided by the discount broker to
investors purchasing shares of the Lexington Funds through the discount broker's
programs. This fee is typically based on the average daily value of the
investments in each Lexington Fund made by the discount broker on behalf of
investors participating in the discount broker's program. While the Company has
no reason to believe that such shareholder servicing arrangements will be
terminated, no assurances can be given that these arrangements will continue or
that they will continue to generate a substantial portion of the Company's total
mutual fund assets after the proposed merger with ReliaStar. The loss of any one
or more of these shareholder servicing arrangements may materially adversely
affect the Company's results of operations. The Company's ability to gain and
maintain access to these distribution channels is largely dependent on the
investment performance of the Company's products, the development of new
investment products, marketing and pricing strategies that serve the needs of
investors and discount brokers and the level of service provided by the Company.
Although the Company historically has been successful in these aspects of its
business, there can be no assurance that the Company can continue to maintain
such access for its products.
(5%) The Lexington Funds are also sold through banks and insurance
companies.
Although the Company does not control all of its distribution channels, the
Company believes that the use of multiple distribution channels, including
competing non-captive distribution channels, stabilizes and increases the
distribution of its products.
7
Regulation
LMC and MSR are registered as investment advisors under the Investment
Advisers Act of 1940, as amended (the "Advisory Act"), and all applicable state
securities laws. LFD is registered as a broker/dealer under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and all applicable state
securities laws, Accordingly, this company is subject to regulation by the
Securities and Exchange Commission (the "SEC") and state securities commissions
and is required to furnish periodic reports and to observe restrictions on
certain activities. LFD is also a member of the National Association of
Securities Dealers, Inc. ("NASD"), and is therefore subject to various NASD
regulations, including net capital requirements. Each Lexington Fund is
registered with the SEC under the Investment Company Act of 1940, as amended
(the "1940 Act"), and is qualified for sale throughout the United States. The
1940 Act imposes restrictions on certain transactions between the Lexington
Funds and LMC.
All aspects of the Company's business are subject to the laws and
regulations of the countries and states in which Lexington, its subsidiaries and
affiliates conduct business. These laws and regulations are primarily intended
to benefit clients and shareholders and, in some instances may impose minimum
capital requirements. These laws and regulations generally grant supervisory
agencies broad administrative powers, including the power to limit or restrict
Lexington's business and impose sanctions, to suspend individual employees, to
limit the Company from engaging in business for specific periods, to revoke
LMC's registration as an investment advisor and LFD's registration as a
broker-dealer and to censure and levy fines. Applicable United States Federal
laws also include the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the Securities Act of 1933, as amended (the "Securities
Act").
Competition
The asset management business is highly competitive. The Company competes
with a large number of other domestic and foreign asset management firms,
commercial banks, insurance companies, broker-dealers and others, although as a
practical matter the Company typically competes with other firms offering
comparable investment services and objectives. According to The Money Market
Directory of Pension Funds and their Investment Managers, the Company ranked
among the top 425 largest investment counsel firms, as measured by total
tax-exempt assets under management at December 1999. As a result, some of the
financial services companies with which the Company competes have substantially
greater resources and assets under management than the Company and offer a wider
variety of products and services.
The Company believes factors which affect its competition for clients
include investment performance records, the range of products offered, the
abilities and reputations of its portfolio managers, management fees and the
development of new investment strategies and marketing, although the importance
of these factors can vary depending on the type of asset management service
involved. Client service is also an important competitive factor. The Company's
ability to increase or retain client assets could be adversely affected if
client accounts underperform the market or if portfolio managers leave the
Company. The ability of the Company to compete with other asset management firms
is also dependent, in part, on the relative attractiveness of its investment
philosophies and strategies under prevailing market conditions. There are
relatively few barriers to entry by new asset management firms which could
increase competitive pressure in the industry.
Selection of advisors by investors often is subject to a competitive review
process relying heavily upon historical performance.
A large number of mutual funds are sold to the public by asset management
firms, broker-dealers, insurance companies and banks in competition with the
Company's mutual funds. Many competitors apply substantial resources to
advertising and marketing their mutual funds which may adversely affect the
ability of the Company's mutual funds to attract new clients and to retain
assets under management.
Personnel
At December 31, 1999, the Company employed 82 people. Approximately 75, 2,
1, 1, and 3 were located in Saddle Brook, New Jersey; Gold River, California;
Dallas, Texas; Edwards, Colorado; and New York, New York, respectively. None of
the Company's employees are represented by a labor union.
8
RISK FACTORS
Acquisition of Company
On February 29, 2000, the Company announced that it has signed a definitive
agreement for ReliaStar to acquire the Company in a stock-and-cash transaction
valued at $47.5 million. The definitive agreement provides for the purchase
price to be allocated in terms of one-third cash and two-thirds in shares of
ReliaStar common stock. Completion of the acquisition is subject to normal
closing conditions, including approval by the Company's shareholders, fund
directors and fund shareholders, and various regulatory approvals. The
transaction is expected to close in the third quarter of 2000. Upon closing of
the acquisition, Company shareholders will be entitled to 0.231 shares of
ReliaStar common stock and $3.306 in cash in exchange for each share of Company
common stock they hold, subject to adjustment based on ReliaStar common stock
price and the Company's assets under management. The Company will become part of
a ReliaStar subsidiary, Pilgrim Capital Corporation, which manages, markets and
distributes open- and closed-end mutual funds and structured finance products.
The acquisition of the Company by ReliaStar will precipitate numerous
actions which will cause the Company to incur additional costs. These include:
1) Change in control provisions contained in the Company's Long
Term Incentive Plan which will accelerate vesting of incentive
stock options and restricted stock;
2) Change in control provisions contained in Employment Agreements
with key executives of the Company which provide for severance
payments to these employees;
3) Severance payment to employees who will be terminated;
4) Payments to third parties including investment bankers,
attorneys, and accountants.
In the aggregate, these costs will substantially reduce shareholders' net
equity as of December 31, 1999.
In addition, the merger agreement between ReliaStar and the Company imposes
numerous restrictions upon the Company including, but not limited to
restrictions on:
1) The declaration or payment any dividends;
2) The acquisition of any corporation, partnership, or other
business organization;
3) The sale or disposition of any of its assets that are material;
4) The incurrence of any indebtedness;
5) The entering into of any new material contract.
The Company can make no assurance that the merger will occur. In the
event the proposed transaction does not occur, the Company could be contingently
liable for termination fees payable to ReliaStar. Depending on the reason for
termination, the Company could be liable for payments to the Buyer of up to
$2.250 million.
Dependence upon Performance Record
The market for providing investment management services is highly
competitive with investors generally favoring investment advisors with a
sustained successful investment performance record. The performance record of
the Company may be affected by factors over which the Company has little or no
control, including general economic conditions, other factors influencing the
capital markets, the net sales of mutual fund shares generally, and interest
rate fluctuations.
Concentration of Distribution Channels and Reliance on Certain Distributors
While the Company over time has used a variety of distribution channels,
currently a substantial percentage of the Company's investment product sales are
through non-captive distribution channels, including no transaction fee
programs. Such non-captive distribution channels generally offer competing
internally and externally sponsored or managed investment products and access to
these distribution channels is limited. The Company's ability to gain and
maintain access to these distribution channels is largely dependent on the
investment performance of the Company's products, the development of new
investment products, marketing and pricing strategies that serve the needs of
investors and the non-captive distribution channels and the level of service
provided by the Company. Although the Company historically has been successful
in these aspects of its business, there can be no assurance that the Company can
continue to maintain such access for its products.
As of December 31, 1999, approximately $639 million, or 38% , of the
Company's total mutual fund assets have been generated through shareholder
servicing arrangements with five discount brokers; Charles Schwab Mutual Fund
OneSource(R), Fidelity Funds Network(R), DLJ Direct, Waterhouse Mutual Fund
Connection, and First Trust Corporation. While the Company has no reason to
believe that such shareholder servicing arrangements will be terminated, no
assurances can be given that these arrangements will continue or that they will
continue to generate a substantial portion of the Company's total mutual fund
assets under management. The loss of any one or more of these arrangements could
materially adversely affect the Company's results of operations.
9
Changes in Market Conditions; Retention of Assets Under Management
The Company derives the major portion of its revenues from asset management
contracts with clients. Under these contracts, the asset management fee paid to
the Company is typically based on the market value from time to time of assets
under management. Accordingly, fluctuations in securities prices could
materially adversely affect the Company's results of operations.
In addition, institutional asset management contracts are generally
terminable upon 30 days' notice. Mutual fund and unit trust investors may
generally withdraw their funds at any time without prior notice. Institutional
clients may elect to terminate their relationship with the Company, or reduce
the aggregate amount of assets under management, and individual clients may
elect to close their accounts or redeem their shares in the Company's mutual
funds or unit trusts, or shift their funds to other types of accounts with
different rate structures, for any of a number of reasons, including investment
conditions or changes in prevailing interest rates or financial market
conditions. Fees vary with the aggregate amount of assets under management by
the Company and with the type of asset being managed, with higher fees earned on
actively managed equity and balanced accounts and lower fees earned on fixed
income and stable return accounts.
Global/International and Precious Metal Equity Mutual Fund Holdings
At December 31, 1999, approximately $0.7 billion, or 20.4%, of the
Company's total assets under management were invested in global/international
and precious metal equities. Many foreign markets, especially emerging markets
and markets where precious metals are mined, may be characterized by volatile
economic, political and social conditions. Many of these countries have also
experienced significant exchange rate fluctuations between the local currencies
and the U.S. dollar which may subject the U.S. dollar value of the Company's
assets under management in global/international and precious metal equities to
currency translation risk, which could materially adversely affect the Company's
results of operations. The markets in such countries may also be less liquid and
less efficient than domestic markets. While the Company believes international
investing offers the potential for reduced risk and higher expected returns
through global diversification, fluctuations in foreign markets may have a
material adverse effect on the value of the assets under management in the
Company's global/international and precious metal equities.
Except for the Lexington Goldfund, Inc., which has a significant portion of
its assets under management invested in Australia, Canada and South Africa, the
Lexington Small Cap Asia Growth Fund, which has a significant portion of its
assets under management invested in Asia, and the Lexington Troika Dialog Russia
Fund, Inc., which has a significant portion of its assets under management
invested in Russia, the Company believes that in general, the assets under
management in its global/international and precious metal equities funds are
invested in a geographically diversified manner.
Competition
The asset management business is highly competitive. The Company competes
with a large number of other domestic and foreign asset management firms,
commercial banks, insurance companies, broker-dealers and others, although as a
practical matter the Company typically competes with other firms offering
comparable investment services and objectives. Many of the financial services
companies with which the Company competes have substantially greater resources
and assets under management than the Company and offer a wider variety of
products and services.
Reliance on Key Personnel
The Company's business is managed by key executive officers, the loss of
whom could have a material adverse effect on the Company. The Company believes
that its continued success will depend in large part on its ability to attract
and retain highly skilled and qualified personnel. In the event that any
officers or directors of the Company cease to be associated with the Company,
the Company will seek to find a qualified person or persons to fill their
positions with the Company. There can, however, be no assurance that such
individuals could be engaged by the Company.
Dividends and Dividend Policy
The decision whether to apply legally available funds to the payment of
dividends on the Common Stock will be made by the Board of Directors from time
to time in the exercise of its business judgment, taking into account, among
other things, the Company's results of operations and financial condition and
any then existing or proposed commitments for the use by the Company of
available funds.
The Company may in the future issue debt securities or preferred stock or
enter into loan or other agreements that restrict the payment of dividends on
and repurchases of the Company's capital stock.
10
Company Buy-Back Program
On March 7, 1997 and September 17, 1998 the Board of Directors of the
Company authorized share repurchase programs of up to 750,000 shares for a total
program of up to 1,500,000 shares. Repurchases have been made from time to time
in the open market or through privately negotiated transactions at market
prices. The stock repurchase plans have terms of three years. As part of the
pending transaction with ReliaStar, this program has been suspended. During
1999, the Company repurchased 307,500 shares of stock for an aggregate purchase
price of $1,078,900. Also during 1999, 8,000 treasury shares were awarded under
the Company's Restricted Stock Award Plan. Through December 31 1998, the Company
repurchased 845,350 shares of its common stock for an aggregate purchase price
of $4,634,232. Also through 1998, 244,000 treasury shares were awarded under the
Company's Restricted Stock Award Plan. To date, 252,000 shares have been awarded
and 159,001 shares have been issued under the plan.
Substantial Stockholders
Descendants of Lunsford Richardson, Sr., their spouses, trusts, a
corporation in which they have interests and charitable organizations
established by such descendants (the "Richardson Family") some of whom are
directors of the Company, beneficially own shares of Common Stock representing
over 51% of the voting power of all the Company's outstanding voting securities.
Accordingly, the Richardson Family has the ability to exert significant
influence over the outcome of any matters submitted to the Company's
stockholders for approval, including mergers, consolidations or the sale of all
or substantially all of the Company's assets, and to prevent or cause a change
in control of the Company.
On February 28, 2000 the Company entered into an Agreement and Plan of
Merger with ReliaStar, and Pilgrim Holdings Corporation, a Delaware corporation
and wholly owned subsidiary of ReliaStar ("Pilgrim"), pursuant to which the
Company will merge into Pilgrim, subject to satisfaction of certain conditions.
Pursuant to the merger agreement, certain members of the Richardson Family,
together with Robert DeMichele, President and Chief Executive Officer of the
Company, and one other shareholder, executed voting agreements and irrevocable
proxies in which they agreed to vote all of the Company's common stock as to
which they have voting power, both individually and as trustees for Richardson
family trusts, in favor of approving the merger agreement and the merger. The
voting agreements represent 2,504,498 shares or approximately 55.5% of the
outstanding shares.
At December 31, 1999 the Company also managed approximately $944 million in
invested assets of the Richardson Family and certain other related persons which
represent approximately 26.4% of the Company's total assets under management at
such date. The fees charged for the management of such assets are based upon
standard fee schedules and are comparable with the fees charged to unaffiliated
accounts. While the Company believes that it will continue to manage these
assets, no assurance can be given with respect to the continued management of
these assets. The loss of such assets would materially adversely affect the
Company's results of operations.
11
Item 2. Properties
Neither the Company nor its subsidiaries and majority owned companies own
real estate. The principal offices of the Company and its subsidiaries are
leased from unaffiliated third parties, which leases expire at various dates up
until the year 2003. The Company and its subsidiaries LMC and LFD are located in
Saddle Brook, New Jersey, occupying approximately 28,000 square feet of office
space at an annual rental of approximately $578,000 under a lease expiring in
2003.
Substantially all of the leases referred to above provide for the payment
of tax, escalation, maintenance, insurance and certain other operating expenses
applicable to the leased premises.
In addition to the above leases, the Company leases equipment on a long-
term or month-to-month basis, which rental expense was approximately $117,000 in
1999.
Additional information concerning leases is provided in Note 8 of the Notes
to Consolidated Financial Statements, and such information is incorporated in
this item by reference.
Item 3. Legal Proceedings
As part of the normal course of its operations, the Company and certain of
its subsidiaries and majority owned companies are named as defendants in various
legal actions seeking monetary damages. Management does not expect any material
adverse judgments to be rendered against the Company or its subsidiaries as a
result of pending legal actions.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Date of Meeting: May 13, 1999 Annual Meeting of Stockholders
(b) Matters voted on and number of affirmative/negative votes:
1. Election of Directors:
Peter L. Richardson, Stuart S. Richardson, Carl H. Tiedemann
For All Directors: 4,520,032 Withheld Authority: 16,081
2. Ratification of the selection of KPMG LLP as the independent
auditors for the current calendar year.
Votes: For Against Abstain
4,531,145 1,330 3,638
12
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock is traded in the NASDAQ National Market System
under the symbol LGAM. The quarterly range of prices of the Company's Common
Stock as reported by the NASDAQ National Market System were as follows:
1999 1998
---- ----
High Low High Low
---- --- ---- ---
First $ 3.875 $ 2.563 $ 9.500 $ 6.750
Second $ 3.750 $ 3.000 $ 8.500 $ 6.750
Third $ 3.875 $ 3.188 $ 7.250 $ 3.313
Fourth $ 3.188 $ 2.250 $ 5.250 $ 3.250
On March 7, 1997, and September 17, 1998 the Board of Directors of the Company
authorized share repurchase programs of up to 750,000 shares for a total program
of up to 1,500,000 shares. Repurchases have been and will be made from time to
time in the open market or through privately negotiated transactions at market
prices. The stock repurchase plans have terms of three years. As part of the
pending transaction with ReliaStar, the program has been suspended. During 1999,
the Company repurchased 307,500 shares of stock for an aggregate purchase price
of $1,078,900. Also during 1999, 8,000 treasury shares were awarded under the
Company's Restricted Stock Award Plan. During 1998, the Company repurchased
532,350 shares of stock for an aggregate purchase price of $2,353,857. Also
during 1998, 11,000 treasury shares were awarded under the Company's Restricted
Stock Award Plan. During 1997, the Company repurchased 313,000 shares of its
common stock for an aggregate purchase price of $2,280,375. Also during 1997,
233,000 treasury shares were awarded under the Company's Restricted Stock Award
Plan. To date, 252,000 shares have been awarded and 159,001 shares have been
issued under the plan.
As of December 31, 1999, there were 576 holders of record of Common Stock.
Item 6. Selected Financial Data
Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(000's omitted except per share data)
(Unaudited)
Results of Operations:
Total revenues $19,137 $19,166 $20,895 $21,694 $21,609
Total expenses 18,338 17,692 17,230 18,567 19,287
Provision for taxes 355 724 1,208 1,270 700
Net income 274 714 2,397 2,475 1,579
Per Share Data:
Basic earnings per share $0.06 $0.14 $0.45 $0.45 $0.29
Diluted earnings per share $0.06 $0.14 $0.45 $0.45 $0.29
Financial Position:
Total assets $18,038 $16,883 $17,433 $16,078 $14,774
Total liabilities 8,792 7,514 6,938 5,911 6,994
Total stockholders' equity 8,773 8,940 10,090 9,822 7,347
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1999 Compared with 1998
The consolidated net income in 1999 was $0.3 million, $0.06 per share, compared
to net income of $0.7 million, $0.14 per share in 1998.
Total assets under management at December 31, 1999 were $3.6 billion compared to
$3.2 billion at December 31, 1998. Mutual fund assets under management increased
approximately $0.2 billion to $1.7 billion from $1.5 billion in 1998. The
increase is mainly attributable to the strong performance or growth in several
products, most notably the Lexington GNMA Income Fund which increased in size by
$104 million; the Lexington Worldwide Emerging Markets Fund, which increased $86
million; the Lexington Troika Dialog Russia Fund, which increased $37 million;
and the Lexington Emerging Markets Fund, which increased $23 million from
December 1998. Private account assets increased $0.1 billion to $0.7 billion,
while institutional assets also showed a $0.1 billion increase to $1.2 billion.
Total revenues of $19.1 million were essentially even with last year. Mutual
fund revenues decreased $1.7 million to $9.2 million in 1999 compared to $10.9
million in 1998. Of this decline, $1.5 million is a result of the termination of
a sub-advisory relationship with one of the Company's larger accounts in the
fourth quarter of 1998. Also contributing to the decline are the Company's
emerging markets funds, which, compared to the prior year period, experienced a
decrease in average net assets in an environment of continuing strength in the
U.S. capital markets. Other management fees show a $1.2 million increase, due to
higher assets under management in the private account and institutional
segments.
Mutual fund commissions of $25 thousand were less than the $72 thousand recorded
in 1998 because the Company's two products with sales loads were changed to
no-load funds in July of 1999.
Other management fees of $9.0 million are up approximately $1.3 million from
$7.7 million in 1998. The Company's private account business accounted for
approximately $0.8 million of the increase due to continued increases in assets
under management associated with the continuing strength of the U.S. equity
markets. Institutional asset management fees contributed $0.4 million of the
increase, also due to an increase in assets under management associated with
strong U.S. markets.
Commission income of $87 thousand decreased $21 thousand from $108 thousand in
1998, due to client terminations. Other income of $0.8 million increased $0.5
million from $0.3 million in 1998. The increase is primarily a result of
unrealized appreciation of $0.4 million at December 31, 1999 versus unrealized
depreciation of $0.2 million at December 31, 1998. The unrealized
appreciation/depreciation stems from investments in a number of products managed
by the Company.
Total expenses of $18.3 million are $0.6 million above total expenses of $17.7
million in 1998. The increase is due to salaries and other compensation, which
increased approximately $1.2 million to $10.2 million. The increase reflects
severance package costs associated with the reorganization of the firm's
Executive Committee and the resulting restructuring of responsibility for the
mutual fund group. In addition, bonus expense increased, reflecting the
increasingly competitive environment for investment professionals.
Selling and promotional costs of $0.9 million are $0.1 million below the $1.0
million in the prior year, due to lower advertising expenditures.
Administrative and general costs of $7.3 million are $0.4 million below the
prior year's figure of $7.7 million. The decrease is primarily attributable to
lower subadvisory fees, relating to the termination of one of the Company's
largest sub-advisory accounts.
Pre-tax income of $0.8 million is $0.7 million less than the $1.5 million
recorded in 1998. The provision for state and federal taxes of $0.3 million
decreased $0.4 million from the $0.7 million in the prior year, due to lower
profits. The Company used approximately $0.2 million of net operating loss
carryforwards (NOLs) in 1999.
1998 Compared with 1997
The consolidated net income in 1998 was $0.7 million, $0.14 per share, compared
to net income of $2.4 million, $0.45 per share in 1997.
Total assets under management at December 31, 1998 were $3.2 billion compared to
$3.5 billion at December 31, 1997. Mutual fund assets under management decreased
$0.4 billion from the prior year, while private account assets increased $0.1
billion. The decrease in mutual fund assets is mainly attributable to the
termination of an advisory relationship with one of the Company's larger
accounts in the fourth quarter of 1998. Assets under management in this
relationship were approximately $300 million. In addition,
14
the turmoil in emerging markets in 1998 adversely affected the Company's funds
with exposure to these markets. The Lexington Troika Dialog Russia Fund and the
Lexington Worldwide Emerging Markets Fund each declined by approximately $100
million from December 31, 1997. Partially offsetting these declines was strong
performance or growth in several other products, most notably the Lexington GNMA
Income Fund which increased in size by approximately $100 million from December
31, 1997. Both the private account and institutional segments, which are
primarily invested in the U.S. equity and bond markets, experienced growth in
assets through strong performance results associated with the robust U.S.
capital markets in 1998.
For the year ended December 31, 1998, total revenues of $19.4 million declined
by $1.8 million from $21.2 million in 1997. Net mutual fund revenues decreased
by approximately $2.6 million from $13.5 million to $10.9 million with the
decline in assets under management.
Mutual fund commissions of $72 thousand were more than the $63 thousand recorded
in 1997 because sales of the Company's two products with sales loads increased
as a result of investor interest in precious metals mutual funds.
Other management fees of $8.0 million are up approximately $1.0 million from
$7.0 million in 1997. The Company's private account business accounted for
approximately $0.9 million of the increase due to continued increases in assets
under management associated with the continuing strength of the U.S. equity
markets. Institutional asset management fees contributed $0.1 million of the
increase.
Commission income of $109 thousand decreased $42 thousand from $151 thousand in
1997. The decrease is due to client terminations.
Other income of $0.3 million decreased $0.2 million from $0.5 million in 1997.
The decrease is a result of unrealized depreciation of marketable securities.
The unrealized depreciation stems from the Company's investments in a number of
the funds managed by the Company.
Total expenses in 1998 increased by approximately $0.5 million to $18.0 million
from $17.5 million in 1997 due primarily to administrative and general expenses,
which increased $0.7 million. This increase is almost entirely attributable to
the Company's administrative contract with Select Advisors ("Select") for the
Company's private account business. This contract was part of the reorganization
of this business, which occurred in 1996. Under this contract the Company pays
fees to Select for administrative and support services for the Company's private
account clients. Because these clients are billed annually in advance, the
expenses incurred for the administrative contract are amortized evenly over a
twelve-month period. The 1998 expense includes amortization of the contract
expense across the entire client base. In 1997, the Company benefited from the
fact that no administrative fees were charged in 1997 for those accounts which
entered into or renewed advisory agreements in the first nine months of 1996;
i.e., prior to September 30, 1996, the date of the reorganization. Partially
offsetting the increase is a decrease of $0.3 million in selling and promotional
expense, mainly attributed to a reduction in advertising and sales literature
for the year. These expenses declined as the Company made greater use of public
relations in its promotional efforts. Total personnel costs of $9.0 million are
even with 1997. Although the costs are even, the Company recognized an increase
of $0.5 million of expense associated with the issuance of restricted stock to
certain key executive employees. In addition, salaries increased $0.2 million
due to annual salary increases. Offsetting the increase was a reduction in bonus
expense due to the Company's lower earnings.
Pre-tax income of $1.5 million is $2.2 million less than the $3.7 million
recorded in 1997. The provision for state and federal taxes decreased $0.5
million due to the decrease in taxable income. The Company used approximately
$1.8 million of net operating loss carryforwards (NOLs) in 1998 and has
remaining NOLs of approximately $0.2 million which are available to offset
future taxable income which expire over the period 2008 through 2013.
Effects of Inflation
The Company does not believe that inflation has had a significant impact on the
operations of the Company to date. The Company's assets consist primarily of
cash and investments which are monetary in nature. However, to the extent
inflation results in rising interest rates with the attendant adverse effects on
the securities markets and on the values of investments held in the Company's
accounts, inflation may adversely affect the Company's financial position and
results of operations. Inflation also may result in increased operating expenses
(primarily personnel-related costs) that may not be readily recoverable in the
fees charged by the Company.
Liquidity and Financial Condition
The Company's business typically does not require substantial capital
expenditures. The most significant investments are in technology, including
computer equipment and telephones.
15
Historically, the Company has been cash self-sufficient. Cash flows from
operations have ranged between $2.4 million and $3.7 million over the past three
years primarily as a result of the Company's net income.
Net cash from investing activities have ranged between $59 thousand and $0.3
million of outflows over the past three years. The primary use of cash in 1999
was the purchase of computer equipment.
Cash flows from financing activities consistently have been negative over the
past three years. On March 7, 1997, and September 17, 1998 the Board of
Directors of the Company authorized share repurchase programs of up to 750,000
shares for a total program of up to 1,500,000 shares. Repurchases have been made
from time to time in the open market or through privately negotiated
transactions at market prices. The stock repurchase plans have terms of three
years. As part of the pending transaction with ReliaStar, the program has been
suspended. During 1999, the Company repurchased 307,500 shares of stock for an
aggregate purchase price of $1,078,900. During 1998, the Company repurchased
532,350 shares of stock for an aggregate purchase price of $2,353,857. During
1997, the Company repurchased 313,000 shares of its common stock for an
aggregate purchase price of $2,280,375. The Company may in the future issue debt
securities or preferred stock or enter into loan or other agreements that
restrict the payment of dividends on and repurchase of the Company's capital
stock.
Historically, the Company has maintained a substantial amount of liquidity for
purposes of meeting regulatory requirements and potential business demands. At
December 31, 1999 the Company has $9.9 million of cash and cash equivalents.
Management believes the Company's cash resources, plus cash provided by
operations, are sufficient to meet the Company's foreseeable capital and
liquidity requirements. As a result of the holding company structure, the
Company's cash flows will depend primarily on dividends or other permissible
payments from its subsidiaries. The Company has no standby lines-of-credit or
other similar arrangements.
LFD, as a registered broker-dealer, has federal and state net capital
requirements at December 31, 1999 of $25,000. The aggregate net capital of LFD
was $0.3 million at December 31, 1999. LMC, MSR, and MSRI, as registered
investment advisors, must meet net capital requirements imposed at the Federal
and state levels.
Stockholders' equity on December 31, 1999 decreased to $8.8 million from $8.9
million a year earlier primarily as a result of the Company's purchase of
treasury shares.
16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company employs a cash management strategy which seeks to optimize excess
liquid assets by preserving principal, maintaining liquidity to satisfy capital
requirements, minimizing risk and maximizing their after tax rate of return. For
working capital purposes, the Company invests only in money market instruments.
Cash which is not needed for normal operations is invested in a tax efficient
manner in instruments with appropriate maturities and levels of risk to
correspond to expected liquidity needs. The Company currently has money market
funds, equity mutual funds, and common stock. To the extent that the Company
invests in marketable equity securities, they ensure portfolio liquidity by
investing in marketable securities with active secondary or resale markets. The
Company does not use derivative financial instruments in their investment
portfolio. At December 31, 1999 our cash and cash equivalents and securities
owned were approximately $10.9 million.
The Company's exposure to interest rate risk relates primarily to the
interest-bearing portions of their investment portfolio. The Company's policy is
to invest in high quality credit issuers, limit the amount of credit exposure to
any one issuer and invest in tax efficient strategies. The Company's first
priority is to reduce the risk of principal loss. The Company seeks to preserve
their invested funds by limiting default risk, market risk, and re-investment
risk. The Company attempts to mitigate default risk by investing in high quality
credit securities that they believe to be low risk and by positioning their
portfolio to respond appropriately to reductions in the credit rating of any
investment issuer or guarantor that they believe is adverse to their investment
strategy.
The Company's interest-bearing investment portfolio primarily consists of
short-term, high-credit quality money market funds. These investments totaled
approximately $8.6 million at December 31, 1999. The Company's interest-bearing
investments are not insured and because of the short-term high quality nature of
the investments are not subject to credit risk, but are not likely to fluctuate
significantly in market value.
17
Item 8. Financial Statements
The following are included and filed under this item:
Page
----
Independent Auditors' Report 19
LEXINGTON GLOBAL ASSET MANAGERS, INC.
Consolidated Statements of Financial Condition--December 31, 1999 and 1998 20
Consolidated Statements of Operations--Years Ended December 31, 1999, 1998 and 1997. 21
Consolidated Statements of Changes in Stockholders' Equity--Years Ended December 31, 1999,
1998 and 1997 22
Consolidated Statements of Cash Flows--Years Ended December 31, 1999, 1998 and 1997 23
Notes to Consolidated Financial Statements 24
18
Independent Auditors' Report
To the Board of Directors and Stockholders of
Lexington Global Asset Managers, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Lexington Global Asset Managers, Inc. and Subsidiaries ("the Company") as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the three-year
period then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lexington Global
Asset Managers, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
------------
KPMG LLP
New York, New York
March 1, 2000
19
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
1999 1998
---- ----
Assets:
Cash and cash equivalents:
Cash $ 1,262,379 $ 228,347
Money market accounts 8,616,274 8,209,827
------------- -------------
9,878,653 8,438,174
------------- -------------
Receivables:
Investment advisory and management fees 1,339,294 863,920
Due from funds and other 468,413 426,585
------------- -------------
1,807,707 1,290,505
------------- -------------
Trading securities, at market value 1,061,227 1,337,110
Prepaid expenses 1,411,688 1,859,517
Prepaid taxes 5,433 182,066
Fixed assets (net of accumulated depreciation
and amortization) 931,576 1,193,515
Intangible assets (net of accumulated
amortization) 162,276 178,476
Assets associated with deferred compensation 1,013,895 834,309
Deferred tax asset, net 1,756,238 1,560,686
Other assets 9,562 8,608
------------- -------------
Total assets $ 18,038,255 $ 16,882,966
============= =============
Liabilities:
Accounts payable and accrued expenses $ 920,713 $ 769,969
Accrued compensation 1,485,983 615,055
Accrued employee benefits 2,442,227 2,559,653
Deferred income 2,134,972 1,891,360
Deferred compensation 1,013,895 834,309
Federal income taxes payable 794,016 843,434
------------- -------------
Total liabilities 8,791,806 7,513,780
------------- -------------
Minority interest 473,156 428,821
Stockholders' Equity:
Preferred stock, $.01 par value; 5,000,000
authorized shares; 0 issued and outstanding - -
Common stock, $.01 par value; 15,000,000
authorized shares; 5,487,887 issued, 4,494,038
and 4,720,208, respectively, outstanding 54,879 54,879
Additional paid-in capital 21,533,392 21,573,392
Accumulated deficit (8,359,891) (8,633,541)
Deferred compensation (506,580) (1,118,758)
Treasury stock, at cost (3,948,507) (2,935,607)
------------- -------------
Total stockholders' equity 8,773,293 8,940,365
------------- -------------
Total liabilities and stockholders' equity $ 18,038,255 $ 16,882,966
============= =============
20
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1999 1998 1997
---- ---- ----
Revenues:
Investment advisory:
Mutual fund management fees (including
approximately $345,000, $318,000 and $521,000,
respectively, from related parties) $ 9,220,626 $ 10,907,452 $ 13,458,933
Mutual fund commissions 24,571 71,600 62,838
Other management fees (including approximately
$3,425,000, $2,954,000 and $2,695,000,
respectively, from related parties) 8,968,448 7,735,194 6,726,438
Commissions income 87,144 108,508 151,334
Other income 836,380 343,711 495,175
------------- ------------- -------------
Total revenues 19,137,169 19,166,465 20,894,718
------------- ------------- -------------
Expenses:
Salaries and other compensation 10,181,344 9,011,246 9,015,128
Selling and promotional 903,883 991,096 1,316,577
Administrative and general 7,252,746 7,689,604 6,898,251
------------- ------------- -------------
Total expenses 18,337,973 17,691,946 17,229,956
------------- ------------- -------------
Income before income taxes and minority interest 799,196 1,474,519 3,664,762
Provision (benefit) for income taxes:
Current 550,763 346,539 13,929
Deferred (195,552) 377,527 1,193,629
------------- ------------- -------------
Total provision 355,211 724,066 1,207,558
------------- ------------- -------------
Income before minority interest 443,985 750,453 2,457,204
Minority interest 170,335 36,013 60,149
------------- ------------- -------------
Net income $ 273,650 $ 714,440 $ 2,397,055
============= ============= =============
Earnings per share:
Basic earnings per share $0.06 $0.14 $0.45
============= ============= =============
Diluted earnings per share $0.06 $0.14 $0.45
============= ============= =============
Basic weighted average shares outstanding 4,551,129 4,994,048 5,322,172
============= ============= =============
Diluted weighted average shares and common
stock equivalents outstanding 4,687,117 5,056,166 5,281,785
============= ============= =============
21
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998, and 1997
Common Stock Total
------------
Shares Additional Accumulated Deferred Treasury Stockholders'
Issued Amounts Paid-In Capital Deficit Compensation Shares Equity
--------- ------- --------------- ------------ ------------ ----------- --------------
Balance at December 31, 1996 5,487,887 54,879 21,501,517 (11,734,723) - - 9,821,673
Net income - - - 2,397,055 - - 2,397,055
Purchase of treasury shares at cost - - - (8,250) - (2,280,375) (2,288,625)
Issuance of restricted stock awards - - 206,625 - - 1,607,875 1,814,500
Deferred compensation amortization - - - - (1,654,342) - (1,654,342)
--------- ------- ----------- ----------- ----------- ----------- ----------
Balance at December 31, 1997 5,487,887 54,879 21,708,142 (9,345,918) (1,654,342) (672,500) 10,090,261
Net income - - - 714,440 - - 714,440
Purchase of treasury shares at cost - - - - - (2,353,857) (2,353,857)
Issuance of restricted stock awards - - - (2,063) - 90,750 88,687
Deferred compensation amortization - - - - 535,584 - 535,584
Miscellaneous adjustment - - (134,750) - - - (134,750)
--------- ------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 5,487,887 54,879 $21,573,392 ($8,633,541) ($1,118,758) ($2,935,607) $ 8,940,365
Net income - - - 273,650 - - 273,650
Purchase of treasury shares at cost - - - - - (1,078,900) (1,078,900)
Issuance of restricted stock awards - - (40,000) - - 66,000 26,000
Deferred compensation amortization - - - - 612,178 - 612,178
--------- ------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 5,487,887 $54,879 $21,533,392 ($8,359,891) ($ 506,580) ($3,948,507) $ 8,773,293
========= ======= =========== =========== =========== =========== ===========
See accompanying notes to the consolidated financial statements.
22
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1999 1998 1997
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 273,650 $ 714,440 $ 2,397,055
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 337,354 337,706 319,267
Amortization of deferred costs - - 9,220
Deferred income taxes (195,552) 377,527 1,193,629
Minority interest 170,335 36,013 60,149
Compensation expense for restricted shares awarded 638,178 624,271 151,908
(Increase) decrease in operating assets:
Receivables (517,202) 539,205 200,412
Trading securities, at market value 275,883 187,678 (319,438)
Prepaid expenses 447,829 (251,395) (1,240,043)
Prepaid taxes 176,633 (75,863) (94,303)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 904,246 (492,908) 746,259
Federal income taxes payable (49,418) (20,233) (151,684)
Deferred income 243,612 254,658 432,445
Other (954) 132,883 41,534
------------- ------------- -------------
Net cash provided by operating activities 2,704,594 2,363,982 3,746,410
------------- ------------- -------------
Cash flows from investing activities:
Purchases of furniture, equipment and leasehold
improvements (59,215) (130,249) (340,515)
Net proceeds from sale of subsidiaries - - 49,954
------------- ------------- -------------
Net cash used in investing activities (59,215) (130,249) (290,561)
------------- ------------- -------------
Cash flows from financing activities:
Dividends and other (126,000) (147,000) -
Purchase of treasury stock (1,078,900) (2,353,857) (2,280,375)
------------- ------------- -------------
Net cash used in financing activities (1,204,900) (2,500,857) (2,280,375)
------------- ------------- -------------
Net increase/(decrease) in cash and cash equivalents 1,440,479 (267,124) 1,175,474
Cash and cash equivalents, beginning of year 8,438,174 8,705,298 7,529,824
------------- ------------- -------------
Cash and cash equivalents, end of year $ 9,878,653 $ 8,438,174 $ 8,705,298
============= ============= =============
Supplemental cash flow disclosure
Income taxes paid $ 461,650 $ 302,543 $ 472,910
============= ============= =============
23
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998
1. Organization and Business
Lexington Global Asset Managers, Inc. (the "Company") serves as a holding
company for the following asset management subsidiaries (collectively referred
to as the "Subsidiaries"): Lexington Management Corporation (100% owned),
Lexington Funds Distributor Inc. (100% owned), MSR Advisors Inc. (65% owned),
Lexington Global Asset Managers (BVI), Ltd. (55% owned), and Piedmont Asset
Advisors (51% owned). The Subsidiaries are engaged in the management,
distribution, and administrative services for the Lexington Family of Funds
("Funds") and for its institutional and private clients. Lexington Management
Corporation ("LMC") and MSR Advisors Inc., ("MSR") are registered investment
advisors under the Investment Advisers Act of 1940, as amended. Lexington Funds
Distributor, Inc. ("LFD") is a registered broker/dealer under the Securities
Exchange Act of 1934, is a member of the National Association of Securities
Dealers, Inc. ("NASD"), and is therefore subject to various NASD regulations,
including net capital requirements.
Subsequent Events
On February 29, 2000, the Company announced that it has signed a definitive
agreement for ReliaStar Financial Corp. ("ReliaStar") to acquire the Company in
a stock-and-cash transaction valued at $47.5 million. The definitive agreement
provides for the purchase price to be allocated in terms of one-third cash and
two-thirds in shares of ReliaStar common stock. Completion of the acquisition is
subject to normal closing conditions, including approval by the Company's
shareholders, fund directors and fund shareholders, and various regulatory
approvals. The transaction is expected to close in the third quarter of 2000.
Upon closing of the acquisition, Company shareholders will be entitled to 0.231
shares of ReliaStar common stock and $3.306 in cash in exchange for each share
of Company common stock they hold, subject to adjustment based on ReliaStar
common stock price and the Company's assets under management. The Company will
become part of a ReliaStar subsidiary, Pilgrim Capital Corporation, which
manages, markets and distributes open- and closed-end mutual funds and
structured finance products.
The acquisition of the Company by ReliaStar will precipitate numerous actions
which will cause the Company to incur additional costs. These include:
1) Change in control provisions contained in the Company's Long Term
Incentive Plan which will accelerate vesting of incentive stock options
and restricted stock;
2) Change in control provisions contained in Employment Agreements with
key executives of the Company which provide for severance payments to
these employees ;
3) Severance payment to employees who will be terminated;
4) Payments to third parties including investment bankers, attorneys, and
accountants.
In the aggregate, these costs will substantially reduce shareholders' net equity
as of December 31, 1999.
In addition, the merger agreement between ReliaStar and the Company imposes
numerous restrictions upon the Company including, but not limited to
restrictions on:
1) The declaration or payment any dividends;
2) The acquisition of any corporation, partnership, or other
business organization;
3) The sale or disposition of any of its assets that are material;
4) The incurrence of any indebtedness;
5) The entering into of any new material contract.
The Company can make no assurance that the merger will occur. In the event the
proposed transaction does not occur, the Company is contingently liable for
termination fees payable to ReliaStar. Depending on the reason for termination,
the Company could be liable for payments to the Buyer of up to $2.250 million.
2. Basis of Presentation and Summary of Significant Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and the Subsidiaries. All material intercompany transactions and
accounts have been eliminated in consolidation.
24
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies
(continued)
Cash Equivalents
Cash equivalents consist of highly liquid investments. At December 31, 1999
and 1998 cash equivalents consist primarily of investments in Lexington Money
Market Trust, recorded at market value (which approximates cost).
Trading Securities
The Company designates all marketable equity securities as held for trading
purposes.
Marketable equity securities (including funds that are advised by the
Company) are carried at market value. The market value of marketable equity
securities (excluding funds that are advised by the Company) is generally based
on quoted market prices.
Realized gains and losses are calculated on the specific-identification
method and are included in other income. Unrealized appreciation (depreciation)
arises from the difference between the cost and market value of securities and
is recognized in other income.
Revenue Recognition
Investment management and advisory fees are recorded as income for the
period in which the services are performed. Commissions related to security
transactions are recorded on trade date.
Segment Reporting
The Company considers itself to principally operate in three business
segments: mutual funds, institutional, and private accounts.
Depreciation and Amortization
Furniture and equipment are depreciated on a straight-line basis over their
estimated useful lives. Leasehold improvements are amortized on a straight-line
basis over the shorter of the lease term or the estimated useful life.
Intangible Assets
The Company assesses the recoverability of its intangible assets whenever
significant events or changes occur which may impair recovery of recorded costs.
Based on its most recent analysis, the Company believes that no impairment of
its intangible assets exists at December 31, 1999.
Stock-Based Compensation
The Company accounts for its employee stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25) and has adopted the disclosure requirements of Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," (SFAS No. 123).
Income Taxes
The Company and its wholly owned subsidiaries are included in the
consolidated federal income tax return filed by the Company. Partially owned
subsidiaries file their own federal income tax returns.
The Company accounts for income taxes under the asset and liability
method. Deferred income tax assets and liabilities are computed for the
differences between the financial statement and tax bases of assets and
liabilities based on enacted tax laws and rates applicable to the periods in
which the differences are expected to reverse.
Financial Instruments
The fair value of cash and cash equivalents, receivables, accounts payable
and accrued expenses approximates cost because of the immediate or short-term
maturity of these financial instruments. The market value of trading securities
has been disclosed in the accompanying consolidated financial statements and
notes.
Securities Transactions
Purchases and sales of fund shares through the underwriting activities of
LFD are recorded on a trade-date basis. All customer funds and securities in
connection with its investment management and advisory services are maintained
by independent custodians.
Financial Statement Presentation
Certain prior year amounts have been reclassified to conform with the
current year presentation.
25
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Fixed Assets
Fixed assets at December 31, 1999 and 1998 consisted of the following:
1999 1998
---- ----
Furniture, fixture and equipment $3,248,923 $3,191,678
Leasehold improvements 170,547 168,577
---------- ----------
Depreciable fixed assets 3,419,470 3,360,255
Less accumulated depreciation and amortization 2,487,894 2,166,740
---------- ----------
Fixed assets, net $ 931,576 $1,193,515
---------- ----------
Depreciation and amortization charged to operations were $337,354, $337,706, and
$319,267 for the years ended December 31, 1999, 1998 and 1997, respectively.
These amounts include amortization of goodwill of approximately $16,200 each
year.
Depreciation and amortization are provided using the straight-line method over
the following estimated lives:
Asset Estimated Life
----- --------------
Furniture and fixtures 5 - 12 years
Office equipment 3 - 5 years
Leasehold improvements term of lease
4. Trading Securities, at market value
At December 31, 1999 and 1998, trading securities consisted of the following:
1999 1998
---- ----
Funds advised by the Company $ 662,832 $1,036,211
Equity Securities 398,395 300,899
---------- ----------
Total trading securities, at market value $1,061,227 $1,337,110
========== ==========
5. Deferred Income and Prepaid Expenses
Certain clients pay investment advisory fees to LMC annually in advance. These
fees are recorded as deferred income and recognized as income over the periods
the services are performed. At December 31, 1999 and 1998, the balance in the
deferred income account was $2,116,064 and $1,879,969, respectively, and was
recorded as a liability in the accompanying consolidated statements of financial
condition.
LMC has an agreement with SAI Capital Holdings, Inc. ("Select"), whereby Select
provides back office and other administrative services for these clients in
return for an administration fee. The administration fee ranges from 25% to 77%
of the investment advisory fee received from these clients. The fee is paid to
Select annually in advance and is recorded as a prepaid expense and amortized as
services are received. At December 31, 1999 and 1998, the balance in prepaid
expense for administrative services was $985,359 and $1,259,097, respectively.
6. Regulatory Requirements
The broker/dealer subsidiary is subject to rules and regulations of the
Securities and Exchange Commission which require maintenance of minimum net
capital and reserve accounts. At December 31, 1999, the amount of net capital
required for the broker dealer subsidiary pursuant to such rules and regulations
was $25,000. The net capital of the broker/dealer subsidiary at December 31,
1999 amounted to $328,049.
7. Intangible Assets
Intangible assets represent the goodwill arising from the original acquisition
of the LMC business by Piedmont Management Company, Inc. ("Piedmont") in 1969.
The goodwill is the excess of the purchase price over the fair value of net
assets acquired and is amortized on a straight-line basis over forty years.
Accumulated amortization of goodwill amounted to approximately $501,000 and
$485,000 at December 31, 1999 and 1998, respectively.
26
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Commitments and Contingencies
The Subsidiaries lease administrative offices under noncancellable operating
leases that expire in 2003.
The future minimum lease payments as of December 31, 1999 are as follows:
2000............................................................ 586,000
2001............................................................ 578,000
2002............................................................ 578,000
2003............................................................ 386,000
----------
$2,128,000
==========
Rent expense was approximately $734,000, $736,000, and $626,000, for the years
ended December 31, 1999, 1998, and 1997, respectively.
9. Preferred Stock
The Company has 5,000,000 shares of preferred stock, $.01 par value authorized;
no shares are issued or outstanding.
10. Incentive Plan
The Company has reserved 750,000 shares of common stock for issuance to key
employees under the Long Term Incentive Plan (the "Plan") established in 1995.
The Plan provides for the granting of stock options, stock appreciation rights
and other stock-based performance awards to employees.
Restricted Award Plan
Under the Plan the Company established the Restricted Stock Award Plan, which
provides for awards of common stock to key employees, subject to forfeiture if
employment terminates prior to the end of the prescribed periods. The
restrictions on the shares will be released over a three-year period as the
employees provide service. The market value of shares awarded under the plan is
recorded as deferred compensation in stockholders' equity. The unearned amounts
are amortized to compensation expense over the periods the employees provide
services.
During the years ended December 31, 1999, 1998 and 1997, the Company awarded
restricted shares which will be issued out of Treasury Stock when the awards
vest. The restricted shares awarded and the respective market values at date of
grant were as follows:
Shares Market
Awarded Value
------- -----
February 3, 1997 33,000 $6.25
November 7, 1997 200,000 $8.00
April 1, 1998 11,000 $8.06
April 1, 1999 8,000 $3.25
For the years ended December 31, 1999, 1998 and 1997, the Company recognized
$638,178, $624,271 and $151,908, respectively, of compensation expense relating
to the Restricted Stock Award Plan.
Stock Option Plan
Under the Plan the Company also established a Stock Option Plan, which reserve
shares of common stock for issuance to key employees. In 1999, 86,600 stock
options were granted at an exercise price of $3.50, the market value at the date
of grant. In 1998, 81,500 stock options were granted at an exercise price of
$8.06 and 7,000 stock options were granted at an exercise price of $4.00, the
market values at the respective dates of grant. In 1997, 131,000 stock options
were granted at an exercise price of $6.25 and 10,000 stock options were granted
at an exercise price of $8.00, the market values at the respective dates of
grant. No options were exercised or expired in 1999, 1998, and 1997 although
272,625 options were exercisable at December 31, 1999.
27
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Incentive Plan (Continued)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the stock options. Had compensation cost for the Company's
stock option plan been determined based on the fair value at the grant date for
awards in 1999, 1998, and 1997 consistent with the provisions of SFAS No. 123,
the Company's net earnings and earnings per share would have been reduced to the
pro forma amounts indicated below:
(Dollars in thousands except for earnings per share information)
1999 1998 1997
---- ---- ----
Net earnings:
As reported $ 274 $ 714 $2,397
Pro forma $ 40 $ 513 $2,252
Basic earnings per share:
As reported $0.06 $0.14 $ 0.45
Pro forma $0.01 $0.10 $ 0.42
Diluted earnings per share:
As reported $0.06 $0.14 $ 0.45
Pro forma $0.01 $0.10 $ 0.42
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998, 1997 and 1995: dividend yield of 0%;
expected volatility of 35.0%; risk-free interest rate of 5.23% to 6.64%; and
expected lives of 10 years.
The Stock Option Plan provides that shares granted come from the Company's
authorized but unissued or reacquired common stock. The price of the options
granted pursuant to the Stock Option Plan will not be less than 100 percent of
the fair market value of the shares on the date of grant. An option may not be
exercised within one year from the date of grant and no option will be
exercisable after ten years from the date of grant. Options vest over a four
year period. Participants may exercise approximately one-fourth of the stock
option shares after the end of each year of the cycle.
Information regarding the Stock Option Plan for 1999, 1998 and 1997 is as
follows:
1999 1998 1997
---------------------------- ----------- -----------
Weighted-
Average
Exercise
Shares
Shares Price Shares Shares
------ ----- ------ ------
Options outstanding, beginning of year 409,500 $5.9552 321,000 180,000
Options exercised - - - -
Options granted 86,600 $3.5000 88,500 141,000
--------- --------- ---------
Options outstanding, end of year 496,100 409,500 321,000
========= ========= =========
Option price range, end of year $ 3.50 $ 4.00 $ 6.25
$ 8.06 $ 8.06 $ 8.00
Weighted-average fair value of options, granted during the year $ 3.5000 $ 7.7389 $ 6.3741
Weighted-average grant-date fair value of options, granted
during the year $ 2.0317 $ 4.5480 $ 3.8720
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Incentive Plan (Continued)
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------- ---------------------------
Weighted-
Average Weighted Weighted-
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/99 Life Price at 12/31/99 Price
------------------------ ----------- ---- ----- ----------- -----
$3.50 86,600 10 $3.50
$4.00 7,000 9 $4.00 1,750 $4.00
$4.75 180,000 6 $4.75 180,000 $4.75
$6.25 131,000 7 $6.25 65,500 $6.25
$8.00 - $8.06 91,500 8 $8.50 25,375 $8.05
----------- ----------
496,100 272,625
=========== ==========
Il. Common Stock Buy-Back Program
On March 7, 1997, and September 17, 1998 the Board of Directors of the Company
authorized share repurchase programs of up to 750,000 shares for a total program
of up to 1,500,000 shares. Repurchases have been made from time to time in the
open market or through privately negotiated transactions at market prices. The
stock repurchase plans have terms of three years. As part of the pending
transaction with ReliaStar, this program has been suspended. During 1999, the
Company repurchased 307,500 shares of stock for an aggregate purchase price of
$1,078,900. During 1999, 8,000 treasury shares were awarded under the restricted
stock award plan. During 1998, the Company repurchased 532,350 shares of stock
for an aggregate purchase price of $2,353,857. During 1998, 11,000 treasury
shares were awarded under the Company's Restricted Stock Award Plan. During
1997, the Company repurchased 3 13,000 shares of its common stock for an
aggregate purchase price of $2,280,375. During 1997, 233,000 treasury shares
were awarded under the Company's Restricted Stock Award Plan. To date, 252,000
shares have been awarded and 159,001 shares have been issued under the
Restricted Stock Award Plan. At December 3 1, 1999, 1998 and 1997, 993,849,
767,679 and 3 13,000 treasury shares were held, respectively.
12. Earnings Per Share
The Company follows SFAS No. 128, "Earnings Per Share," which establishes
standards for computing and presenting earnings per share ("EPS"). Basic EPS
excludes dilution and is calculated by dividing income applicable to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed by dividing income applicable to common
stockholders by the weighted average number of common shares outstanding and
assumed conversions.
Basic earnings per common share amounts were computed by dividing net income by
the weighted-average number of common shares outstanding during the year. The
average number of common shares outstanding was the average number of shares of
common stock outstanding adjusted for repurchased shares.
Diluted earnings per share amounts were calculated by dividing net income by the
weighted-average number of common shares and dilutive potential common share
equivalents outstanding during the year.
Diluted earnings per share assumes the conversion into common stock of
outstanding stock options as computed under the treasury stock method, if
dilutive. Under the treasury stock method, the number of incremental shares is
determined by assuming the issuance of the outstanding stock options, reduced by
the number of shares assumed to be repurchased from the issuance proceeds, using
the average market price for the year of the Company's common stock.
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Earnings Per Share (Continued)
The following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31, 1999, 1998 and 1997.
1999 1998 1997
---------- ---------- ----------
Numerator:
Net income $ 273,650 $ 714,440 $2,397,055
========== ========== ==========
Numerator for basic and diluted
earnings per share - income
available to common stockholders $ 273,650 $ 714,440 $2,397,055
========== ========== ==========
Denominator:
Denominator for basic earnings
per share-weighted-average
shares outstanding 4,551,129 4,994,048 5,322,172
Effect of dilutive securities:
Employee stock options 135,988 62,118 59,613
---------- ---------- ----------
Denominator for diluted earnings per
share- weighted-average shares
outstanding and assumed conversions 4,687,117 5,056,166 5,381,785
========== ========== ==========
Basic earnings per share $ 0.06 $ 0.14 $ 0.45
========== ========== ==========
Diluted earnings per share $ 0.06 $ 0.14 $ 0.45
========== ========== ==========
13. Employee and Retiree Benefit Plans
Effective with the December 13, 1995 spin-off of 100% of the common stock of the
Company being distributed to Piedmont Management stockholders, LMC has assumed
the sponsorship of certain of Piedmont's employee benefit plans and their
related trusts and insurance contracts, and is solely responsible for all
liabilities and obligations under such plans. In addition, in exchange for
payment from Piedmont, LMC assumed certain of Piedmont's obligations to provide
continuing medical and dental coverage to certain of Piedmont's and The
Reinsurance Corporation of New York's ("RECO") employees, and retirement and
postretirement medical and life insurance to former RECO employees.
Savings Plan
LMC's and MSR's employees participate in the 401(k) savings plan sponsored
by LMC. Employees are eligible to participate upon attaining age twenty-one and
completing six months of service. The savings plan provides for voluntary
participant contributions which may not exceed 10% of each participant's annual
salary. Additionally, for each participant's voluntary contribution not
exceeding 6% of the participant's annual salary, LMC or MSR contribute an amount
equal to 50% of the individual participant's contribution.
Contributions fully vest to employees at the end of five years. The annual
savings plan expense by was $112,658, $117,498, and $122,760 for the years ended
December 31, 1999, 1998, and 1997, respectively.
Retirement Plan
LMC sponsors a defined benefit plan ("Retirement Plan") which is part of a
master trust. An employee becomes a participant in the Retirement Plan after
attaining age twenty-one and completing one year of service. Full vesting in the
accrued benefit occurs at the earlier of completing five years of service after
attaining age eighteen or reaching early retirement age. The funding policy for
the Retirement Plan is to annually contribute the statutory required minimum
amount as actuarially determined. Approximately 36% of the plan assets are
invested in the Lexington Group of Mutual Funds.
LMC also maintains non-qualified supplemental benefit plans ("SERP") for certain
employees. These plans replace the portion of benefits that exceed the
limitations established by the Internal Revenue Code for tax qualified benefit
plans. The amount charged to expense relating to these plans was approximately
$101,000, $85,000, and $87,000 for the years ended December 31, 1999, 1998, and
1997, respectively.
30
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Employee and Retiree Benefit Plans (Continued)
The following is selected actuarial information for the Retirement Plan and SERP
(the "Plans"):
The Plans' projected benefit obligation at December 31, 1999 and 1998 was
comprised of:
1999 1998
----------- -----------
Benefit obligation at beginning of year $ 7,974,469 $ 7,067,630
Service cost 387,261 338,530
Interest cost 527,460 487,785
Actuarial (gain) or loss (1,551,388) 390,032
Benefits paid (306,464) (309,508)
----------- -----------
Benefit obligation at end of year $ 7,031,338 $ 7,974,469
=========== ===========
The plan assets at fair value for the years ended December 31, 1999 and 1998 was
comprised of:
1999 1998
----------- -----------
Fair value of plan assets at beginning of year $ 5,693,421 $ 5,158,165
Actual return on plan assets 1,221,547 706,108
Employer contributions 460,057 138,656
Benefits paid (306,464) (309,508)
----------- -----------
Fair value of plan assets at end of year $ 7,068,561 $ 5,693,421
----------- -----------
The following table presents the Plans' funded status and amounts recorded in
the Company's accompanying consolidated statements of financial condition at
December 31, 1999 and 1998:
1999 1998
----------- -----------
Funded status $ 37,223 ($2,281,048)
Unrecognized net actuarial (gain) or loss (1,522,108) 685,031
Unrecognized transition obligation 32,228 123,142
Unrecognized prior service cost 454,888 372,489
----------- -----------
Net amount recorded at end of year ($997,769) ($1,100,386)
=========== ===========
Amounts recorded in the consolidated statements of financial condition at
December 31, 1999 and 1998 consisted of:
1999 1998
----------- -----------
Accrued benefit liability ($1,069,882) ($1,343,147)
Intangible asset 72,113 242,761
----------- -----------
Net amount recorded at end of year ($997,769) ($1,100,386)
=========== ===========
The following table compares year end information for the Plans' projected
benefit obligation, accumulated benefit obligation, and fair value of plan
assets at December 31, 1999 and 1998:
1999 1998
----------- -----------
Projected benefit obligation $ 7,031,338 $ 7,974,469
Accumulated benefit obligation 6,260,849 7,036,568
Fair value of plan assets 7,068,561 5,693,421
31
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Employee and Retiree Benefit Plans (Continued)
Actuarial computations at December 31, 1999, 1998 and 1997 were made utilizing
the following assumptions:
1999 1998 1997
---- ---- ----
Discount rate 8.00% 6.75% 7.00%
Expected return on plan assets 10.00% 10.00% 10.00%
Rate of compensation increase 6.00% 6.00% 6.00%
Net expense under the Plans for the years ended December 31, 1999, 1998 and 1997
was comprised of:
1999 1998 1997
---- ---- ----
Service cost $ 387,261 $ 338,530 $ 267,931
Interest cost 527,460 487,785 436,804
Expected return on plan assets (565,796) (501,717) (469,064)
Amortization of prior service cost 34,711 26,188 18,674
Amortization of transitional asset (26,196) (17,673) (26,196)
---------- --------- ----------
Net periodic benefit cost $ 357,440 $ 333,113 $ 228,149
---------- --------- ----------
Postretirement Employee Benefits
In addition to providing pension benefits, the Company, along with certain
affiliates, provides the option of life and medical insurance benefits for
retirees. Pensioners whose employment was terminated by retirement (age 55 and
10 years of service) become eligible for these benefits. The medical insurance
benefits are partially contributory in nature. Postretirement benefit plans
other than pensions are not funded. The transaction obligation is being
amortized over a 20-year period under the SFAS No. 106 "Employers' Accounting
for Postretirement Benefits Other Than Pensions."
The following is selected actuarial information for the Company's postretirement
employee benefits:
The postretirement employee benefits' accumulated benefit obligation at December
31, 1999 and 1998 was comprised of:
1999 1998
---- ----
Benefit obligation at beginning of year $1,238,079 $1,236,634
Service cost 71,209 57,181
Interest cost 79,912 75,775
Actuarial gain (219,886) (102,883)
Benefits paid (68,009) (28,628)
---------- ----------
Benefit obligation at end of year $1,101,305 $1,238,079
---------- ----------
The following table presents the postretirement employee benefits' funded status
and amounts recorded in the Company's accompanying consolidated statements of
financial condition at December 31, 1999 and 1998:
1999 1998
---- ----
Funded status ($1,101,305) ($1,238,079)
Unrecognized net actuarial gain (312,558) (94,122)
Unrecognized transition obligation 291,000 316,000
----------- -----------
Net amount recorded at end of year
(accrued benefit liability) ($1,122,863) ($1,016,201)
=========== ===========
32
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Employee and Retiree Benefit Plans (Continued)
Actuarial computation at December 31, 1999, 1998 and 1997 were made utilizing
the following assumptions:
1999 1998 1997
---- ---- ----
Discount rate 8.00% 6.75% 7.00%
For measurement purposes, a 9.8% (pre age 65 coverage) and 8.4% (post age 65
coverage) annual rate of increase in the per capita cost of covered health care
benefits was assumed for 1999. The rate is assumed to decrease gradually to 5%
for 2007 and remain at that level thereafter.
Net expense under the postretirement employee benefits for the years ended
December 31, 1999, 1998 and 1997 was comprised of:
1999 1998 1997
---- ---- ----
Service cost $ 71,209 $ 57,181 $ 54,702
Interest cost 79,912 75,775 78,203
Expected return on plan assets (1,420) (3,260) (2,461)
Amortization of transitional obligation 25,000 25,000 25,000
-------- -------- --------
Net periodic benefit cost $174,701 $154,696 $155,444
======== ======== ========
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
One-percentage One-percentage
point increase point decrease
-------------- --------------
Effect on total of service and
interest cost components $ 32,775 ($32,775)
Effect on postretirement benefit
obligation 163,665 (163,665)
Deferred Compensation Program
The Company sponsors a supplemental retirement plan which is non-qualified
deferred compensation plan (the "Plan"). The Plan is maintained by the Company
for purposes of providing deferred compensation for a select group of key
employees. The Company established a trust for this Plan and consolidates the
trust assets with those of the Company in the accompanying consolidated
statements of financial condition and records an offsetting liability. The
investments held in the trust consist of various mutual fund holdings, including
funds in the Lexington Group of Mutual Funds (approximately 24% of the trust's
assets). The value of these investments were $1,013,895 and $834,309 at December
31, 1999 and 1998, respectively.
14. Income Taxes
A reconciliation of income tax expense computed at the U.S. statutory rate to
the effective rate reflected in the accompanying consolidated statements of
operations for the years ended December 31, 1999, 1998, and 1997 follows:
1999 1998 1997
---- ---- ----
Expected tax rate 34.00% 34.00% 34.00%
State and local taxes 12.11 9.92 6.81
Restricted Stock 25.49 8.02 -
Other (15.12) (1.61) (7.31)
------ ----- -----
Effective tax rate 56.48% 50.33% 33.50%
------ ----- -----
33
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Income Taxes (Continued)
The tax effects of temporary differences that give rise to the net deferred tax
asset at December 31, 1999 and 1998 are as follows:
1999 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 0 $ 63,213
Deferred compensation 1,095,610 651,300
Retirement and postretirement 847,023 800,068
Other 34,400 189,059
---------- ----------
Total deferred tax asset 1,977,033 1,703,640
---------- ----------
Deferred tax liabilities:
Deferred state taxes (137,781) (106,865)
Other (83,014) (36,089)
---------- ----------
Total deferred tax liabilities (220,795) (142,954)
---------- ----------
Net deferred tax asset $1,756,238 $1,560,686
========== ==========
Income tax expense attributable to income for the years ended December 31, 1999,
1998, and 1997 consist of:
Current Deferred Total
----------- ------------ -----------
Year ended December 31, 1999:
U.S. Federal $ 344,431 ($ 104,626) $ 239,805
State and local 206,332 (90,926) 115,406
----------- ------------ -----------
$ 550,763 ($ 195,552) $ 355,211
=========== ============ ===========
Current Deferred Total
----------- ------------ -----------
Year ended December 31, 1998:
U.S. Federal $ 71,794 $ 436,024 $ 507,818
State and local 274,745 (58,497) 216,248
----------- ------------ -----------
$ 346,539 $ 377,527 $ 724,066
=========== ============ ===========
Current Deferred Total
----------- ------------ -----------
Year ended December 31, 1997:
U.S. Federal ($339,801) $1,175,028 $ 835,227
State and local 353,730 18,601 372,331
---------- ------------ -----------
$ 13,929 $1,193,629 $1,207,558
----------- ------------ -----------
The Company believes it is more likely than not that it will generate future
taxable income to realize the benefits of the net deferred tax asset.
Accordingly, the Company has not provided a valuation allowance. The amount
ultimately realized, however, could be reduced if actual amounts of future
taxable income are reduced.
15. Disclosures about Segments of an Enterprise and Related Information
The Company and its subsidiaries are principally engaged in a variety of asset
management and related services to retail investors, institutions and private
accounts.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes standards for the way a public enterprise reports
information about operating segments in its annual and interim financial
statements. Generally, financial information will be required to be reported on
the basis used by management for evaluation segment performance and for deciding
how to allocate resources to segments.
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Disclosures about Segments of an Enterprise and Related Information
(Continued)
The Company principally operates in three business segments: Mutual Funds,
Institutional, and Private Accounts. The mutual fund segment, through its
subsidiaries, markets, promotes, and distributes the Lexington family of 16
mutual funds providing a variety of investment choices. The institutional
segment for investment management services includes corporate, government and
multi-employee pension plans, charitable endowments and foundations, insurance
company general accounts and defined contribution and 401(k) plans. The private
account segment offers equity, fixed income and balanced fund alternatives,
tailored to the individual investment objectives of its private clients.
Mutual Private
Year ended December 31, 1999 Funds Institutional Accounts Other Total
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 9,636,604 $ 4,177,750 $ 5,146,599 $ 176,216 $19,137,169
Salaries and other compensation $ 4,282,535 $ 4,308,645 $ 1,590,164 - $10,181,344
Selling and promotional $ 337,711 $ 387,967 $ 135,423 $ 42,782 $ 903,883
Administrative and general $ 2,782,051 $ 1,251,866 $ 2,830,695 $ 388,134 $ 7,252,746
Income before income taxes
and minority interest $ 2,234,307 ($1,770,728) $ 590,317 ($254,700) $ 799,196
- ----------------------------------------------------------------------------------------------------------------
Mutual Private
Year ended December 31, 1998 Funds Institutional Accounts Other Total
- ----------------------------------------------------------------------------------------------------------------
Revenue $11,055,576 $ 3,782,724 $ 4,287,002 $ 41,163 $19,166,465
Salaries and other compensation $ 3,941,343 $ 3,852,303 $ 1,217,600 - $ 9,011,246
Selling and promotional $ 581,897 $ 255,755 $ 99,983 $ 53,461 $ 991,096
Administrative and general $ 3,170,150 $ 1,271,214 $ 2,979,938 $ 268,302 $ 7,689,604
Income before income taxes
and minority interest $ 3,362,186 ($1,596,548) ($10,519) ($280,600) $ 1,474,519
- ----------------------------------------------------------------------------------------------------------------
Mutual Private
Year ended December 31, 1997 Funds Institutional Accounts Other Total
- ----------------------------------------------------------------------------------------------------------------
Revenue $13,829,223 $ 3,581,712 $ 3,448,775 $ 35,008 $20,894,718
Salaries and other compensation $ 3,982,392 $ 3,913,902 $ 1,118,834 - $ 9,015,128
Selling and promotional $ 826,947 $ 337,928 $ 87,932 $ 63,770 $ 1,316,577
Administrative and general $ 3,647,614 $ 1,379,779 $ 1,624,753 $ 246,105 $ 6,898,251
Income before income taxes
and minority interest $ 5,372,270 ($2,049,897) $ 617,256 ($274,867) $ 3,664,762
- ----------------------------------------------------------------------------------------------------------------
Management does not evaluate assets as a means to allocate resources and assess
performance. The Company is domiciled in the United States and does not have any
international operations.
35
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Quarterly Financial Data (Unaudited)
The unaudited quarterly financial data for the years ended December 31, 1999
and 1998 follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
1999
- ----
Results of operations:
Total revenues $4,453,627 $4,755,140 $4,801,869 $5,126,533
Total expenses 4,068,732 4,306,843 5,348,639 4,613,759
Provision (benefit) for taxes 166,874 210,488 (318,583) 296,432
Net income (loss) 185,058 214,209 (299,043) 173,426
Basic earnings (loss) per share $ 0.04 $ 0.05 $ (0.07) $ 0.04
Diluted earnings (loss) per share $ 0.04 $ 0.05 $ (0.07) $ 0.04
Common stock price range:
High $ 3.875 $ 3.750 $ 3.875 $ 3.188
Low $ 2.563 $ 3.000 $ 3.188 $ 2.250
1998
- ----
Results of operations:
Total revenues $5,076,341 $4,932,335 $4,505,184 $4,652,605
Total expenses 4,662,025 4,592,478 4,291,191 4,146,252
Provision for taxes 181,100 157,968 116,274 268,724
Net income 232,587 174,447 89,017 218,389
Basic earnings per share $ 0.04 $ 0.03 $ 0.02 $ 0.05
Diluted earnings per share $ 0.04 $ 0.03 $ 0.02 $ 0.05
Common stock price range:
High $ 9.500 $ 8.500 $ 7.250 $ 5.250
Low $ 6.750 $ 6.750 $ 3.313 $ 3.250
36
PART III
Item 10. Directors and Executive Officers of the Registrant
Other Positions with the Company and Its Subsidiaries; Year Term
Principal Occupation for the Past Five Years; and Director of Office
Name Age All Other Directorships of Publicly Held Companies since to Expire
---------------------------------- --- ------------------------------------------------------ -------- ----------
Sion A. Boney, III (1)............ 44 Nelson Communications; Chairman of Diversified Sector;
Co-Chairman of MCI Network; formerly President of Myers 1995 2001
Products. (Class I)
Robert M. DeMichele............... 55 President, Chief Executive Officer and Director 1995 2001
Company; Chairman and Chief Executive Officer of (Class I)
Lexington Management Corporation; Director of The
Trenwick Group; Director of The Navigators Group,
Inc., an insurance company).
Haynes G. Griffin................. 53 Chairman and CEO of Prospect Partners. L.L.P.; 1995 2001
Chairman of Vanguard Cellular Systems. (Class I)
William R. Miller................. 69 Retired; Director of Chartwell; formerly 1995 2000
Chief Executive Officer of Winterthur U.S. (Class II)
L. Richardson Preyer (2).......... 81 Retired; formerly Professor, University of North 1995 2000
Carolina; formerly a Member of the U.S. House of (Class II)
Representatives from the State of North Carolina.
Lunsford Richardson, Jr. (1)(2)... 75 Vice Chairman of the Company; Chairman of 1995 2000
Richardson Corporation of Greensboro. (Class II)
Peter L. Richardson(3)............ 46 President of Smith Richardson Foundation, Inc.; 1995 2002
Managing Trustee of H. Smith Richardson Family (Class III)
Stuart S. Richardson(3)........... 53 Chairman of the Company; Director of Lexington 1995 2002
Management Corporation (investment counseling and (Class III)
mutual fund management subsidiary of the Company);
Carl H. Tiedemann................. 73 General Partner, Tiedemann Investment Group (an 1995 2002
investment management company). (Class III)
(1) Mr. Sion A. Boney, III is a nephew of Mr. Lunsford Richardson, Jr.
(2) Messrs. L. Richardson Preyer and Lunsford Richardson, Jr. are first cousins.
(3) Messrs. Peter L. Richardson and Stuart S. Richardson are brothers
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of December 31, 1999 with
respect to the Company's executive officers.
Principal Occupation or Employment Office(s)
Name Age Year Elected Executive Officer
- ---- --- ------------------------------
Stuart S. Richardson 53 Chairman (1995)
Robert M. DeMichele 55 President and Chief Executive Officer (1995)
Richard M. Hisey 41 Executive Vice President and Chief Financial Officer (1995)
Denis P. Jamison 52 Senior Vice President (1995)
Richard Saler 38 Senior Vice President (1995)
37
PART III
Item 10. Directors and Executive Officers of the Registrant
Other Positions with the Company and Its Subsidiaries; Year Term
Principal Occupation for the Past Five Years; and Director of Office
Name Age All Other Directorships of Publicly Held Companies since to Expire
---------------------------------- --- ------------------------------------------------------ -------- ----------
Sion A. Boney, III (1)............ 44 Nelson Communications; Chairman of Diversified Sector;
Co- 1995 2001
Chairman of MCI Network; formerly President of Myers (Class I)
Products.
Robert M. DeMichele............... 55 President, Chief Executive Officer and Director 1995 2001
Company; Chairman and Chief Executive Officer of (Class I)
Lexington Management Corporation; Director of The
Trenwick Group; Director of The Navigators Group,
Inc., an insurance company).
Haynes G. Griffin................. 53 Chairman and CEO of Prospect Partners. L.L.P.; 1995 2001
Chairman of Vanguard Cellular Systems. (Class I)
William R. Miller................. 69 Retired; Director of Chartwell; formerly 1995 2000
Chief Executive Officer of Winterthur U.S. (Class II)
L. Richardson Preyer (2).......... 81 Retired; formerly Professor, University of North 1995 2000
Carolina; formerly a Member of the U.S. House of (Class II)
Representatives from the State of North Carolina.
Lunsford Richardson, Jr. (1)(2)... 75 Vice Chairman of the Company; Chairman of 1995 2000
Richardson Corporation of Greensboro. (Class II)
Peter L. Richardson(3)............ 46 President of Smith Richardson Foundation, Inc.; 1995 2002
Managing Trustee of H. Smith Richardson Family (Class III)
Stuart S. Richardson(3)........... 53 Chairman of the Company; Director of Lexington 1995 2002
Management Corporation (investment counseling and (Class III)
mutual fund management subsidiary of the Company);
Carl H. Tiedemann................. 73 General Partner, Tiedemann Investment Group (an 1995 2002
investment management company). (Class III)
(1) Mr. Sion A. Boney, III is a nephew of Mr. Lunsford Richardson, Jr.
(2) Messrs. L. Richardson Preyer and Lunsford Richardson, Jr. are first cousins.
(3) Messrs. Peter L. Richardson and Stuart S. Richardson are brothers
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of December 31, 1999 with
respect to the Company's executive officers.
Principal Occupation or Employment Office(s)
Name Age Year Elected Executive Officer
- ---- --- ------------------------------
Stuart S. Richardson 53 Chairman (1995)
Robert M. DeMichele 55 President and Chief Executive Officer (1995)
Richard M. Hisey 41 Executive Vice President and Chief Financial Officer (1995)
Denis P. Jamison 52 Senior Vice President (1995)
Richard Saler 38 Senior Vice President (1995)
38
Item 11. Executive Compensation
Directors' Compensation
A Director who is also an employee of the Company or one of its
subsidiaries receives no compensation for service on the Board that is in
addition to that received as an employee. Non-employee Directors who do not
receive a fee for consulting and/or advisory services provided to the Company
are paid an annual Director's fee of $10,000 plus $500 for each Board or
committee meeting attended.
Executive Officers' Compensation
Securities
Annual Compensation Underlying
---------------------------------------
Other Restricted Stock
Annual Stock Options All Other
Name/Position Year Salary Bonus Compensation Awards(1) Granted(2) Compensation(3)
---------------------------------- ------ ---------- ----------- -------------- ---------- ----------- ----------------
Stuart S. Richardson.............. 1999 $267,000 $ 10,000 -- -- 8,000 $ 7,543
Chairman 1998 $264,850 0 -- -- 10,000 $ 7,433
1997 $255,900 $ 25,000 -- $ 37,500 20,000 $ 7,633
Robert M. DeMichele............... 1999 $535,000 $ 50,000 -- $ 6,500 8,000 $ 71,178
President & CEO 1998 $530,500 0 -- $ 24,188 10,000 $ 70,413
1997 $511,950 $ 75,000 -- $1,268,750 40,000 $ 68,327
Richard M. Hisey.................. 1999 $292,250 $100,000 -- -- 13,000 $ 8,257
Executive Vice President, CFO & 1998 $266,750 $ 40,000 -- $ 24,188 10,000 $ 7,506
General Manager-- Mutual 1997 $254,625 $140,000 -- $ 425,000 18,000 $ 7,575
Denis P. Jamison.................. 1999 $270,000 $ 85,000 -- $ 4,875 11,000 $ 7,625
Senior Vice President, Director 1998 $267,750 $ 40,000 -- $ 32,250 8,000 $ 7,553
Of Fixed Income Investment
Strategy 1997 $258,000 $ 95,000 -- $ 12,500 7,000 $ 7,094
Richard Saler..................... 1999 $264,000 $135,000 -- $ 3,250 7,000 $ 7,410
Senior Vice President,
Director of 1998 $261,750 $ 18,000 -- -- 8,000 $ 7,349
Internat'l Equity Investment
Strategy 1997 $250,750 $ 75,000 -- $ 12,500 7,000 $ 7,063
Lawrence Kantor................... 1999 $296,000 0 -- -- 6,000 $ 7,551
Formerly Executive Vice President 1998 $293,500 $ 10,000 -- -- 10,000 $ 8,339
1997 $283,250 $120,000 -- $ 25,000 18,000 $ 8,433
_______________
(1) Represents grants of restricted stock under the Company's 1995 Long Term
Incentive Plan.
(2) Represents grants of options under the Company's 1995 Long Term Incentive
Plan.
(3) The amounts reported in this column represent, for each of the individuals
named, the employer portion of contributions to the Company's Pay Conversion
Plan, a defined contribution salary deferral plan which qualifies under
Section 401(k) of the Internal Revenue Code. In addition, amounts include
employer contributions to the Company's Executive and Supplemental Benefit
Plans, non-qualified plans replacing the portion of benefits which are in
excess of Internal Revenue Code (the "Code") limits for tax qualified plans.
For each of the last three calendar years, contributions to the Executive
Benefit Plan for Mr. DeMichele were $61,378, $60,613, and $58,577
respectively; and for each of the last three calendar years contributions to
the Supplemental Benefits Plan were as follows: for Mr. Hisey, $3,968,
$3,203, and $2,825; for Mr. Richardson, $3,210, $3,146, and $2,883; for Mr.
Jamison, $3,300, $3,233, and $2,932; for Mr. Saler, $3,120, $3,053, and
$2,714; and for Mr. Kantor, $3,230, $4,005, and $3.683.
38
The following table contains information concerning the grants of stock
options under the Company's 1995 Long Term Incentive Plan with respect to the
Named Executive Officers during 1999.
Option Grants in Last Fiscal Year(1)
Number of % of Total
Securities Options Exercise Potential Realizable Value at
Underlying Granted to or Base Assumed Annual Rates of Stock
Options Employees in Price Expiration Appreciation for Option Term(2)
--------------------------------
Name Granted Fiscal Year ($/Share) Date 0%($) 5%($) 10%($)
----------------------- ---------- ------------ ---------- ---------- --------- -------- ---------
Stuart S. Richardson... 8,000 9.2 3.50 03/31/09 0 17,600 44,600
Robert M. DeMichele.... 8,000 9.2 3.50 03/31/09 0 17,600 44,600
Richard M. Hisey....... 13,000 15.0 3.50 03/31/09 0 28,600 72,500
Denis P. Jamison....... 11,000 12.7 3.50 03/31/09 0 24,200 61,400
Richard Saler.......... 7,000 8.1 3.50 03/31/09 0 15,400 39,100
Lawrence Kantor........ 6,000 6.9 3.50 03/31/09 0 13,200 33,500
(1) Reflects option grants on March 31, 1999, one fourth of which become
exercisable on each of the first four anniversaries of the date of grant.
Vested options may be exercised at any time prior to the tenth anniversary
of the date of grant, unless the optionee's employment with the Company is
sooner terminated, in which case the optionee shall have a specified period
in which to exercise vested options. All options vest upon a change of
control (as defined in the Plan) of the Company.
(2) As required by the Securities and Exchange Commission (the "SEC"), the
amounts shown assume a 5% and 10% annual rate of appreciation on the price
of the Company's Common Stock throughout a 10 year Option Term. There can be
no assurance that the rate of appreciation assumed for purposes of this
table will be achieved. The actual value of the stock options to the Named
Executive Officers will depend on the future price of the Company's Common
Stock. As reflected in the column which assumes a 0% rate of appreciation,
the options will have no value to the Named Executive Officers if the price
of the Company's Common Stock does not increase above the exercise price of
the options. If the price of the Company's Common Stock increases, all
stockholders will benefit commensurately with the Named Executive Officers.
On December 31, 1999, there were 4,494,038 shares of Common Stock
outstanding and the closing price of the Common Stock was $2.4375. Using the
same Assumed Annual Rates of Stock Price Appreciation for the Option Term to
arrive at Potential Realizable Value shown in the table above, the gain to
all stockholders as a group at the 5% and 10% rates would be $9,891,967 and
$25,068,187, respectively. The amount of the gain to all Named Executive
Officers as a percentage of the gain to all stockholders under these
scenarios would be approximately 1.18%.
Aggregated Option Exercises in 1999 and Year-End Option Values
The following table sets forth information with respect to the Named
Executive Officers, concerning unexercised options held as of December 31, 1999.
No options with respect to the Company's Common Stock were exercised in 1999.
Number of
Shares Underlying Value of Unexercised
Shares Unexercised Options "In the Money" Options(1)
Acquired Value at Fiscal Year-End(#) at Fiscal Year-End($)
--------------------------- ----------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---------------------- ----------- -------- ----------- ------------- ------------- -------------
Stuart S. Richardson.. -- -- 42,500 25,500 $-- $--
Robert M. DeMichele... -- -- 80,000 35,500 $-- $--
Richard M. Hisey...... -- -- 36,500 29,500 $-- $--
Denis P. Jamison...... -- -- 15,500 20,500 $-- $--
Richard Saler......... -- -- 15,500 16,500 $-- $--
Lawrence Kantor....... -- -- 36,500 22,500 $-- $--
__________
(1) These values are based upon the December 31, 1999 market price of the Common
Stock which was $2.4375 per share.
39
Retirement Plan Benefits
The Company and its subsidiaries are the sponsors of a defined benefit
pension plan on behalf of their employees. In addition, the Company and its
subsidiaries are sponsors of an Executive Benefit Plan and a Supplemental
Benefits Plan on behalf of certain of their executives which are non-qualified
plans replacing the portion of benefits which are in excess of the Code limits
for tax qualified plans. Benefit formulas under the plans are explained below.
Benefits vest after five years of service.
An employee becomes a participant in the qualified plan after attaining age
21 and completing one year of service. The pension benefit is equal to the sum
of past service retirement income plus future service retirement income, and if
eligible, the non-qualified plans distributions. For a participant as of
December 31, 1988, the amount of normal retirement income standing to his credit
as of that date will not be less than 1 1/4% of the first $17,000 of his average
annual earnings for the calendar years 1984 through 1988 inclusive, plus 1 3/4%
of average earnings in excess of $17,000, multiplied by his credited service
through December 31, 1988. All participants' benefits for future service are
arrived at by calculating 1 1/2% of annual salary for each year of service. A
participant is eligible for this normal retirement pension on the first date of
the month coincident with or next following his 65th birthday.
The following table illustrates, as of December 31, 1999, for the Named
Executive Officers: (a) years of service credited under the retirement plans;
and (b) the estimated annual benefits payable under the plans, including Social
Security benefits, assuming the election of a single life annuity upon normal
retirement at the age of 65.
Years of Service as of Estimated Annual
Name of Officer December 31, 1999 Benefit Payable
------------------------ -------------------- ----------------
Stuart S. Richardson.... 13 $ 120,132
Robert M. DeMichele..... 19 100,104
Richard M. Hisey........ 13 162,108
Denis P. Jamison........ 18 132,276
Richard Saler........... 13 153,552
Employment and Change in Control Arrangements
Employment Agreements
The Company has entered into three year employment agreements with Messrs.
Richardson, DeMichele, and Hisey pursuant to which such executives serve as
Chairman, President and Chief Executive Officer, and Executive Vice President
and Chief Financial Officer, respectively. The agreements became effective on
December 13, 1995. Pursuant to such agreements, the initial base salaries of
Messrs. Richardson, DeMichele, and Hisey were $240,000, $480,000, and $225,000,
respectively. Their salaries are reviewed annually by the Executive Personnel
Committee and ratified by the Board of Directors. In the past, Messrs.
Richardson, DeMichele, and Hisey received salary increases resulting in the
following new base salaries: Mr. Richardson, $267,000; Mr. DeMichele, $535,000;
and, Mr. Hisey, $300,000. Following the initial term, the agreements continue
from year to year unless terminated by either party on six months notice. Each
agreement provides for continuation of salary and benefits for the remaining
term of the agreement if employment is terminated by the Company "other than for
cause" (as defined in the agreements). If employment is terminated "other than
for cause" following a "change in control" (as defined in the agreements) of the
Company or if an executive terminates his employment following a "change in
control" because his authority and/or responsibilities are substantially reduced
or he is required to relocate, he is entitled to receive a payment equal to his
average annual cash compensation for the immediately preceding five fiscal years
multiplied by 2.99. However, if necessary, such payment will be reduced to an
amount that would cause the payment not to be disqualified from deductibility
for Federal income tax purposes by reason of Section 280G of the Code as an
"excess parachute payment." Each employment agreement also provides that the
executive will not solicit clients or employees of the Company for the term of
the agreement and the one year period following a termination of employment.
40
Severance Plan
On September 14, 1995, the Company adopted the Senior Management Severance
Plan (the "Severance Plan"). The Severance Plan is available to certain senior
management employees designated as participants by the Board of Directors or the
Executive Personnel Committee. The Severance Plan provides that if the
employment of a participant is terminated "other than for cause" (as defined in
the Severance Plan) following a "change in control" of the Company (as defined
in the Severance Plan) or if an executive terminates his employment following a
"change in control" because his authority and/or responsibilities are
substantially reduced or he is required to relocate, he is entitled to receive a
payment equal to his average annual cash compensation for the immediately
preceding five fiscal years multiplied by 2.99. However, if necessary, such
payment will be reduced to an amount that would cause the payment not to be
disqualified from deductibility for Federal income tax purposes by reason of
Section 280G of the Code as an "excess parachute payment." The Severance Plan
requires each participant, as a condition to participation, to agree not to
solicit clients or employees of the Company during such participant's employment
and for the one year period following a termination of employment. Messrs.
DeMichele, Richardson, and Hisey are designated participants in the Severance
Plan.
The Board of Directors of the Company unanimously approved the Severance
Plan because it believes the continued attention and dedication of the
particular employees to their duties under adverse circumstances is in the best
interests of the Company and its stockholders and ultimately outweighs the
potential cost of the benefit.
Deferred Compensation Program
The Company implemented a non-qualified deferred compensation program for
highly compensated employees in 1997. The program allows the employees to defer
a portion of their annual compensation.
Deferred Compensation Agreement
Pursuant to the Deferred Compensation Agreement dated as of February 2, 1981
with Mr. DeMichele, the Company will accrue $5,000 a year until Mr. DeMichele's
death or termination of employment and upon such death or termination of
employment (other than for cause), shall pay such accrued amounts in a lump sum
or, at the option of the Company, in five annual installments.
PERFORMANCE GRAPH
The following line graph compares the percentage change in the cumulative
total stockholder return on the Company's Common Stock with the NASDAQ Stock
Market Index and the NASDAQ Financial Stocks Index during the period from
December 13, 1995 through December 31, 1999. It assumes $100 invested on
December 13, 1995 (including dividends reinvested) in Common Stock of the
Company as against each index. There can be no assurance that the Company's
Common Stock performance will continue into the future with the same or similar
trends depicted in the graph.
[LINE GRAPH]
NASDAQ
LEXINGTON FINANCIAL
GLOBAL STOCKS SIC NASDAQ
ASSET 6000-6799 STOCK
MANAGERS, US & FOREIGN MARKET
Period ending INC. STOCKS (US COMPANIES)
Dec 13 95 $100.00 $100.00 $100.00
Dec 29 95 100.66 100.15 99.58
Dec 31 96 131.58 128.75 122.19
Dec 31 97 192.10 202.08 148.63
Dec 31 98 81.58 209.96 207.54
Dec 31 99 51.32 272.84 385.16
41
- ----------------------------------------------------------------------------------------------------------------------------
Base
Period
Company/Index Name Dec 13, 95 Dec 95 Dec 96 Dec 97 Dec 98 Dec. 99
- ----------------------------------------------------------------------------------------------------------------------------
LEXINGTON GLOBAL $100.00 $100.06 $131.58 $192.10 $ 81.58 $ 51.32
ASSET MANAGERS, INC.
- ----------------------------------------------------------------------------------------------------------------------------
NASDAQ FINANCIAL STOCKS 100.00 100.15 128.75 202.08 209.96 272.84
SIC 6000-6799 US & FOREIGN
- ----------------------------------------------------------------------------------------------------------------------------
NASDAQ STOCK MARKET 100.00 99.58 122.19 148.63 207.54 385.16
(US COMPANIES)
- ----------------------------------------------------------------------------------------------------------------------------
42
Item 12. Security Ownership of Certain Beneficial Owners and Management
STOCK SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT
The following table sets forth certain information as of March 17, 2000
concerning the beneficial ownership of the Company's Common Stock for: (i) each
of the Company's Directors and nominees who own Common Stock, (ii) each of the
Named Executive Officers and (iii) all Directors and Executive Officers of the
Company as a group. For purposes of this Proxy Statement, beneficial ownership
of securities is defined in accordance with the rules of the SEC and means
generally the power to vote or dispose of securities, regardless of any economic
interest therein.
Number of Shares of Percent of
Name of Beneficial Owner Common Stock(1) Common Stock
--------------------------------------- ------------------- ------------
Sion A. Boney, III(2)(3)............... 323,807 7.2
Robert M. DeMichele(4)................. 212,654 4.7
Haynes G. Griffin(3)................... 421,464 9.4
Richard M. Hisey(5).................... 64,301 1.4
William R. Miller...................... 12,000 *
L. Richardson Preyer................... 1,165 *
Lunsford Richardson, Jr.(2)............ 172,478 3.8
Peter L. Richardson(2)(3).............. 550,378 12.2
Stuart S. Richardson(2)(3)............. 1,185,123 26.3
Carl H. Tiedemann...................... -- --
Directors and Executive Officers as a
Group.................................. 2,943,370 65.3
______________
* Less than 1%.
(1) The amounts shown include shares which are beneficially owned by more than
one individual since many shares are held in trusts with more than one
trustee.
(2) The individuals named may be deemed to be control persons of the Company
(other than solely by reason of being Directors of the Company) according to
the rules of the SEC.
(3) These individuals share voting and/or investment power with respect to
certain of their share holdings. For a breakdown of the number of shares for
which control is sole or shared, see "Security Ownership of Certain
Beneficial Owners."
(4) This amount includes restricted share grants under the Company's 1995 Long
Term Incentive Plan of 166,000 shares of which 112,000 are vested as of
March 17, 2000.
(5) This amount includes restricted share grants under the Company's 1995 Long
Term Incentive Plan of 60,000 shares of which 38,333 are vested as of March
17, 2000.
Security Ownership of Certain Beneficial Owners
The following table sets forth information as of March 17, 2000 with respect
to shares of the Common Stock which are held by certain persons and entities
known to the Company to be the beneficial owners of more than 5% of the
Company's outstanding Common Stock.
43
Number of Shares of Percent of
Name and Address of Beneficial Owner Common Stock(1) Common Stock
---------------------------------------------------- ------------------ ------------
Sion A. Boney, III(2)(3)............................ 323,827 7.2
777 Scudders Mill Road, Princeton, NJ 08543
Barbara R. Evans(2)(4).............................. 742,854 16.5
5 Fernwood Road, Summit, NJ 07901
Laurinda V. Lowenstein(2)(5)........................ 341,819 7.6
29 W. 15th Street, New York, NY 10011
Peter L. Richardson(2)(6)........................... 550,378 12.2
1285 Mill Hill Road, Southport, CT 06490
Stuart S. Richardson(2)(7).......................... 1,185,123 26.3
Park 80 West Plaza Two, Saddle Brook, NJ 07663
Richard G. Smith. III(2)(8)......................... 772,930 17.2
2325 Cob Tailway, Blacklick, OH 43004
Center for Creative Leadership(9)................... 421,464 8.9
P.O. Box P-1, Greensboro, NC 27402
Richardson Family(10)............................... 2,301,538 51.1
__________________
(1) The amounts shown include shares which are beneficially owned by more
than one individual since many shares are held in trusts with more than
one trustee.
(2) These shares are included in those owned by the "Richardson Family", as
defined below.
(3) These shares include shares of various trusts of which Sion A. Boney,
III is a trustee and as to which he exercises shared voting and
investment power with respect to such shares. Sion A. Boney, III
exercises sole voting and investment power with respect to 25,432 shares
of Common Stock.
(4) These shares include shares of various trusts of which Barbara R. Evans
is a trustee and as to which she exercises shared voting and investment
power with respect to such shares. Barbara R. Evans exercises sole
voting and investment power with respect to 217,416 shares of Common
Stock.
(5) These shares include shares of various trusts of which Laurinda V.
Lowenstein is a trustee and as to which she exercises shared voting and
investment power with respect to such shares. Laurinda V. Lowenstein
exercises sole voting and investment power with respect to 4,580 shares
of Common Stock
(6) These shares include shares of various trusts of which Peter L.
Richardson is a trustee and as to which he exercises shared voting and
investment power with respect to such shares. Peter L. Richardson has
sole voting and investment power with respect to 400 shares of Common
Stock which shares are also included in those shares owned by the
"Richardson Family," as defined below.
(7) These shares include shares of various trusts of which Stuart S.
Richardson is a trustee and as to which he exercises shared voting and
investment power with respect to such shares. Stuart Smith Richardson
exercises sole voting and investment power with respect to 456,408
shares of Common Stock which shares are also included in those shares
owned by the "Richardson Family," as defined below.
(8) These shares include shares of various trusts of which Richard G. Smith,
III is a trustee and as to which he exercises shared voting and
investment power with respect to such shares. Richard G. Smith, III
exercises sole voting and investment power with respect to 59,236 shares
of Common Stock.
(9) The Members of the Center for Creative Leadership are: Messrs. Eric R.
Calhoun, Haynes G. Griffin, Thomas K. Hearn, Jr., Ph.D., Winburne King,
III, Esq., L. Richardson Preyer, Jr., John W. Red, Jr., Peter L.
Richardson, Stuart S. Richardson, Linda Koch Lorimer, and Ingar Skaug.
These individuals are deemed to be beneficial owners of all shares held
by the Center.
(10) See below for a description of the "Richardson Family."
44
"Richardson Family," as used herein, means the descendants of Lunsford
Richardson, Sr., their spouses, trusts, a corporation in which they have
interests and charitable organizations established by such descendants. In
addition, several of the descendants of Mr. Richardson or their spouses
currently serve as directors of the Company (Messrs. Sion A. Boney, III; L.
Richardson Preyer; Lunsford Richardson, Jr.; Peter L. Richardson; and Stuart S.
Richardson). At March 17, 2000, such descendants and spouses (numbering
approximately 190 persons), trusts, a corporation in which they have interests
and charitable organizations established by them owned approximately 2,301,538
shares of Common Stock (or 51.1% of the outstanding Common Stock). Many of these
shares may be deemed to be beneficially owned by more than one person because of
multiple fiduciaries, but such shares have been counted only once for purposes
of the foregoing totals. These individuals and institutions have differing
interests and may not necessarily vote their shares in the same manner.
Furthermore, trustees and directors have fiduciary obligations (either
individually or jointly with other fiduciaries) under which they must act on the
basis of fiduciary requirements which may dictate positions which differ from
their personal interests.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than ten percent (10%) of a registered class of the
Company's equity securities, to file with the SEC initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of the Company. Reporting persons are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company, all reports required by Section 16(a) of the
Exchange Act were filed on a timely basis.
Item 13. Certain Relationships and Related Transactions
Transactions with Directors, Officers or Their Associates
Approximately $944 million of invested assets of principal stockholders of
the Company (several of whom are directors) and their related interests are
managed by Lexington Management Corporation and Market Systems Research
Advisors, Inc., subsidiaries of the Company. See "Security Ownership of Certain
Beneficial Owners." The fees charged by Lexington Management Corporation and
Market Systems Research Advisors, Inc. for the management of such assets are
based upon standard fee schedules which are competitive with the fees charged on
nonrelated accounts.
Except as stated above, no Director or officer of the Company, nominee for
Director, beneficial owner of more than 5% of any class of stock of the Company
or member of the immediate family of any of the foregoing persons had any
material interest in any material transaction of the Company or any of its
subsidiaries or affiliates during the period from January 1, 1999 through March
17, 2000 or any such proposed transaction.
45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following information is filed under this item:
(a) (1) Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries are included in Item 8:
Consolidated Statements of Financial Condition-December 31, 1999 and 1998;
Consolidated Statements of Operations-Years Ended December 31, 1999, 1998, 1997;
Consolidated Statements of Changes in Stockholders' Equity-Years Ended December
31, 1999, 1998, 1997; Consolidated Statements of Cash Flows-Years Ended December
31, 1999, 1998, 1997; Notes to Consolidated Financial Statements and Independent
Auditors' Report.
(a) (2) Schedules
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or are included in the financial
statements and, therefore, have been omitted.
(a)(3) Exhibits
2.1 Merger Agreement
13.1 Registrant's Annual Report to Stockholders for the year ended
December 31, 1999.
27.1 Financial Data Schedule
99.1 Amendment to Rights Agreement
99.2 Voting Agreement and Irrevocable Proxy, which has been signed by
the following: Stuart S. Richardson, Peter L. Richardson, James L.
Richardson, Laurinda Lowenstein Douglas, Margaret W. Gallagher,
Barbara Richardson Evans, Richard G. Smith, Lunsford Richardson,
Jr., Sion A. Boney, III, Robert and June DeMichele, and Center for
Creative Leadership (signed by John R. Alexander, President)
Exhibits specified by Item 601 of Regulation S-K, other than those listed
above, have been omitted since they are either not required or are not
applicable.
(b) Report on Form 8-K
None filed during the fourth quarter of 1999
(c) Schedules described in item 14A (2) are excluded from the Registrant's
Annual Report to Stockholders.
(d) Items Incorporated by Reference
None
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:
LEXINGTON GLOBAL ASSET MANAGERS, INC.
By /s/ Richard M. Hisey
------------------------------------------
Richard M. Hisey, Executive Vice President
(Chief Financial Officer)
Date March 31, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Stuart Smith Richardson
- ----------------------------------------
Stuart Smith Richardson, Chairman Date March 31, 2000
of the Board of Directors
/s/ Robert M. DeMichele
- ----------------------------------------
Robert M. DeMichele, President & Director Date March 31, 2000
(Chief Executive Officer)
/s/ Richard M. Hisey
- ----------------------------------------
Richard M. Hisey, Executive Vice President Date March 31, 2000
(Principal Financial and Accounting Officer)
/s/ Sion A. Boney
- ----------------------------------------
Sion A. Boney, III, Director Date March 31, 2000
/s/ Haynes G. Griffin
- ----------------------------------------
Haynes G. Griffin, Director Date March 31, 2000
/s/ William R. Miller
- ----------------------------------------
William R. Miller, Director Date March 31, 2000
/s/ L. Richardson Preyer
- ----------------------------------------
L. Richardson Preyer, Director Date March 31, 2000
/s/ Lunsford Richardson, Jr.
- ----------------------------------------
Lunsford Richardson, Jr., Director Date March 31, 2000
/s/ Peter L. Richardson
- ----------------------------------------
Peter L. Richardson, Director Date March 31, 2000
/s/ Carl H. Tiedemann
- ----------------------------------------
Carl H. Tiedemann, Director Date March 31, 2000
46