Lexington Global Asset Managers, Inc. and Subsidiaries
ABOUT THE COMPANY
LEXINGTON GLOBAL ASSET MANAGERS, INC. is a financial services holding company
established in September of 1995 and incorporated in the State of Delaware.
Lexington is publicly owned and its common stock trades under the symbol LGAM on
the NASDAQ National Market System. Lexington offers, through its subsidiaries, a
variety of asset management and related services to retail investors,
institutions, and high net worth individuals. The Company's principal
subsidiaries include Lexington Management Corporation and Lexington Funds
Distributor, Inc. which market, promote, and distribute the Lexington family of
mutual funds. As of December 31, 1997, Lexington and its subsidiaries employed
97 persons.
FINANCIAL HIGHLIGHTS
(Dollars in Thousands except per share data)
1997 1996 1995
---- ---- ----
Operating
Results:
Total revenues $18,977 $20,811 $21,286
Total expenses 15,312 17,684 18,965
Provision for taxes 1,208 1,270 700
Net income 2,397 2,475 1,579
Net income per share:
Basic $0.45 $0.45 $0.29
Diluted $0.45 $0.45 $0.29
Financial
Position:
Total assets $17,433 $16,078
Stockholders' equity $10,090 $ 9,822
TABLE OF CONTENTS
Letter to Stockholders 3
Business Description 5
Financial Report 8
Corporate Directory 30
Corporate and Stockholder Information 32
TO OUR STOCKHOLDERS
April 6, 1998
Lexington appeared to mark time in 1997. Net income was $2.4 million ($.45 cents
per share). This approximates the 1996 result of $2.5 million. Even given that
the 1996 results included a one time pre-tax gain of $.09 cents per share,
(representing the sale of the West Coast non-asset management subsidiaries), the
comparison to 1996 showed little apparent progress.
We do believe, however, that we have set the stage during 1997 for stronger
financial growth in the future. Investment performance is the most critical
factor in determining growth in our business. During 1997, three of our mutual
funds were ranked Number 1 in the country by Lipper Analytical Services, Inc.
The Lexington GNMA Fund, Lexington Troika Dialog Russia Fund, and the Lexington
Natural Resources Fund, all finished as the Number 1 fund in their respective
categories.
Equally important to the future, the Lexington Growth and Income Fund finished
in the top 26% of the Lipper Growth and Income Universe. This was on top of a
strong performance during 1996, when the fund finished in the top 10% of its
peer group.
Asset growth was strong during 1997. Assets under management increased by
approximately $300 million compared to 1996. The Private Client Group, the newly
launched Russia fund, and the growth in domestic assets under management (GNMA,
Lexington Corporate Leaders, and the Growth and Income Fund), all contributed to
the increase in assets.
Lexington has a sizeable amount of business related to international equity
investing and precious metals. These areas of the business are not only large in
terms of their revenue contribution to Lexington, they are the most profitable
parts of our business. International and precious metal markets have been in a
bear market for the past two years. The contraction in these markets, together
with our inconsistent performance compared to competitors, resulted in revenue
reductions and operating margin contraction. We believe that the margin pressure
is behind us. Our expectations are high for a strong recovery in international
and emerging markets during 1998. Regarding precious metals, it may be the
ultimate contrarian area for the near future.
We are pleased with the progress of our stock price. Lexington Global Asset
Managers saw the value of the company stock increase by 46% during 1997.
Our goal is to have a highly profitable company engaged in private client,
mutual fund, and institutional client investment management. We intend to build
a worldwide investment capability through valued relationships and multi-faceted
distribution channels.
We would like to thank all our stockholders, employees and clients for their
support.
Sincerely,
/s/ Stuart Smith Richardson /s/ Robert M. DeMichele
Stuart Richardson Robert M. DeMichele
BUSINESS DESCRIPTION
Lexington Global Asset Managers, Inc. (the "Company" or "Lexington") 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"). Pursuant to the spin-off, Piedmont contributed to the Company all
of its subsidiaries engaged in the asset management business.
The Company manages portfolios of equity, balanced, fixed income,
mortgage-backed and money market investments, which portfolios are designed to
meet a broad range of investment objectives.
INVESTMENT PROCESS
The investment process at Lexington begins and ends with the client. The
Company's investment philosophy is to preserve capital and achieve a superior
risk-adjusted rate of return on client assets. This philosophy drives the
investment process that includes a focus on top-grade research, worldwide
information sources and excellent technological support. These elements are
utilized by the Investment Policy Committee which consists of a group of
seasoned investment professionals who meet on a monthly basis to review all of
the critical factors involved in managing clients' assets.
Lexington firmly believes that a global perspective adds value in creating
portfolios. Worldwide diversification can provide superior risk-adjusted returns
when compared with portfolios with more narrow geographical orientations.
Careful analysis of worldwide liquidity, economic cycles and country
fundamentals considered in a broader geopolitical context can provide more
consistent and superior returns.
PRIMARY MARKETS
The Company's business strategy is targeted at three large market segments:
Mutual Funds
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 $3.5
trillion at December 31, 1996 to $4.5 trillion at December 31, 1997, a growth
rate of approximately 27% for the year.
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 has become
similar to the consumer products business, where marketing strategies, product
development, business development, sales expertise and servicing are
increasingly important.
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 financial advisor
level and the retail investor level; (iii) broaden its efforts to offer
sub-advisory and administration services to other mutual funds; (iv) expand into
other distribution channels; and, (v) evaluate and pursue acquisition
opportunities.
Institutional Market
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 1997 Money Market Directory of Pension Funds
(including 401(k) plans) the institutional market represented over $4.7 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.
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.
Private Client Accounts
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. According to a September 1996 Bernstein Research report,
there are approximately 2 million households in the United States that have
discretionary assets exceeding $1 million. This represents approximately 2.0% of
all U.S. households and total assets for this market segment exceed $4.4
trillion.
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.
SUBSIDIARIES OF THE COMPANY
The subsidiaries of the Company can be divided into its core business (Lexington
Management Corporation and Lexington Funds Distributor, Inc.), which business
generates most of the Company's revenues and profits, and its other
subsidiaries, which generate the remainder of the Company's revenues and
profits.
LEXINGTON MANAGEMENT CORPORATION ("LMC")
LEXINGTON FUNDS DISTRIBUTOR, INC. ("LFD")
LMC and LFD, both located in Saddle Brook, New Jersey, are responsible for
managing, servicing, marketing and distributing the Lexington family of 17
mutual 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.
LMC serves the institutional investment needs of a diverse client base which
includes: corporate, public and Taft-Hartley employee benefit funds; endowments;
charitable foundations; and individuals.
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. These
accounts typically include wealthy individuals and smaller institutional
accounts, including foundations, not-for-profit corporations, pension plans and
employee benefit plans.
OTHER SUBSIDIARIES
At December 31, 1997, the Company had 2 subsidiaries in addition to LMC and LFD:
Market Systems Research Advisors, Inc. ("MSR") 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.
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 terminated in the third
quarter of 1996.)
FINANCIAL REPORT
TABLE OF CONTENTS
Five Year Summary of Financial Data 9
Management's Discussion and Analysis 10
Management's Report on Financial Information 13
Consolidated Statements of Operations 14
Consolidated Statements of Financial Condition 15
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) 16
Consolidated Statements of Cash Flows 17
Notes to Consolidated Financial Statements 18
Report of Independent Auditors 29
SELECTED FINANCIAL DATA
(Dollars in Thousands except per share data)
Results of Year Ended December 31,
Operations: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Total Revenues $18,977 $20,811 $21,286 $22,680 $18,070
Total Expenses 15,312 17,684 18,965 17,576 15,963
Provision for Taxes 1,208 1,270 700 2,059 977
Net Income $2,397 $2,475 $ 1,579 $ 2,990 $ 1,145
Per Share
Data:
Average Shares Outstanding 5,322,172 5,487,887 5,487,887 5,487,887 5,487,887
Earnings Per Share:
Basic $0.45 $0.45 $0.29 $0.55 $0.21
Diluted $0.45 $0.45 $0.29 $0.55 $0.21
Financial
Position:
Total Assets $17,433 $16,078 $14,774 $13,646 $10,867
Total Liabilities 6,938 5,911 6,994 16,201 15,012
Total Stockholders'
Equity (Deficit) 10,090 9,822 7,347 (2,908) (4,346)
ASSET COMPOSITION BY MARKET(1)
(Dollars in Thousands)
(Unaudited)
Assets Under December 31,
Management: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Mutual Funds $1,896,293 $1,797,238 $1,517,260 $1,501,668 $1,309,267
Institutional 1,109,339 1,047,244 1,134,080 1,472,122 1,549,777
Private Clients 467,072 360,226 428,434 421,204 460,756
------- ------- ------- ------- -------
Total $3,472,704 $3,204,708 $3,079,774 $3,394,994 $3,319,800
========== ========== ========== ========== ==========
ASSET COMPOSITION BY TYPE OF INVESTMENT
(Dollars in Thousands)
(Unaudited)
December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Domestic Equity $1,704,426 $1,329,087 $1,172,710 $1,096,988 $1,274,390
Foreign Equity 850,274 807,962 699,842 696,882 578,008
------- ------- ------- ------- -------
Subtotal(2) 2,554,700 2,137,049 1,872,552 1,793,870 1,852,398
Precious Metals(3) 118,416 201,295 273,411 347,023 277,573
Fixed Income 634,029 668,841 712,830 976,104 977,396
Money Market Funds 165,559 196,212 220,981 277,997 212,433
------- ------- ------- ------- -------
Total $3,472,704 $3,203,397 $3,079,774 $3,394,994 $3,319,800
========== ========== ========== ========== ==========
(1) Included in the institutional assets under management are invested
assets of 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"), principal
stockholders of the Company, and certain other related persons, which assets at
December 31, 1997 were valued at approximately $842 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL STATEMENTS
1997 Compared with 1996
The consolidated net income in 1997 was $2.4 million, $0.45 per share, compared
to net income of $2.5 million, $0.45 per share in 1996. Included in the 1996
results is a one-time pre-tax gain of $0.5 million ($0.09 per share) from the
sale of four of the Company's West Coast subsidiaries. On September 30, 1996,
the Company sold four of the West Coast subsidiaries: Lexington Capital
Management Associates ("LCMA"), Lexington Financial Services, Inc. ("LFSI"),
Lexington Plan Administrators ("LPA"), and LCMI Insurance Services ("LCMII"). On
December 31, 1996, the remaining West Coast subsidiary, Lexington Capital
Management ("LCM") was merged into Lexington Management Corporation ("LMC"), the
Company's principal operating subsidiary.
Total assets under management at December 31, 1997 were $3.5 billion compared to
$3.2 billion at December 31, 1996. Each of the Company's three primary served
markets, (Mutual Funds, Private Client, and Institutional), contributed $0.1
billion to the growth in assets. Both the Private Client and Institutional
segments, which are primarily invested in the U.S. bond and equity markets,
experienced growth in assets through superior performance results associated
with the relatively strong U.S. capital markets in 1997. Mutual fund assets
under management grew primarily through net cash inflows of $0.2 billion. One of
the Company's newer products, the Lexington Troika Dialog Russia Fund,
experienced net cash inflows of approximately $150 million in 1997 due to
superior investment performance (ranked number one among emerging markets funds
tracked by Lipper Analytical Services, Inc. and as the number four fund in the
Overall Lipper Equity Fund Universe (4,883 funds)); one of the Company's older
products, the Lexington Corporate Leaders Trust Fund contributed over $100
million in net positive cash flow due primarily to its superior long term track
record and the strong U.S. equity markets. Although not as significant from a
cash flow standpoint, the Company enjoyed superior investment performance from a
number of its other products, including the Lexington GNMA Income Fund (number
one fund among GNMA Funds tracked by Lipper Analytical Services, Inc.) and the
Lexington Natural Resources Trust (which was the number one natural resources
fund in the variable insurance products category according to Lipper Analytical
Services, Inc.). In contrast, the Lexington Worldwide Emerging Markets Fund
experienced net cash outflows of approximately $100 million in 1997 due to lower
quartile performance and a disaffection with emerging markets on the part of
investors due to turmoil in the Asian economies and capital markets. The Asian
"contagion" significantly affected performance in a number of the Company's
mutual funds and was a contributing factor to net depreciation of $0.1 billion
for the mutual fund group as a whole. In short, mutual fund asset growth
amounted to $0.1 billion and was comprised of net cash inflow of $0.2 billion
partially offset by net depreciation of $0.1 billion.
Total revenues of $19.0 million are 8.7% below 1996 when the Company recorded
revenues of $20.8 million. Revenues from the West Coast operations which were
reorganized and partially disposed of in 1996, amounted to $3.4 million in 1997
and $5.6 million in 1996. Excluding the West Coast operations, total revenues of
$15.5 million were $0.3 million above the $15.2 million recorded in 1996.
Net mutual fund management fees, the Company's largest revenue source, increased
$0.5 million to $11.2 million in 1997 compared to $10.7 million in 1996. These
revenues increased as a result of the growth in mutual fund assets under
management. However, underlying the growth in assets under management is a shift
in assets under management from some of the Company's higher priced products
(emerging markets and precious metals) to some of the lower priced products
(domestic equity and fixed income) and to products with shared revenue
arrangements (sub-advisory relationships). This shift occurred as a result of
relative investment performance and changing investor preferences which toward
the end of the year favored U.S. capital markets over some of the foreign
markets, particularly the emerging markets.
Mutual fund commissions of $63 thousand were less than the $216 thousand
recorded in 1996 because sales of the Company's two products with sales loads
decreased as a result of declining investor interest in precious metals mutual
funds.
Other management fees of $7.0 million are down $0.4 million from $7.4 million in
1996. The disposed West Coast operations account for all of this decline.
Similarly, commissions income declined to $0.2 million in 1997 from $1.7 million
in 1996 as a result of the disposal of the West Coast operations. Other income
of $0.5 million is $0.2 million below the 1996 figure of $0.7 million due to the
weaker performance of some of the Company's investments in the Lexington Funds
which were adversely affected by the turmoil in the Asian markets.
Total expenses of $15.3 million are $2.4 million below total expenses of $17.7
million in 1996. Virtually all of the decline is attributable to the disposed
and reorganized West Coast operations which recorded total expenses of $2.3
million in 1997 compared to $5.3 million in the prior year period.
Total personnel costs of $9.0 million are $2.2 million lower than the $ 11.2
million recorded in 1996. A $2.8 million decline in West Coast personnel
expenses was partially offset by a $0.6 million increase in LMC's personnel
costs; LMC added personnel to support and service its remaining West Coast
revenue stream. In addition, the Company recognized approximately $150,000 of
expense associated with the issuance of restricted stock to certain key
executive employees. Finally, employee benefits increased approximately $0.1
million as a result of higher medical insurance premiums despite the Company's
switch to a different provider.
Selling and promotional costs of $1.3 million are $0.1 million above the $1.2
million in such costs in the year earlier period, reflecting LMC's greater
advertising support behind several mutual funds with superior performance
results. In particular, the Lexington Troika Dialog Russia Fund received
significant support in the second half of 1997 as its performance placed the
Fund in the top five of the entire equity fund universe followed by Lipper
Analytical Services.
General and administrative costs of $5.0 million are $0.2 million less than the
prior year's figure of $5.2 million. The decrease is primarily attributable to
the disposed West Coast operations. In addition, the Company benefited from the
absence of certain legal and audit fees associated with the Company's
reorganization which impacted the prior year results. Partially offsetting these
decreases were higher administrative costs related to assets generated from its
West Coast operations and one-time costs related to the termination of the
Company's former portfolio management system. The Company's new system is fully
state-of-the-art which includes compliance with the year 2000 data requirements.
Pre-tax income amounted to $3.7 million for 1997 and 1996. The provision for
state and federal taxes remained relatively unchanged due to the comparable
profit performance in 1997 and 1996. The Company used approximately $3.8 million
of net operating loss carryforwards (NOLs) in 1997 and has remaining NOLs of
approximately $2.1 million which are available to offset future taxable income
which expire over the period 2003 through 2012. Overall, net income amounted to
$2.4 million or $0.45 per share in 1997 compared to $2.5 million, $0.45 per
share in 1996.
1996 Compared with 1995
Total revenues of $20.8 million are 2.4% less than the $21.3 million recorded in
1995.
The revenue decrease primarily reflected the sale of four of the Company's West
Coast subsidiaries on September 30, 1996. These subsidiaries would have
contributed approximately $1.5 million in additional revenue for the fourth
quarter. Partially offsetting the effect of the sale is a 9.5% increase in
mutual fund management fees. This reflects the strong mutual fund asset growth
at the Company's Core Business (LMC/LFD). This business delivered $14.4 million
in revenues in 1996 versus $14.2 million in 1995, reflecting the $300 million,
18.4% increase in mutual fund assets under management. Asset growth was
strongest in domestic equity ($0.2 billion) and international equity ($0.1
billion), partially offset by precious metals which were down $0.1 billion. The
largest increase in mutual fund assets under management was in Lexington
Corporate Leaders Trust which increased by 56% or $137 million in assets under
management. In general, stronger investor demand and performance in a number of
the Lexington funds drove the increase in assets under management. Mutual fund
management fees increased from $9.8 million in 1995 to $10.7 million in 1996. In
particular, management fees associated with the Lexington Corporate Leaders
Trust Fund, SBL Fund Series D, and Lexington Growth & Income Fund, Inc. grew
significantly due to the asset increases noted above.
Other management fees experienced a $1.7 million decline from $9.1 million in
1995 to $7.4 million. This income primarily reflects private client management
fees at the West Coast operations, which, as mentioned above, were sold at the
end of the third quarter and contributed $1.2 million in other management fees
in the fourth quarter of 1995. This revenue line also includes LMC's
institutional asset management fees which declined by $0.8 million from 1995 due
to client terminations.
Commissions income of $1.7 million were even with 1995.
Other income of $0.7 million is $0.2 million above 1995, and is attributable to
higher investment income.
Expenses of $17.7 million decreased $1.3 million from $19.0 million in 1995. The
Company's Core Business incurred total expenses of $10.9 million which are $1.1
million below the $12.0 million for 1995, when the Company incurred one-time
reorganization expenses of $2.2 million due to the Spin-off. The Company's other
subsidiaries incurred expenses of $6.8 million for 1996 versus $7.0 million for
1995.
Total salaries and other compensation increased $0.7 million to $11.2 million
from $10.5 million as a result of: 1) the addition of investment and other
personnel; 2) higher commissions associated with increased revenues in the
Company's West Coast operations; and, 3) the fact that the prior year expenses
benefited from an employee benefit refund associated with a good experience
rating. Selling and promotional expenses of $1.2 million are down $0.7 million.
This is primarily due to the Company re-targeting its marketing efforts and
making greater use of public relations. Administrative and general expenses of
$5.2 million are $1.4 million lower than $6.6 million in 1995. The decrease
reflects $2.2 million in various professional fees incurred in 1995 associated
with the Spin-off and internal reorganization of the Company. Partially
offsetting the $2.2 million decline are the additional costs associated with the
Company's public reporting responsibilities.
The Company recorded a $0.5 million gain on the sale of LFSI, LPA, LCMA, and
LCMII which occurred on September 30, 1996.
Pre-tax income grew to $3.7 million in 1996 from $2.3 million in 1995, an
increase of 60.9% or $1.4 million. Provision for state and federal taxes
increased 88.7% from $0.7 million in 1995 to $1.3 million in 1996, due to higher
profits.
Overall, net income increased 56.3% from $1.6 million in 1995 to $2.5 million in
1996. Earnings per share were $0.45 in 1996 compared to $0.29 in 1995.
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.
Historically, the Company has been cash self-sufficient. Cash flows from
operations have ranged between $1.5 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 inflows of $0.5 million and outflows of $0.5
million over the past three years. The primary use of cash in 1997 was the
purchase of computer equipment.
Cash flows from financing activities consistently have been negative over the
past three years. Prior to 1997, the most significant outflow was the payment of
a regular quarterly dividend to Piedmont, the Company's former parent which
ended in 1995. On March 7,1997, the Company announced a 750,000 share repurchase
program under which the Company may repurchase its stock from time to time in
the open market or through privately negotiated transactions at market prices.
The stock repurchase plan has a term of three years. During 1997, the Company
repurchased 313,000 shares of its stock for a total 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, 1997 the Company had $8.7 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, 1997 of $25,000. The aggregate net capital of LFD
was $0.3 million at December 31, 1997. 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, 1997 increased to $10.1 million from $9.8
million a year earlier primarily as a result of the Company's net income.
Management believes that the Company's liquid assets and its net cash provided
by operations will enable it to meet any foreseeable cash requirements. The
Company's overall financial condition remains strong.
Year 2000 The Company, like most commercial and financial institutions, is
working to ensure that its operating and processing systems will, along with
those of its service providers, continue to function when the year 2000 arrives.
The Company has developed and implemented a comprehensive plan to complete all
internal system conversions by the end of 1998. A significant part of the plan
involves upgrading current software to newer versions which are fully Year 2000
compliant. To date, most of the Company's current software systems are fully
compliant. Based on this plan, it is estimated that incremental expenses to the
Company for the Year 2000 project will be nominal. In addition, the Company is
keeping apprised of the progress of outside vendors' plans to become Year 2000
compliant. Based on their progress, we feel confident that the outside vendors
will achieve compliance in 1998.
MANAGEMENT'S REPORT
ON FINANCIAL INFORMATION
The Management of the Company is responsible for the financial information
appearing in this Annual Report. The consolidated financial statements were
prepared by Management in conformity with generally accepted accounting
principles and, where amounts must be based on estimates and judgments, they
represent the best estimates and judgments of Management. The remaining
financial information presented was prepared on the same basis and is consistent
with the financial statements.
The Company maintains a system of internal financial controls designed to
provide reasonable assurance as to the reliability of financial records and
protection of assets. Qualified personnel in the Company maintain and monitor
these financial controls on an ongoing basis.
The Company engages independent certified public accountants to audit its
financial statements and express an opinion thereon. The independent accountants
have full access to each member of management in conducting their audits. The
audits are conducted in accordance with generally accepted auditing standards
and include a review of the internal financial control structure, tests of
transactions and other auditing procedures considered necessary to express an
opinion on the financial statements.
The Audit Committee of The Board of Directors, consisting solely of Directors
who are not officers or employees of the Company, meet regularly with Management
and the independent accountants to review the work of each, discuss the results
of the independent accountants' audits and the quality of financial reporting by
the Company. The independent accountants meet alone with and have unrestricted
access to the Audit Committee to discuss any matters which they believe should
be brought before the Committee.
/s/ Richard M. Hisey
Richard M. Hisey
Executive Vice President
Chief Financial Officer
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
1997 1996 1995
---- ---- ----
Revenues:
Investment advisory:
Mutual fund management fees (including approximately
$521,000, $430,000 and $452,000 from related parties) $11,223,251 $10,723,805 $9,789,003
Mutual fund commissions 62,838 215,656 175,434
Other management fees (including approximately
$2,695,000, $2,102,000 and $2,443,000 from
related parties) 7,044,356 7,395,337 9,107,863
Commissions income 151,334 1,734,411 1,692,261
Other income 495,175 742,092 521,556
------- ------- -------
Total revenues 18,976,954 20,811,301 21,286,117
========== ========== ==========
Expenses:
Salaries and other compensation 9,015,128 11,241,242 10,492,925
Selling and promotional 1,299,742 1,231,927 1,893,083
Administrative and general 4,997,322 5,210,413 6,578,621
--------- --------- ---------
Total expenses 15,312,192 17,683,582 18,964,629
---------- ---------- ----------
Income before income taxes, gain on sale of
subsidiaries, and minority interest 3,664,762 3,127,719 2,321,488
Gain on sale of subsidiaries - 529,881 -
Provision for income taxes
Current 13,929 1,353,734 1,285,843
Deferred 1,193,629 (83,559) (586,027)
--------- ------- --------
Total provision 1,207,558 1,270,175 699,816
--------- --------- -------
Income before minority interest 2,457,204 2,387,425 1,621,672
Minority interest 60,149 (87,227) 43,015
------ ------- ------
Net income $2,397,055 $2,474,652 $1,578,657
========== ========== ==========
Earnings per share (Note 12):
Basic earnings per share $0.45 $0.45 $0.29
===== ===== =====
Diluted earnings per share $0.45 $0.45 $0.29
===== ===== =====
Average shares outstanding during the period 5,322,172 5,487,887 5,487,887
========= ========= =========
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
Assets: 1997 1996
---- ----
Cash and cash equivalents:
Cash $193,383 $1,631,249
Money market accounts 8,511,915 5,898,575
--------- ---------
8,705,298 7,529,824
--------- ---------
Receivables:
Investment advisory and management fees 1,233,377 1,161,473
Due from funds and other 596,333 868,649
------- -------
1,829,710 2,030,122
--------- ---------
Marketable securities 1,524,788 1,205,350
Prepaid expenses 1,708,122 367,159
Prepaid taxes 6,203 11,900
Fixed Assets (net of accumulated depreciation and
amortization) 1,384,772 1,347,324
Intangible assets (net of accumulated amortization) 194,676 210,875
Deferred income taxes 1,938,213 3,131,842
Other assets 141,491 243,120
------- -------
Total assets $17,433,273 $16,077,516
=========== ===========
Liabilities:
Accounts payable and accrued expenses $926,177 $1,027,123
Accrued compensation 1,530,100 1,480,337
Accrued employee benefits 1,981,308 1,183,866
Deferred income 1,626,123 1,197,576
Federal income taxes payable 863,667 1,015,351
Other liabilities 10,579 6,681
------ -----
Total liabilities 6,937,954 5,910,934
--------- ---------
Minority interest 405,058 344,909
Stockholders' Equity:
Common stock, $.01 par value; 15,000,000 authorized
shares; 5,487,887 issued 54,879 54,879
Additional paid-in capital 21,708,142 21,501,517
Accumulated deficit (9,345,918) (11,734,723)
Deferred compensation (1,654,342) -
Treasury stock at cost (672,500) -
--------
Total stockholders' equity 10,090,261 9,821,673
---------- ---------
Total liabilities and stockholders' equity $17,433,273 $16,077,516
=========== ===========
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 1997, 1996, and 1995
Common Stock
------------
Total
Shares Additional Accumulated Deferred Treasury Stockholders'
Issued Amounts Paid-In Capital Deficit Compensation Shares Equity (Deficit)
------ ------- --------------- ------- ------------ ------ ----------------
Balance at December 31,
1994 5,487,887 $54,879 $11,325,665 ($14,288,032) - - ($2,907,488)
Net income - - - 1,578,657 - - 1,578,657
Dividends - - - (1,500,000) - - (1,500,000)
Capital contributions - - 76,000 - - - 76,000
Conversion of debt to equity - - 10,099,852 - - - 10,099,852
---------- ------- ---------- ---------- ----- ------ ----------
Balance at December 31,
1995 5,487,887 54,879 21,501,517 (14,209,375) - - 7,347,021
Net income - - - 2,474,652 - - 2,474,652
--------- ------ ---------- ---------- ----- ------ ---------
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 - - - - (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
========= ======= =========== ============ =========== ========= ==========
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1997 1996 1995
---- ---- ----
Cash Flows From Operating Activities:
Net income $ 2,397,055 $2,474,652 $1,578,657
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 319,267 389,090 392,923
Amortization of deferred costs 9,220 36,884 36,884
Gain on sale of subsidiaries - (529,881) -
Deferred income taxes 1,193,629 (83,559) (586,027)
Minority interest 60,149 (87,227) 43,015
Compensation expense-stock options 151,908 - -
Change in assets and liabilities
Receivables 200,412 754,372 (779,783)
Trading securities (319,438) (273,068) (157,399)
Prepaid expenses (1,340,043) (17,391) (190,697)
Prepaid taxes 5,697 30,465 (4,969)
Accounts payable and accrued expenses 746,259 (566,869) 1,092,218
Federal income taxes payable (151,684) 36,167 445,799
Deferred income 428,547 (394,955) (224,309)
Other 45,432 48,823 (114,493)
Net assets of subsidiaries sold - (286,425) -
-------- -------- ---------
Net cash provided by operating activities 3,746,410 1,531,078 1,531,819
Cash Flows From Investing Activities:
Purchases of furniture, equipment and
leasehold improvements (340,515) (425,803) (504,648)
Purchases of intangibles - (7,225) -
Sale of furniture and equipment - 157,470 -
Net proceeds from sale of subsidiaries 49,954 816,306 -
------ ------- --------
Net cash (used in) provided by investing activities (290,561) 540,748 (504,648)
Cash Flows From Financing Activities:
Principal payments under capital lease obligations - (157,019) (135,764)
Dividends - - (1,500,000)
Capital contributions - - 76,000
Purchase of treasury stock (2,280,375) - -
---------- ------- ---------
Net cash used in financing activities (2,280,375) (157,019) (1,559,764)
Net increase (decrease) in cash and cash equivalents 1,175,474 1,914,807 (532,593)
Cash and cash equivalents, beginning of year 7,529,824 5,615,017 6,147,610
--------- --------- ---------
Cash and cash equivalents, end of year $8,705,298 $7,529,824 $5,615,017
========== ========== ==========
Supplemental Cash Flow Disclosure:
Income taxes paid $472,910 $1,665,849 $917,679
Interest paid - - $108,530
Supplemental Schedule Of Non-Cash Investing Activities:
Conversion of debt to equity - - $10,099,852
See accompanying notes to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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) 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 ("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.
On September 30, 1996, the Company sold four of its California subsidiaries:
Lexington Capital Management Associates, Inc. ("LCMA"), LCM Financial Services
Inc. ("LFSI"), Lexington Plan Administrators ("LPA"), and LCMI Insurance
Services ("LCMII"), to a company formed by the CEO of the subsidiaries and the
U.S. unit of London Pacific Group Limited, Berkeley (USA) Holdings Limited. On
December 31, 1996, Lexington Capital Management ("LCM") was merged into LMC.
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.
Cash Equivalents
Cash equivalents consist of highly liquid investments. At December 31, 1997 and
1996 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 value. The value of marketable equity securities (excluding funds
that are advised by the Company) is generally based on quoted market prices. The
value of the Funds that are advised by the Company is determined by multiplying
the number of shares held in each Fund by its respective net asset value.
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 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 operate in one line of business.
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 material
impairment of its intangible assets exists at December 31, 1997.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," effective for financial statements for fiscal years beginning
after December 15, 1995. SFAS No. 123 required the Company to adopt, at its
election, either: 1) the provisions in SFAS No. 123 which require the
recognition of compensation expense for employee stock-based compensation plans;
or, 2) the provisions in SFAS No. 123 which require the pro forma disclosure of
net income and earnings per share as if the recognition provisions of SFAS No.
123 had been adopted. SFAS No. 123 explicitly provides that employers may
continue to account for their employee stock-based compensation plans using the
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB No. 25). The Company adopted the disclosure
requirements of SFAS No. 123 effective January 1, 1996 and continues to account
for its employee stock-based compensation plans under APB No. 25.
Employee and Retiree Benefit Plans
Certain subsidiaries sponsor various benefit plans including a 401(k) savings
plan and a defined benefit pension plan covering substantially all employees.
The Subsidiaries also provide retired employees the option of continuing health
and life insurance benefits through various welfare benefit plans in which the
retiree shares in the cost.
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 fair 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.
3. Fixed Assets
Fixed assets at December 31, 1997 and 1996 consisted of the following:
1997 1996
---- ----
Furniture, fixtures and equipment $3,074,485 $2,733,968
Leasehold improvements 155,521 155,521
Depreciable fixed assets 3,230,006 2,889,489
Less: accumulated depreciation and
amortization 1,845,234 1,542,165
--------- ---------
Fixed assets, net $1,384,772 $1,347,324
========== ==========
Depreciation and amortization charged to operations were $319,267, $389,090, and
$392,923 for the years ended December 31, 1997, 1996 and 1995, respectively.
Each of these amounts include amortization of goodwill of approximately $16,200.
Depreciation and amortization is provided using the straight-line method over
the following estimated lives:
Asset Estimated Life
Furniture and fixtures 12 years
Office equipment 5 years
Leasehold improvements term of lease
4. Trading Securities
At December 31, 1997 and 1996, trading securities consisted of the following:
1997 1996
---- ----
Funds advised by the Company $1,272,519 $1,205,350
Equity Securities 252,269 -
------- ---------
Total trading securities $1,524,788 $1,205,350
========== ==========
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, 1997, the balance in the deferred
income account was $1,626,123 and was recorded as a liability in the
consolidated statement 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 50% to 82%
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, 1997, the balance in prepaid expense for
administrative services was $1,255,175.
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, 1997, 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,
1997 amounted to $298,594.
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 $469,000 and
$452,000 at December 31, 1997 and 1996, respectively.
8. Commitments and Contingencies
The Subsidiaries lease administrative offices under noncancellable operating
leases. The future minimum lease payments are as follows:
1998 $599,000
1999 624,000
2000 586,000
2001 578,000
2002 578,000
Later Years 386,000
-------
$3,351,000
==========
Rent expense was approximately $626,000, $941,000, and $1,140,000, for the years
ended December 31, 1997, 1996, and 1995, respectively.
9. Common and Preferred Stock
On December 13, 1995, the Company was recapitalized by adoption of restated
articles of incorporation authorizing 15,000,000 shares of common stock.
Piedmont distributed all of the Company's outstanding common stock as a dividend
to the holders of Piedmont common stock, on a one-for-one basis for each
outstanding share of Piedmont common stock. The accompanying consolidated
financial statements of the Company have been retroactively reclassified to give
effect to the recapitalization. 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 established in 1995. The plan
provides for the granting of stock options, stock appreciation rights and other
stock-based performance awards to employees. 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.
During 1995, 180,000 stock options were granted, all at an exercise price of
$4.75, the market value at date of grant. No grants were made in 1996. No
options were exercised or expired in 1997 and 1996 although 90,000 were
exercisable at December 31, 1997.
The Company's Restricted Stock Award Plan 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 year ended December 31, 1997, the Company awarded restricted shares
out of Treasury Stock. 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
For the year ended December 31, 1997, the Company recognized $151,908 of
compensation expense relating to the Restricted Stock Award Plan. At December
31, 1997, the Company has $1,654,342 of deferred compensation recorded as a
reduction of stockholders' equity.
Stock Option Plan
The Company has a fixed option plan which reserves shares of common stock for
issuance to key employees. 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 1997 and 1995 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)
1997 1996 1995
---- ---- ----
Net earnings:
As reported $2,397 $2,475 $1,579
Pro forma $2,252 $2,399 $1,572
Basic earnings per share:
As reported $0.45 $0.45 $0.29
Pro forma $0.42 $0.44 $0.29
Diluted earnings per share:
As reported $0.45 $0.45 $0.29
Pro forma $0.42 $0.44 $0.29
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 1997 and 1995: dividend yield of 0%; expected
volatility of 35.0%; risk-free interest rate of 5.95% to 6.64%; and expected
lives of 10 years.
Under the plan approved by the stockholders on December 8, 1995, the total
number of shares of common stock that may be granted is 750,000. This 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 these
plans 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. Participants may exercise approximately one-fourth of the stock option
shares after the end of each year of the cycle.
Stock Option Plan
Information regarding this option plan for 1997, 1996 and 1995 is as follows:
1997 1996 1995
---- ---- ----
Weighted-
Average
Exercise
Shares Price Shares Shares
------ ----- ------ ------
Options outstanding, beginning of year 180,000 $4.75 180,000 -
Options exercised - - - -
Options granted 141,000 $6.3741 - 180,000
------- ------- -------
Options outstanding, end of year 321,000 180,000 180,000
======= ======= =======
Option price range at end of year $6.25 $4.75
$8.00
Option price range for exercised shares -
Weighted-average fair value of options,
granted during the year $6.3741
Weighted-average grant-date fair value
of options, granted during the year $3.8720 $2.8028
The following table summarizes information about fixed-price stock options
outstanding at December 31,1997:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted Weighted-
Number Remaining Average Number Average
Range of Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/97 Life Price at 12/31/97 Price
- ------ ----------- ---- ----- ----------- -----
$4.75 180,000 8 $4.75 90,000 $4.75
$6.25 131,000 9 $6.25 - -
$8.00 10,000 10 $8.00 - -
------ ------
$4.75 to $8.00 321,000 90,000
======= ======
11. Common Stock Buy-Back Program
On March 7, 1997, the Board of Directors of the Company authorized a share
repurchase program of up to 750,000 shares. Repurchases are made from time to
time in the open market or through privately negotiated transactions at market
price. The stock repurchase plan has a term of three years. During the year
ended December 31, 1997, the Company repurchased 313,000 shares of stock for a
total of $2,280,375. Also, during the year 233,000 treasury shares were issued
under the Company's Restricted Stock Award Plan.
12. Earnings Per Share
At December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share,"
which establishes standards for computing and presenting earnings per share
("EPS"). SFAS No. 128 replaces the presentation of primary EPS with basic EPS
and fully diluted EPS with diluted 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 similarly to fully diluted EPS. All periods presented have been
restated to conform with SFAS No. 128.
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 shares
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.
The following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31, 1997, 1996 and 1995.
1997 1996 1995
---- ---- ----
Numerator:
Net income $2,397,055 $2,474,652 $1,578,657
========== ========== ==========
Numerator for basic and diluted
earnings per share-income available
to common stockholders $2,397,055 $2,474,652 $1,578,657
========== ========== ==========
Denominator:
Denominator for basic earnings per share-
weighted-average shares outstanding 5,322,172 5,487,887 5,487,887
Effect of dilutive securities:
Employee stock options 59,613 10,957 55
------ ------ --
Dilutive potential common shares 59,613 10,957 55
Denominator for diluted earnings per
share-adjusted weighted-average
shares and assumed conversions 5,381,785 5,498,844 5,487,942
========= ========= =========
Basic earnings per share $0.45 $0.45 $0.29
===== ===== =====
Diluted earnings per share $0.45 $0.45 $0.29
===== ===== =====
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 of approximately $740,000, 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 and MSR contribute an
amount equal to 50% of the individual participant's contribution.
LMC's and MSR's contributions fully vest to employees at the end of five years.
The annual savings plan expense by LMC and MSR were $ 122,760, $ 114,409, and
$88,395 for the years ended December 31, 1997, 1996, and 1995, respectively.
Retirement Plan
LMC sponsors a defined benefit plan which is part of a master trust. An employee
becomes a participant in the 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 plan is to annually contribute
the statutory required minimum amount as actuarially determined. The funded
status and net pension liability for the Master Trust for the years ended
December 31, 1997 and 1996 is provided in the table below:
1997 1996
---- ----
Actuarial present value of benefit obligations:
Vested $5,675,200 $4,851,900
Non-vested 149,600 127,600
------- -------
Accumulated benefit obligation $5,824,800 $4,979,500
========== ==========
Projected benefit obligation 6,573,300 5,603,100
Plan assets at fair value 5,158,200 4,848,000
--------- ---------
Plan assets less than projected benefit obligations (1,415,100) (755,100)
Unrecognized prior service cost 256,500 60,600
Unrecognized net loss 573,200 191,300
Unrecognized transition asset (179,600) (216,100)
-------- --------
Net pension liability ($765,000) ($719,300)
========= =========
The development of the foregoing projected benefit obligations was based upon a
discount rate of 7.0% in 1997 and 7.5% in 1996; a 6% average rate of increase in
employee compensation was used for each year. The expected long-term rate of
return on assets was 10%. Plan assets are invested primarily in bonds, stocks,
short-term securities and cash equivalents.
Net periodic pension cost for the years ended December 31, 1997, 1996 and 1995
included the following components:
1997 1996 1995
---- ---- ----
Service cost - benefits earned during the period $239,200 $220,200 $129,800
Interest cost on projected benefit obligation 415,700 389,800 174,500
Actual return on plan assets (487,000) (485,600) (245,600)
Net amortization and deferral (600) 3,000 83,100
Extraordinary expense - - 27,800
------- ------- ------
Net periodic pension cost $167,300 $127,400 $169,600
======== ======== ========
The straight line amortization method is used in calculating prior service cost.
Gains and losses are amortized only if they are outside of the 10% corridor of
the larger of projected benefit obligation or fair value of plan assets.
LMC also maintains non-qualified supplemental benefit plans 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
$86,900, $116,600, and $51,600 for the years ended December 31, 1997, 1996, and
1995, respectively.
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.
As of January 1, 1992, the provisions of SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," were adopted. The Company
elected the prospective transition approach and is amortizing the transition
obligation over a 20-year period.
Net periodic postretirement benefit costs for the years ended December 31, 1997,
1996 and 1995 included the following components:
1997 1996 1995
---- ---- ----
Service cost $ 55,000 $ 76,000 $ 47,000
Interest cost 78,000 96,000 53,000
Amortization of transition
obligation over 20 years 22,500 29,000 27,000
------ ------ ------
Net periodic postretirement
benefit cost $155,500 $201,000 $127,000
======== ======== ========
The accumulated unfunded postretirement benefit obligation and the accrued
estimated portion of the unfunded postretirement benefit obligation for the
Company at December 31, 1997 and 1996 are provided in the table below:
1997 1996
---- ----
Retirees $624,000 $735,000
Eligible active participants 92,000 89,000
Other active participants 521,000 592,000
------- -------
Total Accumulated Postretirement Benefit Obligation 1,237,000 1,416,000
--------- ---------
Unrecognized cumulative gain 26,000 (200,000)
Unrecognized net transition amount (341,000) (366,000)
-------- --------
Accrued Postretirement Benefit Cost $922,000 $850,000
======== ========
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.0% in 1997 and 7.5% in 1996. The assumed health care cost trend
rate was 7.5% in each year. If the assumptions used in developing the health
care cost trend rate in each of the last two years were increased by 1%, the
effect on the service and interest cost components of net periodic
postretirement benefit cost and on the accumulated postretirement benefit
obligation would be an increase of approximately 20%.
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.
14. Income Taxes
A reconciliation of income tax expense computed at the U.S. statutory rate to
the effective rate reflected in the consolidated financial statements for the
years ended December 31, 1997, 1996, and 1995 follows:
1997 1996 1995
---- ---- ----
Expected tax rate 34.00% 34.00% 34.00%
State and local taxes 6.70 6.50 (3.50)
Other (7.75) (5.78) 0.01
----- ----- ----
Effective tax rate 32.95% 34.72% 30.51%
===== ===== =====
The tax effects of temporary differences that give rise to the net deferred tax
asset at December 31, 1997 and 1996 are as follows:
1997 1996
---- ----
Deferred tax assets:
Net operating loss carryforwards $708,678 $2,203,641
Deferred compensation 647,256 565,587
Retirement and postretirement 648,001 500,880
Other 90,349 -
------ ---------
Total deferred tax asset 2,094,284 3,270,108
--------- ---------
Deferred tax liabilities
Deferred state taxes (86,976) (93,302)
Other (69,095) (44,964)
------- -------
Total deferred tax liabilities (156,071) (138,266)
-------- --------
Net deferred tax asset $1,938,213 $3,131,842
========== ==========
Income tax expense attributable to income for the years ended December 31, 1997,
1996, and 1995 consists of:
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
======= ========== ==========
Current Deferred Total
------- -------- -----
Year ended December 31, 1996:
U.S. Federal $903,832 $5,859 $909,691
State and local 449,902 (89,418) 360,484
------- ------- -------
$1,353,734 ($83,559) $1,270,175
========== ======== ==========
Current Deferred Total
------- -------- -----
Year ended December 31, 1995:
U.S. Federal $992,530 ($401,031) $591,499
State and local 293,313 (184,996) 108,317
------- -------- -------
$1,285,843 ($586,027) $699,816
========== ========= ========
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.
The Company has net operating loss carryforwards of approximately $2,100,000
which are available to offset future taxable income which expire over the period
2003 through 2012.
15. Disclosures about Segments of an Enterprise and Related Information
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for the
way a public enterprise reports information about operating segments in its
annual and interim financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Generally, financial information will be required to be reported on
the basis used by management for evaluating segment performance and for deciding
how to allocate resources to segments. SFAS No. 131 is effective for fiscal
years beginning after December 31, 1997 and need not be applied to interim
reporting in the initial year of adoption. The Company intends to adopt the
provisions of SFAS No. 131 in its 1998 consolidated financial statements;
however, management of the Company has not yet determined what information, if
any, will be reported.
16. Quarterly Financial Data (Unaudited)
The unaudited quarterly financial data for the years ended December 31, 1997,
1996, and 1995 follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1997
- ----
Results of operations:
Total revenues $4,623,365 $4,745,656 $5,022,686 $4,585,247
Total expenses 3,348,977 3,590,374 3,833,388 4,539,453
Provision for taxes 523,329 210,861 543,465 (70,097)
Net income 738,964 931,782 628,824 97,485
Basic earnings per share $0.13 $0.17 $0.12 $0.02
Diluted earnings per share $0.13 $0.17 $0.12 $0.02
Common stock price range:
High $7.125 $7.000 $9.500 $10.125
Low $5.875 $5.875 $6.875 $8.000
1996
- ----
Results of operations:
Total revenues $5,717,300 $5,606,059 $5,565,017 $3,922,925
Total expenses 4,955,313 4,855,620 4,832,825 3,039,824
Provision for taxes 206,807 335,985 580,875 146,508
Net income 543,940 396,835 789,326 744,551
Basic earnings per share $0.10 $0.07 $0.14 $0.14
Diluted earnings per share $0.10 $0.07 $0.14 $0.14
Common stock price range:
High $4.906 $6.500 $5.500 $7.313
Low $3.625 $4.375 $4.250 $5.000
1995
- ----
Results of operations:
Total revenues $5,218,727 $5,347,927 $5,440,059 $5,279,403
Total expenses 4,261,104 4,513,279 4,890,031 5,300,215
Provision for taxes 447,094 311,691 122,234 (181,203)
Net income 510,528 519,104 404,651 144,374
Basic earnings per share $0.09 $0.10 $0.07 $0.03
Diluted earnings per share $0.09 $0.10 $0.07 $0.03
Common stock price range:
High N/A N/A N/A $5.000
Low N/A N/A N/A $4.625
Lexington Global Asset Managers, Inc. and Subsidiaries
REPORT OF INDEPENDENT AUDITORS
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 as of December 31,
1997, and the related consolidated statements of operations, changes in
stockholders' equity (deficit), and cash flows for the year 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 audit. The accompanying consolidated statement
of financial condition of Lexington Global Asset Managers, Inc. as of December
31, 1996, and the related consolidated statements of operations, changes in
stockholders' equity (deficit), and cash flows for the years ended December 31,
1996 and 1995, were audited by other auditors whose report thereon, dated
February 19, 1997, expressed an unqualified opinion on these consolidated
financial statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1997 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, 1997, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York KPMG Peat Marwick LLP
February 18, 1998
CORPORATE DIRECTORY
OFFICERS AND DIRECTORS
Officers
Stuart Smith Richardson
Chairman of the Board
Lunsford Richardson, Jr.
Vice Chairman of the Board
Robert M. DeMichele
President
Chief Executive Officer
Richard M. Hisey
Executive Vice President
Chief Financial Officer
Lawrence Kantor
Executive Vice President
General Manager - Mutual Funds
Lisa Curcio
Secretary
Directors
Sion A. Boney, III
President, Bristol-Myers Products
Robert M. DeMichele
President
Lexington Global Asset Managers, Inc.
Haynes G. Griffin
Chairman
Vanguard Cellular Systems, Inc.
William R. Miller
Retired
L. Richardson Preyer
Retired
Lunsford Richardson, Jr.
Vice Chairman
Lexington Global Asset Managers, Inc.
Peter L. Richardson
President
Smith Richardson Foundation, Inc.
Stuart Smith Richardson
Chairman
Lexington Global Asset Managers, Inc.
Carl H. Tiedemann
General Partner
Tiedemann Boltres Partners
Marion A. Woodbury
Retired
Lexington Global Asset Managers, Inc.
CORPORATE DIRECTORY
PRINCIPAL OFFICERS OF SUBSIDIARY COMPANIES
Lexington
Management Corporation
Robert M. DeMichele
Chairman of the Board
Chief Executive Officer
Richard M. Hisey
Managing Director
and Chief Financial Officer
Lawrence Kantor
Managing Director
and Executive Vice President
Lisa Curcio
Senior Vice President and Secretary
Compliance Officer
Denis Jamison
Senior Vice President
Director of Fixed Income Investment Strategy
Richard J. Lavery
Senior Vice President
Mutual Fund Operations and Sales
Richard Saler
Senior Vice President
Director of International Equity Investment Strategy
Alan Wapnick
Senior Vice President
Director of Domestic Equity Investment Strategy
Market Systems
Research Advisors, Inc.
Robert M. DeMichele
Chairman of the Board
Frank A. Peluso
President
Richard M. Hisey
Chief Financial Officer
Lexington Global Asset Managers, Inc.
CORPORATE AND STOCKHOLDER
INFORMATION
Executive Offices
Lexington Global Asset Managers, Inc.
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Principal Subsidiaries
Lexington Management Corporation
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Lexington Funds Distributor, Inc.
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Market Systems Research Advisors, Inc.
80 Maiden Lane
New York, New York 10038
Stockholder Information
The common stock of Lexington is traded on the NASDAQ National Market System
under the Symbol LGAM. As of December 31, 1997 there were 641 holders of record
of Common Stock. As of March 2, 1998 there were 640 holders of record of Common
stock.
Stock Transfer Agent and Registrar
First Chicago Trust Company of New York
Stock Transfer Division
P.O. Box 2500
Jersey City, New Jersey 07303-2500
Telephone Response Center: (201) 324-0498
Hearing Impaired: TDD: (201) 222-4955
Internet Info: e-mail: fctc@em.fcnbd.com
FCTC Website: http://www.fctc.com
Annual Meeting
The 1997 Annual Meeting of stockholders of Lexington will be held at 9:15 A.M.
Wednesday May 13, 1998 at the Executive Offices of the Company.
Stockholder Requests/Form 10-K
For information or assistance regarding your share-holdings, as well as to
receive, without charge, a copy of Form 10-K filed with the Securities and
Exchange Commission, please address your request to:
Richard M. Hisey
Lexington Global Asset Managers, Inc.
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Independent Auditors
KPMG Peat Marwick LLP
345 Park Avenue
New York, NY 10154