FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended 06-30-98
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.
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
201-845-7300
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 ____
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of June 30, 1998.
Common Stock-$.01 Par Value Per Share
Authorized 15,000,000 Shares
5,060,887 Shares Outstanding
TABLE OF CONTENTS
Part I. Financial Information
Condensed Consolidated Statements of Financial Condition
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II. Other Information
Legal Proceedings and Exhibits
Part I. Financial Information
Item I. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
6/30/1998 12/31/1997
(Unaudited)
Assets:
Cash and cash equivalents:
Cash $ 213,997 $ 193,383
Money market accounts 7,901,998 8,511,915
------------ ------------
8,115,995 8,705,298
------------ ------------
Receivables:
Investment advisory and management fees 1,095,487 1,233,377
Due from funds and other 551,380 596,333
------------ ------------
1,646,867 1,829,710
------------ ------------
Marketable securities 1,484,535 1,524,788
Prepaid expenses 2,006,425 1,708,122
Prepaid taxes 5,919 6,203
Fixed assets (net of accumulated depreciation
and amortization) 1,270,427 1,384,772
Intangible assets (net of accumulated amortization) 186,575 194,676
Deferred income taxes 1,719,189 1,938,213
Other assets 141,491 141,491
------------ ------------
Total assets $16,577,423 $ 17,433,273
============ ============
Liabilities:
Accounts payable and other accrued expenses $ 3,394,839 $ 4,437,585
Deferred income 2,017,793 1,626,123
Federal income taxes payable 863,667 863,667
Other liabilities 11,021 10,579
------------ ------------
Total liabilities 6,287,320 6,937,954
------------ ------------
Minority interest 413,128 405,058
Stockholders' Equity:
Common stock, $.01 par value; 15,000,000
authorized shares; 5,487,887 issued 54,879 54,879
Additional paid-in capital 21,706,079 21,708,142
Accumulated deficit (8,938,884) (9,345,918)
Deferred Compensation (1,434,599) (1,654,342)
Treasury stock at cost (1,510,500) (672,500)
------------ ------------
Total stockholders' equity 9,876,975 10,090,261
------------ ------------
Total liabilities and stockholders' equity $16,577,423 $ 17,433,273
============ ============
See accompanying notes to the condensed consolidated financial statements
(Unaudited).
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended June 30 Six Months Ended June 30,
1998 1997 1998 1997
Revenues:
Investment advisory:
Mutual fund management fees (including approx.
$86,936, $152,236, $186,740, and $286,624
from related parties) $ 2,736,538 $ 3,006,519 $ 5,534,351 $ 5,926,718
Mutual fund commissions 19,832 10,426 48,948 29,075
Other management fees (including approximately
$769,699, $637,402, $1,484,338,
and $1,275,175 from related parties) 2,018,337 1,706,455 3,910,783 3,341,500
Commissions income 28,603 36,858 51,976 69,471
Other income/(loss) (61,331) 230,890 130,726 436,481
----------- ----------- ----------- -----------
Total revenues 4,741,979 4,991,148 9,676,784 9,803,245
----------- ----------- ----------- -----------
Expenses:
Salaries and other compensation 2,320,605 2,107,335 4,756,394 4,371,083
Selling and promotional 271,734 326,141 495,632 565,125
Administrative and general 1,809,785 1,402,390 3,670,586 2,437,366
----------- ----------- ----------- -----------
Total expenses 4,402,124 3,835,866 8,922,612 7,373,574
----------- ----------- ----------- -----------
Income before income taxes and minority interest 339,855 1,155,282 754,172 2,429,671
Provision for income taxes
Current 73,636 114,633 120,044 167,666
Deferred 84,332 96,228 219,024 566,524
----------- ----------- ----------- -----------
Total provision 157,968 210,861 339,068 734,190
----------- ----------- ----------- -----------
Income before minority interest 181,887 944,421 415,104 1,695,481
Minority interest 7,440 12,639 8,070 24,735
----------- ----------- ----------- -----------
Net income $ 174,447 $ 931,782 $ 407,034 $ 1,670,746
=========== =========== =========== ===========
Earnings per share:
Basic earnings per share $0.03 $0.17 $0.08 $0.30
=========== =========== =========== ===========
Diluted earnings per share $0.03 $0.17 $0.08 $0.30
=========== =========== =========== ===========
Average shares outstanding during the period 5,103,634 5,400,041 5,142,528 5,443,169
=========== =========== =========== ===========
See accompanying notes to the condensed consolidated financial
statements (Unaudited).
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30,
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 407,034 $ 1,670,746
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 163,552 161,596
Deferred income taxes 219,024 566,524
Minority interest 8,070 24,735
Compensation expense - stock options 308,430 -
Change in assets and liabilities
Receivables 182,843 (203,744)
Marketable securities 40,253 (452,439)
Prepaid expenses (298,303) (985,250)
Prepaid taxes 284 1,541
Accounts payable and accrued expenses (1,042,746) (605,702)
Federal income taxes payable - (907)
Deferred management fees 391,670 297,838
Other, net 442 24,282
--------------- ---------------
Net cash provided by (used in) operating activities 380,553 499,220
Cash flows from investing activities:
Purchases of furniture, equipment and leasehold
improvements (41,106) (267,379)
--------------- ---------------
Net cash used in investing activities (41,106) (267,379)
Cash flows from financing activities:
Purchase of treasury stock (928,750) (1,236,625)
--------------- ---------------
Net cash used in financing activities (928,750) (1,236,625)
Net decrease in cash and cash equivalents (589,303) (1,004,784)
Cash and cash equivalents, beginning of period 8,705,298 7,529,824
--------------- ---------------
Cash and cash equivalents, end of period $ 8,115,995 $ 6,525,040
=============== ===============
See accompanying notes to the condensed consolidated financial
statements (Unaudited).
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation:
The interim financial information presented is unaudited. In the opinion of
Company management, all adjustments, (consisting only of normal recurring
accruals), necessary to present fairly the condensed consolidated financial
position and the results of operations for the interim period have been made.
The financial statements should be read in conjunction with the financial
statements and related notes in the Company's 1997 Annual Report on Form 10-K.
The results of operations for the interim period presented are not necessarily
indicative of the results to be expected for the full year.
2. 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 will be 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 1997,
the Company repurchased 313,000 shares of stock for a total of $2,280,375. Also
during 1997, 233,000 treasury shares were awarded under the Company's Restricted
Stock Award Plan. In the first half of 1998, the Company purchased 125,000
shares of its stock for a total of $928,750. During this period, 11,000 treasury
shares were awarded under the Company's Restricted Stock Award Plan.
3. Changes in Accounting Principles
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 15, 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 December 31, 1998 annual consolidated
financial statements, however, management of the Company has not yet determined
what additional information, if any, will need to be reported.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's Discussion and Analysis contained in the Company's Annual Report on
Form 10-K for December 31, 1997 is incorporated herein by reference and should
be read in conjunction with the following.
June 30, 1998 Compared to June 30, 1997
The consolidated net income for the six months ended June 30, 1998 was $0.4
million, or $0.08 per share, compared to $1.7 million, or $0.30 per share for
the first six months of 1997.
Total assets under management at June 30, 1998 were $3.5 billion compared to
$3.4 billion at June 30, 1997. Total revenues of $9.7 million are down $0.1
million compared to $9.8 million in the first half of 1997. The West Coast
operations recorded $2.0 million in revenues in the first half of 1998 and $1.6
million in the first half of 1997.
Mutual fund management fees, the Company's largest revenue source, decreased
$0.4 million to $5.5 million in the first half of 1998 compared to $5.9 million
in the first half of 1997. These revenues decreased as a result of a $0.1
billion decline in mutual fund assets under management and the shift in average
net 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
currently appear to favor U.S. capital markets over some of the foreign markets,
particularly the emerging markets.
Other management fees of $3.9 million are up $0.6 million from $3.3 million in
the first half of 1997. The West Coast operations accounted for $0.4 million of
the increase due to continued increases in assets under management associated
with the continuing strength of the U.S. equity markets. Institutional fees
contributed $0.1 million of the increase due to a $0.1 billion increase in
assets under management. Other income decreased $0.3 million to $0.1 million
compared to $0.4 million in the first half of 1997. This decrease is a result of
unrealized depreciation of $0.1 million for six months ended June 30, 1998
versus unrealized appreciation of $0.2 million for the first six months of 1997.
The unrealized appreciation/depreciation stems from investments in a number of
the products managed by the Company.
Total expenses of $8.9 million are $1.5 million above total expenses of $7.4
million in the first half of 1997. The total expense increase was primarily due
to administrative and general expenses of $3.7 million which are $1.2 million
above $2.4 the first half of 1997. Of this increase, $1.0 million derives from
an administrative contract with Select Advisors ("Select") for the Company's
West Coast operations. This contract was part of the reorganization of these
operations, which occurred in 1996. Under the administrative contract the
Company pays fees to Select for administrative and support services for the West
Coast clients. Because the West Coast clients are billed annually in advance,
the expenses incurred for the administrative contract are deferred and amortized
evenly over a twelve-month period. Expenses in the first half of 1998 include
amortization of the contract expense across the entire client base. Prior to
September 30, 1996, the date of the West Coast reorganization, a subsidiary of
the Company was performing all administrative services and therefore did not
incur a fee to Select. In 1997 the Company benefited from the fact that no
administrative fees were charged for those accounts which entered into or
renewed advisory agreements prior to the West Coast reorganization on September
30, 1996. Sub-advisory fees associated with mutual fund revenue increased $0.1
million from last year, primarily due to the increase in average net assets in
the Lexington Troika Dialog Russia fund, which has a shared revenue arrangement.
Total personnel costs of $4.8 million are $0.4 million higher than the $4.4
million recorded in the first half of 1997. Of this increase, approximately $0.3
million is due to the amortization of restricted stock issued to certain key
executive employees in 1997 and 1998. In addition, salaries increased $0.1
million due to annual salary increases.
Selling and promotional costs of $0.5 million decreased $0.1 million from the
$0.6 million recorded in the first half of 1997. The decrease is attributable to
a decrease in advertising and sales literature expenses, reflecting LMC's
greater use of in-house public relations to market its mutual funds.
Pre-tax income of $0.8 million decreased $1.6 million from $2.4 million recorded
in the first half of 1997. The provision for state and federal taxes decreased
$0.4 million due to the decrease in taxable income. The Company used $0.3
million in NOLs in the first half of 1998, and the Company has remaining
approximately $1.8 million which are available to offset future taxable income
and which expire over the period 2003 through 2012.
Three Months Ended June 30, 1998 and 1997
The consolidated net income for the three months ended June 30, 1998 was $0.2
million, compared to $0.9 million for the second quarter of 1997.
Total revenues of $4.7 million are 6% below the second quarter of 1997 when the
Company recorded revenues of $5.0 million. The West Coast operations recorded
$1.0 million in revenues in the second quarter of 1998 and $0.8 million in the
second quarter of 1997. Excluding the West Coast operations, total revenues of
$3.7 million are $0.5 million below the second quarter of 1997 ($4.2 million).
Mutual fund management fees of $2.7 million were $0.3 million below the second
quarter of 1997. Mutual fund assets under management are $0.1 billion lower at
June 30, 1998 than at June 30, 1997. The most significant decline occurred in
the Lexington Worldwide Emerging Markets fund which dropped $159 million from
the June 30, 1997 figure of $256 million. Other management fees of $2.0 million
are up $0.3 million from $1.7 million in the prior year period. The West Coast
accounts for $0.2 million of the increase, due to an increase in assets under
management in this segment of $0.1 billion. The remainder of the increase
results from the Company's institutional asset management fees as a result of
increases in assets under management. Other income of negative $0.1 million is
$0.3 million below the second quarter of 1997 and reflects unrealized
depreciation on the Company's investment accounts. For the three months ended
June 30, 1998, unrealized depreciation totaled $0.2 million compared to
unrealized appreciation of $0.1 million for the second quarter of 1997. The
unrealized appreciation/depreciation stems from investments in a number of the
products managed by the Company.
Total expenses of $4.4 million are $0.6 million above total expenses of $3.8
million in the second quarter of 1997. Of this increase, $0.4 million derives
from an administrative contract with Select Advisors ("Select") for the
Company's West Coast operations. This contract was part of the reorganization of
these operations, which occurred in 1996. Under the administrative contract the
Company pays fees to Select for administrative and support services for the West
Coast clients. Because the West Coast clients are billed annually in advance,
the expenses incurred for the administrative contract are deferred and amortized
evenly over a twelve-month period. The second quarter 1998 expense includes
amortization of the contract expense across the entire client base. In the
second quarter of 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 West Coast reorganization. The remainder of
the expense increase ($0.2 million) was a result of increased personnel costs
including the amortization of expense associated with the granting of restricted
stock in 1997 and 1998.
Profit before tax amounted to $0.3 million, down $0.9 million from the $1.2
million recorded in the second quarter of 1997. The provision for state and
federal taxes decreased $0.1 million to $0.2 million in the second quarter due
to lower taxable income.
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 inflows of $3.7 million and $1.5 million over the
past three years. In the first half of 1998 the Company had cash inflows from
operations of $0.4 million. The major source of this cash inflow was 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. Outflows of cash from
investing activities were just marginally negative in the first half of 1998
reflecting the purchase of computer equipment.
Cash flows from financing activities consistently have been negative over the
past three years. 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. In
the first half of 1998, the Company purchased 125,000 shares of its stock for a
total of $928,750. 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
June 30, 1998 the Company had $8.1 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, had federal and state net capital
requirements at June 30, 1998 of $25,000. The aggregate net capital of LFD was
$0.3 million at June 30,1998. LMC, MSR, and MSRI, as registered investment
advisors, must meet net capital requirements imposed at the Federal and state
levels.
Stockholders' equity on June 30, 1998 decreased to $9.9 million from $10.1
million at December 31, 1997 primarily as a result of the purchase of $0.9
million of treasury shares offset partially by the Company's $0.4 million in net
income and amortization of $0.3 million of deferred compensation.
Management believes that the Company's liquid assets and its net cash provided
by operations will enable it to meet any foreseeable cash requirements.
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.
Forward Looking Statements
Some of the statements included within Management's Discussion and Analysis may
be considered to be forward looking statements which are subject to certain
risks and uncertainties. Factors which could cause the actual results to differ
materially from those suggested by such statements are described from time to
time in the Company's Annual Report on Form 10-K and other filings with the
Securities and Exchange Commission.
Part II. Other Information
Item 1. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) Date of Meeting: May 13, 1998 Annual Meeting of Stockholders
(b) Matters voted on and number of affirmative/negative votes:
1. Election of Directors:
Sion A. Boney, Haynes G. Griffin, Robert M. DeMichele
For All Directors: 4,974,937 Withheld Authority: 71,577
2. Ratification of the selection of KPMG Peat Marwick L.L.P. as the
independent auditors for the current calendar year.
Votes: For Against Abstain
5,043,388 234 2,892
Item 5. Other Information
Subsequent to June 30, 1998, the Company received verbal notification that its
advisory relationship with one of its larger accounts will be terminated in the
fourth quarter of 1998. Assets under management in this account amounts to
approximately $327 million as of June 30, 1998 and annualized revenues from this
account are approximately $1.2 million.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
No. 27 Financial Data Schedule (filed with the Securities and Exchange
Commission)
Other Items under Part II have been omitted since they are either not required
or are not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LEXINGTON GLOBAL ASSET MANAGERS, INC.
By: /s/Richard M. Hisey
__________________________
RICHARD M. HISEY
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER
Date: 8-14-98